Small Enterprise Research, 2015

Vol. 22, No. 1, 17–31, http://dx.doi.org/10.1080/13215906.2015.1017076

Entrepreneurial orientation within small firms: a critical review of why

leadership and contextual factors matter
Michael Muchiri* and Adela McMurray

School of Management, RMIT University, Australia

(Received 17 December 2013; accepted 18 January 2015)

To better understand the relationship between entrepreneurial orientation and performance, this
paper conducted a major review of published work on the entrepreneurial process with a focus
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on small businesses. Following the review, it became evident that even though the extant
literature indicated that both entrepreneurial orientation and transformational leadership
influenced firm performance, there was limited literature examining how these two
important organisational variables related to each other, and how they interacted to influence
firm performance within the context of small businesses. Therefore, the purpose of this
paper is to evaluate the extant literature on entrepreneurial orientation, transformational
leadership and firm performance and then build a logical framework depicting the
interrelationships between transformational leadership, entrepreneurial orientation and
organisational effectiveness within the context of small businesses. Specifically, we advance
a conceptual research framework, which explicates some pathways through which leader
behaviours influence the firm entrepreneurial orientation and overall firm effectiveness. We
conclude the paper by outlining a future research agenda for effectively leading
entrepreneurial organisations within the small business sector.
Keywords: entrepreneurial orientation; transformational leadership; firm performance; small
businesses

Introduction
Three decades after Miller’s (1983) seminal work on the correlates of entrepreneurship, research-
ers continue to investigate the entrepreneurial process, placing greater focus on firms’ entrepre-
neurial behaviour and how firms leverage policies and practices that provide the basis for their
strategic decisions and entrepreneurial actions to attain high performance (Lumpkin & Dess,
1996; Miller, 2011; Rauch, Wiklund, Lumpkin, & Frese, 2009; Wales, Monsen, & McKelvie,
2011). Miller’s (1983, p. 787) central thesis then was that ‘entrepreneurship is integrally
related to variables of environment, structure, strategy, and leader personality, and that these
relationships vary systematically and logically from one type of firm to another’. Subsequent sep-
arate studies on entrepreneurship and leadership indicated that entrepreneurial behaviour and sub-
sequent performance within firms was a consequence of carefully implemented strategies by
managers and employees (Cao, Simsek, & Jansen, 2012; Cogliser & Brigham, 2004; Daily,
McDougall, Covin, & Dalton, 2002; Moreno & Cassilass, 2008; Ren & Guo, 2011; Vecchio,
2003). Indeed, studies investigating this entrepreneurial behaviour, a phenomenon known as

*Corresponding author. Email: michael.muchiri@rmit.edu.au

© 2015 Taylor & Francis

 18 M. Muchiri and A. McMurray

entrepreneurial orientation (EO), have found that EO influences learning, information acquisition
and utilisation, satisfaction with the firm, global success ratings made by owners or business man-
agers, sales growth and return on investments (Covin, Green, & Slevin, 2006; Keh, Nguyen, &
Ng, 2007; Miller, 2011; Rauch et al., 2009; Sapienza, De Clercq, & Sandberg, 2005). Further-
more, firms that have a strong entrepreneurial orientation, where they direct their strategic
decisions and practices towards pursuing new opportunities, perform much better when compared
to firms that do not adopt an EO (Lumpkin & Dess, 1996; Rauch et al., 2009).
Related to the discussion above, some recent studies indicate that the magnitude of the
relationship between EO and performance seems to vary across studies (Rauch et al., 2009).
Indeed this variability in research findings could be attributed to inconsistencies in the way differ-
ent researchers operationalise, define and measure the EO construct. As described by Lyon,
Lumpkin, and Dess (2000, p. 1057), EO could be measured through examining managerial per-
ceptions regarding the entrepreneurial processes, entrepreneurial firm behaviour and archival data
denoting prior firm resource allocations. Since the relationship between entrepreneurial behaviour
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and firm performance was ‘contingent’ rather than ‘direct’ (Lyon et al., 2000, p. 1056), a more
appropriate approach to understanding the EO–performance was to include organisational and
environmental factors (Dess, Lumpkin, & Covin, 1997). This would improve the explanatory
power of research models that focus on the EO–performance relationship. Moreover, the recent
literature on EO indicates a need to elaborate on various internal influencers of EO (Miller,
2011), especially on the relationship between the managerial resource or leadership and EO
(Miller, 2011; Wales et al., 2011). Indeed, several researchers suggest that while EO provides
the direction for firms to pursue new opportunities in the marketplace, it was vital to examine
the impact of effective leadership on the implementation of EO (Engelen, Gupta, Strenger, &
Brettel, 2013; Hmieleski, Cole, & Baron, 2012; Jung, Wu, & Chow, 2008; Ling, Simsek, Lubat-
kin, & Veiga, 2008). Additionally, while the extant literature indicates that EO influences firm per-
formance, there was a need to establish how some organisational antecedents influence EO, and
how organisational internal behaviours would act as moderators of the relationship between EO
and firm performance (Covin et al., 2006; De Clercq, Dimov, & Thongpapanl, 2010; Green,
Covin, & Slevin, 2008; Lyon et al., 2000; Rutherford & Holt, 2007). Related to this, Covin
and Miller (2013) propose that certain socioeconomic and institutional conditions could favour
the emergence of an EO and that it is vital to understand the effects of key factors (such as national
and religious values, and national economic development) on EO. Thus, there is an existing gap in
relation to how the presence of EO, leadership, organisational and environmental factors shapes
firm performance.
Notably, only limited literature explains the relationship between leadership and EO, even
though the conceptualisation of EO makes it plausible that leadership would impact on the EO
of small firms (Bouchard & Basso, 2011; Engelen et al., 2013; Hmieleski et al., 2012). Indeed,
it is vital to identify some of the mechanisms through which manager owners maintain strong
entrepreneurial orientation over time. Specifically, it is important to theorise the potential path-
ways through which leadership behaviours and styles of managers within small firms would influ-
ence a small firm’s entrepreneurial orientation.
Thus, having established that the EO–performance relationship is contingent upon effective
leadership (Eddleston, 2008; Engelen et al., 2013; Wales et al., 2011), organisational and environ-
mental factors (Dess et al., 1997), this conceptual paper has four goals. First, the paper reviews the
existing literature to explicate possible relationships between leadership, entrepreneurial orien-
tation and firm performance within small businesses. While there is disjointed literature regarding
how EO and leadership relate to firm performance, there are limited studies exploring the two con-
cepts in the same studies. Second, the paper proposes some boundary conditions under which the
relationship between leadership and EO may be enhanced or limited. In that regard, when
 Small Enterprise Research 19

reviewing the literature, the paper recognises that both the EO and transformational leadership
concepts were creations of much larger firms and thus may not be generalisable to smaller
firms. However, few studies have explored the potential interactions between EO and leadership,
and how they could be impacted by organisational and environmental factors when predicting
firm performance. Third, the paper proposes a conceptual model, which forms the basis for inte-
grating the literature on leadership, entrepreneurial orientation and moderating variables. The
model proposes feasible linkages between facets of transformational leadership behaviours and
entrepreneurial orientation within small businesses. Subsequently, the paper puts forward
several research propositions geared towards advancing our understanding of the linkages
between transformational leadership, entrepreneurial orientation and firm performance and effec-
tiveness. Finally, the paper discusses a number of key issues and research implications related to
the study of leadership, EO and firm performance. In the following section, the paper explains the
research design relating to how we conducted the literature review. Afterwards, the paper situates
the current review within the general literature on how leadership and entrepreneurial orientation
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are vital for small businesses.

Literature search methodology

Following on the recommendations by Frank and Hatak (2014), we followed rigour in our litera-
ture review process, aiming to systematically gather a sample of published studies representing
the literature on entrepreneurial orientation, transformational leadership, firm performance and
effectiveness, and the moderation roles of leadership, organisational factors and environmental
factors on the entrepreneurial orientation–performance relationship. In order to capture as
many relevant studies as possible, we relied on computerised keyword searches in the main
business source databases of EBSCOhost, Emerald, ProQuest, ScienceDirect and SpringerLink.
We also conducted a manual search in relevant journals including the Academy of Management
Journal, Entrepreneurship Theory & Practice, Journal of Business Venturing, Journal of Man-
agement, Journal of Management Studies, Journal of Small Business Management, Management
Science, Human Resource Management Review, Personnel Psychology, Strategic Management
Journal, and The Leadership Quarterly. We used a variety of keywords to identify firm perform-
ance (including growth, profitability and performance), EO (including entrepreneurial orien-
tation and entrepreneurial behaviour), and transformational leadership (including leadership
and the four dimensions of transformational leadership). Finally, we searched the reference sec-
tions of journal articles for further exploration to ensure that we did not overlook some of the key
literature addressing entrepreneurial orientation, transformational leadership, and firm perform-
ance. Although all studies on entrepreneurial orientation were considered sufficient for inclusion
in the review, we were more interested in studies which focused on small businesses or firms.

Literature review
Leadership and entrepreneurial behaviour within small businesses
Clearly, the emerging studies recognise the importance of harnessing the existing human capital
of a firm as well as developing effective leaders within small to medium-sized enterprises (SMEs)
to enable them to respond to the turbulent business environment within which they operate
(Barrett & Mayson, 2006; Jung et al., 2008; Pajo, Coetzer, & Guenole, 2010). Further, as
small businesses leverage their human resources to attain sustainable firm performance (Kotey
& Folker, 2007; Pajo et al., 2010), more research findings link effective leadership to a firm’s stra-
tegic flexibility, firm performance and effectiveness (Engelen et al., 2013; Hmieleski et al., 2012;
 20 M. Muchiri and A. McMurray

Ling et al., 2008; Yukl, 2013; Zahra, Hayton, Neubaum, Dibrell, & Craig, 2008). For example,
Eddleston (2008, p. 1055) postulated that a firm’s founder who exhibited transformational
leader behaviours would establish a ‘common purpose, identity, and shared sense of destiny
among family members that helps to create positive family cultures that embody commitment,
stewardship, and strategic flexibility’. Additionally, Zahra et al. (2008) proposed that a culture
of family commitment to the business and a stewardship culture positively influenced strategic
flexibility, and that the interaction of the family commitment culture and stewardship culture
further enhanced a family firm’s strategic flexibility. Thus, various studies have highlighted the
vital role played by leadership in successful entrepreneurial ventures (Cogliser & Brigham,
2004; Vecchio, 2003; Wales et al., 2011).
Notably, the ever-growing literature on EO and leadership seeks to uncover how leadership
influences a firm’s innovation capability, risk taking, employees’ proactive behaviours, and
how employees adopt entrepreneurial attitudes and behaviours (Engelen et al., 2013; Khan,
Tang, & Zhu, 2013; Ling et al., 2008; Tang & Hull, 2012). However, most of the studies on
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EO and leadership mainly focus on larger firms, and rarely explore the two concepts in small
businesses (Lyon et al., 2000; Yukl, 2013). It is vital that we understand the two concepts
within the context of small businesses, bearing in mind there are differences between managers
from small and entrepreneurial ventures and their counterparts in larger companies in relation
to how they view the different dimensions of the EO construct (Wiklund & Shepherd, 2005).
Therefore, there is a need to meaningfully integrate existing research findings and then design sys-
tematic and extensive research to unpack the leadership phenomena within small businesses. In
the next section, the paper situates EO within the resource dependency theory and the resource-
based view, and then explores the relationship between entrepreneurial orientation and firm
performance.

Entrepreneurial orientation and firm performance within small businesses

To better understand the EO-performance relationship it is vital that EO is conceptualised within
the resource dependency theory (Pfeffer & Salancik, 1978) and the resource-based view (Barney,
1991). Examining EO within a framework of those two theories has the potential to assist
researchers unpack the resources required to sustain EO, the paths through which those resources
would be obtained and identify the ‘resources critical to foster a robust entrepreneurial process’
(Miller, 2011, p. 884). Noting that the resources a firm has could influence decision making pro-
cesses, Miller (2011) urges researchers to explicate the role of the ‘managerial resource’ as a
plausible trigger for the different aspects of EO (that is, risk taking, innovation, proactiveness,
competitive aggressiveness and autonomy). Accordingly, managerial resource is viewed as an
especially appealing resource since it relates directly to human capital that could influence inno-
vation capability, trigger proactiveness and motivate risk taking within small firms.
As originally conceptualised by Miller (1983), EO encompasses a firm’s propensity for risk
taking, innovation and proactiveness. Lumpkin and Dess (1996) further refined the EO construct,
and added the two components of competitive aggressiveness and autonomy. In explaining the
construct, Covin and Slevin (1988, p. 218) describe EO as the extent to which ‘top managers
are inclined to take business-related risks, to favour change and innovation in order to obtain a
competitive advantage for their firm, and to compete aggressively with other firms’. Dess and
Lumpkin (2005, p. 147) conceptualised EO as ‘a frame of mind and perspective about entrepre-
neurship that are reflected in a firm’s ongoing processes and corporate culture’. Further, Miller
(2011, p. 875) clarified that EO encompassed a process or ‘a way in which entrepreneurs
behave in creating their ‘“new entry”– be that entry a new firm, a new product or technology,
or a new market’. Further, Stam and Elfring (2008, p. 98) describe EO as the ‘simultaneous
 Small Enterprise Research 21

exhibition of innovativeness, proactiveness and risk taking’. Clearly, EO has its roots in the strat-
egy-making process literature, and has been described as ‘the strategy making processes that
provide organisations with a basis for entrepreneurial decisions and actions’ (Rauch et al.,
2009, p. 762). Thus, EO encompasses those policies and practices that provide a basis for entre-
preneurial decisions and actions, and comprises of strategy-making practices and processes aimed
at developing venture opportunities for the firm (Rauch et al., 2009; Wales et al., 2011).
Rauch et al. (2009) identify five EO dimensions and the way in which they relate to entre-
preneurial behaviour within a firm. The first dimension is risk taking and is associated with the
firm’s ability to engage in valiant decisions and actions to sail into uncharted waters and com-
mitting significant funding to do so. The second dimension is identified as Innovativeness
which engages in testing and trialling new processes, products or services including technologi-
cal leadership. The pro-activeness dimension focuses on ascertaining immediate opportunities
and strategic forecasting so as to secure competitive market advantage over other firms in
terms of new products and services. The fourth dimension is labelled as Competitive aggres-
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siveness and refers to the firm’s capacity to engage in aggressive action and high levels of
energy and efforts to outclass, and eliminate, its competitors. Lumpkin and Dess (1996) differ-
entiated between competitive aggressiveness (i.e. behaviour aimed at competitors) and pro-
activeness (i.e. behaviour oriented to taking the initiative towards clients). The final dimension
in Rauch et al.’s (2009) EO model is autonomy which relates to entrepreneurial teams and
leaders who facilitate independent action thereby generating new ventures which are seen to
fruition. This also refers to entrepreneurial independence when developing and bringing into
effect new ideas.
Several studies have conceptualised EO as an organisational construct finding a strong
relationship between EO and firm performance (e.g. Rauch et al., 2009; Tang & Hull, 2012;
Wales et al., 2011). Notably, initial studies treated EO as a unidimensional concept (Covin &
Slevin, 1989), finding that different dimensions of EO related to performance in similar
ways. However, recent literature conceptualises EO as multidimensional, countering that the
different dimensions of EO could occur in different combinations (Covin et al., 2006), and
that each dimension had different and independent impact on firm performance. Additionally,
earlier research suggests that firms that adapt to the ever changing, turbulent environment
through risk taking, innovativeness, and proactiveness are more likely to enjoy sustained
growth and profitability (Lumpkin & Dess, 1996). By adopting an EO, firms seek new oppor-
tunities and eventually benefit from risk taking, developing innovative products, and proactively
positioning their products that lead to strong firm performance. Indeed, firms that adopt a strong
EO perform much better when compared to firms that do not adopt an EO (De Clercq et al.,
2010; Kollmann & Stockmann, 2012; Lumpkin & Dess, 1996; Rauch et al., 2009). Thus, a
strong EO influences several firm performance indicators including satisfaction with the firm,
global success ratings made by owners or business managers, sales growth and return on invest-
ments. Undoubtedly, most of the reported studies have been on larger organisations. However,
some studies focusing on small- and medium-sized firms found support for the direct influence
of EO on performance (Anderson & Eshima, 2013; Chandler & Hanks, 1993; Engelen et al.,
2013; Keh et al., 2007). In line with earlier research findings that a strong EO was related to
firm performance (Lumpkin & Dess, 1996; Runyan, Ge, Dong, & Swinney, 2011; Wiklund
& Shepherd, 2003, 2005), this paper proposes that a strong EO will enhance various forms
of firm performance. It is also plausible to assume that each specific dimension of EO will
be positively related to firm performance within small businesses. First, we postulate that
researchers should examine the direct effects of EO on individual, team and organisational per-
formance. Second, we urge researchers to examine how each dimension or facet of EO is related
to indicators of firm performance. Thus,
 22 M. Muchiri and A. McMurray

Proposition 1: Specific dimensions of EO will have direct positive effects on indicators of firm
performance.

In the next section, we further integrate the literature on transformational leadership, entrepreneur-
ial orientation and firm performance.

Linking transformational leadership, entrepreneurial orientation and small firm

performance
Clearly, managerial activities such as information gathering and processing within small firms
influence the processes, practices and decision making activities leading to the creation of new
ventures (Bouchard & Basso, 2011; Lumpkin & Dess, 1996). Based on the extant literature
which describes transformational leadership as an effective form of leadership (Avolio & Bass,
2002, 2004; Bass, 1985; Muchiri, Cooksey, & Walumbwa, 2012; Yukl, 2013), we propose that
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transformational leaders are best suited to explain the EO-performance relationship within
small businesses. Bass and colleagues (Avolio & Bass, 2002, 2004; Bass, 1985) describe trans-
formational leaders as those leaders who behave in ways which achieve superior results by
emphasising one or more of four dimensions of transformational leadership.
First, leadership is idealised when followers seek to identify with their leaders and emulate
them. Indeed, when a leader in a small business displays strong personal values, coupled with
infectious charisma, followers are more likely to integrate such characteristics into their own
persona, and emulate this moral and ethical stance within inter-personal dealings with co-
workers (Zhang, Cao, & Tjosvold, 2011). When a leader can be counted on to do the
right thing in all situations, this fosters an environment where trust is more likely to be estab-
lished between the leader, followers, and between dyadic follower relations (Yukl, 2013).
Accordingly, transformational leaders will influence both the entrepreneurial attitude orien-
tation and behaviours of their employees, as well as the overall effectiveness of their small
business.
Second, leadership inspires followers with challenges and persuasion that provide meaning
and understanding. Transformational leaders of small businesses would influence entrepreneur-
ial orientation and behaviours of employees through inspiring followers to broaden and elevate
their personal performance beyond expectations than what they thought possible. Further,
leaders would encourage innovation, strive to create change and create high expectations.
In addition, leaders would arouse team spirit, display enthusiasm and optimism, and involve
followers in envisioning attractive and collective future states. Finally, transformational
leaders would foster a shared collective identity, encourage strong interpersonal bonds and
then clearly communicate expectations that followers must meet to achieve future states and
goals.
Third, leadership is intellectually stimulating, expanding the followers’ use of their abil-
ities. Transformational leaders of small businesses would influence entrepreneurial orientation
and behaviours of employees through encouraging in-depth intellectual processing, questioning
norms, concepts, practices and processes. Furthermore, leaders would encourage their fol-
lowers to approach old problems in new ways by encouraging and leading organisational
change.
Finally, leadership is individually considerate, providing the followers with support, mentor-
ing and coaching. Again, as proposed in the existing literature, transformational leaders do influ-
ence entrepreneurial orientation and behaviours of employees when they act as mentors, and
personalise their interactions with followers by listening effectively, identifying different needs,
desires and behaviours in ways that demonstrate an acceptance of individual differences. Thus,
 Small Enterprise Research 23

the leader delegates tasks based on individual ability and qualities (Walumbwa & Hartnell, 2010).
Transformational leaders motivate their associates, colleagues, followers, clients and even their
bosses to go beyond their individual self-interests for the good of the group, organisation or
society.
Research conducted over the years concludes that transformational leadership has significant
and positive relationships with several important attitudinal and organisational outcomes. For
example, transformational leadership has been positively associated with employees’ psychologi-
cal well-being (Sparks, Faragher, & Cooper, 2001; van Dierendonck, Haynes, Borrill, & Stride,
2004), follower work engagement (Zhu, Avolio, & Walumbwa, 2009), and both empowerment
and an innovation-supporting climate (Makri & Scandura, 2010; Oke, Munshi, & Walumbwa,
2009; Sarros, Cooper, & Santora, 2008). Extant research also shows that transformational leader-
ship is highly correlated with trust in the leader (Dirks & Skarlicki, 2009), and that several trans-
formational behaviours such as inspirational motivation and individualised consideration have
been shown to increase self-efficacy of individual subordinates as well as the collective efficacy
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of teams (Walumbwa, Wang, Lawler, & Shi, 2004; Walumbwa et al., 2008a). Furthermore, trans-
formational leaders encourage followers not only to perform beyond expectations, but to take
greater ownership of their work, while fostering a more salient sense of self-identity (Bass,
1985; Walumbwa et al., 2011). Indeed, transformational leadership expands follower aspirations,
motivations, and goals and values by acting as idealised role models displaying high standards of
moral and ethical behaviour.
In general, it is envisaged that transformational leaders within small businesses will articu-
late new visions to motivate their employees, and exhibit high passion and confidence in their
beliefs. Moreover, transformational leaders within small businesses will give importance to
ethics and values while setting accountable standards in the small firm. It is also anticipated
that transformational leaders will inspire followers to transcend self-interest and focus on collec-
tive goals, promote their commitment, effort and performance to the organisation (Judge &
Piccolo, 2004). Within the context of small businesses, transformational leaders will expand fol-
lower aspirations, motivations, and goals and values by acting as an idealised role model dis-
playing high standards of moral and ethical behaviour. Finally, transformational leaders of
small firms will encourage their followers not only to perform beyond expectations, but to
take greater ownership of their work, and foster a more salient sense of self-identity (Bass,
1985; Walumbwa et al., 2011). Therefore, there is value in examining how each facet of trans-
formational leadership, will be related to firm performance within small businesses. Several past
studies support a link between transformational leadership and facets of EO (Jung, Chow, &
Wu, 2003; Jung et al., 2008; Ling et al., 2008). In their study, Jung et al. (2008) found that
a positive relationship existed between CEO transformational leadership and organisational
innovation. Furthermore, Ling et al. (2008) also found that transformational CEOs influenced
the top management teams (TMTs) behavioural integration, risk propensity, and decentralisation
of responsibilities which in turn influenced corporate entrepreneurship. Thus, we postulate that
researchers should examine the direct effects of transformational leadership on firm perform-
ance. Second, we urge researchers to examine how transformational leadership is related to
EO. Thus,

Proposition 2: Transformational leadership will have direct positive effects on firm performance.
Proposition 3: Transformational leadership will have direct positive effects on entrepreneurial orien-
tation (EO).

We now focus on the moderating roles of organisational and environmental factors on the EO-per-
formance link.
 24 M. Muchiri and A. McMurray

Moderating influence of organisational and environmental factors on the EO–performance

link
All in all, findings from recent studies indicate that the magnitude of the relationship between EO
and performance seemed to vary across studies, signalling the need to examine the role of other
organisational and internal variables. Lyon et al. (2000, p. 1077) classify factors that influence the
EO-performance relationship into organisational factors and environmental factors. Accordingly,
organisational factors comprise of internal variables such as organisational size, structure and
strategy and the characteristics of the top management team. On the other end, environmental
factors include industry trends, growth rates and business cycles, and the power exercised by a
firm’s customers, suppliers and competitors. Some recent studies focusing on small- and
medium-sized firms found support for the indirect influence of EO on firm performance (Ander-
son & Eshima, 2013; Engelen et al., 2013; Keh et al., 2007). For example, using data from small
and medium-sized businesses in Singapore, Keh et al. (2007) found that EO played an important
role on the acquisition and utilisation of marketing information as well as direct effect on firm
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performance. However, Keh et al. (2007) also found that utilisation of marketing information par-
tially mediated the relationship between EO and firm performance. In another study of small and
medium-sized enterprises, Anderson and Eshima (2013) found that the relationship between EO
and firm performance was moderated by the firm age and intangible resources. As suggested by
Wiklund and Shepherd (2005, p. 72), ‘ … relying solely on this main effect relationship provides
an incomplete understanding of small business performance. A greater understanding is gained by
the concomitant consideration of EO’. De Clercq et al. (2010) found that the EO-Performance
relationship was stronger for higher levels of procedural justice, trust, and organisational commit-
ment. In line with earlier research findings that organisational factors and environmental factors
would moderate the direct relationship between EO and performance (Lyon et al., 2000; Wiklund
& Shepherd, 2005), this paper proposes a moderation model of explaining the EO–performance
relationship. It is plausible to assume that specific facets of organisational and environmental
factors will interact with specific dimensions of EO and consequently influence the relationship
between EO and performance. Therefore, it is proposed that researchers examine the indirect,
moderating effects of organisational factors and environmental factors on the EO-performance
link. Thus,

Proposition 4a: Specific dimensions of organisational factors will have a moderation effect on the
relationship between EO and firm performance.
Proposition 4b: Specific dimensions of organisational factors will have a moderation effect on the
relationship between leadership and firm performance.
Proposition 5a: Specific dimensions of environmental factors will have a moderation effect on the
relationship between EO and firm performance.
Proposition 5b: Specific dimensions of environmental factors will have a moderation effect on the
relationship between leadership and firm performance.

In the next section we further examine the moderating role of transformational leadership on the
EO-performance link.

Transformational leadership as a moderator of the EO-Performance relationship

In line with the conceptualisation of the contingency theory (Fiedler, 1967) we propose that small
firms will attain optimal performance if key organisational variables like EO and effective forms
of leadership were aligned correctly. Furthermore, recent studies indicate that the leader’s impact
on a small firm’s performance can be direct or mediated by strategy making and other manager
 Small Enterprise Research 25

and organisation-dependent variables such as information processing activities, the organic nature
of the organisation, and the level of decentralisation and formality (Bouchard & Basso, 2011). In
some instances, transformational leadership would act as an important moderator for the EO–per-
formance relationship (Engelen et al., 2013), and that the various dimensions of transformational
leadership would be related to EO and firm performance. Indeed, the study by Engelen et al.
(2013) found that each of the four facets of transformational leadership (that is, articulating a
vision, providing an appropriate model, having high performance expectations, and showing sup-
portive leader behaviour) positively affected the relationship between EO and firm performance.
Moreover, they found that performance consequences of EO were greater when top management
exhibited the highest possible levels of transformational behaviours. In line with that study, we
also postulate that in cases of higher transformational leader behaviour, entrepreneurial orien-
tation will have stronger, positive relationship with all indicators of high-firm performance
whereas the absence of transformational leader behaviour will weaken the relationship between
EO and firm performance. Thus, we propose that:
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Proposition 6: Transformational leadership will influence the EO-firm performance such that the
influence of EO on performance is strongest when firm leaders exhibit transformational leadership.

In line with suggestions espoused by past studies (Lyon et al., 2000; Wiklund & Shepherd, 2005),
this paper proposes a need to employ a contingency approach when studying the EO-performance
link. Thus, Figure 1 captures the research model and the propositions which were described pre-
viously. Specifically, the relationship between EO–performance is both direct and indirect,
meaning that the EO–performance relationship can be best unpacked through the use of multi-
variate methods which also explore leadership, organisational factors and environmental factors.

Conclusions and future research directions

In this paper we reviewed various studies relating to the EO, transformational leadership and firm
performance. Notably, the extant studies point to the positive effects of EO and leadership on
entrepreneurial behaviour and outcomes in both large and small firms (Cao et al., 2012; Daily
et al., 2002; Gupta, MacMillan, & Surie, 2004; Jensen & Luthans, 2006; Miller, 2011; Ren &
Guo, 2011; Wales et al., 2011). The paper fills the existing literature gap in relation to how the
presence of EO, leadership, and organisational and environmental factors shape firm perform-
ance. The article puts forward a conceptual model which tries to extend our understanding of
direct and interaction effects of EO, leadership and organisational and environmental factors in
the prediction of firm performance within the context of small firms.
On the basis of the literature review and the conceptual research model, this paper put forward
six propositions relating to the relationships among EO, leadership, organisational and environ-
mental factors, and firm performance within the context of small business. We build on the extant
literature regarding how small business owners exhibiting a strong entrepreneurial orientation
perform better than firms that do not (Covin & Slevin, 1991; Naldi, Nordqvist, Sjöberg, &
Wiklund, 2007; Zahra & Covin, 1995), and why effective leadership influences entrepreneurial
behaviour (Kuratko & Hodgetts, 2007). In the case of small businesses, we propose that commen-
surate with the size and /or structure of the business, transformational leaders have to exhibit the
four dimensions of idealised leadership/ charisma, inspirational motivation, intellectual stimu-
lation and individualised consideration for them to be able to influence EO and firm performance.
In order to unpack the complex relationship between leadership, entrepreneurial orientation
and firm performance, this paper urges researchers to engage in a more in-depth conceptualisation
of relationships among entrepreneurial orientation, leadership and firm performance. Our review
 26 M. Muchiri and A. McMurray
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Figure 1. Conceptual model linking entrepreneurial orientation, leadership and performance.

of the extant literature on EO and leadership, and the subsequent conceptual research framework
are all attempts to try and explain some potential pathways through which transformational lea-
dership and entrepreneurial orientation influence firm performance within small businesses. The
emerging research propositions are based on the conceptual framework and are geared towards
explicating the role played by organisational leaders as they implement EO policies and pro-
cedures. In some ways, the conceptual research framework attempts to explain plausible direct
and indirect pathways through which leadership influences both EO and firm performance.
Indeed, we have extended the extant literature by proposing some of the mechanisms through
which manager owners maintain strong entrepreneurial orientation over time. In a sense, we
provide a conceptual background for researchers of leadership and entrepreneurial orientation
on which to build when researching EO within small businesses. We theorise the potential path-
ways through which leadership behaviours and styles of small firm managers would influence a
small firm’s entrepreneurial orientation and subsequently, the individual, team and overall firm
performance.
This paper brings together plausible arguments in relation to why it is vital to examine effec-
tive leadership, entrepreneurial orientation and small firm performance within future studies of
small businesses. Theoretically, this paper extends our understanding of the possible linkages
between transformational leadership, entrepreneurial orientation and small firm performance.
Moreover, we propose pathways through which transformational leadership influences entrepre-
neurial orientation and small firm performance. Through a comprehensive conceptual model, we
propose that effective leadership matters in the determination of small firm performance whether
directly or indirectly. By discussing the moderating roles of organisational factors, environmental
 Small Enterprise Research 27

factors and transformational leadership, the paper proposes some boundary conditions upon
which entrepreneurial orientation could be effective or ineffective towards a small firm’s perform-
ance. Furthermore, it is imperative that researchers embark on more studies to consolidate the
gains made in our understanding of how both EO and transformational leadership manifest in
small businesses.
To ensure the generalisation of findings to more small businesses, there is a need to conduct
more small firm research which is located in multiple sectors, and utilises research samples drawn
from small public and private-sector organisations. Importantly, studies should include under-
researched and previously unexplored leadership theories and models such as authentic leader-
ship, ethical leadership and servant leadership within many small firms. Future research should
also investigate several leadership theories simultaneously to determine the impact of context
on the relationship between effective leadership behaviours, entrepreneurial orientation, and
firm performance.
In practical terms, we propose that it is beneficial to develop founders, managers or other
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employees in positions of authority within small firms so that they exhibit more transformational
characteristics (idealised influence, inspirational motivation, individualised consideration and intel-
lectual stimulation) as these lead to better firm performance (Dvir, Eden, Avolio, & Shamir, 2002;
Yukl, 2013). Further, our model suggests that it is vital that human resource developers and trainers
focus on developing those small business-specific aspects of entrepreneurial orientation that would
enable firm employees attain set organisational goals. Finally, the conceptual framework should
help small business management developers design effective leadership development programs
capable of helping leaders adjust their leadership styles to fit specific contextual factors relevant
to small firms. This would lead to an optimal interaction of leader behaviours, firm entrepreneurial
orientation and organisational context leading to high-firm performance.
While this article brought together two vital streams of small business research, we propose
the need for a more methodical examination of how other effective leadership behaviours and EO
influence the performance and effectiveness of small businesses. Besides examining transforma-
tional leadership, there is a need to examine other variables that could mediate or moderate the
relationship between EO and a firm’s performance, since various studies have proposed the
need to explicate those conditions when transformational leadership may or may not be effective
within a small firm (Eddleston, 2008). Certainly there is merit in examining how the newer con-
ceptualisations of effective leadership (such as transactional leadership, authentic leadership,
servant leadership and ethical leadership) impact on the EO and performance of small businesses.
For example, examining the relationship between EO and ethical leadership (Brown, Trevino, &
Harrison, 2005) could help small firms understand the antecedents of ethically suspect behaviours
(Kahn et al., 2013), and how entrepreneurs engage in moral reasoning (Robinson, Davidson, van
der Mescht, & Court, 2007; Teal & Carroll, 1999), ethical decision making and overall moral
awareness (Dawson, Breen, & Satyen, 2002). On the other hand, exploring the relationship
between EO and authentic leadership (Walumbwa et al., 2008b) could help small firms understand
the value of shared authentic leadership (Hmieleski et al., 2012), and how specific dimensions of
authentic leadership impacts the facets that make up entrepreneurial orientation. Moreover, an
examination of the relationship between servant leadership (Greenleaf, 1991) and EO would
also lead to a better understanding of how these two variables are related.
Notably, the conceptual model we put forward in this paper assumes that there is a causal
relationship between leadership and EO, where leadership influences EO and firm performance.
However, some studies have found that EO mediates the relationship between task environment
and performance (Rosenbusch, Rauch, & Bausch, 2013), EO enhances the positive relationship
between knowledge-based resources and performance (Wiklund & Shepherd, 2003) and that EO
also explains some managerial processes that are related to how organisations utilise their
 28 M. Muchiri and A. McMurray

resources to identify and respond to environmental cues earlier than competitors (Cockburn, Hen-
derson, & Stern, 2000; Wiklund & Shepherd, 2003). Therefore, we suggest that future research
should also examine whether and how EO influences the leadership–performance relationship.
Thus, we believe there is value in examining the moderating and mediating effects of EO on
the relationship between leadership and performance (see also Li, Zhao, Tan, & Liu, 2008).
As acknowledged by Lyon et al. (2000), one of the reasons for limited EO studies in small
businesses is the fact that it is often difficult to measure firm behaviour for small businesses.
Unlike large organisations with archival data relating to resource allocations (which can often
be used as a proxy for entrepreneurial orientation), smaller businesses may not have that infor-
mation as they may be family owned. This inexplicably limits the researchers’ ability to
unpack how resources are allocated within small businesses. Turning to research design, there
is a lack of mixed method approaches when examining the leadership–EO–performance relation-
ship. Operationalising mixed methods is vital as this research approach provides researchers with
grounded basis for the development of new leadership theory while also allowing for the inte-
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gration of phenomena operating at multiple levels (Creswell & Plano-Clark, 2007; Mumford,
Friedrich, Caughron, & Antes, 2008). In conclusion, if one of the outcomes of our paper is to
stimulate more methodologically diverse research on EO and various forms of leadership,
especially the emerging conceptualisations of authentic leadership servant leadership and
ethical leadership, then the paper will have attained a major goal.

Notes on contributors
Dr Michael Muchiri is a Senior Lecturer in the School of Management, RMIT University, Australia.
Michael’s research interests are on organisational leadership processes, and his work on leadership has
been published in the Journal of Occupational and Organizational Psychology, Leadership & Organization
Development Journal, International Journal of Organisational Behaviour, and as book chapters by the
American Psychological Association (2013) and Edward Elgar (2014). Michael’s ongoing research projects
(in Australia, Indonesia and Kenya) focus on four forms of positive leadership styles and behaviours (auth-
entic, ethical, servant and transformational), and how these influence followership, ethical behaviour, work-
place safety, safety citizenship and climate and innovation.
Professor Adela McMurray, PhD, is Deputy Head Research and Innovation in the School of Management,
RMIT University. Adela’s work in the area of culture, climate and innovation is recognised internationally
resulting in over 100 publications. She has won best author, teacher, and conference paper awards. Adela is
the recipient of prestigious research funding including four Australian Research Council grants and others
totalling over $2.5 million. She is an Editorial Advisory Board member for the Journal of Management
History, the Journal of Small Business & Enterprise Development, and the International Journal of Entre-
preneurial Behaviour & Research. Adela holds several Chair positions at the prestigious US Academy of
Management.

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