William E. BakerSan Diego State UniversityWilliam.baker@sdsu.edu

Co-authored by:Nukhet Harmancioglu, Koc University, Istanbul

Amir Grinstein, Ben Gurion University

Firms with strong Entrepreneurial Orientations (EO) are associated with strong innovation capabilities.

However, A strong EO is characterized by behaviors that produce high levels of risk.

Are there activities can help firms to increase innovation success without having to accept higher levels of risk?

“No company today, no matter how large or how global, can innovate fast enough or big enough by itself. Collaboration – externally with consumers and customers, suppliers and business partners, and internally across business and organizational boundaries – is critical” --A.G. Lafley, CEO of P&G

Mark Parker, the CEO of Nike, works with a global network of tattoo and graffiti artists, DJs, fashion designers, musicians, and industrial designers to broaden the scope of Nike’s innovation activities

Market orientation (MO), learning orientation (LO) and entrepreneurial orientation (EO) are all linked to learning, innovation and firm performance.

Of these, EO is the most aggressive and is most often associated with a business philosophy predicated on the ability of firms to challenge existing views of the marketplace

Strong EO cultures are associated with innovativeness, proactiveness and risk-taking.

Strong EO firms prioritize exploiting new market and product opportunities. More so than MO, EO is associated with breakthrough, radical innovation.

For these reasons scholars have long recommended firms to couple strong MOs with strong EOs to improve the ratio of radical to incremental innovation

Too Big a Risk?Too Big a Risk? High EO, however, demands a cultural orientation that is too

aggressive for many firms.

Suggesting that all firms have a strong EO is similar to suggesting that all firms should be prospectors rather than a mix of

prospectors, analyzers and defenders.

An important resource which is central to the concept of organizational learning, but which has received little attention in the marketing literature is social capital (SC)

Nahapiet and Ghoshal (1998) define SC as “the sum of actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit”

Such resources that “extend beyond the firm's boundaries” and which may be embedded within inter-organizational processes and activities are called external social capital.

ESC is known to produce diverse and non-redundant information that improves not only firms’ information acquisition processes, but also their information interpretation processes.

As a result, strong ESC capabilities may enable firms to detect trends, draw novel insights and confirm opportunities earlier than firms with weak ESC capabilities.

In essence, ESC may simulate the exploratory learning capabilities of a strong EO, but without the need for an aggressive culture.

In other words, ESC may be a low risk substitute for EO.

Both EO and ESC foster innovation success through their ability to foster the type of learning that helps firm to identify unique opportunities

Strong ESC is expected disproportionately benefit the innovation

programs of more conservative (low EO firms) by giving them the confidence to move forward with innovation programs that might otherwise be deemed as too risky.

External Social Capital

Entrepreneurial

Orientation

Share of New Product Sales

Market Response Speed

Industry-level Covariates IndustryCustomer TypeCompetitive IntensitySupplier Price Negotiation Ease of Competitor EntryTechnological ChangeGovernment RegulationCustomer Loyalty Stability

Sampling frame: • A commercially supplied list of 12,500 US firms• A broad cross-section of industries, managers and manager

functions

Opt-in research panel: managers, senior managers (e.g., director, vice-president, district manager, group leader) or top management (e.g., owner, CEO, CFO, COO, senior vice-president)

Response rate: N=3,534 surveys (29.5%response rate)

• Final sample= 1648 (half from SMEs, half from large firms)

MEASURES LOADING

Share of New Product Sales (7 point Likert scale; 1= low, 7= high)

Percentage of sales generated by new products or services relative to major competitors n.a.

Market Response Speed (7 point Likert scale; 1=strongly disagree, 7=strongly agree)For one reason or another, we tend to respond slowly to changes in our customer’s product or service needs

.89

Even if we came up with a great marketing plan, we would not implement it in a timely fashion .83

We tend to take longer than our competitors to respond to marketplace events. .89

Entrepreneurial Orientation (7 point semantic differential scale)1 Market tried and true products and services…..Market new to the market products and services .67

2 Innovate products and services only after others have shown these innovations to be successful….. Innovate products or services before others even if that means some will fail

.75

3 Respond to actions that competitors initiate…..Initiate actions to which competitors respond .75

4 Serve our existing customers and markets….. Pursue new opportunities even if that requires developing new customers and markets

.69

5 Engage in gradual and cautious behavior to pursue new opportunities….. Engage in bold, wide ranging acts to pursue new opportunities

.72

External Social Capital (7 point Likert scale; 1=strongly disagree, 7=strongly agree)

1 We routinely network with outside experts to explore new ways to solve problems & exploit opportunities

.87

2 We frequently share ideas with external networks whose point of view may be different than ours .80

3 We routinely interact with knowledgeable people outside our company to "make sense" of available information about our industry

.87

4 We understand that the best ideas do not always emerge internally, so we seek guidance from sources and networks external to the firm

.86

Unidimensionality:

Confirmatory factor analysis (CFA) using maximum likelihood

Scale reliabilities:

Cronbach alphas ranged from .83 to .91

Convergent validity:

High standardized loadings (> .67) for all scales

Discriminant validity:

• Average variance extracted (AVE): at least .60

ALL construct AVE’s > Shared Variances with other constructs (Cor2)

• Comparing models with construct correlations estimated freely versus set yielded significant χ2 differences

• Te lack of significant cross loadings as indicated by the LM test results

Checks for Common Method Bias:

1. Harman’s one-factor test: No single general factor

2. On pairs of multiple item scales: two distinct factors

3. Netemeyer et al. (1997) & Podsakof et al. (2001): Comparison of unconstrained model with a ‘same-source’ factor vs. a

constrained model Significant χ2 difference, but paths and loadings remain consistent

Hierarchical regression analysis• Items were averaged for the multi-item constructs • Variables were mean-centered (Aiken and West, 1991)

  Primary MeasuresNPs as a % of Sales Response Speed

M1 M2 M1 M2Industry and Firm CovariatesIndustry 0.008 0.006 0.026 0.022Customer Type .046* .044* 0.013 0.011Age of Firm -0.025 -0.026 0.003 0.001Respondent Knowledge 0.01 0.015 -.054* -0.038Price Leadership .115*** .113*** -.162*** -.167***Competitive Intensity 0.009 0.008 .072** .065*Supplier Price Negotiation .111*** .115*** 0.023 0.028Ease of Competitor Entry 0.012 0.017 -.260*** -.248***Technological Change .164*** .162*** -.060* -.067*Government Regulation -0.003 -0.004 -.121*** -.121***Customer Loyalty Stability .075*** .081*** .072** .077**Commitment to Learning 0.022 0.0007 .235*** .196***

Commitment to Market Information Acquisition .112*** .119*** -0.028 -0.027

Independent VariablesEO .228*** .343*** .157***ESC .087*** .13 -.116*** .076Firm Size 0.039 .024 -.067** - .079**Independent Variable InteractionEO * ESC -.258** -.241*Firm Size * EO -.111 0.177Firm Size * ESC -.054 -0.049Firm Size * EO * ESC .204* 0.077

Adjusted R2 0.422 0.428 0.188 0.212Δ R2 0.006 0.024Sig. of Δ R2   p < .002 p < .000

New ProductsAs % ofSales

High EO

Low ESC

High ESC

Low EO*

MarketResponseSpeed

High EO*

Low ESC

High ESC

Low EO

Stronger ESC enables more conservative firms (firms with weaker EO) to narrow the innovation gap with more aggressive firms (firms with higher EO)

It appears that conservative firms can achieve much of the same innovation success as risk-seeking firms if they have external relationships that allow them to clearly identify and confirm market and technology opportunities

ESC may act as a lower risk substitute for a strong EO.

The effects of ESC on firms with a weaker EO are more pronounced in SMEs than large firms

A stronger ESC provides an avenue for smaller firms to compete against larger ones with more market power and more resources

Questions ?

MEASURES – CONTROL VARIABLES LOADINGCommitment to Market Information Acquisition (7 point Likert scale; 1=strongly disagree, 7=strongly agree)1 We regularly conduct research with our customers to assess the performance of our products

and services.74

2 Intelligence on our competitors is frequently collected .773 Intelligence on our distribution network is frequently collected .834 We frequently review the likely effect of changes in our business environment (e.g., regulation,

technology) on customers.84

5 We frequently collect and evaluate general macroeconomic information (e.g., interest rates, exchange rates, GDP, industry growth rate, inflation rate) that might affect our business

.79

Commitment to Learning (7 point Likert scale; 1=strongly disagree, 7=strongly agree)

1 Our basic values include learning as a key to improvement .902 The collective wisdom in this enterprise is that once we quit learning we endanger our future .83

Other Covariates (7 point Likert scale; 1=very low, 7=very high)1 Industry: Manufacturing or service n.a.2 Customer Type: B2B or B2C n.a.3 Firm Age: Years of operation n.a.4 Respondent Knowledge: Marketing programs, business strategy, financial performance n.a.

5 Price Leadership: Your ability to be the first to raise prices in your served market(s) n.a.

6 Competitive Intensity: Competitive intensity in your market n.a.7 Suppliers Price Negotiation: Your ability to negotiate lower prices from your suppliers n.a.

8 Ease of Competitor Entry: The likelihood of a new competitor to successfully enter your market

n.a.

9 Technological Change: The rate of change of production/service technology in your market n.a.

10 Government Regulation: The extent to which government regulation impacts your industry n.a.

11 Customer Loyalty Stability: The stability of customer preferences and loyalty in your market n.a.

  Boundary MeasuresProduct Strategy Firm PerformanceM1 M2 M1 M2

Industry and Firm CovariatesIndustry -0.003 -0.004 0.01 0.01Customer Type -0.025 -0.026 -.051** -.053***Age of Firm 0.01 0.01 0.026 0.023Respondent Knowledge .044* .047* 0.031 0.033Price Leadership .047* .045* .097*** .098***Competitive Intensity .079*** .080*** -0.016 -0.016Supplier Price Negotiation 0.033 0.034 .099*** .102***Ease of Competitor Entry -.065** -.063** -.060*** -.059***Technological Change .091*** .090*** 0.025 0.026Government Regulation -.068** -.069** 0.033 0.033Customer Loyalty Stability .209*** .211*** .111*** .115***Commitment to Learning .185*** .179*** .090** .083**

Commitment to Market Information Acquisition 0.045 0.044 .083*** .083***New Products % of Sales .497*** .490***Independent VariablesEO .224*** .352*** .055** 0.08ESC 0.009 -0.085 -.040* -0.008Firm Size 0.005 0.001 .078*** .061***Independent Variable InteractionEO * ESC -0.086 -.283***Firm Size * EO -0.126 -0.025Firm Size * ESC 0.092 -0.041Firm Size * EO * ESC 0.065 .257***

Adjusted R2 0.372 0.373 0.601 0.604Δ R2

Sig. of Δ R2 0.001 0.003