2011 International Conference on Sociality and Economics Development IPEDR vol.

10 (2011) (2011) IACSIT Press, Singapore

The Effects of Entrepreneurial Orientation on Firm Organisational Innovation and Market Orientation Towards Firm Business Performance
Affendy Abu Hassim 1, Asmat-Nizam, Abdul-Talib 1, Abdul Rahim Abu Bakar 2
2

College of Business, Universiti Utara Malaysia, Sintok, Malaysia College of Business Administration, Taibah University, Madinah, Saudi Arabia

Abstract. This research examines the relationships between entrepreneurial orientation, market orientation, innovativeness and firm performance on the moderating effect of external environmental factors on the market orientation and firm performance relationship. There has been relatively little research that examines the relationship between strategic orientations, such as entrepreneurial orientation, market orientation, organizational innovations and their consequences on firm performance in developing countries. This paper represents an attempt to do so from the Malaysian perspectives. A response rate of 398 SMEs in Malaysia and the findings show that the entrepreneurial orientation and innovativeness exert a positive effect on firm business performance, market orientation exhibits a negative effect on firm performance. The external environmental factors do have a moderating effect on the relationship between market orientation and firm performance. This paper provide recommendations for entrepreneurs of how their entrepreneurial orientation, market orientation and organizational innovations influenced their firm performance. Keywords: Entrepreneur Orientation, Market Orientation, Innovation, Performance, SMEs

1. Introduction
This study is primarily concerned on how firms accomplished superior performance. It is centered on the behaviour that will enable firms to achieve superior performance. This study focused on Small and Medium Enterprises (SMEs) in Malaysia. SME have been recognised as the strategic thrust in Malaysian economy and is a very important segment of the Malaysian economy accounting for 99.2 percent of total business establishments, providing employment for about 56 percent of the total workforce and contributing about 32 percent of gross domestic product (Malaysian SME Annual Report 2005, 2006). Based on the SME Annual Report 2008, in terms of contribution to Gross Domestic Product (GDP) and exports, Malaysian SMEs lag behind SMEs in developed nations. The target is to raise the contribution of SMEs to GDP from 32 percent in 2005 to 37 percent in 2010, exports from 19 percent to 22 percent and employment to 57 percent in 2010. Central Bank of Malaysia (2003) findings based on case studies done on the SMEs with more than 10 years in business, has identified ten common critical success factors of which three of these factors are investigated in this study. The three factors are related to the extent of the firm entrepreneurial orientation, market orientation strategy and organisational innovation. These factors are also recognised as the engine to drive international competitiveness among SMEs. Firms need to be aware of every possible opportunity that exists in the market. Entrepreneurial orientation is related to being proactive and willing to take a risk when implementing certain strategy to compete with the business rivals. Many high performance firms are marketdriven, that is they listen to what their customers are telling them and continually respond to perceived shifting market needs. Market-oriented firms are argued to be those which collect information about their customers and competitors, disseminate this information to appropriate decision makers within the organisation, and then take appropriate actions to meet better the needs and wants of their customers and stakeholders (Cadogan et al. 2002). By embarking on market intelligence, firms should be better able to understand the needs and wants in the marketplace, resulting in delivering superior value to customers. This in turn will enhance the business performance. In the market-orientated firms, entrepreneurial orientation is also equally important to promote firm performance (Atuahene-Gima and Ko 2001). They further stated that in such cases, when a firms market orientation and entrepreneurial orientation are aligned, the maximum
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positive effect on performance is achieved. The performance impact of market orientation and that of entrepreneurial orientation have been studied in two separate bodies of literature, but only a handful of studies that have investigated the issues simultaneously (Matsuno et al. 2002). There is evidence that SMEs performance is importance to the owner, managers, policy makers and society, however, there is lack of knowledge on which entrepreneurial factors influence SMEs performance and how they influence the performance (Awang et al., 2009). On the basis of the research problem, this study was guided by the following major research questions: 1. Does firm entrepreneurial orientation play a role in improving its market orientation? 2. Does firm entrepreneurial orientation play a role in improving the firm business performance? 3. Does firm market orientation have any influence on the organisational innovations and firm business performance? 4. What is the association between organisational innovations and firm business performance? 5. Do the firm environmental factors moderate the relationship between the market orientation and its business performance?

2. Literature Review 2.1. Entrepreneurial Orientation and Market Orientation

A business can achieve market orientation's full potential when driven by an entrepreneurial orientation (Slater and Narver, 1995). Matsuno et al. (2002) found that entrepreneurial orientation drives market orientation that is the greater the level of entrepreneurial orientation, the greater is the level of market orientation. This can be explained in that entrepreneurial orientation facilitates organisation members ability and willingness to recognise the need to reduce uncertainty, to commit to market learning activities and to take a more calculated risk, hence: H1: Entrepreneurial orientation is positively related to market orientation. 2.2. Entrepreneurial Orientation and Business Performance Each entrepreneurial orientation dimension affected firm performance differently (Kreiser, Marino, and Weaver, 2002; Lumpkin and Dess, 2001). High innovativeness shows positive relationship with sales growth, while proactiveness is positively related to sales level, sales growth, and gross profit (Kreiser et al., 2002). In other studies, proactiveness and competitive aggressiveness are differentially related to performance in different circumstances (Kreiser et al., 2002; Lumpkin and Dess, 2001). Awang et al. (2009) examined Malaysian Bumiputera SMEs and found that each entrepreneurial orientation dimension contributes independently in explaining the performance, hence: H2: There is a positive impact of entrepreneurial orientation on business performance. 2.3. Market Orientation and Organisational Innovations Henard and Szymanski (2001) identified positive connection between market orientation and innovativeness. Salavou et al. (2004) further showed that market oriented SMEs facing strong competition tended to be more innovative. They found that market orientation increased the SMEs' innovative activity. Competition-related characteristics and industry concentration and barriers to entry appeared to also have significant effects on SMEs' innovative activity, hence: H3: Market orientation is positively related to organizational innovations.

2.4.

Market Orientation and Business Performance Slater and Narver (2000) found that market orientation and business performance are positively related. Pulendran et al. (2000), and Tay and Morgan (2002) identified significant, positive links between market orientation and overall performance. The consumer orientation is similar in definition to a market orientation as defined by Kohli and Jaworski (1990) because it begins and ends with the needs of the customer. For small firms, market orientation can also help to improve performance, hence: H4: Market orientation is positively related to business performance. 2.5. Organisational Innovations and Business Performance Firms having higher innovativeness might have higher organizational performance (Subramaniam and Nilakanta, 1996). Study by Tidd et al (2001) mentioned that the success of the Japanese automobile firms during the late twentieth century was mostly derived from process of innovations. Innovation capability is a useful strategy for exporting firms to gain competitiveness and achieve excellent business performance. Thus we argued that small firms that innovate successfully would increase their chances of survival and growth (Cefis and Marsili, 2003; De Jong et al., 2004), hence: H5: An organizational innovation has positive impacts on firm business performance.
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3. Method
The focus of this study was at the firm level therefore the unit of analysis is the organization represented by owner and senior managers as respondent. The population of this study was all SMEs in Malaysia. SME Business Directory that is available online via www.smeinfo.com.my was used as the population frame. According to the SME Business Directory there are 16,920 SMEs in Malaysia. 900 questionnaires were mailed to the SME firms. The selection of the companies was derived by using the simple random sampling technique which ensures that each individual from a population has the exact same probability of being included in a sample. A quantitative mail survey instrument was use to collect the data. Entrepreneurial orientation was measured using six items originally devised by Khandwalla (1977). Market orientation was measured using Narver and Slater (1990) measurements. Some items used to measure inter-functional coordination included in the original instrument were dropped because they were less appropriate for smallsized firms (Ellis, 2007). In order to measure innovation, five items adapted from Hurley and Hult (1998) were utilised. External environmental factors are measured via three main constructs and sources for this constructs are adapted from Jaworski & Kohli (1993). There are 17 items used in order to measure external environmental factors. All the items were measured using seven-point Likert scale items with anchor points 1 = strongly disagree and 7 = strongly agree. For performance, this study adopted the survey instrument developed by Khandwalla (1977), based on the managers assessment of the companys performance relative to its competitors. To ensure appropriate response rate is achieved, the questionnaire was pre-tested by 15 firms from Kuala Lumpur. This exercise is mainly to check on the ease of completion, identify difficulties in wording and any vague sentences. The questionnaire was then revised based on the feedback received from the pilot study.

4. Findings and Discussion

A number of 398 responses were received resulting in a response rate of 44%. Firms from all eleven industries were represented in this study. This shows that the samples are diverse as it consists of representatives from the various sectors of the population. According to Armstrong and Overton (1977), non-respondents were assumed to have similar characteristics to late respondents. This procedure involves breaking the sample into early responses that is the first 50 responses and late responses that is the last 50 responses and then conducting chi-square test on the demographic characteristics of the respondents. The significant values of the analysis revealed no statistically significant difference between the two groups (significant p> .05). Thus, it can be concluded that non-response bias will not significantly affect the generalisability of the findings of this study. Therefore, the analysis was carried out on the full 398 responses. Factor analysis conducted on business performance items shows the Kaiser-Meyer-Olkin value of .779, exceeding the recommended value of 0.50 (Hair et al., 1998) and the Barletts test of sphericity was highly significant (p= .00), supporting the factorability of the correlation matrix. As for the three independent variables that containing 20 items, they were combined and the results of factor analysis extracted only 2 factors. Factor analysis of the 20 items making up the 100% extracted 2 factors with eigenvalue of 1 or more, which jointly explained 78% of the variations in the items but since all the three factors are relevant to the study and none of the factors could be removed or combined, factor analysis was conducted separately for each variable which resulting in all three factors were retained. The results for factor analysis of all 17 items of the environmental factors were combined extracted 2 factors. Factor analysis of the 17 items making up the 100% extracted 2 factors with eigenvalue of 1 or more, which jointly explained 66% of the variations in the items. However since this study only focused on overall aspects of environmental factor, the factor remains as 1. In descriptive statistics for the SMEs business performance the mean values for the variables are at the range of 3.4 to 4. This indicates that most respondents experience slightly similar achievements in terms of business performance. Most of the standard deviations were less than 1.00, indicating that the variations on respondents business performances were small.

4.1.

Hypotheses 1 With F value of 1251 (p= .00), this indicates that entrepreneurial orientation behaviour is significantly influencing market orientation. The model is strong with entrepreneurial orientation behaviour explaining 75.9 percent (R= .759) of the variation in market orientation. Furthermore, it is noted that entrepreneurial orientation behaviour positively influences market orientation. (= .872). Therefore, hypothesis 1 is supported.

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4.2.

Hypotheses 2, 4 and 5 Table 2 provides evidence of the influence of entrepreneurial orientation, market orientation and organisational innovation on business performance. The F-statistic (F=24.901, p< .05) indicates that the relationship between independent and dependent variables is significant. The adjusted R obtained indicates that all the three independent variables account for 15.3 percent of the variation in business performance. Furthermore, it is noted that entrepreneurial-orientation behaviour positively influences performance. (=.467). As being hypothesized, entrepreneurial orientation is found to have a positive influence on business performance. So, hypothesis 2 is supported. However, it was noted that market orientation behaviour negatively influences performance. (=.-313). Therefore, hypothesis 4 is rejected. Furthermore, it is noted that innovations behaviour positively influences performance. (=.225). As being hypothesised, innovation is found to have a positive influence on business performance. Based on the results, hypothesis 5 is supported. Hypotheses 3 With F value of 1673 (p= .00), this indicates that market orientation behaviour is significantly influencing innovation behaviour. The model is strong with market orientation behaviour explaining 80 percent (R= .808) of the variation in innovation behaviour. Furthermore, it is noted that market orientation behaviour positively influence innovation behaviour. (= .899). Therefore, hypothesis 3 is supported. Hypotheses 6 The interaction between environmental factor and market orientation is statistically significant, b = .0656, p = 0.0034. Therefore, the relationship between market orientation and performance is dependent on environmental factor. Specifically, the negative coefficient for the interaction means that the effect of market orientation on performance is becoming more positive as environmental factor decreases. The SPSS macro probes the interaction at low (3.2657), moderate (4.5377), and high values (5.8097) of environmental factors. The effect of environmental factor is statistically significant.

4.3.

4.4.

5. Conclusions
Both entrepreneurial orientation and innovativeness exert a positive effect on business performance. However, market orientation exhibit a negative effect on business performance, due to the lack of proactive and risk taking elements in market orientation dimension. Nevertheless this is complemented by entrepreneurial orientation behavior. Entrepreneurial orientation is positively related to market orientation and it is considered as an input to market orientation. SME that is entrepreneur oriented will be more proactive in conducting market intelligence to look at the current market opportunities. Market orientation positively influences the innovation behaviour as it encourages the organisation to seek additional knowledge in order to improve and change the current business processes, product and services. The external environmental factors do have a moderating effect on the relationship between market orientation and business performance. The market turbulence, competition intensity and technological elements of the environmental factors do have a significant impact on the market orientation-performance relationship. These results present important grounds for SME managers in formulating and implementing strategies to improve their business performance. SME also needs to regularly improve their processes, product or services and organisation because firms that innovate successfully would increase their chances of survival and growth. The management of SME firms must also ensure that all elements of entrepreneurial orientation i.e. innovation, proactiveness and risk taking are practiced in their organization. Focusing on only one element will hamper entrepreneurs to compete and strengthen their business (Wiklund and Shepherd, 2005). Therefore, managers of the SME should attempt to develop appropriate behavior as an important component of the firms strategy to enhance their innovativeness and proactiveness. Managers of SME firms need to develop appropriate entrepreneurial orientation, market orientation and innovative behavior via their strategic plan to incorporate the cultures into their organisation. They also need to be more proactive, search for new opportunities and incorporate risk-taking elements into the company strategies in order to improve their business performance. The government and agency related to entrepreneur development needs to provide SME firms with the necessary assistance and consultation to equip them with necessary elements of entrepreneurial proclivity and innovativeness. More resources and energy needs to be directed and channelled towards promoting and encouraging entrepreneurial orientation and innovativeness of SMEs.

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