Entrepreneurial Orientation, Organizational Culture, and Firm Performance: An Empirical Study in the Banking Industry

Ken Chadwick, Nicholls State University

Tim Barnett, Louisiana Tech University

Sean Dwyer, Louisiana Tech University

Executive Summary

The objective of this study is to further the extant research on firm-level entrepreneurship by empirically assessing the relationships between (1) entrepreneurial orientation and firm performance, and (2) organizational culture and entrepreneurial orientation. To test our hypotheses, a self-report questionnaire was mailed to a national sample of 2,100 bank presidents. A total of 535 completed and usable questionnaires were returned. After controlling for bank size and age, no significant relationship was found between entrepreneurial orientation and any of the three measures of firm performance. However, there is empirical support for the theoretical link between organizational culture and entrepreneurial orientation.

Firm-level entrepreneurship, and especially its link to performance, has, and continues to generate high levels of interest among scholars and practitioners. Much of this attention results from the perception that firms which engage in relatively high levels of risky, proactive, and innovative behaviors can effectively develop, maintain, and/or enhance organizational competitiveness and performance (Covin & Miles, 1999). Barrett and Weinstein (1999) suggest that the proliferation of research has enriched the field in terms of improved conceptualizations, modeling, and empirical study. However, the abundance of both anecdotal and empirical evidence espousing a positive relationship between entrepreneurship and performance has led many to view entrepreneurship as inherently beneficial. Such beliefs may have resulted in numerous managers experiencing pressure from stakeholders to engage in higher levels of entrepreneurial activities (Wiklund, 1999), possibly to the detriment of the firm.

While much of the published research in the field does support a positive relationship between entrepreneurial orientation and firm performance, additional empirical evidence is needed before researchers or practitioners should, with confidence, encourage wholesale adoption of an entrepreneurial orientation (Wiklund, 1999). Evidence suggests that an entrepreneurial orientation may not always be appropriate (e.g., Karagozoglu & Brown, 1988; Naman & Slevin, 1993; Zahra & Covin, 1995). In addition, other studies imply that firms that are overly focused on any strategic orientation may divert attention and resources away from what may be equally, or more, important concerns. For example, Covin and Slevin (1989) found that strategic posture was not a significant independent predictor of firm performance. Also, while Wiklund (1999) did report a significant and enduring association between entrepreneurial orientation and firm performance, access to financial capital had a larger influence on performance. In sum, the notion that an entrepreneurial orientation provides a fundamental firm-wide advantage remains in question and in need of additional examination.

Further research is also needed to more specifically identify in what context an entrepreneurial orientation may best be supported. Covin and Slevin (1991), in developing their Model of Entrepreneurship as Firm Behavior, identified three categories of variables that could be theoretically or empirically linked to a firm’s ability to successfully develop and/or maintain an entrepreneurial orientation—environmental, strategic, and internal. Included among the latter was organizational culture, a focus of the current study. Other potentially significant variables have also been proposed and tested. And while over 45 empirical papers have examined organizational and environmental factors that influence a firm’s entrepreneurial activities and/or the outcomes of these activities (Zahra, Jennings, & Kuratko, 1999), a framework for fully explaining and predicting firm-level entrepreneurship has not yet been achieved. Increasing understanding in this regard will require continued efforts to identify, test, and retest the nature, antecedents, and effects of an entrepreneurial orientation.

One potentially important factor that may influence the direction, nature, and effect of entrepreneurial activities is organizational culture (Zahra, 1993; Zahra, et al., 1999). In fact, Cornwall and Perlman (1990) suggest that organizational culture is a key determinant of entrepreneurial orientation. Other researchers, in recognizing organizational culture's potential influence on EO, have called for an examination of the relationship between organizational culture and entrepreneurial orientation (e.g., Covin & Slevin, 1989, 1991; Pearce, Kramer, & Robbins, 1997). However, the influence of organizational culture on a firm’s ability to develop, maintain, or enhance entrepreneurial orientation has not been empirically tested. The primary objective of this study is to fill this void in the literature.

This paper reports the results of a national study in which the entrepreneurial orientation, organizational culture, and performance of banks were examined. The purpose of the study was to empirically examine the influence of entrepreneurial orientation on firm performance in an industry-specific setting; and to explore the antecedent influence of organizational culture on entrepreneurial orientation. Thus, this study attempts to answer two research questions: (1) What is the relationship between entrepreneurial orientation and firm performance? and (2) What is the association between organizational culture and entrepreneurial orientation?

Background and Hypotheses

Various typologies have been proposed to describe and operationalize the concept of strategic posture. Miles and Snow (1978) view strategic posture as relatively enduring patterns of strategic behavior that seek to align the organization with its environment. Different postures are posited as having a particular strategy and combination of structure, culture, and processes for responding to the environment. Like Miles and Snow (1978), Mintzberg (1973) suggests that firms can be characterized according to their approach to strategic management. He describes various attributes that correspond to different "strategy-making modes." Both typologies describe the concept of strategic posture as the relationships between the organization and the environment. Each provides a useful basis for understanding firm-level behavior (Covin 1991).

According to Covin and Slevin (1989), another method of describing and operationalizing the concept of strategic posture is the entrepreneurial orientation of the firm. Firms that display relatively high levels of risk-taking, innovative, and proactive behaviors have entrepreneurial strategic postures (i.e., entrepreneurial orientation). Those firms that display relatively low levels of these behaviors have conservative strategic postures (i.e., conservative orientation). According to Miller (1983), these three components of strategic posture comprise a basic, unidimensional strategic orientation.

In the present study entrepreneurial orientation is defined as that strategic posture characterized by a firm's engagement in relatively high levels of risk-taking, proactivity, and a propensity to develop and introduce new product innovation (Miller, 1983). According to this perspective, entrepreneurship is viewed as a characteristic of organizations that can be measured by examining firm-level behaviors (Covin & Slevin, 1989). This is consistent with the widely held perspective of many researchers in the field (e.g., Burgelman & Sayles, 1986; Covin & Slevin, 1989, 1991; Lumpkin & Dess, 1996; Naman & Slevin, 1993; Stevenson & Gumpert, 1985; Zahra & Covin, 1995).

Covin and Slevin (1991) state that increased interest in the study of entrepreneurship results from the belief that a focus on relatively high levels of risky, proactive, and innovative behaviors leads to improved firm performance. This perspective suggests that entrepreneurial oriented firms are able to position themselves to take advantage of market opportunities. Such firms are able to target premium market segments, charge high prices, and establish industry standards (Wiklund, 1999; Zahra & Covin, 1995). Such first-mover advantages play a critical role in a firm’s ability to develop and/or sustain competitive advantages over rivals and achieve above-average profitability.

Most of the recently published empirical evidence supports a positive relationship between entrepreneurial orientation and firm performance. Covin and Slevin (1986) found a simple correlation of r = .39 (p < .001) between entrepreneurial posture and a multivariable measure of firm performance. Both Zahra (1991), and Smart and Conant (1994), reported a positive relationship between entrepreneurial activities and firm performance. Zahra and Covin’s (1995) longitudinal study found a positive and significant association between entrepreneurial activities and return on assets and return on sales. More recently, Wiklund (1999) investigated the sustainability of the entrepreneurial orientation to performance relationship. In addition to finding a positive association between the variables, they reported that the strength of the relationship increased over time. This suggests that the effects of entrepreneurial orientation appear to be long term and persistent.

While there exists some ambiguity regarding the financial impact of entrepreneurial orientation (e.g., Covin & Slevin, 1989; Covin, Slevin, & Schultz, 1994; Fast, 1981), both theoretical and empirical research generally supports a positive relationship with firm performance.

H1: Entrepreneurial orientation is positively associated with firm performance.

Cornwall and Perlman (1990) state that organizational culture is a key determinant of a firm’s ability to understand, develop, or maintain entrepreneurial activity. Firms seeking to develop or maintain an entrepreneurial orientation must also develop or maintain a “positive culture”—one that is congruent with the firm’s vision, mission, and strategies. In an entrepreneurial oriented firm a positive culture would be one that supports risk-taking, opportunity seeking, and innovation. Therefore, we expect organizational culture to be associated with entrepreneurial orientation.

However, the nature of this relationship--positive or negative--is expected to vary with the culture type emphasized within the firm. For example, Burgelman and Sayles (1986) state that culture can encourage or discourage business-related risk-taking. By examining specific organizational types, it can be inferred that, for example, an adhocracy culture, which stresses the values of creativity, adaptability, change, and a focus on the external environment (Denison & Spreitzer, 1991), can be expected to provide the context for the development or enhancement of an entrepreneurial orientation. Conversely, a hierarchy culture, with a focus on stability, order, rules, and regulations (Zammuto & Krakower, 1991), reflects the norms and values associated with a more conservatively oriented strategic posture. This emphasis on a more mechanistic form of organization can be expected to negatively affect a firm's ability to create and maintain entrepreneurial behaviors.

The effect of two other types of organizational culture--market and clan--on the ability of a firm to create and maintain a specific strategic posture is less clear. The market culture emphasizes not only the achievement of a competitive position for the overall system, but also planning, efficiency, and the attainment of well-defined goals. The clan culture focuses on flexibility and the development of human potential but does so through consensus building and an emphasis on the internal organization. Thus, the relationships between market and clan cultures and entrepreneurial orientation are ambiguous. This uncertainty results from their emphases on various values and ideals that are expected to both positively and negatively influence a firm's ability to create and maintain specific postures.

H2a: Adhocracy culture is positively associated with entrepreneurial orientation.

H2b: Hierarchy culture is negatively associated with entrepreneurial orientation.

Methods

Sample

This study employed a single-industry sampling frame to control for the potential effects of environmental forces on firm performance. The banking industry was chosen because deregulation is likely to increase the heterogeneity of strategies used (Delery & Doty, 1996). Also, all banks are required to report common types of financial data. Thus, objective financial data on all domestic banks was available from secondary sources. As a result, the representativeness of the sample was not biased by incomplete financial information (Delery & Doty, 1996).

The total population of banks was stratified into three categories based on total assets: assets less than or equal to $100 million, assets greater than $100 million and less than or equal to $500 million, and assets greater than $500 million. Seven hundred banks from each asset category were randomly selected, resulting in a total sample of 2,100 banks.

The questionnaire was sent to the president of each bank. Targeting senior executives was consistent with literature suggesting that such individuals are most knowledgeable about their bank's entrepreneurial activities and firm performance (Hambrick, 1981; Snow & Hrebiniak, 1980; Zahra, 1991). Non-respondents were sent a second questionnaire three weeks following the first mailing. Returned questionnaires were considered usable data only when the questionnaires were completely filled out. Questionnaires with blank sections were deleted from subsequent analyses. A total of 535 completed and useable questionnaires were received, yielding a response rate of 25.5%.

The data were analyzed for potential outliers using procedures recommended by Hair, Anderson, Tatham, & Black, (1995). In the data cleaning stage, frequencies were examined to identify data entry errors and/or easily observed outliers. Potential outliers were flagged and noted as such in subsequent analyses.

Non-response bias was assessed by comparing respondents from the two waves of questionnaires (Armstrong & Overton, 1977). Neither multivariate nor univariate analyses indicated any significant differences between the first and second wave of respondents based on any of the study variables of interest.

Of the individuals responding to the survey, 462 (87%) listed their current job title as President/CEO and 39 (7%) as Vice-President. Respondents averaged 51 years in age, had been with their present banks an average of 16 years, and in their present position an average of 8.5 years.

Almost 34% of the responding banks had assets of $100 million or less, 38% had assets greater than $100 million and less than $500 million, and 28 percent had assets greater than $500 million. For the banks in the sample, the mean return on assets (ROA) for the year ending 1997 was 1.24%. This closely approximated the 1.23% average 1997 ROA reported in the Federal Deposit Insurance Corporation’s (FDIC) Internet site for the entire population of banks in the US. The mean return on equity (ROE) for the year ending 1997 for the sampled banks was 13.67%. This was a little lower than the 14.49% average 1997 ROE reported in the FDIC's Internet site for all US banks.

Variables and Data Analysis

Entrepreneurial Orientation. Entrepreneurial orientation was viewed as a characteristic of organizations that can be measured by examining a firm's behavior as it engages in the entrepreneurial process (Covin & Slevin, 1986). According to Miller (1983), entrepreneurial orientation is demonstrated in firm-level risk-taking, innovative, and proactive behaviors. These behaviors were captured in the 9-item, 7-point Likert type “Entrepreneurial Orientation” scale. The scale was originally developed by Khandwalla (1977) and subsequently refined by Miller and Friesen (1978, 1982) and Covin and Slevin (1989). This Entrepreneurial Orientation scale, or slightly modified versions of the instrument, is one of the most commonly used measures of firm-level entrepreneurship (Merz, Parker, & Kallis, 1990; Zahra et al., 1999). Wiklund (1998) identified 12 or more studies that were based on the scale. According to Zahra, et al. (1999), researchers have demonstrated a high degree of consistency in measuring firm-level entrepreneurship, with most using the Entrepreneurial Orientation scale, or slightly modified versions.

As per previous research, the mean ratings on the items were used as a measure of entrepreneurial orientation. The higher the score, the greater the degree to which a firm is entrepreneurial oriented (Covin & Slevin, 1989). The lower the score, the greater the degree to which a firm is conservatively oriented.

The Cronbach’s coefficient alpha value for the scale was 0.81. This exceeds the 0.70 threshold recommended by Nunnally (1978), and approximates the values of 0.91, 0.87, 0.81, and 0.83 reported by Barrett and Weinstein (1999); Covin and Slevin (1989); Naman and Slevin (1993); and Knight (1997), respectively. To further assess the internal consistency of the scale, the statistical significance of coefficient alpha was assessed, following a procedure recommended by Feldt, Woodruff, & Salih (1987). For the Entrepreneurial Orientation scale, the calculated F value of 5.26 exceeded the critical F value of approximately 2.51 (p < .01) providing additional evidence of internal consistency.

Organizational Culture. Organizational culture was assessed using Quinn and Spreitzer’s (1991) 16-item scale designed to measure four types of organizational culture. The “Competing Values” scale, adapted from Cameron (1978), identifies the types of organizational culture as (1) Market (2) Clan, (3) Hierarchy, and (4) Adhocracy. The scale uses four items to describe each of the four culture types. Likert items scored on a 7-point scale ranging from "1 = strongly disagree" to "7 = strongly agree" comprised the scale.

The Competing Values scale used in this study has a strong theoretical foundation and its dimensionality and psychometric properties are well established (Cameron & Quinn, 1999). Acceptable levels of reliability, in terms of Cronbach’s coefficient alpha, have been reported by several researchers (e.g., Quinn & Spreitzer, 1991; Yeung, Brockbank, & Ulrich, 1991; Zammuto & Krakower, 1991). As Cameron and Quinn (1999, p. 140) note, “Sufficient evidence has been produced regarding the reliability of the [scale] to create confidence that it matches or exceeds the reliability of the most commonly used instruments in the social and organizational sciences.” In the present study, the adhocracy culture scale's estimated coefficient alpha value was 0.74. The estimated coefficient alpha values for clan, hierarchy, and market culture scales were 0.68, 0.54, and 0.51, respectively.

Firm Performance. Firm performance was assessed using both subjective and objective measures. The use of multiple measures recognizes the multifaceted nature of firm performance and the advantages in integrating various measures in empirical studies (Lumpkin & Dess, 1996).

The Weighted Average Performance scale is a modified version of an instrument developed by Gupta and Govindarajan (1984). Respondents were first asked to indicate on a 5-point Likert-type scale, the degree of importance their firm attaches to sales level, sales growth rate, cash flow, return on shareholder equity, gross profit margin, net profit from operations, profit to sales ratio, return on investment, and ability to fund business growth from profits. The respondents were then asked to indicate on another 5-point Likert-type scale, the extent to which they are currently satisfied with their firm's performance on each of the financial performance criteria.

This measurement scale has been used numerous times in previous entrepreneurial research and acceptable levels of reliability have been reported. Covin and Slevin (1988, 1989); Covin et al. (1997); and Naman & Slevin (1993) reported Cronbach’s coefficient alphas for the Weighted Average Performance scale of 0.78, 0.88, 0.93, and 0.81 respectively. In the present study, the estimated coefficient alpha for the Weighted Average Performance scale was 0.85

Two objective financial performance measures were also examined. Return on assets (ROA) and return on equity (ROE) for year ending 1997 were employed because both are key indicators of profitability within the banking industry (Delery & Doty, 1996). For example, ROE represents the central measure of the strength of any financial institution (Earle & Mendelson, 1991) and is a preferred measure of a bank’s financial performance (Bird, 1991; Hopkins & Hopkins, 1997). The measures of ROA and ROE were obtained from the FDIC's web site.

Control Variables. Two control variables, also obtained from the FDIC's Internet site, were included in the analysis. The first, bank size, has been shown to have a direct effect on financial performance (Richard, 2000; Shepherd, 1975; Winn, 1977). To enhance the normality of skewed data (Hair et al., 1995) bank size was measured as the natural logarithm of total bank assets in millions. This is an established method of accounting for variances in firm performance and has been used in multiple bank-related studies (e.g., Delery & Doty, 1996; Hopkins & Hopkins, 1997; Richard, 2000).

While previous research has examined the relationship between company size and entrepreneurship (Kamien & Schwartz, 1982), the effect on entrepreneurial activity is unclear. For example, while a smaller company's simple structure may allow it to respond quickly to changing markets, the firm may lack the financial resources necessary for entrepreneurial activities. However, smaller companies are generally believed to be more innovative than larger firms (Scherer, 1980; Zahra, 1995).

Company age, measured as the number of years from the founding date, was also included as a control variable. Younger companies, in search of brand recognition customer loyalty, and competitive advantages, are believed to be more innovative than older firms (Acs & Audretsch, 1988). Also, older companies tend to focus on existing products, services, and technologies, while using marketing to establish their position (Zahra, 1995).

Results

Table 1 reports the means, standard deviations, and correlations for the study variables. The correlations between entrepreneurial orientation and both weighted average performance (r = 0.09) and ROE (r = 0.11) were significant at the 0.05 level. Significant correlations were also found between entrepreneurial orientation and both adhocracy culture (r = 0.66, p < 0.01) and hierarchy culture (r = -0.13, p < 0.05). Also, entrepreneurial orientation was positively associated, at the 0.05 level of significance, with market culture (r = 0.29).

Table 1: Means, Standard Deviations and Correlations

EO AC HC CC MC WAP ROA ROE BA YR

EO

AC .66**

HC -.13** -.03

CC .10* .21** .27**

MC .29** .37** .26** -.01

WAP .09* .07 .09* .16** .12**

ROA .02 .04 -.06 .08 .10* .43**

ROE .11* .12** -.03 .01 .14** .45** .77**

BA .27** .15* -.11** -.13** .16** .12** .11* .26**

YR .10* .01 .02 .03 -.07 -.03 .01 -.07 .17**

M 4.14 4.70 4.75 5.51 4.56 0.43 1.24 13.67

sd 0.85 0.97 0.85 0.79 0.83 0.63 0.40 4.75

** = p < 0.01 level

* = p < 0.05 level

EO = Entrepreneurial Orientation WAP = Weighted Average Performance

AC = Adhocracy Culture ROA = Return on Assets Year Ending 1997

HC = Hierarchy Culture ROE = Return on Equity Year Ending 1997

CC = Clan Culture BA = Natural Log of Total Bank Assets

MC = Market Culture YR = Age of Bank in Years

As posited by H₁ we expected to find a positive relationship between entrepreneurial orientation and firm performance. The results of the hierarchical regression analysis are shown in Table 2. To remove extraneous influences on the three dependent performance variables, bank size and bank age were first entered into the regression equation. The independent variable—entrepreneurial orientation--was entered in the next step. No significant relationships were found between entrepreneurial orientation and any of the three measures of firm performance.

Table 2

Regression Results: Entrepreneurial Orientation and Performance

Independent Variable	Dependent Variables
	WAP (n = 514)	ROA (n = 510)	ROE (n = 510)
Total Assets Bank Age	0.12^a** -0.07 (0.02)^b	0.13** -0.01 (0.01)	0.27*** -0.12 (0.08)
Entrepreneurial Orientation	0.07 (0.00)	-0.06 (0.00)	0.05 (0.00)
Adjusted R^2	0.02	0.01	0.08

^a Standardized regression coefficients are shown

^b Changes in Adjusted R² are shown in parentheses

*** = p < 0.001

** = p < 0.01

Further analysis was performed by classifying firms as either conservative or entrepreneurial based on their score on the Entrepreneurial Orientation scale. Those that scored less than 3.5 were classified as conservative. Firms that scored above 4.5 were classified as entrepreneurial. Firms with scores of 3.5 to 4.5 on the 7-point scale could not be unambiguously classified and were omitted from this analysis. This classification technique has been used in previous firm-level entrepreneurship research to create distinct conservative and entrepreneurial subgroups (Covin, 1991; Karagozoglu & Brown, 1988; Miller & Friesen, 1982).

Multivariate analysis of co-variance was conducted on the three performance measures with bank size and age as co-variates (see Table 3). The conservative versus entrepreneurial banks had mean scores of 0.38 and 0.55 on the weighted average performance measure, 1.26% and 1.25% for return on assets, and 13.06% and 14.65% for return on equity, respectively.

Table 3: MANCOVA Results

Entrepreneurial Versus Conservative Orientation

Performance Variables Comparison of Subgroups
Test	Multivariate Test Values	F	Significance of F
Multivariate Tests Pillais Hotellings Wilks Roys	0.057 0.060 0.943 0.060	5.836 5.836 5.836 5.836	0.001 0.001 0.001 0.001
Univariate Tests Weighted Average Performance Return on Assets Return on Equity		2.687 1.138 1.739	0.102 0.287 0.188

The multivariate analysis of co-variance resulted in a significant multivariate effect (F_3,292 = 5.84, p < 0.01). Thus, when the three measures are assessed as an overall evaluation of performance, entrepreneurial banks were found to perform significantly better than conservative banks. An examination of the mean scores for the two subgroups reveals that the difference was attributable to the higher weighted average performance and ROE scores for entrepreneurial versus conservative banks.

Next, we examined whether entrepreneurial banks outperformed conservative banks on any of the three performance measures individually. No significant univariate results were found for the three performance measures. Significant results were found for bank size and ROA (F_1,296 = 5.49, p < 0.05) and for bank size and ROE (F_1,296 = 19.39 p < 0.001).

The results of the regression analysis used in testing H₂ are presented in Table 4. Bank age and the natural log of total assets were entered in the first step followed by the four organizational culture types. As expected, after controlling for age and size, the organizational culture types explained an additional 41% of the variance in entrepreneurial orientation. The overall statistical significance of the regression equation was F _6,504 = 78.69, p < 0.001. Specifically, adhocracy culture was found to be significantly and positively related to entrepreneurial orientation (B = 0.60, p < 0.001). Thus, banks with stronger emphasis on an adhocracy culture were more entrepreneurial oriented than banks that put less emphasis on an adhocracy culture. Hierarchy culture was found to be significantly and negatively related to entrepreneurial orientation (B = -0.12, p < 0.01). This shows that banks with a stronger emphasis on a hierarchy culture were more conservatively oriented than banks that put less emphasis on a hierarchy culture. In addition, market culture was found to be significantly and positively related to entrepreneurial orientation (B = 0.08, p < 0.05). Thus, banks with a stronger emphasis on a market culture were more entrepreneurial oriented than banks that put less emphasis on a market culture. An examination of the beta coefficients revealed information about the strength of the relationships between these three culture types and entrepreneurial orientation. Adhocracy culture (B = 0.60, p < 0.001), had a stronger association with entrepreneurial orientation than did hierarchy culture or market culture. Hierarchy culture, in turn, had a stronger association with entrepreneurial orientation than did market culture. Therefore, the results of the analysis strongly support H₂.

Table 4

Regression Results: Organizational Culture and Entrepreneurial Orientation

Independent B Change in R^2 Variables
Bank Assets 0.15 ^a*** Bank Age 0.07 * 0.07 ***
Adhocracy Culture	0.60 ***
Hierarchy Culture	-0.12 **
Clan Culture