International Journal of Business and Behavioral Sciences Vol. 3, No.

3; March 2013

The Role of Entrepreneurial Orientation on the Firm Performance Through Strategic

Flexibility ; A Conceptual Approach
Mohammad Arief , Prof. Armanu Thoyib, SE., M.Sc, Ph.D 2, Prof. Dr. Achmad Sudiro, SE., ME
1

3
, Dr. Fatchur Rohman, SE., M.Si 4
Faculty Of Economic And Business, Brawijaya University, Indonesia
Abstract
In the dynamic environment, organization should always have and develop a greater
competitive advantage against its competitors. To cope with the ever changing environment,
a firms need to increase Entrepreneurial Orientation (EO) conducted flexibly to improve firm
performance. This article attemps to develop a conseption of the relationship between EO to
firm performance by mediationg variable strategic flexibility. Although some previous
studies have shown that EO is directly related to firm performance, but other studies indicate
that the significance of the relationship between variables must be mediated by other
variables. The argument developed in this article is relatively still very few studies that use
strategic flexibility as a mediating variables of the relationship between EO to firm
performance. Thus, the purpose of this article is to explain the relationship between EO to
firm performance through strategic flexibility as a mediating variable.
Keyword: Entrepreneurial Orientation, Strategic Flexibility, Firm Performance

1. Introduction
In recent decades, the attention given by academics and practitioners on the topic of
entrepreneurship have experienced a significant increase. The occurs because of the
increased attention to the limitations of traditional societies, the proven entrepreneur is
able to survive in the ever – changing environment. Some authors argue that the ability of
the entrepreneur to be able to survive in the ever – changing environment because they are
highly dynamic, innovative, efficient, flexible and bold in taking business risks (Okpara,
2009).
Increased interest of researcher who have been studying about entrepreneurship led to this
field undergoes a rapid evolution. Some authors have tried to explain the field of
entrepreneurship based on the process to being entrepreneur (such, Low and
MacMillan,1988; Morris and Sexton, 1996), activities that should be performed by an
entrepreneur (such, Miller, 1983), as well as the ability of a must have to be entrepreneur
(such, Murray, 1984). Nevertheless, Lumpkin and Dess (2001) explained that the form of
entrepreneurship is a unity that cannot be separated. In the explanation, Lumpkin and Dess
(2001) noted that entrepreneurship is regarded as the core of the entrepreneurial process
that can answer questions about the process, and the ability of the entrepreneurial activity
that will determine the development of business. This concept is called the entrepreneurial
orientation (EO).
EO refers to the processes, practices, and decision-making activities that lead to new entry
(Lumpkin and Dess, 1996). The key dimensions that characterize an EO include a propensity
to act autonomously, a willingness to innovate and take risks, and a tendency to be

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aggressive toward competitors and proactive relative to marketplace opportunities.

Business oriented organizations will enchance the EO behavior in the form innovative,
willing to take risks and always trying to produce new products through proactive behavior
in order to capture market opportuniy (Covin and Slevin, 1991; Wiklund and Sheperd, 2005).
Earlier theoretical work proposed a contingency framework for exploring the relationship
between EO and a firm performance and suggested the usefulness of considering EO as a
multidimensional construct (Lumpkin and Dess 1996). From the behavioral perspective,
Covin and Slevin (1989) shows the conceptual model of EO based on entrepreneurial
activity, include innovative, proactive and risk taking. Based on that model, Covin and Slevin
(1989) showed that the EO is related on the firm performance. Nonetheless, some
researchers (see. Covin and Slevin, 1991; Lumpkin and Dess, 1996; Weaver, et al., 1998;
Mason, 2006; Kraus, et al., 2012) assume that the complexity of the environmental factors
play a role against the strength of the relationship between EO and performance. Hence,
the relationship between EO and performance can be mediated by other variables. Some
authors argue that the environment will lead to the company must be flexible in crafting a
strategy that will be used. With the strategic flexibility the company will be able to adapt to
changes in the environment through continuous changes (Yu, 2012).
With this paper, we attempt to contribute additional empirical evidence that clarifies the
relationship among EO on the firm performance. We argue that the difference in the
findings of several studies that examine the relationship between EO on the performance of
the above led to the emergence of the gap can be traced further. Furthermore, some
authors argue that that relationship may be more complex and the impact caused cannot be
viewed in a simple manner (Wiklund and Sheperd, 2005; Yu, 2012). This issue has led
researchers to recognise the convenience of expanding research to different scopes
(Cervera, et al., 2001). By integrating strategic flexibility, this article tries to link the new
chain of consequences brought about EO on the firm performance.

2. Theoretical Background
Entrepreneurial Orientation
Basically, the concept of entrepreneurship is not a new field in business ventures. It's just
that, some of the authors had previously always use different terms in the explain
conception of entrepreneurship. For example, Mintzberg (1978) wrote about
entrepreneurial firms, referring to them as “entrepreneurial organizations” in the case of
former. Miller and Freisen (1982) describes 'entrepreneurial' firms may try to obtain a
competitive advantage by routinely making dramatic innovations and taking the
concomitant risks. Miller (1983) describes the company entrepreneuriship as “one who is
involved in product innovation, market-driven business, do a little risky, and it first came up
with the proactive innovation, as well as provide punch to beat competitors”.
In the development, some of the further authors explained entrepreneurship concept
operationalizations to describe levels that exist in the organization. Covin and Slevin (1989)
defines an EO as the processes, structures, and behaviors of firms that are characterized by

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innovativeness, proactiveness, and risk taking. Based on an approach Miller (1983), Covin
and Slevin (1991) lists three types of organization-level behavior to represent the EO,
include: (1) risk taking top management (e.g., about investment decisions and strategic step
in spite of uncertainty), (2) the behavior with the trends in technological leadership; and (3)
the tendency of corporate culture to compete aggressively and proactively with competitors
in the industry. The third dimension of the EO have been studied extensively and widely
accepted, for example, Quince (2003); Galetid and Milovanovid (2004); Avlonitis and
Salavou, (2007); Naldi, et al., (2007); Kropp, et al., (2008); Okpara (2009); Xaba and Malindi
(2010).
EO And Performance
EO is set of abilities that are owned by a firm to deminstrate innovative behavior, courage in
taking risks and more proactive in the face of new market opportunity (Lumpkin and Dess,
1996; Wiklund and Sheperd, 2005). Study literature has been describe that EO is an
important factor in determining the firm performance (Miller, 1983; Lumpkin and Dess,
2001; Wiklund, 1999; Wiklund and Shepherd, 2005). Firm with strong EO will show the
capability to exploit market opportunity (Smart and Conant, 1994; Wiklund and Sheperd,
2003), as well as they can respond to the challenges of competition and the dynamics of the
environment (Low and MacMillan, 1988; Lumpkin and Dess, 1996).
Previous studies showed that the direct effect between EO gives rise to consequences on
the firm performance (Covin and Slevin, 1989; Smart and Conant, 1994; Lumpkin and Dess,
1996; Wiklund, 1999; Lee and Peterson, 2000; Nelson and Coulthard, 2005; Loss and
Coulthard, 2006; Naldi, et al,. 2007; Kaya, 2009; Li, et al., 2009). The outcome of some
research can be described in Figure 1.
Figure 1. Direct Effects Of EO On The Firm Performance

Innovativeness

Proavtiveness Entrepreneurial Organizational

Orientation Performance

Risk Taking

Nevertheless, Lumpkin and Dess (1996) argued that the relationship between EO
and business performance is context specific and introduce the integrative framework for
exploring this relationship. This statement indicate that when the influence of EO was made
into a model, then the direct influence became less meaningful. Turbulence environment
will cause the influence from EO on the firm performance are becoming increasingly
complex (Wiklund and Sheperd, 2005; Yu, 2012). Furthermore, another authors argue that
the complexity that occurs in the relationship between EO and firm performance can be

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developed through integration of other variables. These variables can serve as mediation or
moderation.
3. Model Development
In the context of entrepreneurship, Okpara (2009) explains that one of the characteristics
inherent in it is the flexibility in taking a decision. The flexibility that exists on the
organization caused due to the limitations of traditional societies, so that the organization
can not adapt to the environment that is always changing. The flexibility that is owned by an
organization is a very important component in the face of environmental changes (Aaker
and Mascarenhas, 1984; Volberda, 1996; Hitt, et al., 1998; Combe and Greenley, 2004;
Ferreira and Azevedo, 2007). Entrepreneurial need to have a flexible organization, so as to
devise strategies that are able to adapt and adjust to changes in the environment (Hill,
2001; Coulthard, 2007). Within the theoretical perspective, EO which consists of behaviors
that are innovative and dare to take risks, require organizations to demonstrate flexible
behaviour (Simon, et al,. 2011).
Based on the above explanation, then the development of the conception of the
relationship between EO and firm performance can be done through the use of the strategic
flexibility as variables which mediate that relationship. The use of the strategic flexibility as
variables that mediate the relationship between EO and firm performance based on the
explanation given by some of the researchers in advance, where a component of the
environmental factors that will affect the firm performance, such Covin and Slevin (1991);
Lumpkin and Dess (1996); Sushil (2005); Matthyssens, et al., (2005); Zhang (2005); Mason
(2006); Ferreira and Azevedo, (2007); Supara, et al., (2007); Kraus, et al., (2012); Yu (2012).

Figure 2. Proposed Direct and Indirect Effects of EO on Firm Performance

Strategic
Flexibility

Entrepreneurial Organizational
Orientation Performance

Strategic flexibility described about the company's ability to perform allocation and
reconfiguration of resources belonging to cope with environmental change (Sanchez, 1995;
Shimizu and Hitt, 2004). Furthermore, Li, et al,. (2011) explained the statement issued by
arguing that the strategic flexibility may be able to serve as mediation of the relationship
between EO and performance. The role of strategic flexibility as mediators of the
relationship between EO and firm performance relates to the decision-making is done by
the entrepreneur, the ability to manage risks, and ability to communicate that can motivate
employees in an effort to find problem solving (Matthyssens, 2005).

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4. Conclusion
Previous research suggests a relationship between EO on firm performance, such Covin and
Slevin (1991); Lumpkin and Dess (1996); Wiklund (1999); Liu, et al, (2009); Simon, et al.,
(2011). Even so, some of the last article suggested that the positive relationship between EO
and firm performance is affected also by a variety of factors, such as dynamism of the
environment, changes in technology and market structure (Lumpkin and Dess, 1996,
Wiklund and Sheperd, 2005). To resolve it, then the company needs to be more flexible in
running business activity. Flexibility will impact on the ability of companies to adapt to the
dynamics of the environment. Furthermore, with the company's ability to adapt to changes
in the environment cause they can devise a flexible strategy.
From some previous studies, EO will be positively associated if mediated by specific
variables. Explicitly, some researchers such as Covin and Slevin (1991); Lumpkin and Dess
(1996); Zhang (2005); Mason (2006); Ferreira and Azevedo (2007); Kraus, et al., (2012); Li, et
al., 2009; Yu (2012), provide recommendations that the significance of the relationship
between EO on the firm performance can be achieved through the mediation of the variable
strategic flexibility. Following our discussion of the relationship between EO on firm
performance, we argue that the firm must enhance the flexible behavior in determine a
strategy. As a consequence, a firm can follow the dynamic environment, will eventually
affect the performance of the organization as a whole. The dimensions on the EO provide
the basis for the organization in determining the flexible behavior to compose a strategy.
Such a strategy further provides the foundation for a sustainable competitive advantage
Although the dynamic environmental factors can also affect the relationship between EO
with the firm performance, but at this articles environmental factors not included in the
development of the framework. We argue that environment will be a stimulus factor from
the relationship between EO and firm performance. Hence, the implementation of the
strategic flexibility within the a firm already describe the dynamics of the environment. This
was confirmed by a statement from Hill (2001) that entrepreneurial activities need to have a
flexible organization, so as to devise strategies that are able to adapt and adjust to changes
in the environment.
Even though the conception of the relationship between EO on the firm performance has
can be developed, but this article has a number of limitations. First, previous studies
indicate that environmental factors play a role in moderating the relationship between
variables. On the other hand, environmental factors are not included as a component that
can develop the relationships between variables. Therefore, in future research can be
developed further the role of environmental factors that can moderate the relationship
between EO and market orientation with the performance.
Second, the framework of the strategic flexibility has multiple dimensions. This article does
not explain in detail about the dimensions of strategic flexibility that can mediate the
relationship between EO and firm performance. Therefore, in the future research can be
explained in more detail about the strategic flexibility that mediates these relationship.

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Third, the explanation is still persuasive in nature, thus requiring empirical support. Further
research may be empirical proof of the relationship is examined..
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