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Entrepreneurial Orientation and Firm

Performance: The Unique Impact of
Innovativeness, Proactiveness, and
Risk-taking
a a
Patrick M. Kreiser & Justin Davis
a
College of Business, Ohio University
Published online: 19 Dec 2012.

To cite this article: Patrick M. Kreiser & Justin Davis (2010) Entrepreneurial Orientation and Firm
Performance: The Unique Impact of Innovativeness, Proactiveness, and Risk-taking, Journal of
Small Business & Entrepreneurship, 23:1, 39-51, DOI: 10.1080/08276331.2010.10593472

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 Entrepreneurial Orientation and Firm Performance:
The Unique Impact of Innovativeness, Proactiveness,
and Risk-taking
Patrick M. Kreiser, College of Business, Ohio University
Justin Davis, College of Business, Ohio University
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Abstract. This paper develops a theoretical model of the relationship between firm-level entrepreneurship and
firm performance. This model is intended to further clarify the consequences of an ‘entrepreneurial orientation,’
paying particular attention to the differential relationship that exists between the three sub-dimensions of
entrepreneurial orientation and firm performance. Included in the theoretical model are other important variables
(such as organizational structure and environmental characteristics) that may impact the EO-performance
relationship. Propositions are developed regarding the various configurations of the sub-dimensions of EO and
organizational structure that would be most appropriate in a given environmental context. Future research may
also benefit from considering the important role that organizational strategy and life cycle stage play in this
model. The implications of this model for both researchers and managers are discussed.

Résumé. Cet article élabore un modèle théorique de la relation entre l’entrepreneuriat au niveau de
l’organisation et le rendement de l’entreprise. Ce modèle a pour but de préciser davantage les conséquences
d’une « orientation entrepreneuriale » en portant une attention particulière à la relation différentielle qui
existe entre les trois sous-dimensions de l’orientation entrepreneuriale et le rendement de l’entreprise. Le
modèle théorique inclut d’autres variables importantes (ex. structure organisationnelle, caractéristiques
environnementales) qui peuvent avoir un impact sur la relation entre l’orientation entrepreneuriale et le
rendement de l’entreprise. Des propositions sont élaborées, quant aux diverses configurations des sous-
dimensions de l’orientation entrepreneuriale et l’organisation structurelle, qui seraient les plus appropriées
dans un contexte environnemental précis. D’autres recherches pourraient examiner le rôle important que joue
la stratégie organisationnelle et l’étape du cycle de vie dans ce modèle. L’article examine aussi les implications
qu’a ce modèle pour les chercheurs et les dirigeants d’entreprise.

Introduction
The relationship between entrepreneurship and firm performance has received considerable
attention in the organizational literature over the last several decades (Sandberg and Hofer,
1987; Tang et al., 2008; Todorovic and Schlosser, 2007; Wiklund and Shepherd, 2005).
Specifically, scholars have theorized that the incidence of firm-level entrepreneurial
behaviors will be positively associated with organizational profitability and growth
(Covin, Green, and Slevin, 2006; Covin and Slevin, 1991; Ireland, Covin and Kuratko,
2009; Lumpkin and Dess, 1996). Previous studies suggest that, in certain situations,
firms exhibiting high levels of an entrepreneurial orientation (EO) will achieve superior
performance to those possessing low levels of EO (Keh, Nguyen, and Ng, 2007; Li et al.,
2008; Zahra, 1991). Indeed, studies indicate that increases in firm performance related to
EO are sustainable over long periods of time (Wiklund, 1999), but that this relationship
may be contingent on the environmental context in which the firm is operating (Lumpkin
and Dess, 2001; Zahra, 1993; Zahra and Covin, 1995).

Journal of Small Business and Entrepreneurship 23, no. 1 (2010): pp. 39–51 39
 40 KREISER and DAVIS

Covin and Slevin (1991) offered an important contribution to the entrepreneurship

literature in developing a theoretical model of the relationship between an aggregated
conceptualization of entrepreneurial orientation (innovativeness, proactiveness, and risk-
taking) and firm performance. However, it has been argued in the literature that future
research on entrepreneurial orientation may benefit from considering innovativeness,
proactiveness, and risk-taking as unique sub-dimensions of the entrepreneurial orientation
construct (Kreiser, Marino, and Weaver, 2002; Lumpkin and Dess, 1996). If this is the case,
then many of the relationships that constitute existing models of firm-level entrepreneurship
may need to be reassessed. The three sub-dimensions of entrepreneurial orientation,
which were aggregated together in earlier theoretical models, may in fact possess unique
relationships with other important variables. Therefore, it is necessary that a revised model
be developed to conceptualize innovativeness, proactiveness, and risk-taking as unique
elements of the entrepreneurial process.
This study conceptualized entrepreneurial orientation as consisting of three unique
sub-dimensions—innovativeness, proactiveness, and risk-taking—which were able to vary
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independently of one another in a given context. Innovativeness is embodied by a strong

organizational commitment to “engage in and support new ideas, novelty, experimentation,
and creative processes that may result in new products, services or technological processes”
(Lumpkin and Dess, 1996: 142). Risk-taking is the “degree to which managers are willing to
make large and risky resource commitments—for example, those which have a reasonable
chance of costly failure” (Miller and Friesen, 1978: 923). Proactiveness is an “opportunity-
seeking, forward-looking perspective involving introducing new products or services ahead
of the competition and acting in anticipation of future demand to create change and shape
the environment” (Lumpkin and Dess, 2001: 431).
This study will examine the relationship between the three sub-dimensions of
entrepreneurial orientation, environmental characteristics, organization structure, and
firm performance. First, the fundamental characteristics of the entrepreneurial orientation
construct will be explored. Second, we will examine the differential relationship between the
sub-dimensions of EO and firm performance. Third, we will examine the moderating role
that environmental characteristics and organization structure play in the EO-performance
relationship. Fourth, we will examine the potential performance ramifications of different
configurations of entrepreneurial orientation and organizational structure and provide a
model specifying these configurations. Finally, we will discuss the implications of this
theoretical model for both researchers and managers. Figure 1 displays the model of firm-
level entrepreneurship that will be developed in this paper.
Theoretical Development

The Entrepreneurial Orientation Construct

Early research on entrepreneurial orientation posited that entrepreneurial firms tended
to take more risks than other types of firms, especially when faced with conditions of
uncertainty (Khandwalla, 1977; Mintzberg, 1973). Expanding on these views, several
researchers operationalized the behavior of entrepreneurial firms as consisting of product-
market innovation, proactiveness of decision-making, and risk-taking (Miller, 1983; Miller
and Friesen, 1983). These scholars maintained that the level of entrepreneurship exhibited
by a firm was the aggregate total of these three sub-dimensions. A firm that was truly
“entrepreneurial” would exhibit high levels of each dimension. Covin and Slevin (1988:
218) argued that entrepreneurial orientation could best be measured by summing together
 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 41

Figure 1. A theoretical model of EO-environment-structure-performance relationship

Environmental Characteristics
 Environmental Dynamism
 Environmental Munificence

Innovation
 R&D
Leadership
 New Product
Lines
 Product
Changes
Proactiveness Firm Performance
 Competitive
Actions
 Profitability
 New  Growth
Techniques
 Competitive
Posture
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Risk-Taking
 Risk-taking
Proclivity
 Environmental
Boldness

Organizational Structure
 Organic Structure
 Mechanistic Structure

“the extent to which top managers are inclined to take business-related risks (the risk-taking
dimension), to favor change and innovation in order to obtain a competitive advantage for
their firm (the innovation dimension), and to compete aggressively with other firms (the
proactiveness dimension).”
The theoretical model developed by Covin and Slevin (1991) depicted the relationship
between entrepreneurial orientation and other important research variables, such as
organizational structure and environmental conditions. Covin and Slevin aggregated the
three sub-dimensions of entrepreneurial orientation (innovativeness, proactiveness, and
risk-taking) together when developing their theoretical model. However, recent research
suggests that the three sub-dimensions of entrepreneurial orientation may in fact have
differential relationships with other important organizational variables (Kreiser, Marino, and
Weaver, 2002; Lumpkin and Dess, 1996). This study will extend existing conceptualizations
of entrepreneurial orientation by developing a prescriptive model of the relationship
between the sub-dimensions of entrepreneurial orientation and firm performance, while
also considering internal (organizational structure) and external (environmental) factors.
The Unique Relationships Between the Sub-Dimensions of EO and Firm Performance
The three sub-dimensions of entrepreneurial orientation have been shown to possess
differential relationships with organizational performance. On the one hand, Begley
and Boyd (1987) found that risk-taking had a curvilinear relationship with performance
in entrepreneurial firms. Their findings suggested that entrepreneurial firms exhibiting
moderate levels of risk-taking would outperform those exhibiting either very high or very
low levels of risk-taking. The authors concluded that “risk-taking has a positive effect on
 42 KREISER and DAVIS

ROA up to a point. Beyond that point, increases in risk-taking began to exert a negative
effect on ROA” (Begley and Boyd, 1987: 89).
On the other hand, previous research also suggests that high levels of innovativeness
(Deshpande, Farley, and Webster, 1993; Zahra and Bogner, 2000) and proactiveness
(Lumpkin and Dess, 2001; Miller and Friesen, 1983) lead to increased organizational
performance. Zahra (1996: 189) contended that innovative behaviors were critical to firm
survival, arguing “success in today’s competitive environment requires a company to
pursue a coherent technology strategy to articulate its plans to develop, acquire, and deploy
technological resources to achieve superior financial performance.” Porter (1980) posited
that, in certain situations, firms could utilize proactive behaviors in order to increase their
competitive positioning in relation to other firms. Lieberman and Montgomery (1988)
argued that first-mover firms were able to gain significant advantages over follower firms.
They defined such first-mover advantages in terms of the ability of pioneering firms to earn
higher economic profits through such advantages as technological leadership and increased
buyer switching costs (Lieberman and Montgomery, 1988).
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The previous arguments suggest that the three sub-dimensions of entrepreneurial

orientation may offer unique contributions to the overall level of a firm’s performance. For
example, high levels of risk-taking are likely to be counterproductive for organizations.
Theoretical arguments suggest that risk-taking will display a curvilinear relationship with
performance, such that moderate levels of risk-taking will allow firms to outperform those
that exhibit extreme levels of risk-taking. This may help to explain some of the mixed
findings on the EO-performance relationship, such as the curvilinear relationship between
EO and performance found by Tang et al. (2008). It is also expected that innovative and
proactive firm behaviors will be positively associated with firm performance.
The EO-Environment-Performance Link
The external environment can be broadly defined as “the totality of physical and social factors
that are taken directly into consideration in the decision-making behavior of individuals
in organizations” (Duncan, 1972: 314). The relationship between the environment and
strategy formation has received considerable attention in the entrepreneurship literature
(Covin and Slevin, 1989; Miller and Friesen, 1983; Zahra, 1993). Specifically, the
concepts of environmental dynamism and munificence have played a fundamental role
in understanding the strategic decision-making process that occurs within entrepreneurial
organizations (Lumpkin and Dess, 2001; Miller and Friesen, 1982; Zahra, 1996).
Environmental dynamism refers to the “rate of change and innovation in an industry as well
as the uncertainty or predictability of the actions of competitors and customers” (Miller and
Friesen, 1983: 222). Environmental munificence refers to the availability of resources and
the amount of external opportunities that are present in a specific environmental setting
(Dess and Beard, 1984; Zahra, 1993).
Thus, it stands to reason that environmental characteristics will play an important role
in influencing the performance level of entrepreneurial organizations (Covin and Slevin,
1991; Lumpkin and Dess, 1996). The plentiful resources and opportunities afforded to firms
in munificent environments make it easier for them to implement their strategic initiatives
(Dess and Beard, 1984). In such environments, the relative ease in which firms can acquire
the resources necessary for the pursuit of organizational objectives and the decreased threat
of competition fosters higher rates of firm survival and growth (Castrogiovanni, 1991). The
constant rate of change in highly dynamic environments also creates numerous opportunities
that entrepreneurial firms can exploit (Miles, Covin, and Heeley, 2000). However, the high
 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 43

level of industry stability found in non-dynamic environments allows firms to minimize their
costs by not having to consistently develop new and innovative products and technologies
to meet changing industry conditions (Zahra and Bogner, 2000).
Contingency Relationships: EO-Environment-Performance
The three sub-dimensions of entrepreneurial orientation and key characteristics of the external
environment may also interact with one another in order to influence firm performance
(Lumpkin and Dess, 2001). Specifically, environmental attributes such as dynamism and
munificence may moderate the relationship between the three sub-dimensions of EO and
performance. The following section details the theoretical relationship between each of the
sub-dimensions of EO, the external environment, and organizational performance.
Innovativeness and the External Environment. Organizations operating in dynamic
environments are more likely to benefit from new product innovation than firms operating in
stable environments (Miller, 1983; Miller, 1988; Zahra, 1993). According to Miller (1988:
284), “product innovation is generally more prevalent and useful in dynamic environments
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[…] Without innovation, firms in such settings fall behind, losing market share and sales.”
Zahra (1996) found that pioneering activities and radical product technologies are more
appropriate in dynamic environments than in munificent environments. Zahra and Bogner
(2000: 141) found further support for this argument, indicating that dynamic environments
serve to “encourage the development of radically new products and technologies in order to
capture premium market segments, or preempt competitors’ entry.” Thus, it is expected that
new product innovation and the use of R&D strategies will be more positively associated
with firm performance in dynamic environments than in stable environments.
It is likely that firms operating in munificent environments will also be more innovative
in their strategic orientation than firms operating in hostile environments. Lumpkin (1996:
46) claimed that “a munificent environment is one in which innovativeness is favored
because resources are available to devote to technological development and the growth
environment invites a proliferation of new products.” Zahra (1996: 197) found that
munificent environments acted to encourage R&D spending within firms, since firms
operating in hostile environments “may be reluctant to invest heavily in developing new
technologies because hostility erodes profit margins and reduces the resources available
for innovation.”
Zahra and Bogner (2000) found that the introduction of radical new products was
negatively associated with ROE in hostile environments and that R&D spending was
negatively associated with market share in such settings. The negative relationship
between innovativeness and hostility was “consistent with theoretical expectations that
intense hostility in these markets might make aggressive gambling of new ventures’ limited
financial resources by offering radically innovative products a poor strategic choice” (Zahra
and Bogner, 2000: 165). These theoretical arguments suggest that innovative practices will
be more positively associated with firm performance in munificent environments than in
hostile environments.
Proactiveness and the External Environment. There is also an intuitive link between the
adoption of proactive firm behaviors and environmental dynamism. Since the industry
conditions in a dynamic environment are subject to rapid change, firms that are proactive
and actively seek out opportunities will outperform firms that are unwilling to exploit market
opportunities. Dynamic environments act to create many new opportunities for firms, and
proactive strategies can be effectively utilized in order to seize these opportunities and to
gain a competitive advantage for the firm (Zahra, 1991).
 44 KREISER and DAVIS

Zahra (1996) found that dynamic environments acted to increase the evidence of
pioneering activities in entrepreneurial firms, which were more uncommon in stable
environments. Proactive activities benefited such a firm, since “by reaching the market
first and establishing its technology as the standard, the pioneer can dictate the rules of
competition” (Zahra, 1996: 193). Lumpkin and Dess (2001: 444) found that “both sales
growth and profitability are positively and significantly related to a proactiveness-dynamism
link.” These arguments suggest that proactive firm behaviors will be more positively
associated with performance in dynamic environments than in stable environments.
Proactive behaviors will also be more strongly linked with firm performance in
munificent environments. On the one hand, Miller and Friesen (1982) argued that munificent
environments promote such behaviors since growing markets are characterized by a great
deal of strategic opportunities. Firms that are proactive in their orientation are able to
capitalize on these numerous opportunities and, thus, build a strategic advantage in relation
to their competition (Lieberman and Montgomery, 1988). On the other hand, Lumpkin
and Dess (2001) argued that hostile environmental conditions would force organizations
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to abandon proactive behaviors, in order to preserve their limited resources. Such a

“conservative use of resources is antithetical to the important role of experimentation and
discovery inherent in proactiveness” (Lumpkin and Dess, 2001: 437). These arguments
suggest that proactive behaviors will be more positively related to firm performance in
munificent environments than in hostile environments.
Risk-taking and the External Environment. Theoretical support suggests that dynamic
environments will also result in a stronger link between organizational risk-taking and
firm performance. Organizations that do not take risks in dynamic environments will lose
market share and will not be able to maintain a strong industry standing relative to more
aggressive competitors (Covin and Slevin, 1991; Miller, 1983). Khandwalla (1977) found a
stronger relationship between organizational risk-taking and firm performance in dynamic
environments. According to Khandwalla, organizations need to make bold, risky strategic
decisions in order to cope with the constant state of change common in dynamic environments.
These arguments suggest that organizational risk-taking will be more positively associated
with firm performance in dynamic environments than in stable environments.
Risk-taking will also offer the possibility for high payoffs in munificent environments,
due to heightened availability of resources in those environments. It is likely that
excessively hostile environments will discourage organizations from taking risks that they
consider unnecessary and that might harm firm survival (Zahra and Garvis, 2000). These
arguments are consistent with prior research claiming that even risk-taking managers
would be discouraged from taking large-scale risks in extremely uncertain environments
since the risk-taking would likely not be as effective (Smart and Vertinksy, 1984). On
the one hand, Goll and Rasheed (1997: 585) posited that the lack of resources in hostile
environments would “lead firms to avoid excessive risk-taking and pay greater attention
to the conservation of resources.” On the other hand, firms operating in munificent
environments will be able to afford taking risks, since resources are readily available in
such hospitable environments. These arguments suggest that risk-taking will be more
positively associated with organizational performance in munificent environments than in
hostile environments.
The EO-Structure-Performance Link
Organizational structures have often been conceptualized as running on a continuum from
organic to mechanistic (Burns and Stalker, 1961; Thompson, 1967). On the one hand,
 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 45

organic structures are typified by open channels of communication, decentralized decision-

making, a lack of formal planning constraints, loose systems of control, and a high level of
organizational flexibility. On the other hand, mechanistic structures are often conceptualized
as possessing high levels of bureaucracy, restricted channels of communication, centralized
decision-making, a formalized planning system, tight systems of control, and a constrained
level of flexibility (Khandwalla, 1977; Slevin and Covin, 1990). Researchers have argued
that an organization’s choice of structure will have an important impact on their ensuing
level of performance (Chandler, 1962; Miles and Snow, 1978; Rumelt, 1974).
Numerous studies have argued that an organic structure positively impacts the
relationship between an entrepreneurial orientation and firm performance (Covin and
Slevin, 1988; Lumpkin and Dess, 1996). Covin and Slevin (1991: 18) argued that the
appropriate structure for an entrepreneurial organization will “include decentralization
of decision-making authority, minimal hierarchical level or structural levels, free-flowing
communication channels, and closely integrated R&D, manufacturing, and marketing
functions.” The empirical work on this topic has also found that organic structures, when
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aligned with an entrepreneurial orientation, will lead to increased levels of firm performance
(Naman and Slevin, 1993; Slevin and Covin, 1990).
Covin and Slevin (1988: 219) argued that organic structures, which were “characterized
by such things as flexibility in administrative relations, informality, and authority vested in
situational expertise, facilitate innovation—a vital component of an entrepreneurial style.”
The formalization of rules in the upper levels of mechanistic organizations may also lead
to the development of hierarchical structures within the organization. Numerous studies
have found that strong hierarchies act to stifle innovativeness through bureaucratic actions
(Burns and Stalker, 1961; Thompson, 1967). Lumpkin and Dess (1996: 160) argued that
organic structures were a key component in increasing the efficacy of innovativeness
within organizations, claiming that “such an organizational environment may promote the
autonomy and creativity required for innovative behavior.”
Proactive and risk-taking behaviors also will be more positively associated with firm
performance when firms utilize organic structures rather than mechanistic structures. For
example, Covin and Slevin (1989) posited that an organic structure allowed firms the
flexibility to seize environmental opportunities through proactive behaviors. This flexibility
allowed firms to exhibit a “rapid organizational response to changing external forces in
unpredictable environments, while ‘mechanistic’ structures are better suited to predictable
environments where rapid organizational responses are not typically required” (Covin and
Slevin, 1989: 77). Khandwalla (1977) argued that the organizational flexibility inherent in
organic structures enhanced the value of risk-taking within organizations. He claimed that
“risk-taking managements usually seize opportunities and make commitments of resources
before fully understanding what actions need to be taken. Unless management is flexible,
the organization will not be able to adapt itself to the evolving situation” (Khandwalla,
1977: 18). These arguments suggest that the three sub-dimensions of entrepreneurial
orientation will be more positively associated with firm performance when organizations
adopt an organic structure than when they adopt a mechanistic structure.
A Theoretical Model of Entrepreneurship: Appropriate
Configurations of EO and Structure
The arguments proposed in this paper can be utilized to develop several configurations of
the sub-dimensions of entrepreneurial orientation and organizational structure that lead
to the highest levels of performance in specific environmental contexts. Based on our
 46 KREISER and DAVIS

previous discussion of the external environment, there are four potential environmental
situations that an organizatioin might face: (1) Dynamic/Munificent, (2) Stable/Munificent,
(3) Dynamic/Hostile, and (4) Stable/Hostile. Integrating the arguments related to
innovativeness, proactivness, risk-taking, and organizational structure suggests that there
are appropriate configurations of these variables based on the four environmental contexts.
Table 1 summarizes the appropriate configurations of the sub-dimensions of entrepreneurial
orientation and organizational structure that should be utilized in various environmental
settings.

Table 1. Appropriate configurations of EO and structure by environment

Dynamic Stable

Innovativeness: Very High Innovativeness: Moderate to High

Proactiveness: Very High Proactiveness: Moderate to High
Munificent
Risk-taking: Moderate to High Risk-taking: Moderate
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Organizational Structure: Organic Organizational Structure: Combination

Innovativeness: Moderate to High Innovativeness: Low

Proactiveness: Moderate to High Proactiveness: Low
Hostile
Risk-taking: Moderate Risk-taking: Low
Organizational Structure: Combination Organizational Structure: Mechanistic

A firm operating in a dynamic and munificent environment should emphasize very high
levels of innovativeness and proactiveness, moderate-to-high levels of risk-taking, and
should implement an organic structure. Innovativeness is enhanced in such environments
due to the new opportunities created through environmental change in a dynamic
environment (Zahra and Bogner, 2000) and the increased resources with which to innovate
in a munficent environment (Lumpkin and Dess, 1996). Proactiveness is more beneficial
because it allows firms to be first movers in responding to changing circumstances in a
dynamic environment (Lumpkin and Dess, 2001) and to capture prevalent opportunities in a
munificent environment (Lieberman and Montgomery, 1988). While moderate levels of risk-
taking tend to be associated with the highest levels of performance in general (McClelland,
1960), risk-taking becomes a bit more useful in dynamic/ munificent environments because
it allows firms to improve their industry standing in a dynamic environment (Khandwalla,
1977) and because the potential problems associated with a failed risk-taking endeavor
are lessened due to the availability of slack resources in a munificent environment (Goll
and Rasheed, 1997). Finally, an organic structure will allow organizations the flexibility to
respond to the change inherent in a dynamic environment and the resources necessary to
benefit from innovativeness, proactiveness, and risk-taking in a munificent environment.
As such, it is proposed that:

Proposition One: In dynamic and munificent environments, firms that are very high in
innovativeness, very high in proactiveness, moderate-to-high in risk-taking, and whose
structure is organic, will display the highest levels of firm performance.

Firms operating in either a stable/munificent environment or a dynamic/hostile

environment should utilize moderate-to-high levels of innovativeness and proactiveness
 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 47

and moderate levels of risk-taking. These firms should also utilize an organizational
structure that is a combination of organic and mechanistic. In general, we have argued
that innovativeness and proactiveness are positively associated with firm peformance, and
that moderate levels of risk-taking are associated with the highest levels of performance.
While innovativeness and proactiveness will still likely lead to increased peformance
levels in stable/munificent and dynamic/hostile environments, the potential gains will
be lessened somewhat by the lack of emerging opportunities in a stable environment
(Zahra, 1996) and the lack of available resources in a hostile environment (Smart and
Vertinsky, 1984). Moderate levels of risk-taking will still be the most appropriate strategy
in this environment, since these behaviors will not likely be as productive as in dynamic/
munificent environments and not necessarily as potentially detrimental as in stable/hostile
environments. Finally, a combination of organic and mechanistic structures would be
appropriate in either environmental situation. For example, the flexiblity of an organic
strategy would be beneifical in a changing and dynamic environment, but the extra costs
associated with this flexibility would be harmful in a hostile environment. We would
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recommend that firms maintain at least a moderate level of flexibility, while maintaining
a cost-effective structure that does not necessarily demand maximum flexibility. Based on
these arguments, it is proposed that:

Proposition Two: In stable and munificent environments, firms that are moderate-to-high
in innovativeness, moderate-to-high in proactiveness, moderate in risk-taking, and whose
structure is a combination of mechanistic and organic, will display the highest levels of
firm performance.

Proposition Three: In dynamic and hostile environments, firms that are moderate-to-high
in innovativeness, moderate-to-high in proactiveness, moderate in risk-taking, and whose
structure is a combination of mechanistic and organic, will display the highest levels of
firm performance.

A firm operating in a stable and hostile environment should utilize low levels of
innovativeness, proactiveness, and risk-taking, as well as a mechanistic structure. Innovative
efforts typically will not be effective because of the lack of changing market demand and
customer preferences in a stable environment (Miller, 1988) and the lack of resources
with which to innovate in a hostile environment (Zahra and Bogner, 2000). Proactiveness
will not represent a preferred strategic approach because first-mover advantages will be
slow to develop in a non-changing, stable environment (Zahra, 1996) and due to the lack
of opportunity-based incentives in a hostile environment (Lumpkin and Dess, 2001).
The potential negatives associated with risk-taking will be higher because less risky
alternatives will be available to firms in stable environments (Covin and Slevin, 1991)
and the cost of strategic failure will be extreme in hostile environments (Zahra and Garvis,
2000). Finally, the use of a mechanistic structure will be well-suited to a stable/hostile
environment because structural flexibility is not as large a concern in stable environments
and centralized decision-making is more cost-effective in a hostile environment. As such,
it is proposed that:

Proposition Four: In stable and hostile environments, firms that are low in innovativeness,
low in proactiveness, low in risk-taking, and whose structure is mechanistic, will display
the highest levels of firm performance.
 48 KREISER and DAVIS

Discussion and Conclusion

This theoretical model offers important insights regarding how organizations can utilize
an entrepreneurial orientation to maximize their firms’ level of performance. These
propositions offer several insights into the combination of innovative, proactive, and risk-
taking behaviors that firms should display in particular environments. It is also proposed
that organizational structure will moderate the relationship between the sub-dimensions
of EO and firm performance. For example, a firm operating in a munificent environment
should emphasize high levels of innovativeness and proactiveness, moderate levels of
risk-taking, and an organic structure. Thus, managers can utilize the arguments in this
paper in order to maximize firm performance according to the dominant environmental
characteristics of the industry in which the firm is competing.
Further, the importance of environmental and organizational variables when analyzing
the entrepreneurial orientation of firms has been highlighted by the model presented in
this analysis. In contrast to other models presented examining the EO construct, the model
presented in this manuscript is: 1) more comprehensive in that it simultaneously depicts
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the roles of organizational structure and environment and their impact on the relationship
between EO and firm performance; and 2) a normative model providing prescriptive
measures for varying environmental situations firms are facing. While early literature on
EO suggested that firms in hostile environmental contexts should adopt an entrepreneurial
posture (Covin and Slevin, 1989; Khandwalla, 1977; Miller, 1983), our arguments suggest
that an EO may be most conducive to firm performance in dynamic and munificent
environments. This is consistent with more recent findings suggesting that EO may be
negatively related to performance in hostile environments (Zahra and Bogner, 2000; Zahra
and Garvis, 2000).
This study offers prescriptive advice for organizations by suggesting that certain
environmental and organizational configurations provide the optimal situation for
entrepreneurial behaviors, while other specific environmental and organizational
configurations are not as optimal for entrepreneurial activities. By utilizing a configurational
approach, this study suggests that entrepreneurial behaviors do not always represent a
sound strategy for an organization. In particular, our model suggests that entrepreneurial
behaviors are not a preferred strategic approach in stable/hostile environments. In this
situation, firms exhibiting more conservative, non-entrepreneurial behaviors would be
expected to achieve a higher level of performance. Extending this logic, although the vast
majority of previous research has assumed a positive relationship between entrepreneurial
orientation and firm performance, we are suggesting that entrepreneurial behaviors will
only heighten performance in particular situations.
The model developed in this paper also has several important research implications.
While much of the previous research on this topic has utilized aggregated measures of
entrepreneurial orientation (Covin and Slevin, 1989), it is clear that the sub-dimensions of
EO may exhibit differential relationships with firm performance. Future empirical research
should address the configurations of EO that lead to the highest levels of firm performance
in various types of environments. This study provides important insights into the particular
environmental and structural characteristics that encourage firm performance, as well as the
manner in which these characteristics interact with the sub-dimensions of EO. Therefore,
researchers need to be cognizant of possible environmental and organizational influences
when creating models designed to test entrepreneurial behavior and firm performance.
This study suggests that the optimal levels of each dimension of EO will differ based
 ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE 49

on an organization’s environment. Thus, rather than seeking to have the highest level of
EO, an organization should seek to find the most effective configuration of its innovative,
proactive and risk-taking behavior. While each of these should be present in some form,
their configurational relationship is likely to differ in varying settings. Researchers are also
likely to benefit from exploring the moderating impact of environmental characteristics
and organizational structure when researching the topic of firm performance. While past
research studies have examined the role of environmental variables as moderators of the
EO-firm performance relationship (e.g. Covin and Slevin, 1989; Zahra and Covin, 1995),
no models have empirically analyzed a combined model of environment, structure, and
entrepreneurial orientation.
Future research should be conducted assessing the role that other important variables
may hold in the theoretical model developed in this paper. For example, organizational
strategy may also moderate the relationship between entrepreneurial orientation and firm
performance (Covin, 1991; Dess, Lumpkin, and Covin, 1997). The majority of these
studies have posited that differentiation strategies will lead to increased performance in
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entrepreneurial firms. Dess, Lumpkin, and Covin (1997: 681) argued that “innovative
differentiation is characterized by creativity in product development, original applications
of new technologies, up-to-date innovations, and quality design. Overall differentiation
strategies appear to fit well in a context of entrepreneurial strategy making given the
apparent similarity of purposes and means.” It is also possible that industry life cycle stage
may moderate the relationship between entrepreneurial orientation and firm performance
(Lumpkin and Dess, 2001). Numerous researchers have argued that entrepreneurial
strategies are most effective when employed by organizations in the growth stage of an
industry’s life cycle (MacMillan and Day, 1987; Sandberg and Hofer, 1987). Thus, future
research aimed at determining the potential moderating influences of strategy and life cycle
stage on the EO-performance relationship may help shed light on many of these important
relationships. Future research should also attempt to clarify the potentially reciprocating
nature of this model, as factors such as firm performance may also encourage even higher
levels of the sub-dimensions of entrepreneurial orientation.
In conclusion, this paper has developed a theoretical model describing the expected
relationships between the three sub-dimensions of entrepreneurial orientation,
organizational structure, environmental characteristics, and firm performance. The various
propositions contain important insights for both managers and researchers interested in
understanding and predicting firm performance in entrepreneurial firms. It is likely that
different configurations of EO and structure will lead to increased levels of performance
in various environmental contexts. It is hoped that these insights will help to provide a
framework for future research on this topic. Future studies aimed at determining the impact
of strategy and life cycle stage, as well as other important variables, may help provide even
more clarity regarding the fundamental relationship between entrepreneurial orientation
and firm performance.
Contact
For further information on this article, contact:

Patrick M. Kreiser, Ohio University College of Business, 304 Copeland Hall, Athens, OH 45701
Tel: (740) 597-3045
Email: kreiser@ohio.edu
or
 50 KREISER and DAVIS

Justin Davis, Ohio University College of Business, 310 Copeland Hall, Athens, OH 45701
Tel: (740) 593-2391
Email: davisj6@ohio.edu

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