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ENVIRONMENT, CORPORATE

ENTREPRENEURSHIP, AND
FINANCIAL PERFORMANCE:
A TAXONOMIC APPROACH
Shaker A. Zahra
Georgia State University

This study examined the association between a firm’s external environ-
EXECUTIVE ment, corporate entrepreneurship, and financial performance. The study
SUMMARY emphasized three propositions: (1) perceive&ather than objective-
characteristics of the environment significantly influenced entrepre-
neurship activities: (2) a multidimensional definition of a firm’s environ-
ment was essential to unravel the interplay between the environment,
corporate entrepreneurship activities, and financial performance; and (3) a taxonomic approach had
the advantage of accounting for the interrelationships among the dimensions of the environment in
classifring jrms.
Using data from 102 companies in six I-digit industrial classification codes (SIC), cluster analysis
was used to distinguish four environmental settings: “dynamic growth,” “hostile and rivalrous but
technologically rich.” “hospitable, product-driven growth,” and “static and impoverished”
environments. These four environments varied in their characteristics.
The four empirically derived environment clusters were then used to examine variations in
corporate entrepreneurship-operationalized as corporate innovation and venturing, and corporate
renewal activities. Thefirst dimensiorr-corporate innovation and venturing-had four components: new
business creation, new product introduction, percent of revenue from new products, and technological
entrepreneurship. The renewal dimension had three components: mission reformulation, reorganiza-
tion, and system-wide change. The data were used to test six hypotheses:

HI: In dynamic or growth environments, companies will emphasize new business creation and
innovation.

Address correspondence to Professor Shaker A. Zahra, Department of Management, College of Business
Administration, Georgia State University, Atlanta, GA 30303.
The author is grateful to the Management Department Research Fund at George Mason University for its financial
support for data collection for this project. He acknowledges with appreciation the excellent comments and
suggestions offered by Marilyn Brazier, Jeff Covin, Evelyn Heitman, William D. Schulte, Jr., Patricia H. Zahra, and
two JBV reviewers.

Journal of BusinessVenturing 8,319-340
0 1993 Elsevier Science PublishingCo., Inc., 655 Avenueof the America$, New York, NY 10010

319
320 S. A. ZAI-RA

H2: Environmental hostility is positively associated with the redefinition of business through
venturing activities.
H3: Hospitable business environments are positively associated with business venturing and renewal
activities.
H4: Static environments are inversely associated with corporate venturing and renewal activities.
HS: Corporate entrepreneurship activities are positively associated with company financial
performance.
H6: Corporate entrepreneurship activities emphasized in HI through H4 will be significantly and
positively associated with company financial performance in their respective environmental
clusters.

The results provided general support for the six hypotheses. They showed that: (I) each
environmental cluster had a distinct combination of activities relating to corporate innovation and
venturing, and renewal: (2) corporate entrepreneurship activities varied in their associations with
measures of company growth and profitability: and (3) the associations between corporate
entrepreneurship and company financial performance varied among the four environment clusters. The
results from this study can help executives in selecting specific entrepreneurial activities that match the
demands of success in their business environment to improve their company’s performance.

INTRODUCTION
The relationship between a firm’s external environment and corporate entrepreneurship
activities has been the subject of interest in the literature (Zahra 1991, 1993). Whereas there
is consensus that the external environment is an important antecedent of corporate
entrepreneurship (Guth and Ginsberg 1990), there has been little empirical research on the
patterns of the specific associations between these two variables. Also, previous studies have
focused on only a few environmental dimensions as the predictors of corporate
entrepreneurship, offering only a fragmented view of their potential associations. It is also
unclear how entrepreneurship influences company financial performance in different
environments (Covin and Slevin 1991, 1993).
This paper reports an empirical study that exami res the association among the external
environment, corporate entrepreneurship, and financial performance. The study adopts a
taxonomic approach that simultaneously considers multiple dimensions of a firm’s
environment. These dimensions are used as input into cluster analysis to identify distinct
environmental settings. These empirically derived settings are then used to clarify variations
in corporate entrepreneurship activities. Finally, the associations between corporate
entrepreneurship and company financial performance- within different environmental
settings-are explored.
The remainder of this paper consists of six sections. The first presents the concept and
dimensions of corporate entrepreneurship. The second focuses on the role of executives’
perceptions of their firms’ environments in making decisions on corporate entrepreneurship,
giving special attention to the concepts of environmental munificence and hostility. The third
section introduces the study’s six hypotheses. The fourth discusses the research method and
measures. The fifth explains the statistical analyses used in the study and reports the results.
The sixth, and final, section offers a discussion of the results and their implications for
executive action and future research in this area.
ENVIRONMENT AND FINANCIAL PERFORMANCE 321

CORPORATE ENTREPRENEURSHIP
Corporate entrepreneurship is a process of organizational renewal (Sathe 1989) that has two
distinct but related dimensions: innovation and venturing, and strategic renewal (Guth and
Ginsberg 1990). Innovation and venturing activities stress creating new business through
market developments or by undertaking product, process, technological and administrative
innovations. Venturing can occur throughout the firm, with the goal of improving company
profitability and competitive position.
The second dimension of corporate entrepreneurship embodies renewal activities that
enhance a firm’s ability to compete and take risks (Miller 1983). Renewal has many facets,
including the redefinition of the business concept, reorganization, and the introduction of
system-wide changes for innovation. Typically, renewal activities relate to the concept of a
firm’s business and its competitive approach. Renewal is achieved through the redefinition of
a firm’s mission through the creative redeployment of resources, leading to new combinations
of products and technologies (Guth and Ginsberg 1990).
Renewal also requires developing or adopting new organizational structures that spur
innovation and venturing (Zahra and Zahra 1992). Often, this requires the reorganization of
a firm’s procedures to improve communications, and to crate the internal systems that are
conducive to innovation (Hitt, Hoskisson, and Harrison 1991; Hitt, Hoskisson, and Ireland
1990; Kanter 1989). Reorganization induces the adoption of organic organizational structures
essential for successful corporate entrepreneurship (Covin and Slevin 1989).
Renewal entails system-wide changes that enhance creative organization learning and
problem solving. These changes energize a firm, make it attentive to its external environment,
and increase its ability to discern threats and opportunities and respond to them creatively.
These changes refocus a company’s basic values. Because these views and values determine
a firm’s proactiveness and competitive posture, system-wide changes are an integral part of
renewal processes (Guth and Ginsberg 1990).
Researchers have attempted to understand the factors that stimulate or impede
corporation entrepreneurship (Sexton and Bowman-Upton 1991). They examined the effect
of a company’s strategy, organization and external environment. It appears that the
environment plays a profound role in influencing corporate entrepreneurship (Zahra 1991,
1993). Focusing on the environment, the literature highlights two research questions that
deserve examination. First, how do companies that compete in different environments vary in
the corporate entrepreneurship activities mentioned above? Second, which corporate
entrepreneurship activities are conducive to superior financial performance in different
environments? The following section develops the theoretical foundation of these questions.

THE LINK BETWEEN ENVIRONMENT AND
CORPORATE ENTREPRENEURSHIP
This study emphasizes three propositions. First, the characteristics of the environment play an
important role in executives’ pursuits of corporate entrepreneurship. In particular, executives’
perceptions of the environment frame their definitions of the issues facing their company and
the actions it takes (Zahra and Pearce 1990). To understand variations in corporate
entrepreneurship, executives’ perceptions of the external environment should be recognized.
Second, environments within and across industries are heterogeneous. These perceived
“environments” arise from the variations in companies’ definitions of their industry’s
boundaries and business domain, and from the differences in senior executives’ perceptions
of the institutional and competitive forces that shape their industry. Third, there is a need to
322 S. A. ZAHRA

use multiple dimensions to capture a company’s perceptions of their environments (Miller
and Friesen 1982; Zahra and Pearce 1990). The selection of environmental dimensions should
be tied to the goals of the research.
Capturing executives’ perceptions of the environment is a challenging task because the
literature highlights a multitude of classifications of environmental dimensions (Dess and
Rasheed 1991). Three such dimensions, in particular, may influence corporate entrepre-
neurship: munificence, hostility, and heterogeneity (Tsai, MacMillan, and Low 1991).
However, because this study focuses on single or dominant business units (Rumelt 1989) that
may not exhibit significant variations in their markets or production processes or procedures
(i.e., low heterogeneity), only environmental munificence and hostility and their association
to corporate entrepreneurship are examined in this research.

Environmental Munificence and Corporate Entrepreneurship
Environmental munificence reflects the richness of opportunities for corporate venturing and
renewal in an industry (Aldrich 1979). As a multidimensional concept, it embodies the
dynamism, the abundance of technological opportunities, industry growth, and the demand
for new products in the environment.

Dynamism
This dimension refers to the continuity of changes in a firm’s environment, arising from
technological progress, competitive rivalry, regulatory developments, and similar forces.
Following Miller and Friesen (1982), this definition emphasizes the persistence of change in
the environment, rather than the stability of rate of change per se. Dynamism creates
opportunities for a firm within its existing markets or in adjacent fields. A firm may locate a
new niche in its existing market and respond to it by modifying its products and processes. Or
the firm may locate an attractive niche outside its traditional markets by expanding the scope
of its markets or by embarking on new product or process ventures. Dynamism prompts a
company to exploit opportunities in current or new markets (Zahra and Ellor 1993).
Dynamism also pressures companies to renew themselves through innovation. Consider,
for example, the dynamic competitive environment introduced by the deregulation of the
telecommunications, trucking, and airline industries. Companies in these industries had to
reexamine their approach to competition and to discover a set of enduring competitive
competencies, revising their business mission. Other firms have embarked on major programs
to reshape their culture and values either by altering their structure or by revising their internal
processes. These changes have led to increased innovation and speedy decision-making
processes. Thus, as companies perceive their environments as dynamic, their emphasis on
self-renewal and corporate venturing activities will rise.

Technological Opportunities
This dimension refers to the perceived availability of new pockets of demand for new or
existing technologies. These opportunities arise from a “technological push,” where new
advances stimulate new demand in existing or new markets (Scherer 1980). The existence, or
lack of opportunities, may, therefore, stimulate or impede corporate entrepreneurship.
Technological opportunities differ from one industry to another because of differences
in their stages of evolution. For instance, technological opportunities are currently more
abundant in the young biological products than in the mature steel or fabricated metals
ENVIRONMENT AND FINANCIAL PERFORMANCE 323

industries. Moreover, even within an industry, companies may vary greatly in their
perceptions of these opportunities. Whereas one company may see its industry as ripe with
opportunities for new technological advances, another may view the same industry as being
dominated with forces that lead to obsolescence. These differences arise from companies’
experiences with a particular technology or with the forces that govern the market.
Differences in perceived technological opportunities are likely to influence corporate
entrepreneurial activities. When such opportunities are abundant, technological innovation is
emphasized. Alternatively, companies may license the use of their technology to other
companies within the industry, thus crating new business and enhancing their revenue and
profits. Therefore, technological opportunities in an industry are associated positively with
increased corporate entrepreneurship.

Perceived Industry Growth
This dimension refers to a firm’s perception of the demand for industry products (Harrigan
1985). Although data on the industry may be readily available, companies still differ in their
interpretations of data. These differences result from asymmetry of access to environmental
data, idiosyncratic organizational qualities, differential market position, and variations in the
cognitive abilities and styles of senior executives.
The relevance of the perceived industry growth pattern for corporate entrepreneurship
has been discussed in past studies. Harrigan (1985) has observed that the rate of industry
growth shapes the self-renewal strategies companies use to survive in declining industries.
Also, Hambrick and Schecter (1983) have emphasized this variable in explaining turnaround
strategies. Thus, a perceived pattern of declining industry growth leads companies to embark
on renewal initiatives, including changing their concept of business and altering their
competitive posture.

Importance of New Products
This final component of environmental munificence refers to the weight that an industry
assigns to the value of new products for creating and retaining a competitive position. In
industries where new products are valued as a source of competitive advantage, firms will
invest heavily in stimulating demand. Demand for new products will compel companies to
increase their investment in new product development and introduction. Product,
technological, and administrative innovations are inseparable; to increase its product
innovation, a company must also develop appropriate technological and administrative
structures. Thus, a “demand pull” by the market for a new product is an antecedent of
corporate venturing activities, achieved through product, technological, and administrative
innovations.
Demand pull for a new product may also force companies to emphasize self-renewal.
Demand pull makes investing in redefining a company’s business concept worthwhile to
delineate appropriate arenas for entrepreneurial activities. Companies must define their
business portfolio, create effective scanning systems to monitor market changes, and develop
appropriate structures for new ventures. A strong demand pull will force executives to change
the reward and communication systems to speed the introduction of new products to the
market (Zahra and Ellor 1993); these changes increase self-renewal activities.
324 S. A. ZAHRA

Hostility and Corporate Entrepreneurship
Besides munificence, environmental hostility is another major source of variation in corporate
entrepreneurship. Hostility shows the unfavorability of environmental forces for a company’s
business. This unfavorability results from radical changes in the industry or the intensity of
rivalry in the industry.

Unfavorability of Change
This dimension refers to the extent to which the environment is perceived as unfavorable to
a company’s goals and mission. Hostility arises from several sources, including declining
demand or radically changing innovations that render a firm’s technology obsolete.
When environmental hostility rises, companies usually proceed to redefine their
business, decide their new domain, and undertake significant alignments in their operations
through divestments, retrenchment, or restructuring (Zahra 1991). For example, as the canned
food industry became increasingly hostile, some firms (e.g., Campbell Soup) abandoned
expansion activities and, instead, divested some of their divisions. Another firm, Larsen Co.
of Wisconsin, expanded its sales by venturing into the frozen food segment, taking advantage
of its rivals’ concerns over shrinking margins. Increased hostility forces executives to find
innovative ways to reduce or manage the sources of hostility. Another option is to initiate
self-renewal programs that redefine their business concept, reduce waste within the existing
business, enhance agile responses to change, or insulate current markets from the adversity
introduced by rising environmental hostility. These renewal activities may entail adopting
organic organizational structures (Covin and Slevin 1989) or increasing environmental
scanning. Thus, as the environment becomes more hostile, a firm will become more involved
in corporate entrepreneurial activities. However, the association between both hostility and
dynamism and corporate entrepreneurship may be nonlinear (Fombrun and Ginsberg 1990).

Competitive Rivalry
This dimension of a firm’s environment refers to the intensity of competition in a market or
segment. Although rivalry can cause dynamism and hostility, it is theoretically distinct from
both variables. Dynamism and hostility arise from many sources, of which rivalry is only one
possible cause. Moreover, rivalry reflects the specific nature of competitive dynamics in an
industry (Porter 1980) and the number of competitors in an industry (Oster 1990).
When rivalry is fierce, companies must innovate in both products and processes,
explore new markets, find novel ways to compete, and examine how they will differentiate
themselves from competitors. These actions have become common among successful
companies in such diverse competitive environments as microcomputers, hospitals, and
fabricated metals. Past research suggests that intensive competitive rivalry is conducive to
companies’ venturing, especially through innovation (Adler 1989). Caution is necessary in
generalizing these findings because fiercely intensive rivalry may force some companies to
exit rather than undertake risky corporate innovation and ventures. Alternatively, increased
rivalry may raise environmental hostility and force companies to conserve resources, rather
than innovate.
Increased rivalry is also conducive to corporate renewal efforts. Witness, for example,
the effect of successful entry by foreign producers into the U.S. textile and tool machinery
industries. This entry has forced companies to redefine their business by redeploying their
resources and changing their business portfolio. Divestments, spinoffs, and turnarounds are
ENVIRONMENT AND FINANCIAL PERFORMANCE 325

included in these companies’ current strategic actions. Similar examples of corporate renewal
can be found in other industries, as well. Besides changing their mission and competitive
approach, companies may reorganize in response to growing competition. In the biological
product segment, for instance, Upjohn has reorganized its drug research, testing and treatment
division. It also merged the research and medical affairs divisions in an effort to reduce
overlap and inefficiency, speed product development, and improve company performance.
These actions help to revise a company’s concept of business, spur its innovativeness, and
enable it to compete more vigorously. One must be cautious, however. Although rivalry may
be conducive to increased corporate entrepreneurship activities, this relationship may be
nonlinear (Fombrun and Ginsberg 1990). Moreover, increased corporate entrepreneurship
may intensify the level of rivalry, as companies attempt to reposition themselves in their
market. This suggests that rivalry and entrepreneurship may influence each other over time.
This longitudinal, dynamic interplay between these two variables should be examined in
future studies. The following section presents the study’s hypotheses.

HYPOTHESES
This study is based on the premise that the perceived characteristics of a firm’s external
environment are an important “antecedent” of corporate entrepreneurship. In particular, the
dimensions of the environmental munificence and hostility deserve attention. Although
discussed separately above, these dimensions are interrelated. For instance, technological
progress causes change (“dynamism”) that may be viewed by some companies as
unfavorable (“increased hostility”); such technological changes invite new competitors,
altering the dynamics of competitive rivalry in the industry. This environmental
interconnectedness suggests that a taxonomic approach is necessary to understand variations
in corporate entrepreneurship.
Research suggests that companies stress different strategic choices within different
environments (e.g., Aldrich 1979; Hambrick 1983a, b). That is, in seizing opportunities or
avoiding threats, companies are expected to emphasize certain venturing and self-renewal
activities within their environments. Companies cannot devote the resources needed for all
promising ventures. And some ventures are simply more interesting-intellectually,
politically and financially-than others. These ventures will receive support (Burgelman and
Sayles 1986). Finally, inertial forces are a source of selective attention to venturing and self-
renewal activities (Ginsberg and Buchhohz 1990). Inertial forces combine both tangible and
intangible qualities and cognition in an organization. Although these forces retain companies’
commitments to existing procedures and projects, they sometimes blind firms to emerging
opportunities. Consequently, inertial forces can influence the fate of a new venture idea or a
self-renewal program.
Inertial forces develop over time, depending on a firm’s interaction with its environment.
As an organization learns successful patterns of competition in an environment, inertial forces
evolve to ensure that it pursues those actions that will maximize company survival (Hannan
and Freeman 1984). Inertial forces reflect, to some extent, the demands of success in given
environments. This means that some new ventures and self-renewal activities will be favored
in some environments and ignored in others; entrepreneurship activities will vary from one
environment to another. This suggests that companies may pursue distinct combinations of
entrepreneurship activities in different environmental settings, as follows:
HI: In dynamic or growth environments, companies will emphasize new business creation
and innovation.
326 S.A. ZAHRA

H2: Environmental hostility is positively associated with the redefinition of business
through venturing activities.
H3: Hospitable (high munificence) environments are positively associated with both
business venturing and renewal activities.
H4: Static environments are inversely associated with corporate venturing and renewal
activities.
Normative theory also suggests that not all corporate entrepreneurship activities are
useful in all environments. Only venturing and renewal activities that match the demands of
the environment would pay off by improving competitive position, financial performance, or
both. Thus, corporate innovation and self-renewal activities will exhibit different associations
with the same measures of company performance in different environments. The discussion
suggests two additional hypotheses:
HS: Corporate entrepreneurship activities are positively associated with company financial
performance.
H6: Corporate entrepreneurship activities emphasized in Hl through H4 will be
significantly and positively associated with company financial performance in their
respective environmental settings.
Clearly, the above six hypotheses represent a modest start toward unraveling the
complex links among the environment, entrepreneurship, and company performance. As
empirical findings accumulate, more advanced hypotheses can be postulated and tested. To
establish these empirical links, the current study empirically tested six hypotheses, as reported
in the following section.

METHOD
Data Collection and Sample
A questionnaire was mailed to the presidents (or the highest ranking executives) of
manufacturing firms, representing six Cdigit standard industrial classification (SIC),
consumer and industrial goods groups in the USA. To reduce the confounding effect of
diversification, companies had to generate at least 70% of their revenue from a given industry,
corresponding to Rumelt’s (1989) definition of a “single” or “dominant” business. Two
hundred ninety-one U.S.-based firms qualified and were contacted by mail.
Two mailings--one month apart-were used, resulting in 102 valid responses, for a
response rate of 35.5%. Responding firms averaged $678.6 million in annual sales, with a
range from $200 million to $2.286 billion. Industries included canned specialties, canned
fruits and vegetables, dehydrated fruits, vegetables and soups, biological products, fabricated
metal products, and food product machinery. They were identified from Porter’s (1980) list
of fragmented industries.
Using the r-test, responding and nonresponding firms were compared using average
sales, size, number of full-time employees, and SIC. No significant differences were found
regarding sales, assets, or employees. Responding firms were more prevalent in consumer
than industrial goods sectors.
To minimize source bias, executives completed the section on their environment and,
then, forwarded the questionnaire to a second senior manager who was familiar with
entrepreneurial activities.
ENVIRONMENTANDFINANCIALPERFORMANCE 327

Measures
Consistent with the literature cited earlier, multiple items gauged respondents’ perceptions of
the external environment. As the Appendix shows, measures of corporate entrepreneurship
focused on venturing and innovation and self-renewal activities. The scores of multiple items
were summed to produce indexes, whose reliability was assessed through Cronbach
coefficient alpha (a), as presented in the Appendix.
Two criteria were employed to gauge company financial performance over a three-year
period: return on sales (ROS) and growth in sales. These measures reflected how well a
company related to its external environment through expansion via innovation-a major
source or profits and sales. Thus, innovation and renewal activities can influence both the
return on sales and growth in sales measures.

ANALYSIS
Testing the hypotheses required four steps. The first entailed adjusting all data for
inter-industry variations. The second focused on using cluster analysis to create discrete
environmental settings. The third examined variations among environmental settings in their
corporate entrepreneurship activities. The final step focused on examining the associations
between corporate entrepreneurship and company performance, using simple correlations and
stepwise regression analyses.

Adjusting for Interindustry Variations
The first step in the analysis required adjusting the data for interindustry variations in the
characteristics of their environments and financial performance. For all measures, the mean
industry score was subtracted from company performance, then divided by the mean industry
score; then the product was multiplied by 100. The adjusted data were then used in the
analyses.

Creating Environmental Settings
The second step of the analysis focused on creating homogeneous environmental settings, by
using cluster analysis. Correlations among the six measures of the environment were
significant, ranging between .I8 and .38, thus supporting the independence of these
dimensions.
Ward’s method of hierarchial agglomeration was used because of its reputed ability to
create meaningful clusters. Two factors guided the selection of the final cluster solution. First,
Lehmann (1979) has suggested that, for a given sample of companies (N), the number of
reliable clusters was in the N/30 to N/50 region; i.e., within the two- to four-cluster range in
the present sample. Second, Hambrick (I 983a, b; 1984) has suggested examining variations
in clustering coefficients as radical changes in these coefficients would show any instability
in the results. These two factors suggested that a four-cluster solution was the most
appropriate classification for this sample. To understand these clusters, multivariate analysis
(MANOVA), analysis of variance (ANOVA), and Scheffe tests of differences in group means
were conducted.
MANOVA showed that the four clusters were significantly different (F - 31.39, p c
0.001). Variations in dimensions of the environment among the four clusters were gleaned
from ANOVA, as summarized in Table I. Scheffe tests also highlighted the distinguishing
328 S. A. ZAHRA

TABLE 1 StandardizedMeans of the Four Environmental Clusters: Results of ANOVA

Cluster’

Environmental Variables (1) (2) (3) (4) Scheffe Results F

Dynamism I .23 .83 .76 .23 1>2;1>3;1>4;2>4;3>4 9.55’
Hostility .37 .88 .41 -.24 2>1;2>4;3>4 22.90’
Rivalry 52 .96 .28 -.76 l>3; 1>4;2>3;2>4;3>4 26.84’
Technological .47 .64 .38 .08 I >4;2>4;3>421.98’
opportunities
Growth opportunities .73 .23 .7s .I1 1>2;1>4;3>2;3>410.96’
Demand for new products .87 -.I2 .63 -.25 1>2; 1>4,3>2;3>4 17.62’

qualities of the four environmental settings. In reviewing the profiles of the four clusters
(summarized below), the reader should note that because the number and content of clusters
were inseparable from the classification criteria used, the results of ANOVA were presented
only to illustrate where the greatest differences existed among the clusters.

Cluster I: Dynamic Growth Environment (N = 34)
Companies in this cluster viewed their environments as dynamic and growth-oriented. They
saw many opportunities for product and, to a lesser extent, technological development. While
rivalry was considered intense, the environment was viewed as favorable (“low hostility”)
for a company’s operations.

Cluster 2: Hostile and Rivalrous but Technologically Rich Environment (N = 20)
These companies viewed their environments as fiercely rivalrous, dynamic, and full of
opportunities for technological progress. The environment had few opportunities for growth
through new product development.

Cluster 3: Hospitable, Product-Driven Growth Environment (N = 30)
Companies saw their environments as rich in opportunities for growth, especially through
new product innovation. They shared similar perceptions of those firms in cluster 1. However,
there was one significant difference between clusters 1 and 3 in terms of dynamism. The third
cluster exhibited significantly lower levels of dynamism but higher levels of rivalry than the
first (,D< 0.05). This did not mean that cluster 3 lacked dynamism; this cluster tended to be
more static but more rivalrous than firms in the first cluster. Still, although the first and third
clusters differed only in dynamism and rivalry, the meaning of the clusters cannot be
determined solely based on these two variables; other dimensions should also be considered.

Cluster 4: Static and Impoverished Environment (N = 18)
Companies in this cluster saw their environment as stable, offering very few new
opportunities for future growth through new product development and technological
advances. It was the least rivalrous and hostile of the four clusters.
ENVIRONMENT AND FINANCIAL PERFORMANCE 329

TABLE 2 Variations in Corporate Entrepreneurship by Environmental Setting
Corporate Environmental Clusters’
Entrepreneurship
Indicators (1) (2) (3) (4) Scheffe Results F
Corporate Venturing
New business creation .38 .21 .29 -.24 1>2,3,4;2>4;3>4 5.11”
New product innovation .50 .30 .43 -.I8 1>2,3,4;3>2;3>4 3.81’
% Revenue from new .36 .I8 .28 .lO 1z-2; 1>4;3>4 2.87’
business
Technological .29 .45 .I2 .I7 1>3,4;2>1,3,4 6.12”’
entrepreneurship
Corporate Renewal
Mission reformulation .I9 .41 -.02 -.27 1>3,4;2>3,4 5.01”
Reorganization .08 -.06 .48 -.50 3>1,2; I>4 4.53”’
System-wide change .47 .23 .33 -.46 1>2.3,4;2>4;3>4 4.06”

’ Cluster luhels: (I) = dynrrmicgrowth: (2) = hostilr und riwtlrous hut techttolo&dly rich; (3) = hospittthle,newpro&t-tlrivtvt;
md (4) = smtic und impoverishedemGwvmvtt.
‘p < 0.05.
l*p <O.Ol.
“‘pco.001.

Corporate Entrepreneurship in the Four Environmental Settings:
Hl through H4
Having defined appropriate environmental clusters, three additional analyses were performed
to test Hl to H4: MANOVA, ANOVA, four environmental clusters were
and Scheffe. The
used as the “independent” variables while corporate entrepreneurship measures served as the
“dependent” variable in MANOVA. The results were significant (F-33.16, p < O.OOl),
suggesting that the four environments varied significantly in their corporate entrepreneurship
activities.
The ANOVA test was used after MANOVA to pinpoint differences among the means of
environmental settings in corporate entrepreneurship. When ANOVA results were significant
@ < 0.05), the Scheffe test was then used to identify significant differences among pairs of
environmental clusters, as summarized in Table 2. The following discussion emphasizes the
patterns of corporate entrepreneurship in different clusters, as they pertain to the study’s first
four hypotheses.
Companies in the dynamic growth environment (cluster 1) focused primarily on new
business creation, new product introduction, and system-wide changes in their organization
to enhance venturing and innovation. These activities are consistent with Miller’s (1983)
research which found that dynamic environments induced product innovation and encouraged
business creation. Thus, Hl was supported.
Companies in cluster 2, the hostile and rivalrous but technologically rich environment,
pursued technological entrepreneurship as their most important means of venturing and
innovation activities, perhaps because of the perceived richness of opportunities for
technological advances in the environment. Companies also embarked on significant
reformulation of their missions, possibly to protect themselves in this environment (Guth and
Ginsberg 1990). These results supported the study’s H2. Note that the results were different
from those typically found in the literature; cluster 2 was dominated by hostility but also
combined other environmental faciors. The results showed that this cluster focused on the
business redefinition aspect of venturing. This suggested a need for future research to
examine the specific association between hostility and particular dimensions of corporate
330 S. A. ZAHRA

entrepreneurship. Overall indices of hostility and corporate entrepreneurship used in past
research might have obscured such fine-grained analyses.
Companies in the hospitable and product-driven, growth environment had a different
set of corporate entrepreneurship activities from the other clusters. These companies
aggressively pursued business creation and product innovation; they had the second highest
scores among the four clusters. Unlike companies in cluster 2, however, they strongly
deemphasized technological entrepreneurship, possibly because of the richness of
opportunities for product development. Companies in cluster 3 also stressed the
reorganization of their structures and systems to promote entrepreneurship more than firms
in the other clusters. These choices were consistent with the literature (Oster 1990). Thus,
H3 was partly supported.
Companies in the “static and impoverished” cluster had the lowest scores on six of the
seven measures of corporate entrepreneurship. The exception was that these companies’
moderate attention to technological entrepreneurship, which was exceeded only by companies
in cluster 3. These results supported H4. This low emphasis on corporate entrepreneurship
was caused by the absence of strong rivalry that spurred technological innovation or because
of environmental scarcity.
Briefly, the four environmental clusters differed significantly in the type and intensity of
their entrepreneurship activities. The first cluster differed in six cases from the second, in six
cases from the third, and in seven cases from the fourth. The second cluster differed in three
(of seven) cases from the third, and in four cases from the fourth. Finally, the third cluster
differed from the fourth in four cases. The following section shows how these intercluster
variations relate to company financial performance.

Corporate Entrepreneurship and.Financial Performance Within
Environmental Clusters (H5 and H6)
Simple correlations and regression analyses were used to test H5 and H6. Table 3 reports
Pearson’s correlations between corporate entrepreneurship and performance criteria.

Sample-wide Patterns (HS).
The correlations among the measures of corporate entrepreneurship and performance ranged
between .I9 @ < 0.05) to .45 @ < 0.001). Corporate entrepreneurship activities were
associated with company financial performance, thus supporting H5.

Patterns within Clusters (H6).
In cluster 1, “dynamic growth environment,” the seven indicators of corporate entrepre-
neurship were positively associated with return on sales (ROS) and growth in sales in 12 of
the 14 cases. The two exceptions were the nonsignificant association between technological
entrepreneurship and system-wide change with ROS. There was the possibility that business
creation, production innovation, mission reformulation, and reorganization activities were
more consistently associated with superior financial performance than were technological
entrepreneurship and system-wide change. These activities might disrupt the organization,
and cause temporary declines in profitability. Technological entrepreneurship and system-
wide change were positively associated with sales growth.
ENVIRONMENT AND FINANCIAL PERFORMANCE 331

TABLE 3 Associations Between Corporate Entrepreneurship and Financial Performance
Environmental Clusters1
Corporate I (N-34) 2 (N-20) 3 (N-30) 4 (N-l 8)
Entrepreneurship Sales Sales Sales Sales Sales
lndicatiors ROS Growth ROS Growth ROS Growth ROS Growth ROS Growth
Corporate
Venturing
New business .38’ .47” S3” ho** .45’ .38* .47’ .42’ .45*** .43”’
creation
New product .38* .36’ .43’ .50’ ..54” .46* -.21 -.I6 .42**’ .38**’
innovation
I of Revenue 44’ 48’ .28 .14* .62”* .39* -.40 .I6 .36” .32”
from new
business
(N-25) (N-l 3) (N-28) (N-l 2)
Technological .29 40’ .47’ S8” 48’ -.21 .52’ .57’ .43”’ .40”
entrepreneurship
Corporate
Renewal
Mission 40’ 4’ .54* S-l’ -.I2 -.23 .5l’ .54’ .36”’ .43**’
refonulation
Reorganization .49” .36* .56’ .36 .l9’ .w* -.I3 .26 .44” .43”’
System-wide .I3 .38’ .45’ .52’ -.I4 -.27 .l5” .l8” .l9’ .34**
change

I Cluster labels: (I) = dytwmic growth; (2) = hostile utul riwlrous. but technologicully rich: (3) = hospitable, new
product-driven; und (4) = stutic uml impoverished mvironment.
lp < 0.05.
**p<o.o1.
“‘p<O.o01.

A different pattern of association was observed in the “hostile and rivalrous but
technologically rich environment.” In this cluster 12 out of the 14 correlations were
significant @ c 0.05). Neither new product introduction nor revenue from such new products
was associated with performance. These activities might take a long time to payoff in terms
of improved financial performance.
In the “hospitable, product-driven” growth cluster, nine out of 14 correlations were
significant. Mission reformulation and system-wide changes were not associated with the two
performance criteria. Moreover, technological entrepreneurship was not significantly
associated with sales growth. Overall, corporate venturing was associated with successful
performance whereas renewal efforts were not.
Finally, in the “static and impoverished environment” cluster, three of the seven
corporate entrepreneurship indicators were associated significantly with performance: new
business creation, technical entrepreneurship, and mission reformulation. This cluster
appeared to reward companies that pursued new business opportunities and undertook major
changes in their business mission. By creating new business and refocusing their business
concepts, some of these companies improved their performance. These results are consistent
with Porter’s (1980) observations on industries that are “stuck;” these industries greatly
resemble companies in cluster 4. These “stuck” industries have very few opportunities for
future profitability and growth. Without creative leadership, companies in these environments
may fail. Porter’s observations pose a challenge for firms in this environment: If they become
aggressive, they may cause fundamental changes in their environments, creating hostility that
332 S. A. ZAHRA

may undermine their existence. Yet, if they accept the status quo, they may eventually fail.
Fortunately, the results suggest that there were three options that were positively associated
with company performance: creating new business, pursing technological entrepreneurship,
and reformulating the company’s mission. These activities would enable companies in the
“static and impoverished” environment to revitalize themselves and achieve higher
performance. Whether and how companies undertake these actions is a question for future
studies. However, the results suggest that some entrepreneurial activities are associated with
financial performance even in this environment.
The results on the relationship between corporate entrepreneurship and company
performance (ROS and sales growth) may signal the possibility that the MacMillan and Day
(1987) “dynamic” is at play. That is, the current data suggest the possibility that companies
may achieve both profits and growth through corporate entrepreneurship activities, without
presuming a potential tradeoff between these two variables. However, the present sample
precludes a direct comparison between the established firms studied and the new ventures
examined by MacMillan and Day (1987). Still, it appears that corporate entrepreneurship
activities might have a “double” positive effect on company performance, which is another
reason for encouraging companies to engage in entrepreneurial activities.

Regression Analysis
Stepwise regression was used to isolate the major correlates of company performance in
different cluster and validate the results of correlational analysis. A stepwise procedure was
used because of the small ratio of observations to variables in the clusters which may render
the results unstable. This possibility urges readers to exercise caution in analyzing the data in
Table 4.
Regression results were consistent with Pearson’s correlations, thus supporting H5 and
H6. Entrepreneurship explained .31 and .28 of ROS and sales growth, respectively, in the
overall sample. Focusing on cluster 1, the results supported the hypothesized positive
association between business venturing activities and performance. In cluster 2 (hostile but
rivalrous), mission reformulation and technological entrepreneurship were associated with
performance. In cluster 3, reorganization and new product innovation were significant
“predictors” of performance. Finally, three aspects of corporate entrepreneurship were
particularly negatively associated with performance: technological entrepreneurship, mission
reformulation and system-wide change. Only reorganization was positively associated with
growth in sales. Overall, H6 was supported because different dimensions of corporate
entrepreneurship activities were related differently to measures of company performance in
different environmental clusters.

DISCUSSION
This empirical study examined the association between a firm’s external environment,
corporate entrepreneurship and financial performance. One must recognize the limitations
of the study when interpreting its results. The cross-sectional data do not allow causal
inferences about the longitudinal interplay between the environment, corporate entrepre-
neurship, and financial performance. Thus, although the study has focused on the
environment as an antecedent of corporate entrepreneurship, it does not refute the opposite
possibility. Corporate entrepreneurship has been depicted also as an antecedent of company
performance; the opposite relationship cannot be dismissed. The interplay between these
ENVIRONMENT AND FINANCIAL PERFORMANCE 333

TABLE 4 Stepwise Regression Analysis

Cluster
Overall 1 2 3 4

Corporate Sales Sales Sales Sales Sales
Entrepreneurship ROS Growth ROS Growth ROS Growth ROS Growth ROS Growth

New business .28” .19’ .29” .21*
creation
New product .18’ .22’ .23’ .22’ .23’ .32’
innovation
8 Revenue .31** .19’ .20’
from new
business
Technological .25** .28” .35** -.28’
entrepreneurship
Mission .l9’ .28” .26* .23’ -.31*
reformulation
Reorganization .21* .24’ .30’ .28’ .33**
System-wide .20’ -.24’
change
R2 .3l .28 .22 .I9 .20 .I2 .I8 .I4 .I0 .08
l .* a*. l * l l l * l * l

P’

lpco.o5.
“p<O.Ol.
***p<0.001.

variables is dynamic in nature; longitudinal designs are necessary to detect any lag effects.
Finally, the focus of this study was on the combined effect of environmental variables on
corporate entrepreneurship. This focus may have resulted in overlooking any non-linear
associations between rivalry and hostility and entrepreneurship. These nonlinear associa-
tions deserve attention in future studies.
The results show the usefulness of the taxonomic approach to studying the links between
a firm’s external environment, corporate entrepreneurship and financial performance. This
approach enables researchers to evaluate the association between the overall environmental
setting and the types of corporate entrepreneurship. It provides a realistic means of
understanding tradeoffs among corporate entrepreneurship activities, helping to identify
companies’ viable choices in different environments.
The study also shows that most corporate entrepreneurship activities are associated with
company performance, for the sample (see Table 3). Although the data support H5, as
mentioned, one must be careful in interpreting the results because they do not suggest a
cause-effect relationship, and because the reverse relationship (that performance induces
corporate entrepreneurship) is plausible as well. Also, there is evidence that corporate
entrepreneurship activities take time before they improve performance (Biggadike 1979;
Miller and Camp 1985). Still, the current results suggest that corporate entrepreneurship is
positively associated with financial performance which is consistent with other findings
(Zahra 1991). Further, these associations are contingent upon the firm’s environmental setting
(thus supporting H6), emphasizing the need to select the types of entrepreneurship activities
that companies undertake. Thus understanding the nature of the environment represents an
important first step in selecting corporate entrepreneurship activities.
334 S. A. ZAHRA

IMPLICATIONS AND FUTURE DIRECTIONS

Managerial Implications
The results have three implications for senior executives. The first is the need to recognize the
importance of the external environment for the pursuit of corporate entrepreneurship. Because
perceptions of the external environment are so crucial in this respect, executives should
ensure that an effective system of environmental scanning is in place. This system should be
comprehensive in scope, covering the factors that influence the munificence and hostility of
the environment. The system should help executives to interpret environmental changes and
what they might mean for corporate venturing activities.
Besides conducting effective environmental scanning, executives should recognize the
importance of their own perceptions of the environment for entrepreneurship. These
perceptions shape organizational choices of appropriate ventures. Senior executives should
validate their assumptions, data, and interpretations by using multiple sources of information.
Data generated from environmental scanning often suggest multiple options; effective
executives should probe the assumptions behind these options before initiating or approving
new ventures.
A second implication is the desirability of achieving match (fit) between the type of
environmental setting (as seen by executives) and corporate entrepreneurship activities.
Without match, these activities will be unfocused and perhaps unproductive. Of course, this
match must be engineered by matching the environment and the types of ventures being
explored. Achieving this fit requires that executives promote and manage the firm’s strategic
and administrative contexts (Burgelman and Sayles 1986). Whereas the former focuses on the
generation of new enterprise ideas for innovation or renewal, the latter provides a forum
within which the ideas are evaluated and implemented. To achieve a profitable fit between the
environment and corporate entrepreneurship, executives should be visibly engaged in shaping
both the strategic and administrative contexts. Shaping the strategic context requires setting
the “vision” by sharing information about environmental conditions and articulating the
types of enterprise that might be of interest. Managing the administrative context requires,
among other things, applying the acid test to each new venture: Does the venture match the
environmental challenges the company is expected to face?
Executives should adopt a long-term view of the effect of corporate entrepreneurship.
Although there may be some short-term performance implications from their activities, as
reported in Tables 3 and 4, the magnitude of the relationships is relatively low. The present
results urge executives to champion promising ideas for corporate venturing for improving
financial performance. Equally important, executives should view these projects as long-term
investments in the company’s future. This means that innovative ventures need financial,
organizational and political support from senior executives (Hitt et al. 1990; Zahra and Fescina
1991). They also need to be evaluated differently from existing, well-established units.

Research Implications
The results urge scholars to consider multidimensional conceptualizations of corporate
entrepreneurship. Such conceptualizations are necessary to understand the commonalities and
any tradeoffs in managerial responses to environmental forces. While using overall indices of
corporate entrepreneurship is understandable at this stage of scholarship in this area, these
measures may not fully capture the domain of corporate entrepreneurship. As research
ENVIRONMENT AND FINANCIAL PERFORMANCE 335

matures, there is a need for studies that map the domain of corporate entrepreneurship and
empirically establish the link among its dimensions. This will set the stage for examinations
that thoroughly document the financial implications of companies’ engagement in corporate
entrepreneurship. It will also encourage future research by offering a unifying framework for
the topic.
This study also suggests a need to revise long-held assumptions about possible tradeoffs
between growth and profitability because of corporate entrepreneurship. The current
results-along with those of MacMillan and Day (1987) and Zahra (1991)-show that some
corporate entrepreneurship activities may enrich both company profitability and growth
simultaneously. We should not always assume that tradeoffs will exist between profitability
and growth measures; future researchers should use measures of both variables to establish
the validity of the current study’s findings.
There are three additional issues that deserve future empirical attention in research in this
area. (1) There is a need to explore how other relevant environmental dimensions (e.g.,
heterogeneity) may influence corporate entrepreneurship. (2) Corporate entrepreneurship is
both a pattern of corporate choices and a process or revitalizing the organization. This paper
has emphasized some actions companies may undertake. Future scholars should explore the
processes associated with implementing these choices. Differences in corporate ventures and
strategic renewal activities may influence these variables’ association with company financial
performance. (3) Whereas generic environmental settings transcend industry boundaries,
future studies may also benefit from focusing on single industries, thus capturing their distinct
features and their particular patterns of corporate entrepreneurship. Studies along these lines
will help set the stage for offering advanced hypotheses that consider the complex links
among the environment, entrepreneurship and performance.
The results of this study-showing that companies in different environments emphasize
different corporate entrepreneurship activities, and that these activities are associated
differently with indicators of financial performance-invite replications and extensions. The
results also invite additional taxonomic studies to understand the intricate links between the
environment and corporate entrepreneurship, and to understand how these links may
influence company financial performance.

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ENVIRONMENT AND FINANCIAL PERFORMANCE 337

Appendix Study Measures
Multi-item indexes were constructed for the environment and corporate entrepreneurship. All scaled-items followed
a 5-point response format. In all cases, executives were asked to circle a number that best described their opinion,
covering their company’s position over the past three years.

Munificence
I. Dynamism
(a - X3). Rate the extent of changes that might have occurred in your company’s environment,
following the scale below.

I 2 3 4 5
Minor Major
Change Change

changes in technology I 2 3 4 5
changes in consumer demographics I 2 3 4 5
government regulation in the industry I 2 3 4 5
number of domestic competitors has I 2 3 4 5
number of foreign competitors has I 2 3 4 5
industry-wide spending on advertising has I 2 3 4 5

2. Technological Opportunities (a a. 80). Indicated how true or untrue are the following statements of your
company’s situation, using the scale below.

I 2 3 4 5

Very Very
Untrue True

our industry offers many opportunities for technological innovation I 2 3 4 5
demand for new technology in our industry is growing I 2 3 4 5
new technology is needed for growth in this industry I 2 3 4 5

3. Perceived lndusrry Growth (a - .76). Indicate how true or untrue are the following statements of your
company’s situation, using the scale below.

I 2 3 4 5

Very Very
Untrue True

there are very few opportunities for growth in this industry (reversed) I 2 3 4 5
this industry offers many attractive opportunities for future growth I 2 3 4 5
growth opportunities in this industry are abundant 1 2 3 4 5

4. Demandfir New Producfs (a - .7 I). Indicate how true or untrue are the following statements of your company’s
situation, using the scale below.

I 2 3 4 5

Very Very
Untrue True

In this industry . . .

there are many opportunities for new product introduction I 2 3 4 5
consumer demand for new products is growing I 2 3 4 5
market demand for new products is growing I 2 3 4 5

Hostility

I. Unjkwability of Change(a - .74). Rate the changes that might have taken place in your industry on the
following scale. Have they been favorable for (or conducive to) the success of your company?
338 S. A. ZAHRA

1 2 4 5
Unfavorable Favorable

changes in government regulations 1 2 3 4 5
changes in demographics 1 2 3 4 5
technological changes I 2 3 4 5
changes in the number of foreign competitors I 2 3 4 5
changes in the number of domestic competitors I 2 3 4 5
changes in industry-wide spending on advertising I 2 3 4 5

2. Competitive Rivalry (a - .72). Rate the intensity of competition your company has faced from the following
groups over the past three years.

I 2 3 4 5
Low High

Competition from ..
established domestic producers I 2 3 4 5
established foreign producers 1 2 3 4 5
new domestic producers I 2 3 4 5
new foreign producers 1 2 3 4 5

Corporate Entrepreneurship: Venturing and Innovation

1. New Business Creation (a - .80). Indicate the extent to which your company has emphasized each of the
following items.

1 2 3 4 5
Minor Major
Emphasis Emphasis

stimulating your new demand on your existing products in your current I 2 3 4 5
markets through aggressive advertising and marketing
broadening your business lines in your current industries 1 2 3 4 5
pursuing new businesses in new industries that are related to your current I 2 3 4 5
business
finding new niches for your products in your current markets 1 2 3 4 5
entering new businesses by offering new lines and products I 2 3 4 5

2. Producr innovation (a - X0). Indicate the extent of changes that might have taken place in your company over
the past three years.

1 2 3 4 5
Decreased Increased
Significantly Significantly

your company’s emphasis on developing new products 1 2 3 4 5
rate of your new product introduction into the market 1 2 3 4 5
your company’s spending on new product development activities 1 2 3 4 5
the number of new products added by your company 1 2 3 4 5
the number of new products introduced by your company I 2 3 4 5

3. Percent ofRevenue Generatedfrom New Business. Executives estimated the percent of their company’s revenue
generated from products that did not exist three years earlier. Only 78 companies provided data on this variable.
ENVIRONMENT AND FINANCIAL PERFORMANCE 339

4. Techtwlo~ical Entrepreneurship (a - .63). Indicate the extent of changes that may have taken place in your
company over the past three years.

I 2 3 4 5
Decreased Increased
Significantly Significantly

your investment in developing proprietary technologies 1 2 3 4 5
your emphasis on creating proprietary technology I 2 3 4 5
your adoption of technologies developed by other companies or industries 1 2 3 4 5
your company’s emphasis on technological innovation
your company’s emphasis on pioneering technological developments in I 2 3 4 5
your industry

Corporate Entrepreneurship: Self-Renewal Activities

1. Mission Rejkudarion (a - .86). Indicate the extent to which your company has emphasized each of the
following items.

I 2 3 4 5
Minor Major
Emphasis Emphasis

defining your company’s mission I 2 3 4 5
revising your business concept I 2 3 4 5
redefining the industries in which your company will compete 1 2 3 4 5

2. Reorganization (a - .70). Indicate the extent to which your company has emphasized each of the following
items.

I 2 3 4 5
Minor Major
Emphasis Emphasis

reorganizing units and divisions to increase innovation I 2 3 4 5
coordinated activities among units to enhance company innovation I 2 3 4 5
increasing the autonomy (independence) of different units to enhance their I 2 3 4 5
innovation
adopting flexible organizational structures to increase innovation 1 2 3 4 5

3. System-Wide Changes (a - .74)

1 2 3 4 5
Minor Major
Emphasis Emphasis

training employees in creativity techniques I 2 3 4 5
rewarding employees for creativity and innovation 1 2 3 4 5
establishing procedures to solicit employee ideas for innovations I 2 3 4 5
establishing procedures to examine new innovation ideas I 2 3 4 5
designating formal idea (project or venture) champions I 2 3 4 5
making resources available for experimental projects I 2 3 4 5

Company Performance. As mentioned, two criteria were used to gauge company financial performance over a
three-year period: return on sales (ROS) and growth in sales. Executives provided data on their SBUs’ (units or
divisions) return on sales (ROS) and growth in sales. Each criterion was defined in the survey instrument to minimize
misinterpretations. For each criterion, executives were asked to provide data for the most recent three-year period, and
340 S. A. ZAHRA

the data were then averaged. In addition, data from COMPUSTAT and corporate documents (such as the 10-K
reports) were used to validate the accuracy of executives’ responses. Secondary financial data on the subset of 32
firms from COMPUSTAT were correlated with survey data. The average correlation was .74 @ c O.Ol), thus
supporting the reliability of the survey data.