The impact of entrepreneurial orientation on firm ...

The International Journal of Human Resource Management, Vol. 20, No. 5, May 2009, 1078–1095

The impact of entrepreneurial orientation on firm performance: the role of CEO position tenure and industry tenure Orlando C. Richarda*, Ping Wub and Ken Chadwickc a

School of Management, University of Texas at Dallas, Dallas, USA; bMcCombs School of Business, University of Texas at Austin, Austin, USA; cDepartment of Management and Marketing, Nicholls State University, Thibodaux, USA The relationship between Entrepreneurial Orientation (EO) and firm performance, despite generating significant scholarly interest, has remained mixed. These results may be attributed, at least in part, to the failure to sufficiently examine the potential impact of top management characteristics. The present study investigates how CEO characteristics (i.e. CEO industry and position tenure), impact the relationship between EO and firm performance within a sample of 579 US banks. As predicted, some support for a positive EO to performance relationship was found. In addition, the results strongly support, as posited, that CEO industry tenure positively moderates, and CEO position tenure negatively moderates, the EO to performance relationship. We also report evidence supporting the effect of EO, configured with CEO position tenure and industry tenure on firm performance. Our study suggests the EO– performance relationship is more complex than previous studies indicate. Implications for future research and practice are provided. Keywords: entrepreneurial orientation; industry tenure; position tenure

Entrepreneurial Orientation (EO) is a major firm-level construct in strategic management and entrepreneurship studies. EO captures specific entrepreneurial aspects of decisionmaking styles, methods and practices which lead to new entry (Lumpkin and Dess 1996). Among different conceptualizations of EO, three dimensions of EO – innovativeness, risk-taking propensity and proactiveness – were suggested, adopted and extended in several other studies (e.g. Lumpkin and Dess 1996; Richard, Barnett, Dwyer and Chadwick 2004). Within the realm of EO research, the EO –performance relationship is one of the most intriguing topics. Prior studies have empirically examined the independent effect of EO on performance, its contingent relationships with the external environment and organizational factors such as strategy, strategic processes, financial resources and knowledgebased resources (e.g. Wiklund and Shepherd 2005; Covin, Green and Slevin 2006). However, past research has largely ignored the effects of managerial characteristics on the EO – performance relationship. This omission is surprising, given the significant volume of studies on the relationships among managerial characteristics, strategy and firm performance (e.g., Finkelstein and Hambrick 1996; Carpenter, Geletkanycz and Sanders 2004). Among managerial demographic characteristics, executive position tenure has attracted considerable attention and has a sound theoretical base. Another demographic characteristic – industry tenure, has been examined (e.g., Govindarajan 1989; Thomas and Ramaswamy 1993;

*Corresponding author. Email: [email protected] ISSN 0958-5192 print/ISSN 1466-4399 online q 2009 Taylor & Francis DOI: 10.1080/09585190902850281 http://www.informaworld.com

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Strandholm, Kumar and Subramanian 2004), but to a lesser extent. In examining both characteristics, Kor (2003) found that a bundle of managerial experience composed of the interaction of firm-specific managerial experience with industry-specific managerial experience was associated with managerial competence. Such bundles of experience may better explain firm performance than any one specific experience. Most studies that examine managerial demographic characteristics focus on the top management team because it is assumed that strategic choice is made collectively, not by the CEO alone (e.g. Finkelstein and Hambrick 1990). However, studying executives collectively may overlook important individual-level effects (Bertrand and Schoar 2003). For example, CEOs may directly impact the range of strategic alternatives available to the firm, as well as the choices ultimately made (e.g. Hayward and Hambrick 1997). The present study contributes to the entrepreneurship literature by examining the combined effects of CEO position tenure and industry tenure on the relationship between EO and firm performance and the separate effect of each. The methodology employed responds to the call for using a configurational approach in exploring the complex EO – performance relationship (Lumpkin and Dess 1996; Wiklund and Shepherd 2005). This study also provides additional insight by considering the simultaneous and joint effects of CEO position tenure, CEO industry tenure and EO. Specifically, the present study addresses the following research questions. Is EO positively associated with firm performance? Does CEO position tenure moderate the relationship between an EO and firm performance? Does CEO industry tenure moderate the relationship between an EO and firm performance? Does the configuration of CEO position tenure, CEO industry tenure and EO have more robust effects on firm performance than EO alone or when moderated by either CEO position tenure or CEO industry tenure? In addressing these questions, the present study draws upon upper echelon theory and the resource-based view of the firm. Previous studies suggest that these perspectives may predict divergent results on the effects of CEO position tenure and industry tenure on strategy and performance (e.g. Bergh 2001). This study examines the applicability of these two perspectives to better explain the EO-performance relationship. In the next section, a review of extant research is presented and hypotheses that relate CEO position tenure and industry tenure to EO and performance based on main, contingency and configuration effects are proposed. Theoretical background and hypotheses Upper echelon theory posits that top managers are the strategists who set the direction of the firm and thus the pace of competition in the industry. Thus strategic choices made are the reflection of top managers’ values, cognitions, knowledge and skills through intervening information processing steps such as field of vision, selective perception of information, and interpretation of information (Hambrick and Mason 1984). Demographic characteristics, as representative of psychological profiles of top managers, have been linked with a firm’s strategic profile (e.g. Finkelstein and Hambrick 1990) and performance (e.g. Haleblian and Finkelstein 1993). Prior research suggests a positive relationship between CEO position tenure and commitment to the status quo (e.g. Hambrick, Geletkanycz and Fredrickson 1993), reluctance to change (Musteen, Barker III and Baeten 2006), lack of experimentation (Miller and Shamsie 2001) and risk-taking (Miller 1993). Past success is thought to foster overconfidence and complacency of CEOs and reinforces their belief in the established ways of doing and thinking (Miller 1991; Wiersema and Bantel 1992; Walsh 1995).

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In addition, as tenure increases, CEOs have more restrictive sources of information and tend to develop a refined repertoire of responses to stimuli, both internal and external (Aguilar 1967; Katz 1982; Miller 1991). These constraints inhibit the consideration of alternative views and decisions to change strategies and organizational configurations (Finkelstein and Hambrick 1990; Wiersema and Bantel 1993). Moreover, CEOs may seek to consolidate and institutionalize their power within firms through the expenditure of resources, making of appointments and establishment of networks of influence (Pfeffer 1981; Ocasio 1994). The result is increased difficulty in challenging top executives’ views and decisions. Finally, CEOs with long position tenure possess greater firm-specific human capital, power and status (Finkelstein and Hambrick 1990; Miller 1991) and may feel particularly vulnerable to organizational change (Miller 1991). The aforementioned attitude and values underlie the relationship between CEO tenure and the strategies firms pursue, including invention (Wu, Levitas and Priem 2005), product line experimentation (Miller and Shamsie 2001), strategic persistence (Finkelstein and Hambrick 1990), strategic conformity (Finkelstein and Hambrick 1990) and diversification (Wiersema and Bantel 1992). Moreover, cognitive orientations associated with CEO position tenure were found to directly affect firm performance (e.g. Finkelstein and Hambrick 1990; Miller and Shamsie 2001). Consistent with theoretical arguments in behavioural decision-making that decision makers’ perspective is bounded by prior experience (Simon 1957; March and Simon 1958); long tenure also fosters the commitment to the status quo (Hambrick et al. 1993). CEO position tenure and industry tenure affect not only cognitive orientations but also knowledge base. Studies examining tenure emphasize the value of knowledge and skills resulting from long position and industry tenure (e.g. Govindarajan 1989; Bergh 2001; Strandholm et al. 2004). Such studies recognize the significance of managerial skills and knowledge in building capabilities and competitive advantage in the firm – as per the resource-based view of the firm. The resource-based view posits that firms which possess valuable, rare, difficult to imitate and non-substitutable resources can develop sustainable competitive advantage and earn above-average rates of return (Mahoney and Pandian 1992; Amit and Schoemaker 1993; Peteraf 1993). Managerial knowledge and skills can contribute to a firm’s ability to effectively and innovatively manage and convert resources into rentgenerating capabilities and earn superior returns (Castanias and Helfat 1991; Mahoney and Pandian 1992; Mahoney 1995; Kor and Mahoney 2000). Managerial skills and knowledge, because they are acquired from innate abilities and learning processes (Castanias and Helfat 1991), are scarce, not easily transferred and difficult to replicate. CEOs with relatively long position and industry tenure would possess unique and nontransferable firm- and industryspecific knowledge unavailable to those with shorter tenures (Govindarajan 1989; Haspeslagh and Jemison 1991; Cannella and Hambrick 1993). As proposed by Bergh (2001), the two aforementioned views imply contradictory effects of industry and position tenure on the relationship between the strategic orientation of the firm and performance. Which effect might dominate the relationship may be context specific (Govindarajan 1989; Strandholm et al. 2004; Thomas, Litschert and Ramaswamy 1991). According to Beal and Yasai-Ardekani (2000), a fit between strategy and CEO demographic characteristics leads to high performance. In some contexts, when a firm is led by a CEO with relatively short industry or position tenure, the willingness to depart from established practices may surmount the absence of firm-specific or industry-specific knowledge (e.g. Strandholm et al. 2004), while, in other contexts, when a firm is led by a CEO with relatively long industry or position tenure, an intimate understanding of the firm or industry outweighs executives’ commitment to the status quo (e.g. Govindarajan 1989; Bergh 2001).


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EO and performance As a process construct, EO is concerned with the methods, practices and decision-making styles managers utilize (Lumpkin and Dess 1996). An EO is not created or imposed by top management, but reflects a strategic posture as exhibited by multiple layers of management (Stevenson and Jarillo 1990). Entrepreneurial oriented firms engage in relatively high levels of innovative, proactive, and risk-taking, behaviours (Covin 1991). According to Miller (1983), such firms seek to generate above-average returns through somewhat risky ventures and demonstrate a proclivity to proactively engage in product market innovation with new products, technologies or processes. The innovativeness dimension of EO reflects the tendency to engage in and support new idea generation, novelty, experimentation and creative processes (Lumpkin and Dess 1996). Innovative firms, through the creation and introduction of new products and technologies, develop a market niche with new products/services, differentiate themselves and/or substitute incumbents with better quality, cheaper price or other means that customers value (Lee, Lee and Pennings 2001; Wiklund and Shepherd 2005). Innovativeness increases the likelihood that a firm will realize first-mover advantages and capitalize on emerging market opportunities (Wiklund 1999) and generate extraordinary economic performance (Schumpeter 1934; Brown and Eisenhardt 1998). Proactiveness refers to the propensity of a firm to take the initiative to compete aggressively with other firms. By utilizing a forward-looking perspective, proactive firms anticipate future wants and needs and actively participate in emerging markets (Lumpkin and Dess 1996). The propensity to aggressively compete can result in advantages such as dominant distribution channels and brand recognition and the ability to target premium market segments, charge high prices and ‘skim’ the market ahead of competitors (Zahra and Covin 1995; Wiklund and Shepherd 2003, 2005). The risk-taking dimension of EO reflects a firm’s tendency to commit large amounts of resources to uncertain and novel business opportunities (Miller 1983; Lumpkin and Dess 1996). The willingness to engage in relatively high levels of risk-taking behaviors helps a firm seize profitable opportunities in the face of uncertainty and the achievement of long-term profitability (March 1991; McGrath 2001). While not all entrepreneurial efforts will improve firm performance (Fast 1981), a theoretical link between EO and firm performance can be inferred from the literature (Zahra and Covin 1995). For example Lengnick-Hall (1992) suggest that organizations that pioneer the creation and introduction of new products or technologies can achieve superior financial performance. Previous empirical research also supports the premise of a positive relationship between EO and firm performance, at least within certain contexts (e.g., Covin and Slevin 1991b; Zahra 1991; Zahra and Colvin 1995; Wiklund 1999; Wiklund and Shepherd 2005). Thus, while there still exists some ambiguity regarding the financial impact of EO, on the whole, the extant literature supports a positive relationship with firm performance. Thus: Hypothesis 1: Entrepreneurial orientation is positively associated with firm performance.

The moderating effect of CEO position tenure CEOs with relatively short position tenures have more diverse information resources and tend to proactively seek advice from inside and outside the firm (Aguilar 1967; Katz 1982; Miller 1991). At the same time, these CEOs have not yet institutionalized their power

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and thus other executives are better able to challenge views and provide divergent ideas (Pfeffer 1981; Ocasio 1994). Also, CEOs with short position tenure, being open to change and experimentation (Hambrick et al. 1993; Miller and Shamsie 2001; Musteen et al. 2006) are more likely to consider available alternatives. Thus, shorter position tenure would foster a wider range of creative strategic alternatives and possibly lead to more creative and effective competitive strategies. In contrast, CEOs with relatively long position tenures are more apt to gather less information about their operations and environments (Katz 1982; Miller 1991, 1993). In addition, their sources of information become increasingly narrow and restricted (Aguilar 1967; Hambrick and Fukutomi 1991). As a result, they are less likely to exploit diverse perspectives from various sources and respond to a call for novelty and creativity during the course of strategy formulation and implementation. In pursuit of competitive advantage, an entrepreneurial oriented firm focuses attention and effort towards pursuing new opportunities in timely and aggressive manner (Covin and Slevin 1989; Lumpkin and Dess 1996; Wiklund and Shepherd 2003, 2005). With the help of diverse information, CEOs with short position tenure in utilizing diverse information may recognize strategic opportunities, consider and pursue strategic, while CEOs with long position tenure with restricted views of firm operations and environments (Finkelstein and Hambrick 1990; Wiersema and Bantel 1993) may not identify such opportunities and/or consider all possible alternatives when formulating strategies. CEOs, early in their tenures, work at learning and implementing strategy (Hambrick and Fukutomi 1991; Miller 1991; Miller and Shamsie 2001). As tenure increases, CEOs become more confident and their learning declines (Miller and Shamsie 2001). Therefore, CEOs with short position tenure are more likely to gain real time knowledge from operations. Meanwhile, they can make emergent strategies to take advantage of this acquired knowledge (Covin et al. 2006). Emergent strategies would increase the chances of success of innovative, risky and proactive actions (Maidique and Zirger 1985; Covin et al. 2006). Emergent strategies also enable a firm with an EO to postpone commitments to a particular course of action, thereby retaining the strategic flexibility necessary for successful operation under uncertainty (Covin et al. 2006; Shimizu and Hitt 2004). Conversely, it is difficult for CEOs with long position tenure to implement emergent strategies. They formulate and implement strategies not in terms of the real time knowledge about the firm and its environment, but in terms of their prior organizational experience (Hambrick et al. 1993). As a result, strategies they make may not be suitable for emerging environmental opportunities. This is supported by Miller (1991) who examined the match between the environment and strategy and CEO position tenure. In sum, CEOs with short position tenure can respond effectively to a firm’s EO and implement strategies that will enhance the benefits of EO on performance. There is some empirical evidence to support the moderating effect of CEO position tenure on the EO – performance relationship. An EO firm has similar characteristics to Miles and Snow’s (1978) prospectors as both are inclined to pursue opportunities outside their current scope. Prospectors led by short-tenured executives were found to have higher market share than other prospectors (Thomas et al. 1991). Thus: Hypothesis 2: The relationship between EO and firm performance will be moderated by CEO position tenure. Firms with an EO led by CEOs with shorter position tenure will have higher performance than firms led by CEOs with longer position tenure.


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The moderating effect of CEO industry tenure Similarly to CEO position tenure, CEO industry tenure also mirrors CEOs’ skills, knowledge and cognitive orientation (Hambrick et al. 1993). CEOs with long industry tenure have more knowledge of markets, competition, regulations, customers and suppliers (Kor 2003), which help them identify and assess emerging opportunities, design proper strategies and position products and services strategically (Castanias and Helfat 2001; Schefczyk and Gerpott 2001; Kor 2003). CEOs with long industry tenure not only facilitate the implementation of EO, but convert emerging opportunities into viable growth strategies. Prior knowledge influences one’s ability to comprehend, extrapolate, interpret and apply new information (Roberts 1991). The discovery of entrepreneurial opportunities results from prior knowledge about markets and customers (Venkataraman 1997; Shane 2000). Shane (2000) argued that new information about a technology, combined with the prior information on markets and customer problems, leads to the discovery of entrepreneurial opportunities. Govindarajan (1989) posits that industry tenure, and industry-specific knowledge, can assist in identifying unique products and enhance the effectiveness of a differentiation strategy. Therefore, innovative firms are positioned to exploit a CEO’s accumulated industry-specific knowledge to generate more experimentation and differentiate itself entering new businesses and markets. Proactiveness describes the pioneering nature of a firm in introducing new products or services ahead of competitors in anticipation of future demand (Miller 1983; Lumpkin and Dess 1996). Such behaviors reflect a proclivity to pursue new opportunities by being the first to market (Venkatraman 1989) and represent a forward-looking perspective and willingness to initiate actions through innovative activity (Lumpkin and Dess 1996). Industry-specific knowledge, gained through industry tenure, can be expected to assist in rapidly assessing emerging opportunities and in implementing proactive strategies under conditions of uncertainty. Risk-taking is defined as the extent to which top managers are inclined to take business-related risks with regard to investment decisions and strategic actions in the face of uncertainty (Miller 1983; Covin and Slevin 1988). Such a strategic orientation reflects, in part, the pursuit of very high, but less certain, returns through the commitment of resources to novel ideas, as opposed to a propensity to engage in activities with lower, but more predictable, rates of return (Slevin and Covin 1990). A firm constrained by limited resources cannot be expected to devote all of its resources to what are viewed as relative risky endeavors. As a result, decisions on the allocation of resources must be made in terms of the strategic outcomes desired. Compared with CEOs with relatively short industry tenure, those with more industry experience can be expected to more accurately assess and optimize resource allocations to projects so as to generate higher returns. As mentioned previously, prior research also supports the position that long industry tenure may negatively impact an entrepreneurially oriented firm due to executives’ restrictive knowledge base or commitment to the status quo (Davis 1951; Hambrick et al. 1993). However, individuals may work in different positions and/or at different firms before they become the CEO in their current firm. Their individual network will expand as their tenure increases (Aguilar 1967). Diverse people in the network may challenge the restricted views of CEOs and the accompanying commitment to the status quo. Thus: Hypothesis 3: The relationship between entrepreneurial orientation and firm performance will be moderated by CEO industry tenure. Firms with an EO that have CEOs with long industry tenure will have higher performance than those that have CEOs with short industry tenure.

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The configuration prediction Hypotheses 2 and 3 predict the moderating role of CEO position and industry tenure respectively. However, research suggests that firms which are configured consistently on multiple attributes have superior performance and that assessing these attributes simultaneously can yield greater insight than that which is gained through direct effect or contingency models (Dess, Newport and Rasheed 1993; Wiklund and Shepherd 2005). The combination of CEO position and industry tenure may better depict CEOs’ skills, knowledge and cognitive orientation than any one individually (Meyer, Tsui and Hinings 1993). Research in cognitive and behavioural science suggest that prior knowledge facilitates the learning of new, related knowledge (Ellis 1965; Lindsay and Norman 1977; Bower and Hilgard 1981). CEOs with relatively short position tenure, but long industry tenure, despite the initial absence of firm-specific knowledge, have rich and diverse knowledge and skills that would enhance their capacity to efficiently gain firm-specific knowledge (Ellis 1965; Lindsay and Norman 1977; Bower and Hilgard 1981). Thus, industry tenure serves to compensate for lack of position tenure. With knowledge of the industry and the firm competencies, CEOs with short position tenure and long industry tenure would be able to assess better the performance potential of different strategies, and develop and execute the most effective strategy (Prescott and Visscher 1980; Castanias and Helfat 2001; Schefczyk and Gerpott 2001; Kor 2003). Lack of both industry and position tenure may negatively influence the performance of an entrepreneurial oriented firm. An EO may be promoted by a tendency of CEOs to make strategic changes and take risks. However, performance benefits cannot be realized without consideration of the firm’s resources and capabilities, competition and external alliances. CEOs with short industry tenure and position tenure would not have an in-depth understanding of such contingencies. As a result, it could be expected that the performance of entrepreneurial oriented firms led by relatively short-tenured CEOs or long-tenured CEOs will suffer. In fact, we propose that entrepreneurial oriented firms with CEOs that have both high industry tenure and low position tenure will experience the highest performance. Thus: Hypothesis 4: Firms configured with more of an EO that have CEOs with both long industry tenure and short position tenure will have higher performance than those that do not.

Methodology This study employed a single-industry sampling frame to control for the potential effects of external environmental forces on firm performance. The banking industry was chosen because deregulation is likely to increase the heterogeneity of strategies used across the banking industry (Delery and Doty 1996). Also, because banks are required to report financial information, 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 and Doty 1996). A survey was sent to each president of 700 banks drawn from a stratified random sample of 2100 banks. CEOs were targeted because such individuals are most knowledgeable about their bank’s activities and firm performance (Snow and Hrebeniak 1980; Hambrick 1981; Zahra 1991). Non-respondents were sent a follow-up questionnaire several weeks after the initial mailing. A total of 579 completed and useable questionnaires were received. The items on the survey related to the firm’s entrepreneurial


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orientation as well as other background characteristics (e.g. CEO position tenure, CEO industry experience). Non-response bias was assessed by comparing respondents from the two waves of questionnaires (Armstrong and Overton 1977). Neither multivariate nor univariate analyses indicated any significant differences between the first and second wave of respondents. Most banks had between 50 and 499 employees. The average number of employees was 154 and the banks had an average of 7 branches. The banks were on average 75 years old. The mean return on assets (ROA) and return on equity (ROE) were 1.24% and 13.57%, respectively. These closely approximated the 1.23% average ROA and 14.49% average ROE reported on the Federal Deposit Insurance Corporation’s Internet site for the entire population of banks in the US. Respondents had an average position tenure of 8.46 years and average industry tenure of 25.75 years. This suggests that CEOs have acquired enough power from a variety of sources to effect decision-making within a firm (Pfeffer 1981; Ocasio 1994). Measures Firm performance – the year ending return on assets (ROA) and return on equity (ROE) were our bottom-line measure of financial performance and are the recommended measures (particularly ROE) of a bank’s financial performance and overall viability (Hopkins and Hopkins 1997). Entrepreneurial orientation – to measure dimensions of entrepreneurial orientation, we employed the nine-item ‘Entrepreneurial Orientation’ scale (Covin and Slevin 1989). According to Kreiser, Marino and Weaver (2002) the scale is the most commonly utilized instrument in operationalizing EO. This scale is intended to assess three components of firm-level entrepreneurial orientation – innovativeness, risk-taking and proactiveness. Previous studies have reported evidence of reliability and validity for the EO scale (e.g. Knight 1997; Naman and Slevin 1993; Kreiser et al. 2002). In the present study, the Cronbach’s coefficient alpha value for the overall scale was 0.81 with all corrected itemcorrelations exceeding the .40 threshold. The mean ratings on the items were used as a measure of EO. The higher the score, the greater the degree to which the firm is entrepreneurial orientated (Covin and Slevin 1989). The lower the score, the greater the degree to which a firm is conservative oriented. Other independent variables – we controlled for firm size, which was operationalized as the number of employees. Past research suggests that other measures of size such as total assets and total sales yield similar results (Welbourne and Andrews 1996; Carpenter and Fredrickson 2001). Firm size was also chosen because bank assets are a component of ROA, one of our performance measures. Total employees (company size) was measured with five categories (e.g. 1 ¼ 1 – 49 employees 2 ¼ 50– 99 employees, 3 ¼ 100– 499, 4 ¼ 500 – 999, 5 ¼ 1000 or more). In addition, we controlled for firm age, which is the number of years from the founding date (Delery and Doty 1996). Moderators include the following two constructs: CEO position tenure, the number of years the CEO had been in present position; CEO industry tenure, the number of years the CEO had worked in the banking industry. Results Table 1 provides the means, standard deviations, and correlations for all the variables. Regression results for the test of hypotheses are presented in Tables 2 and 3. Hypothesis 1

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Table 1. Descriptive statistics and correlations. Variable

Mean

1

2

3

4

5

6

7

1. Firm size (# of employees 2.32 (1.31) – in categories) 2. Bank age 75.79 (42.6) 2.17** – 3. Entrepreneurial orientation 4.13 (.85) .27** .09* – 4. CEO position tenure 8.46 (6.54) 2.11* 2 .06 .07 – 5. CEO industry tenure 25.78 (8.27) 2.02 .02 .04 .46** – 6. Return on equity 13.72 (4.59) .25** 2 .08 .12** 2 .005 2.01 – 7. Return on assets 1.25 (.38) .10* .01 2 .03 .05 .02 .77** – Two tailed tests; * p , .05; ** p , .01

states that EO will be positively related to firm performance. Model 1 in Tables 2 and 3 report the results of H1 for ROE and ROA respectively. In Model 1, EO is positively related to ROE (b ¼ 0.073, p ¼ .039) but not ROA (b ¼ 2 0.043, p ¼ .155). Thus, we found some support for Hypothesis 1. Hypotheses 2 and 3 were assessed simultaneously in Model 3. Our test of Hypothesis 2 examined the negative moderating effect of CEO position tenure on the EO-performance relationship while the Hypothesis 3 test evaluated the positive moderating effect of CEO industry tenure. CEO position tenure significantly and negatively moderated the EO – performance relationship as measured by ROE (b ¼ 2 .34, p ¼ .026) and ROA (b ¼ 2 .39, p ¼ .015). In general, these results provide solid support for Hypothesis 2. CEO industry tenure, as posited, was found to have a significant and positive effect on the relationship between EO and performance for ROE (b ¼ .50, p ¼ .020) and ROA (b ¼ .65, p ¼ .005). Thus, the results provide strong support for Hypothesis 3 as well. Hypothesis 4 predicted the configuration impact of EO, CEO industry tenure, and CEO position tenure on firm performance. Results reveal a positive configuration effect on ROE (b ¼ .29, p ¼ .048) and ROA (b ¼ .35, p ¼ .026). To illustrate, clarify and provide additional support for the analyses graphs of the above moderating effects were developed and are presented in Figures 1 to 4. The dataset was split into CEOs with high position tenure (above median) and low position tenure (below median) as well as high industry tenure and low industry tenure. As Figures 1 and 2 demonstrate, the relationship of EO with ROE varies in form according to the level of CEO position tenure and CEO industry tenure. Although the relationship between EO and performance is different between high and low CEO position tenure, as reflected in Figure 1, the low CEO position tenure has a much more positive slope and an even more pronounced effect if the CEO also has long, as opposed to short, industry tenure (see Figures 3 and 4). In sum, the visuals provide additional support for our moderator and configuration hypotheses.

Discussion This study examined the EO – performance relationship as well as the impact of CEO position and industry tenure on that relationship. The results of the regression analysis for Hypothesis 1 were equivocal. As reported, EO was found to be significant predictor of ROE (b ¼ 0.073, p ¼ .039) but not ROA (b ¼ 2 0.043, p ¼ .155). Thus, only partial support for Hypothesis 1 was found. Initially, these results were somewhat surprising as entrepreneurial activity is generally seen as an impetus toward economic growth and, at least within certain

Intercept Company size Bank age Entrepreneurial orientation CEO position tenure CEO industry tenure EO X CEO position tenure EO X CEO industry tenure EO X CEO position tenure X CEO industry tenure R2/Adjusted R2 F

Variable

.079/.074 16.58***

11.09*** (.93) .85*** (.14) .01*** (.004) .39* (.22)

Model 1 B

.079/.071 9.94***

11.17*** (1.08) .85*** (.15) .01*** (.004) .38* (.22) .001 (.03) 2.001 (.02)

Model 2 B

.088/.076 7.87***

15.17*** (2.61) .85*** (.15) .01*** (.004) 2 .59 (.62) .23* (.11) 2.23* (.11) 2.05* (.03) .05* (.03)

Model 3 B

Unstandardized beta coefficients shown with standard deviations in parentheses below; one tailed tests: * ¼ p , .05; ** ¼ p , .01; *** ¼ p , .001

N ¼ 579

H2 H3 H4

H1

Hypothesis Tested

Table 2. Hierarchical regression results for return on equity.

15.02 (2.60) .86*** (.15) .01*** (.004) 2.28 (.65) .22* (.11) 2 .22* (.11) 2 .09** (.04) .04 (.03) .001* (.001) .092/.079 7.26***

Model 4 B

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Intercept Company size Bank age Entrepreneurial orientation CEO position tenure CEO industry tenure EO X CEO position tenure EO X CEO industry tenure EO X CEO position tenure X CEO industry tenure R2/Adjusted R2 F

Variable (.73) (.01) (.000) (.02)

.011/.006 2.17

1.25*** .03*** .4E-05 2.02

Model 1 B

.016/.007 1.82

1.25*** (.74) .03*** (.01) 9.1E-07 (.000) 2 .02 (.02) .004 (.003) 29E-04 (.002)

Model 2 B

.028/.016 2.37*

1.69*** (.75) .03*** (.01) 8E-06 (.000) 2 .13 (.53) .02* (.01) 2 .03** (.01) 2 .005* (.002) .006** (.002)

Model 3 B

Unstandardized beta coefficients shown with standard deviations in parentheses below; one tailed tests: * ¼ p , .05; ** ¼ p , .01; *** ¼ p , .001

N ¼ 579

H2 H3 H4

H1

Hypothesis Tested

Table 3. Hierarchical regression results for return on assets.

1.67*** (.75) .03*** (.01) 6E-05 (.000) 2.1* (.06) .02* (.01) 2 .02* (.01) 2 .01** (.003) .004* (.002) .0001* (.000) .034/.021 2.55*

Model 4 B

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15.0 Short position tenure Long position tenure 14.5

ROE

14.0

13.5

13.0

12.5 0.00

1.00 EO

Figure 1. Relationship between EO and performance for short and long CEO position tenure.

contexts, has been shown to be positively associated with, or as having a positive impact on firm performance (Covin and Slevin 1991a, 1991b; Zahra 1991; Zahra and Colvin 1995; Wiklund 1999; Wiklund and Shepherd 2005). However, according to Lumpkin and Dess (1996), the effects of EO may take some time to be realized. In addition, there may be little or no difference in the performance of entrepreneurial versus conservative firms (Jennings and Seaman 1994; Zahra, Nielsen and Bogner 1999). This would suggest that banks are capable of competing along different strategic dimensions and still achieving similar performance. Thus, while the lack of clear support for Hypothesis 1 contradicts some previous research in 15.0 Short industry tenure Long industry tenure 14.5

ROE

14.0

13.5

13.0

1.00 1.00

12.5 0.00 EO

Figure 2. Relationship between EO and performance for short and long CEO industry tenure.

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14.0

Short position tenure Long position tenure

ROE

13.8

13.6

13.4

13.2

13.0 0.00

1.00 EO

Figure 3. Relationship between EO and performance for short and long CEO position tenure at short CEO industry experience.

the field, others suggest that not all entrepreneurial efforts will improve firm performance (e.g., Fast 1981). As a result, the findings are consistent with some of the theoretical and empirical research in the field. The results of the analyses strongly support Hypothesis 2 which posited that CEO position tenure would negatively moderate the EO – performance relationship. This suggests that CEOs with relatively short position tenures may: draw upon more diverse information resources, be more open to change, and, possibly because of a lack of institutionalized power, be more open to creative competitive strategies. This match between CEO, strategic orientation (EO) and the environment provides the context 16.0 15.5

Short position tenure Long position tenure

15.0

ROE

14.5 14.0 13.5 13.0 12.5 12.0 0.00

1.00 EO

Figure 4. Relationship between EO and performance for short and long CEO position tenure at long CEO industry experience.


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(match) and thus contributes to enhanced firm performance. This contrasts with CEOs with relatively long position tenures, who tend to rely more on past experience as opposed to information about their environments and broad sources of information resulting in a mismatch and thus poorer firm performance. As reported previously, Hypothesis 3, which posited that CEO industry tenure would positively moderate the EO –performance relationship, was supported. This suggests that experience and knowledge gained though industry tenure would assist CEOs in anticipating future needs and wants and in choosing appropriate strategies under conditions of uncertainty. Entrepreneurial oriented firms are positioned to exploit a CEO’s accumulated industry-specific knowledge to better assess and exploit opportunities through creative strategic decisions. The findings on the moderating effects of CEO position and industry tenure support contingency theory and imply that contingencies such as CEO characteristics should be taken into account when modeling the EO – performance relationship. Additionally, our results supporting Hypothesis 4 indicate that the configuration of EO, CEO position and industry tenure explains additional variance in firm performance above and beyond the contingency relationships predicted in Hypotheses 2 and 3. These results suggest that long industry tenure and short position tenure probably compensate for each other’s weaknesses and allow CEOs to have a thorough and unbiased assessment of entrepreneurial opportunities and formulate performance-enhancing strategies. Although this study advances our understanding of the complex EO – performance relationship, it has several limitations. First, the use of regression analysis and crosssectional nature of the data precludes any inference of causality between variables. It is plausible that a firm’s strategic posture may influence a firm’s performance or vice-versa. For example, managers may feel that a more entrepreneurial posture is needed if they perceive that risk-taking, proactive and innovative behaviours are needed to improve firm performance. Other managers in poorly performing firms may feel that such behaviours are exactly what their firm should avoid (Covin and Slevin 1988). Longitudinal studies would help to explain better the casual relationship between EO and firm performance. Another limitation is the use of a single industry in the study. Because the sample encompassed only banks the results may not be generalizable to other industries. Also, only one executive per bank was sampled. Thus, the potential for key informant bias exists (Huber and Power 1985). Multiple respondents per bank would have been preferred. Finally, this study focuses on CEO position and industry tenure while other CEO characteristics, as well as the top management team, may be important moderators of the EO – performance relationship. Future research should focus on identifying potentially additional significant characteristics. Continued focus on the EO and firm performance relationship is critical to developing theory, the construct and models. The current research suggests the need to go beyond simple linear models to more complex contingency and configurational models. Such studies can better explain the role of EO, contingency factors and outcomes than that which is derived from simple main effect models. References Aguilar, F.J. (1967), Scanning the Business Environment, New York: Macmillan. Amit, R., and Schoemaker, P.J.H. (1993), ‘Strategic Assets and Organizational Rent,’ Strategic Management Journal, 14, 33 – 46. Armstrong, J.S., and Overton, T.S. (1977), ‘Estimating Nonresponse Bias in Mail Surveys,’ Journal of Marketing Research, 14, 396– 402.

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