The Impact of External Environment on Intrapreneurial Behaviour within the Manufacturing Sector

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1 The Impact of External Environment on Intrapreneurial Behaviour within the Manufacturing Sector by Al-Mansor Abu Said Lecturer of Economic and Research Methodology at the School of Business and Management, Kolej Yayasan Melaka (KYM) Mohd Razali Mohamad Lecturer of Technology Management and Manufacturing at the Manufacturing Faculty, Universiti Teknikal Malaysia Melaka (UTeM) ABSTRACT The objective of this study is to establish an empirical investigation of intrapreneurial behaviour and its relationships to the antecedent and the outcome, in manufacturing firms from the perspective of employees. Mailed structured questionnaire data for this crosssectional study were collected from firms in the Melaka manufacturing firm (137 usable responses). Pearson Correlation and Simple Regression were used to estimate the models. Findings of the study indicate managers perceive that their firms external environment makes a highly positive contribution to intrapreneurial behaviour. In addition, managers perceive that their firms intrapreneurial behaviour makes a highly positive contribution to the firms performance. The basic value of understanding intrapreneurial behaviour is the prediction of certain firm performance. Intrapreneurial behaviour proved to have a very significant impact on the firm s performance from the perspective of managers. However, the measurement of customer satisfaction and financial performance needs to be clarified, since the data contains only employees perceptions about customers opinions. Thus the data does not include direct customers opinions on the issues analysed. The practical implication of this study is that intrapreneurial behaviour can have beneficial effects on the firm s growth and profitability. Keywords: Intrapreneurial behaviour, entrepreneurship, external environment, internal organisational characteristic, performance. 1. Introduction Intrapreneurial behaviour is a concept linked to the entrepreneurial orientation of an organisation. Corporate entrepreneurship has its roots in entrepreneurship literature, even though intrapreneurial behaviour as a concept has lately been positioned also in management literature (Antoncic & Hisrich, 2003). Intrapreneurial behaviour is important for organisational survival, growth, profitability and renewal (Zahra, 1996), especially in larger organisations. It seems that different kinds of organisations are eagerly promoting entrepreneurial activities within their staff and management teams. Different kinds of intrapreneurial behaviour have been recognised in previous research (Antoncic & Hisrich, 2001; Covin & Miles, 1999; Sharma & Chrisman, 1999 [this last 1

2 pair of names are not found under the References list at the end). Innovation is broadly defined as the common theme underlying all forms of corporate entrepreneurship. To be more precise, the use of innovation as a mechanism to redefine or rejuvenate the organisation, its position within markets and industries, or the competitive arena in which the organisation competes, seems to form the core of corporate entrepreneurship (Covin & Miles, 1999). Early research on intrapreneurial behaviour focused on the appropriate utilisation of rewards (Antoncic & Hisrich, 2003), management support (Kuratko et al., 1990; Heinonen, 1999), resource availability (Zahra, Jennings & Kuratko, 1999), organisational structure (Zahra, 1996), and risk taking (Antoncic & Hisrich 2001). To further the limited research, Antoncic and Hisrich, (2001, 2004) conducted descriptive and statistical studies in varying settings. Those statistical studies included information related to personal intrapreneurial characteristics. Based on the limited findings of existing research, the relationship of intrapreneurial programmes to the corporate environment and the impact of such programmes on corporate performance is an area ripe for more specific investigation. This study takes these areas of research as a starting point and attempts to integrate these areas in measuring corporate entrepreneurship within an existing organisation. Despite the growing interest in and use of corporate entrepreneurship, little empirical research has been conducted on the prerequisites and outcomes of corporate entrepreneurship in different kinds of organisations and contexts. Several models have been built, but the relationships depicted in, or proposed by these models still need to be tested (Zahra & Jennings et al., 1999). This study attempts to contribute to bridging the above-mentioned gap. Objectives of the Study The objective of this study is to establish an empirical investigation of corporate entrepreneurship and its relationships to the antecedent and the outcome of manufacturing firms from the perspective of employees. The model presents a comprehensive picture of both the direct and indirect effects of the relationships among the variables. This study works toward indicating that the model of corporate entrepreneurship leads to an understanding of success in manufacturing firms Research Questions 1. Does a significant relationship exist between the external environment and intrapreneurial behaviour? 2. Does a significant relationship exist between intrapreneurial behaviour and the firm s performance? The paper is structured as follows. Firstly, we present the theoretical bases for the model of corporate entrepreneurship under construction. This section also describes the phenomenon and concept of corporate entrepreneurship. Following the methodology section, the results of preliminary analyses are presented. The paper concludes with a discussion on the findings in terms of their implications for research, theory and practice. 2

3 2. The Model of Corporate Entrepreneurship Theoretically the study is based on entrepreneurship research, especially the corporate entrepreneurship school of it (Cunningham & Lischeron, 1991). Corporate entrepreneurship is a concept closely related to entrepreneurship emphasizing the entrepreneurial process (entrepreneurs carrying out new combinations) and innovativeness (Guth & Ginsberg, 1990). Corporate entrepreneurship, however, takes place within the organisation, in this study in small companies. The intrapreneur acts like an entrepreneur in that he/she realises his/her own ideas without being the owner of the enterprise (Cunningham & Lischeron, 1991). Intrapreneurship here is defined as an entrepreneurial way of action in an existing organisation and more specifically, in a small company. This may be the broadest possible definition for corporate entrepreneurship. This broad definition indicates a relatively early stage in the development of the field (Antoncic & Hisrich, 2003). The basis of corporate entrepreneurship is recognising an opportunity, exploiting it and trusting that exploiting the opportunity in a new way that deviates from previous practice, will succeed and support the realisation of the organisation s aims (Heinonen, 1999). Research into the nature, prerequisites and effects of firm-level entrepreneurial activities has grown over the past 25 years. The seminal study of Peterson and Berger (1972) on entrepreneurship in organisations sought to identify organisational and environmental factors affecting a company s entrepreneurial activities. Furthermore, Miller s study in 1983 was a key turning point in the research on firm-level entrepreneurship. From then, researchers have used Miller s theory and research instruments to examine the linkages between environmental, strategic and organisational variables, and a company s entrepreneurial activities (Zahra & Jennings et al., 1999). In this study, we have organised the prerequisites and outcomes of corporate entrepreneurship, as well as the phenomenon of corporate entrepreneurship as follows (Figure 1): ANTECEDENT PHENOMENON: Strategic Process OUTCOMES: Firm s performance External Environment Dynamism Hostility Technological Sophistication Intrapreneurial Behaviour Innovation Proactiveness Risk-taking Competitive Aggressiveness Performance Figure 1 A Proposed Theoretical Framework of the Antecedent and Consequence of Intrapreneurial Behaviour 3

4 The phenomenon of corporate entrepreneurship This study takes Miller s (1983) contribution as a starting point for understanding the phenomenon of corporate entrepreneurship. Miller stresses the company s commitment to innovation, i.e. three related components: product innovation, proactiveness and risk taking. Product innovation refers to the ability of a company to create new products or to modify existing ones to meet the demands of current or future markets. Proactiveness refers to a company s capacity to compete in markets by introducing new products, services or technologies. Competitive aggressiveness is about competing for demand. Finally, risk taking refers to the company s willingness to engage in business ventures or strategies in which the outcome may be highly uncertain (Zahra & Covin, 1995). The prerequisites of intrapreneurial behaviour As indicated earlier, several researchers have attempted to understand the factors that stimulate or impede corporate entrepreneurship. Areas such as external environment, organisation, its strategy and management activities have been presented as factors affecting intrapreneurship (Guth & Ginsberg, 1990; Miller, 1983; Kuratko et al., 1990; Heinonen, 1999). Intrapreneurial behaviour is a process, which occurs in interaction with the environment (Van de Ven, 1993). It appears that the environment plays a profound role in influencing corporate entrepreneurship: the more dynamic, hostile and heterogeneous the environment, the more emphasis the company puts on intrapreneurial activities (Zahra, 1993). The outcomes of intrapreneurial behaviour It is evident that corporate entrepreneurship can give grounds for the competitive advantage of an existing organisation. The manifestations of such competitive advantage may be for example, differentiation or cost leadership in the markets, quick response to any change, new strategic direction or new ways of working or learning within the organisation (Covin & Miles, 1999). Prior research proposes that intrapreneurial processes are associated with an organisation s performance (Zahra, 1991; Zahra, 1995; Zahra & Nielsen et al., 1999; Heinonen, 1999, Antoncic & Hisrich, 2001). Zahra and Nielsen et al., (1999) raise the importance of organisational learning and knowledge creation as outcomes of intrapreneurial activities, and thus, as grounds for competitive advantage and a basis of the superior performance of the organisation. In this study, organisational performance does not include only financial performance, but also nonfinancial manifestations, such as customer satisfaction as well as employee job satisfaction. 3. Research Method The purpose of this step is to explain the methodology adopted for empirically assessing the hypotheses presented in the previous step. This includes a discussion of the empirical methodology, methods of data collection, sampling strategy and an outline of the analytical procedures. The study involved the following phases: 4

5 1. Development of a conceptual framework for corporate entrepreneurship that is applicable to the human resource (HR) department of manufacturing firms in Melaka, Malaysia. 2. Contextual adaptation, development, and initial testing of a valid and reliable measurement instrument for corporate entrepreneurship within the HR unit by combining and adapting two prior scales for corporate entrepreneurship from other contexts. These are the ENTRESCALE scale (Khandwalla, 1977; Knight, 1997) and the corporate entrepreneurship scale (Zahra, 1991; 1993) from the business venturing literature. Table 1 provides details on the operationalisation of the various constructs used in the study. CONSTRUCT No. of items Table 1 Operationalisation of Research Constructs 5 OPERATIONALISATION Adapted from Dynamism (4) Lumpkin & Dess, 1996; Zahra, 1993 Technological sophistication (4) Zahra, 1993, Kuratko & Hornsby, Hostility (3) Antoncic & Hisrich, 2001 Innovation (3) Slevin & Covin, 1989; Zahra, 1993 Risk taking (1) Slevin & Covin, 1989 Proactiveness (3) Zahra, 1991; Lumpkin & Dess, 1996 Competitive aggressiveness (4) Khandwalla, 1977; Lumpkin & Dess, 1996 Appreciation of work and job satisfaction (4) Lumpkin & Dess, 1996; Miller & Friesen, 1984 Perceived customer satisfaction (3) Antoncic & Hisrich, 2004; Hornsby et al., 1993 Perceived firm s financial performance (5) Lumpkin & Dess, 1996; Dess, Lumpkin & Covin 1997; Zahra, 1991 Neuman (2003) argues that variables and relationships are the central idea in quantitative research. This is the key objective in this research. Moreover, quantitative methods are very useful in providing detailed planning prior to data collection and analysis because they provide tools for measuring concepts, planning design stages and for dealing with sampling issues (Neuman, 2003). Therefore, this quantitative approach also utilises a deductive mode in testing the relationship between variables. Sample The sampling frame for this study comprised manufacturing firms in the Melaka State of West Malaysia. The primary data collection method was a mailed questionnaire survey. The sample was randomly selected from the manufacturing membership lists in Melaka International Trade Centre Sdn Bhd. The sample was selected on the basis of two major considerations: various manufacturing firm types, and size. First, the researcher had to avoid a possible bias toward entrepreneurial activities made by the limited number of manufacturing firms in limited firm segments. The sample should represent various firms entrepreneurial activities from the perspectives of managers in as many types of firms as possible.

6 The research population consisted of all manufacturing firms in Melaka. The selection of sampled schools and teachers was conducted by simple random sampling. In simple random sampling, samples are selected based on their products. The personnel survey contains queries about internal organisational characteristics, financial performance, customer satisfaction and job satisfaction. The management survey concerns an organisation s venture activity and innovation, the proactiveness of their firm, risk taking and the firm s competitive aggressiveness. Each potential respondent was sent a personal questionnaire. In this paper, we discuss only the results of the personnel survey and exclude the management survey because of the small amount of data at this time. Due to the naturally smaller number of management level personnel in a firm, the amount of data in the management survey is not sufficient for analysis at this juncture. Based on these preliminary results, more data is expected to be gathered in due course. The survey gives information about the potential prerequisites, phenomena and outcomes of an organisation s corporate entrepreneurship. The studied items analysed in this paper are as follows: 1. External environment 2. Intrapreneurial behaviour 3. Performance In order to reduce the amount of survey statements, we conducted a factor analysis on the data groups. The factorability of the variables was evaluated using the Kaiser-Mayer- Olkin measure 1. The number of factors was determined using the eigenvalue criterion and the interpretability of the factors. The main component analysis was employed, as well as Varimax for the rotating. Factor analysis in this case was a tool for creating aggregate variables from the data. The aggregates formed were handled as means. Their reliability was tested using the Cronbach s Alpha method (Alkula et al., 1999). The dependency relation between potential elements of intrapreneurial behaviour and firm performance was studied by way of correlation analysis. The limit to an acceptable correlation coefficient in the study was defined as The utilisation of this correlation coefficient of average is reasonable in that the amount of data used is large enough. 1 The KMO measure defined for factoring is as follows: > 0,90 = excellent premises; > 0,80 = good premises; > 0,70 = moderate premises; > 0,60 = marginal premises; > 0,50 = feeble premises; > 0,40 = not worth factoring (Olkkonen & Saastamoinen, 2000). 2 The Guilford 5-level interpretative model was employed in interpreting the coefficients: 1) < 0,2 = marginal correlation, nearly non-existent dependence; 2) 0,2 to 0,4 = low correlation, certain but small dependence; 3) 0,4-0,7 = moderate correlation, remarkable dependence; 4) 0,7-0,9 = high correlation, obvious dependence; 5) > 0,9 = extremely high correlation, extremely reliable dependence (Guilford, 1956). 6

7 Restrictions The research has some restrictions. Firstly, we could only deal with part of our data; due to the insufficient volume of management personnel surveyed so far, we had to exclude it. Therefore we had to concentrate on the potential elements of corporate entrepreneurship from the information received through the personnel surveys. In addition, the measurement of customer satisfaction was done based on data containing only the employees perceptions about customers opinions. Thus the data does not include direct customers opinions on the issues analysed. 4. Results and Data Analysis This section provides the results of the analysis, which represent a description of the respondents and scale development. Profiles of the manufacturing firms in this survey are reported in the early sections. The empirical portion of the scale developed for the measure of each variable is identified in the next section. Results of the hypothesis tests are also presented, analysed and summarised. The scale development procedures, as reported by Covin and Slevin (1991), were applied to measure the components of antecedents to corporate entrepreneurial behaviour and their consequences. The study also utilised the scales a developed by Lumpkin and Dess (1996) to measure environmental factors moderating corporate entrepreneurship and business performance. Cronbach s Alpha Reliability for Internal Consistency The initial values of the coefficient alpha were.842,.742, and.840 with respect to the managers perspective of the firm s corporate entrepreneurial behaviour and performance. Nunnally (1967, 1978) suggests that reliability coefficients above.70 are generally considered acceptable. Thus this study employed existing scales with consistently high-reliability alpha coefficients. Variable Table 2 Reliability Estimates (n=137) Alpha External environment 9 Intrapreneurial behaviour.742 Firm performance.840 Hypotheses Testing For clarity of the constructs, refer to Figure 1. Correlation coefficients were calculated to observe the strength of the association. Regression analysis was used to test hypotheses. These hypotheses examined the relationship between internal organisational characteristics and corporate entrepreneurship, and corporate entrepreneurship and the firm s performance. Answer to Research Question 1: Relationship between External Environment and Intrapreneurial Strategy Correlation coefficients were calculated to observe the strength of the association between the external environment as the independent variable and intrapreneurial strategy as the 7

8 dependent variable. Hypothesis 1 H 0 : H A : There is no significant relationship that exists between the external environment and intrapreneurial behaviour, from the perspective of employees. There is a significant relationship that exists between the external environment and intrapreneurial behaviour, from the perspective of employees. Table 3 Coefficient Correlation: External Environment and Intrapreneurial Strategy External Environment Intrapreneurial Behaviour External environment Pearson Correlation 1.899** Sig. (2-tailed).000 N Intrapreneurial Pearson Correlation behaviour.899** 1 Sig. (2-tailed).000 N **Correlation is significant at the 0.01 level (2-tailed). Correlation analysis is a useful and powerful technique for exploring the relationship among variables. Table 3 displays the correlation coefficients. A significant correlation was found between the external environment and intrapreneurial behaviour of (.899; p<.000). It implies that the external environment does influence the implementation of intrapreneurial behaviour. Regression Analysis: External Environment and Intrapreneurial Behaviour The summary of the regression analysis between the independent variable (external environment) and the dependent variable (intrapreneurial behaviour) is shown in Table 4. A positive relationship between the variables was found. The adjusted R 2 was.808 indicating that external environment explained 80.8% of the variation in intrapreneurial behaviour. Based on the results of the regression analysis, H 0 is rejected. 8

9 Table 4 Regression Analysis: External Environment and Intrapreneurial Strategy Dependent Variable Intrapreneurial Behaviour Predictors External Environment Multiple R.899 a R Square.808 Adjusted R Square.807 Std. Error of Estimate Model Sum of Mean df Squares Square F Sig. 1 Regression (a) Residual Total (a) Predictors: (Constant), External Environment (b) Dependent Variable: Intrapreneurial Behaviour [Please specify where (b) should appear inside Table 4. Only (a) is shown in Table 4.] Variable in Equation Model Unstandardised Standardised Coefficients Coefficients t Sig. B Std. Error Beta 1 (Constant) External Environment (a) Dependent variable: Intrapreneurial Behaviour Equation 1: Intrapreneurial Strategy = (External Environment) [Please specify where (a) should be inside the table, since there is a footnote about (a). Or is this just a general note to the table?] There is positive linear relationship and positive correlation between the external environment and intrapreneurial strategy. The results are consistent with the expectation that the external environment will increase the implementation of intrapreneurial behaviour. This finding is consistent with Lumpkin and Dess previous research (1996) that the external environment influences the implementation of intrapreneurial behaviour. Answer to Research Question 2: Relationship between Corporate Entrepreneurship and the Firm s Performance Pearson's correlation supported by regression analysis was used to test the relationship between a firm s performance as the dependent variable and corporate entrepreneurship as the independent variable. Table 4(a) shows direct correlation between corporate entrepreneurship and the firm s performance. Regression analysis reveals a positive relationship between corporate entrepreneurship and the firm s performance. Hypothesis 2 9

10 H 0 : There is no significant relationship that exists between intrapreneurial behaviour and the firm s performance, from the perspective of employees. H A : There is a significant relationship that exists between intrapreneurial behaviour and the firm s performance, from the perspective of employees. Table 4(a) Coefficient Correlation: Intrapreneurial Strategy and Firm s Performance (n=137) Intra-corporate entrepreneurship Intrapreneurial Pearson Correlation Firm s Performance 1.882** Behaviour Firm [s Performance Pearson Correlation.882** 1 **Correlation is significant at the 0.01 level (2-tailed). Coefficient Correlation: Intrapreneurial Behaviour and Firm s Performance Table 4(a) shows that corporate entrepreneurship is significantly correlated with the firm s performance from the perspective of employees (.882, p<.000). This indicates that corporate entrepreneurship can be important in determining of the degree of a firm s performance. This result suggests that corporate entrepreneurship in a manufacturing firm influences the degree of the firm s performance. Regression Analysis: Intrapreneurial Behaviour and Firm s Performance The summary of the regression analysis between the independent variable (intrapreneurial behaviour) and the dependent variable (Firm Performance) is shown in Table 4(b). A positive relationship between the variables was found. The adjusted R 2 was.777 indicating that intrapreneurial behaviour explained 77.7% of the variation in Firm Performance. Based on the results of the regression analysis, H 0 is rejected. Table 4(b) Regression Analysis: External Environment and Corporate Entrepreneurial Behaviour Dependent Variable Firm Performance Predictors Intrapreneurial Behaviour Multiple R.882 a R Square.778 Adjusted R Square.777 Mode Sum of Mean df F l Squares Square Sig. 1 Regression (a) Residual Total (a) Predictors: (Constant), Intrapreneurial Behaviour (b) Dependent Variable: Firm Performance [Please specify where (b) should be inside the table, in relation to the footnote (b).] 10

11 Variable in Equation Unstandardised Coefficients Standardised Coefficients Model B Std. Error Beta T Sig. 1 (Constant) Intrapreneurial Behaviour a) Dependent Variable: Firm Performance Equation 5: Firm s Performance = (intrapreneurial behaviour) [Pls specify whether (a) should appear in the table, or is just a general note below the table.] There is a positive linear relationship and positive correlation between intrapreneurial behaviour and the firm s performance. The results are consistent with the expectation that corporate entrepreneurship will increase the firm s performance. This finding is consistent with research done by Schollhammer (1982) and Lumpkin and Dess (2001) who insist that intrapreneurial behaviour has been found to have a relationship with the firm s performance. Even though some studies have indicated that entrepreneurial strategy is associated with poor performance, there is strong evidence of a positive relationship between corporate entrepreneurship and the firm s performance (Lumpkin & Dess, 2001). 5. Discussion and Conclusions The primary purpose of this study was to explore a model that examines the relationships among the external environment, intrapreneurial behaviour and a manufacturing firm s performance, from the perspective of the firm s managers. The study considered the perception of a firm s managers viewing the relationships among their firm s external environment, intrapreneurial behaviour and performance. The model indicates that firms managers perceive that their external environment makes a highly positive contribution to intrapreneurial behaviour. The model also indicates that a firm s managers perceive that the firm s intrapreneurial behaviour makes a highly positive contribution to the firm s performance. The basic value of understanding intrapreneurial behaviour is the prediction, to a certain extent, of the firm s performance. Intrapreneurial behaviour has been shown to have a very significant impact on the firms performance from the perspective of their managers. This leads to the idea that firms managers perceive their firms intrapreneurial behaviour to be driven by external environmental change in the industry. It is very understandable for managers to perceive such because managers constantly provide firms with local environmental information through communication and relationship channels. Firms compete with one other in many local markets, so they are knowledgeable about significant changes in the local environment. Managers might perceive the local environment to be a greater critical factor to firms intrapreneurial behaviour than the general external environment in the industry. They might also think of the external environment in the industry as important enough to have an influence on corporate entrepreneurship. It is very daunting and costly for firms to get sufficient amount of knowledge about the environment in local areas without their managers assistance. It is recommended that 11

12 free-flowing relationships, authority and communication channels between firms and their managers be formed to ensure that these firms local environmental elements are learned in the firm s entrepreneurial decision-making process. From the managers perspective, the firm manager relationship is identified as the most important element which determines a firm s intrapreneurial behaviour, leading to its performance. Entrepreneurial strategies seeking a high level of performance must be located in a complex network involving numerous interactions among people in the firm s system. Recommendations The following recommendations arise from the results of data analysis and the findings of the study. It is recommended that the present study and its findings should form the basis for infusing manufacturing firms with corporate entrepreneurship and innovative thinking and acting. It is specifically recommended that the following be done: 1. Align the demographic structure of the sample to identify significant differences or correlations between groups to identify the difference/correlation between male and female managers with regard to entrepreneurial behaviour. 2. The modified innovation and corporate entrepreneurship instrument should be adopted by all Malaysian manufacturing firms to diagnose their entrepreneurial climate and to identify innovation and corporate entrepreneurship training needs. The modified instrument is valid and reliable for their environment. 3. The experimental design of the study should be adopted by Malaysian manufacturing firms to foster their innovation and corporate entrepreneurial culture. Future Research The results of this study provide adequate evidence in support of the sound principles of entrepreneurship documented in literature. Furthermore, the results contribute to the science and body of knowledge on corporate entrepreneurship, and establish a platform for longitudinal research on corporate entrepreneurship inside manufacturing industries. Suggestions for future research are outlined below: 1. A future study could be conducted to determine how many companies in Malaysia (other than manufacturing firms) and other countries offer entrepreneurial training to its employees. 2. A future study could be conducted to determine why people are motivated to increase their entrepreneurial thinking under their present employer. 3. A future study could be conducted to determine the relationship between the amount of entrepreneurial training and the firm s performance where, besides patience, a certain passion for corporate entrepreneurship is also needed. 12

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