UNIVERSIT CARLO CATTANEO LIUC FACOLT DI ECONOMIA

Corso di Laurea in Economia Aziendale

Entrepreneurial Orientation and Firm Performance

TUTOR: Salvatore Sciascia

Paper di: Giorgio Tomassetti Matr. 11854

Anno Accademico 2010/2011

ENTREPRENEURIAL ORIENTATION AND FIRM PERFORMANCE

Contents
Acknowledgment ................................................................................................................. 3 Abstract ............................................................................................................................... 4 Introduction ......................................................................................................................... 5 1. Entrepreneurship ......................................................................................................... 6 1.1. 1.2. 1.3. 1.4. 1.5. 2. The Entrepreneurial Mindset ............................................................................... 6 Entrepreneurship at the Corporate Level: Corporate Entrepreneurship ................. 7 Entrepreneurial Orientation (EO) ......................................................................... 9 The Role of the Management in creating an Entrepreneurial Organization ......... 15 The Relationship between EO and Financial Performance ................................. 16

Research Design ....................................................................................................... 18 2.1. 2.2. 2.3. Method ............................................................................................................. 18 Content Analysis ............................................................................................... 19 Financial Performance....................................................................................... 24

3.

Analysis.................................................................................................................... 25 3.1. 3.2. 3.3. EO ROI .......................................................................................................... 26 EO ROE ......................................................................................................... 28 EO ROS ......................................................................................................... 30

4.

Discussion ................................................................................................................ 32

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4.1. 4.2. 4.3.

Results .............................................................................................................. 32 Conclusion ........................................................................................................ 35 Further Research ............................................................................................... 35

Bibliography ...................................................................................................................... 38

Index of Figures
Figure 1: The five dimensions of EO .................................................................................. 10 Figure 2: Ranking of companies based on their EO Index score .......................................... 23 Figure 3: EO Index - ROI ................................................................................................... 26 Figure 4: EO dimensions ROI.......................................................................................... 27 Figure 5: EO Index - ROE .................................................................................................. 28 Figure 6: EO dimensions ROE ........................................................................................ 29 Figure 7: EO Index ROS ................................................................................................. 30 Figure 8: EO dimensions ROS ......................................................................................... 31 Figure 9: Autonomy - ROI ................................................................................................. 34

Index of Tables
Table 1: Word list for EO dimensions................................................................................. 21 Table 2: Means and Standard Deviations ............................................................................ 22 Table 3: Correlations between dimensions of EO and performance measures ...................... 25

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Acknowledgment
First and foremost, I would like to thank my family for their support and encouragement. They have always believed in the importance of my education and for this I will always be grateful. I would like to express my deep and sincere gratitude to Prof. Salvatore Sciascia for being my mentor and advisor for this research project. His guidance and assistance have been essential during the research and writing of this thesis. Also, special thanks to Joseph R. Erba, professor at the University of North Carolina at Greensboro (UNCG), for introducing me to the subject of Corporate Entrepreneurship and providing me with valuable advice. I find his ability to inspire and motivate people extremely impressive. Finally, I have to thank Dennis P. Leyden, professor at the University of North Carolina at Greensboro (UNCG), who taught me how to properly write a research paper. Most importantly, I have to thank Mr. Leyden for his invaluable insights on the art of Critical Thinking.
Prima di tutto, vorrei ringraziare la mia famiglia per il loro supporto e incoraggiamento. A loro sar sempre grato per aver creduto nellimportanza della mia educazione. Vorrei inoltre esprimere la mia pi sincera gratitudine a Salvatore Sciascia per aver svolto il ruolo di tutore. I suoi consigli e il suo aiuto sono stati fondamentali durante il periodo di ricerca e di stesura della tesi. Un ringraziamento speciale va a Joseph R. Erba, professore presso University of North Carolina a Greensboro (UNCG), per avermi introdotto allo studio della Corporate Entrepreneurship e per avermi dato sempre consigli preziosi. La sua abilit a ispirare e motivare le persone mi ha colpito molto. In conclusione, devo ringraziare anche Dennis P. Leyden, professore presso University of North Carolina a Greensboro (UNCG), per avermi insegnato ad affrontare un progetto di ricerca. In particolare, devo ringraziare il professor Leyden per le sue preziose lezioni sullarte del Pensiero Critico.

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Abstract
The primary objective of this thesis is to determine whether firms who have a greater entrepreneurial orientation tend also to be more successful in terms of performance. In particular, I want to answer the following research question: What is the relationship between the entrepreneurial orientation and the performance of a firm?. This thesis is the result of a research project conducted on a set of 49 companies in the Consumer Goods sector listed on Borsa Italiana (the Italian Stock Exchange) during the year 2010. The paper is composed of four parts. In the first chapter I introduce the subject of entrepreneurship. In particular, I describe the main findings and points of view on the topic of corporate entrepreneurship and entrepreneurial orientation. The research background in the first chapter allows the reader to gain a better understanding of the second chapter. Indeed, in the second chapter I describe the tools and the method used in this research project to gather the necessary data. In the third chapter, I explain the analysis I conducted on the information previously collected. Finally, the fourth chapter is about the results of my research. In this part of the paper I conclude that there is a moderate positive correlation between the level of entrepreneurial orientation and a firms performance and this result is coherent with previous research in the field of corporate entrepreneurship.

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Introduction
On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. In the following days it became clear how fast the world was moving. Suddenly, organizations all over the globe were experiencing serious financial difficulties and in a matter of hours the U.S. financial system, as well as the world financial system, were under severe risk of collapsing. Although this paper is not about the recent financial crisis, it is important to realize that todays business world has gone through some major changes in recent years. The effects of Lehmans bankruptcy are just an example that helps us realize how fast the world is moving today and how complex it has become. Indeed, companies need to learn how to successfully deal with a constantly changing external environment that forces them to continually work on their strategy to align the internal environment with the external environment. Many organizations are fully aware of their need to change. Nevertheless, many are unwilling to do so. As research shows, individuals tend to be risk-adverse and tend to stick with the status quo (Samuelson & Zeckhauser, 1988). Therefore organizations need to develop strategies that allow them to embrace change by making it a vital part of their culture. By doing so they reduce the resistance to change and the whole process becomes easier. As a matter of fact, we have seen many companies taking actions to exploit opportunities by fostering entrepreneurship (Sathe, 1988; Russell, 1999). Indeed, as you will read in this thesis, by having an entrepreneurial orientation companies are able to quickly react to changes happening in the external environment and ultimately improve their performance.

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1. Entrepreneurship
In this first chapter I introduce the reader to concept of entrepreneurial behavior and its main characteristics. Then I describe the meaning of Corporate Entrepreneurship (CE) and in particular I expand on the concept of entrepreneurial orientation (EO) and its dimensions, which are a central element of this paper. Also, in this chapter, I analyze the role of the management in creating an entrepreneurial organization. Finally, I describe similar research projects that previously tried to determine the type of relationship that exists between the entrepreneurial orientation of a firm and its performance.

1.1. The Entrepreneurial Mindset

The entrepreneurial mindset can be described as a way of conducting business operations that involves a constant risk-taking in order to seize opportunities. Indeed, entrepreneurship has been proved to be an important wealth creation tool that facilitates innovation, value creation and renewal (Hitt, Ireland, Camp, & Sexton, 2001). Throughout history many definitions of the word entrepreneur have been given. According to Schumpeter, for example, the entrepreneur is a major agent of economic development, while Kirzner defines the entrepreneur as the one who identifies potential opportunities that are unexploited and allocates efficiently the resources available on the market (Sciascia & De Vita, 2004). These definitions help us understand what it really means to be entrepreneurial. Although every entrepreneurial organization is different from another, we are still able to identify some common traits that characterize them. For instance, entrepreneurial organizations have a high acceptance of failure, which ultimately provides a unique way of approaching innovation. As Tim Campos, Facebook CIO, recently said, Failure is the critical ingredient to

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creating an innovative culture (Wall, 2011). The acceptance of failure needs to be promoted by the management and in particular the so called failure-tolerant leaders need to focus their attention on promoting a culture of intelligent risk taking by assuming a non-judgmental analytical posture and admitting their own mistakes. Another common trait of entrepreneurial cultures is the high level of engagement among the workers and in particular between the leaders and their teams. Engagement can be achieved, for example, by encouraging collaboration, showing interest and being supportive to others. It is interesting to notice that a recent study shows that praising people can actually reduce their performance, while only a genuine interest in an employees work has positive effects on performance (Farson & Keyes, 2002). Finally, it is important to understand that entrepreneurship is both a way of thinking (cognition) and a way of acting (behavior) (Morris, Kuratko, & Covin, 2010), and for an entrepreneurial culture to work, a constant flow of relevant information across all levels have to occur. After this short introduction to entrepreneurship we can now explore the application of entrepreneurial principles in the corporate world.

1.2. Entrepreneurship at the Corporate Level: Corporate Entrepreneurship

Entrepreneurship is often associated with small companies and start-ups, but in recent years we have seen many corporations embrace the principles of entrepreneurship inside their own organizations. This phenomenon has been labeled Corporate Entrepreneurship (CE) and it has been defined as the process by which individuals inside organizations pursue opportunities without regard to the resources they currently control (Stevenson, Roberts, & Grousbeck, 1999). For

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instance, successful companies like 3M, Google and IBM strongly encourage their employees to be entrepreneurial. 3M allows its employees to spend 15% of their time on side project. Similarly Googles employees can spend 20% of their time pursuing their own projects; products such as Gmail and Google News are a direct result of this policy. Instead IBM organizes the so called jams, which are brainstorming sessions that more than 300,000 employees attend. These initiatives have been very successful (and also profitable) for the companies that have implemented them (Howe, 2010). CE can be better understood by describing the three types of concepts in which it can be expressed (Guth, & Ginsberg, 1990; Covin, & Miles, 1999): 1. The creation of new businesses within an established organization (i.e. corporate venturing or internal innovation) 2. The transformation of organizations through strategic renewal 3. Entrepreneurial Orientation (EO) The first concept (corporate venturing or internal innovation) is defined as an activity which seeks to generate new businesses for the corporation in which it resides through the establishment of external or internal corporate ventures (Von Hippel, 1977, p. 163). The second concept, strategic renewal, is the revitalization of the companys operations by changing the scope of its business, its competitive approach, or both (Zahra, 1996, p. 1715). Finally, the third concept, entrepreneurial orientation, has been defined by Covin and Miles (1999, p. 48) as an entrepreneurial philosophy that permeates an entire organizations outlook and operations. In the literature we find that entrepreneurial orientation is also referred as entrepreneurial management (Brown, Davidsson, & Wiklund, 2001; Stevenson, & Jarillo, 1990) or entrepreneurial posture (Covin & Slevin, 1991).

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In this paper I will focus my attention on this last one of the three concepts described above, Entrepreneurial Orientation (EO), and I will study the correlation between the EO of an organization and its financial results. In particular, I will look at a set of companies in the Consumer Goods sector listed on Borsa Italiana (the Italian Stock Exchange) and analyze their Managements Discussion and Analysis (MD&A). The MD&A can be found inside the annual report of a public company and it is supposed to address the performance of the firm for that year, as well as the significant events, trends, conditions and contingencies that can affect the future of the firms operations. It should also include the financial statements, systems and controls, compliance with laws and regulations, and actions taken or planned to address problems (Federal Accounting Standards Advisory Board, 1999).

1.3. Entrepreneurial Orientation (EO)

Entrepreneurial orientation has now become a central concept in entrepreneurship and research on this subject is increasing because it is now recognized by managers and scholars as a critical success factor (Kaya & Aca, 2009). It is possible to define Entrepreneurial Orientation (EO) as the set of processes, practices, and decision-making styles of firms that act in an entrepreneurial way (Lumpkin & Dess, 1996). A firm can be considered entrepreneurial if it exhibits the following five entrepreneurial behaviors: autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.

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Autonomy

Entrepreneurial Orientation

Competitive aggressiveness

Risk taking

Innovativeness

Proactiveness

Figure 1: The five dimensions of EO

These dimensions are considered to be the key dimensions of EO (Short, Payne, Brigham, Lumpkin, & Broberg, 2009) and they are essential if an organization wants to engage in successful CE. Below I will describe each one of the five dimensions to gain a better understanding on what it really means to have an entrepreneurial orientation. Also, the following five dimensions are used in this research project to measure the level of EO in each company.

Autonomy
Autonomy refers to the independent actions taken by individuals or teams in order to develop new opportunities from the idea stage to completion (Lumpkin & Dess, 1996). The ability to freely think and share opinions is, for instance, a key trait of an entrepreneurial organization. This mindset

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ultimately translates in a sense of empowerment, which helps employees take an active, rather than passive, role in the company. Although the concept of autonomy seems simple to implement, encouraging independent actions can pose several threats to the organizations if the process is not well managed. It is therefore extremely important that these autonomous teams/individuals are well coordinated to reduce the possible waste of resources and the creation of other forms of inefficiencies, such as the duplication of effort. Practical actions that can be taken to foster autonomy are: sunkworks1; management structure that supports and empowers employees, so that they can actively contribute to the success of the company; organizational structures that support independent actions. In conclusions, companies need to empower their employees by giving them a sense of autonomy that should stimulate their creativity and innovativeness while, at the same time, making sure that these individuals are well coordinated, in order to reduce the possible inefficiencies that a greater degree of autonomy might cause (Dess, Lumpkin, & Eisner, 2010).

Competitive Aggressiveness
This entrepreneurial behavior refers to the aggressive competitive attitude that some firms implement to outperform their competitors or to maintain and/or improve their competitive position in the marketplace. For instance, some companies preannounce their products to discourage

Sunkworks are groups inside an organization that have a high level of autonomy and typically engage in creative problem solving.

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competitors from engaging in similar activities. Competitive aggressiveness can lead to competitive advantages only if it is used with moderation. As a matter of fact, some companies have seriously damaged their reputation with their extremely aggressive attitude (Dess, Lumpkin, & Eisner, 2010). Actions associated with this behavior are for example: cutting prices; sacrificing profitability to gain market share (Venkatraman, 1989); aggressive spending on marketing, quality, or manufacturing capacity (MacMillan & Day, 1987).

Innovativeness
Innovativeness refers to the willingness to creatively find novel solutions and opportunities that ultimately lead to the creation of new or improved products/processes. This dimension of EO is critical in a constantly changing environment. Innovation is indeed a way for companies to understand the needs and the wants of the market and translate them into actions that can be taken inside established organizations. The ability to innovate can and should result in the creation of sustainable competitive advantages. In particular, research shows that innovations that lead to sustainable competitive advantages usually share four common traits (Lengnick-Hall, 1992). They are: hard to imitate; reflect market realities; allow a firm to exploit the timing characteristics of the industry;

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rely on readily accessible technologies and capabilities.

Although investing in innovation has many potential benefits, it is important to be aware of the possible pitfalls as well. For instance, R&D expenses might result in a waste of resources, innovation might not be appropriately protected or competing firms might find a better use of the technology that your company has developed. There are several ways to foster innovativeness inside an organization. Few examples are: encouraging creativity and experimentation with the help of corporate resources; making a constant investment in R&D to produce new technology and improve existing products/processes. In conclusion, an innovative environment has the potential to generate true competitive advantages and future growth, but it also involves a great deal of risk associated with the fact that the investments made by the company might not pay off (Dess, Lumpkin, & Eisner, 2010). This is a compromise that an entrepreneurial organization has to accept.

Proactiveness
Proactiveness can be defined as the ability to anticipate changes in the marketplace or future needs and problems (Short, Payne, Brigham, Lumpkin, & Broberg, 2009). In other words, it is the ability to pursue new opportunities. Proactive firms are able to be ahead of their competitors by constantly monitoring the external environment to spot new trends and needs but, most importantly, they take action. Also, by being proactive many firms are able to gain what is called first mover advantage. First movers can usually charge higher prices and quickly gain and maintain a good market share.

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Typical ways to express a proactive culture are: introducing new products or technological capabilities before the competition; constantly seek out new products/services (Dess, Lumpkin, & Eisner, 2010). However, it is correct to note that first movers are not always successful because they can encounter resistance from the marketplace or the new product/service might not respond to a real customer need. Therefore a proactive attitude needs to be sustained by the last one of the five entrepreneurial behaviors; risk taking.

Risk Taking
Risk taking refers to the willingness to act boldly without knowing the consequences (Dess, Lumpkin, & Eisner, 2010). As I stated earlier, the ability to take risk to seize opportunities is a fundamental trait of entrepreneurs that must be embraced by those organizations that pursue an entrepreneurial orientation. It is possible to distinguish between three types of risk: business risk: it is related to the decision to invest in new markets or to use new technologies without knowing the probability of success; financial risk: is present whenever growth is achieved through heavy borrowing or a relatively big commitment of resources; personal risk: is taken by an executive when he or she decides to take a stand in favor of a specific strategic decision. When talking about risk taking it is important to specify that taking risk should not be confused with gambling. Indeed, companies should approach risk taking by carefully managing the level of risk associated with their actions. For instance, decisions should be made with a sufficient

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level of research and planning with the objective of reducing or at least better defining the level of risk of a specific course of action. In conclusion, firms can internalize the principles of entrepreneurial orientation inside their own organization and this cultural change allows them respond more easily and quickly to the changes that take place in the external environment. In other words, corporate entrepreneurship serves as an adaptation mechanism, as Lumpkin and Dess (1996) suggested.

1.4. The Role of the Management in creating an Entrepreneurial Organization

The implementation of an entrepreneurial orientation inside an established organization can pose several challenges. In most cases, companies decide to initiate an organizational reorientation only after a performance crisis that forces them that to take action, especially on their management team that does not show signs or willingness to make changes. Although this is the most common behavior in todays marketplace, it is not however the most correct. In fact, the most successful reorientations occurred when the management initiated the necessary changes before the crisis has started (Tushman, Newman, & Romanelli, 1986). Therefore we can conclude that, in order for this implementation to be successful, the role played by the management is critical. Indeed, research shows that innovative managerial behavior must be displayed and reinforced constantly inside an organization (Kuratko, Ireland, & Hornsby, 2004). Managers must be able to empower employees and inspire them on the value of the company so that their performance is maximized. In particular, managers can: create an organization that stimulates the creation of entrepreneurial initiatives; provide an entrepreneurial vision that can guide innovation;

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make sure that promising projects do not lack the necessary resources (Ramachandran, Devarajan, & Ray, 2006). An entrepreneurial organization needs therefore to make of innovation an accepted and

appropriate way to solve problems, and a firm can do this successfully by creating a shared sense of purpose in the organization (Roberts, 1984). Given the critical role played by the management in implementing a culture of entrepreneurship inside a company, the research that I have conducted has been based on the analysis of the Managements Discussion and Analysis (MD&A) found inside the annual report that each company has published for the year 2010. This report is written by the management to give public notice of how a company is being operated.

1.5. The Relationship between EO and Financial Performance

In this section I would like review what has already been written on the relationship between EO and performance and describe the main findings of this growing field of research. As previously stated, in this paper I will explore the relationship between the level of EO and the financial results of a set of Italian public companies. Previous research has demonstrated that EO may improve performance because it helps organizations identify promising opportunities, obtaining first mover advantages and targeting premium market segments (Lumpkin & Dess, 1996). Also, the benefits that EO provides are being recognized across firm types and managerial levels (Covin, Ireland, & Kuratko, 2003). Corporate entrepreneurship more in general can improve the growth and the profitability of a company by increasing the level of proactiveness and willingness to take risk that allows the development of

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new businesses, as well as new products/services and processes (Ramachandran, Devarajan, & Ray, 2006). A positive relationship between CE and performance has also been observed by Zahra and Covin (1995) in their study in which they examined the longitudinal impact of CE on a financial performance index that took into consideration both growth and profitability information. However, researchers such as Covin and Slevin (1989), as well as Smart & Conant (1994), were not able to find a positive relationship between these two elements. In particular, they found that under certain circumstances EO is less related or even negatively correlated with performance. This result has been observed in firms that operate in benign environments (Covin & Slevin, 1989). In conclusion, we can state that it is still debatable whether there is a positive correlation between EO and performance or not. However, the number of researchers that found a positive correlation between the two is greater than the number of those who did not find it.

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2. Research Design
In this second chapter I describe how I conducted this research project. In particular, I explain the method used to collect the necessary information and the techniques that allowed me to elaborate the data in my possession and reach meaningful results.

2.1. Method
After researching and studying the existing relevant material on the subject of entrepreneurial orientation, I had to decide how to conduct some exploratory research to determine the most reliable and feasible way to reach a meaningful result that would allow me to correctly answer the following research question:

What is the relationship between the entrepreneurial orientation and the performance of a firm?
In this preliminary part of my research, the first task I had to perform was finding a method to determine the level of EO of a firm. In previous research projects on this subject, mainly two different types of tools have been used to solve this issue. Most researchers have used surveys to question people inside organizations on their entrepreneurial attitude (Covin & Slevin, 1989), while other researchers have used content analysis (Short, Payne, Brigham, Lumpkin, & Broberg, 2009). For this research project I decided to use the content analysis, and I explain the reasons for this decision later in the paper. Second, I had to decide on which type of document I could conduct a content analysis. I looked at a series of annual reports of public Italian companies, and I decided to perform my research on the Managements Discussion and Analysis (MD&A), mainly for two reasons. First, MD&As are present in all annual reports of Italian public companies; second, they are written by

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the management and they indirectly reflect the attitude of the firm and possibly its entrepreneurial spirit. For this research I decided to focus on a set of 49 companies of the Consumer Goods sector listed on Borsa Italiana (the Italian Stock Exchange) during 2010, which is the year I choose for my research. The sector was formed by 50 companies but I had to exclude one (Aicon Spa) due to the unavailability of its annual report for 2010. Finally, to answer the research question, I had to gather some data on performance for the chosen set of companies. Performance can be expressed with various indicators, both financial and non-financial. In this research I collected financial measures of performance because they have been used more widely and they have resulted more appropriate when performance measures were compared to EO measures (Rauch, Wiklund, Lumpkin, & Frese, 2009). Also, to avoid misleading results that often self-report data presents, the financial data used in this research is based on archival data collected from secondary sources.

2.2. Content Analysis

In this section I describe how I conducted the content analysis for this paper, and I explain the reasoning behind the decision of using this method of research. As previously stated, the level of entrepreneurial orientation of each firm was found by performing a content analysis on the MD&As available in the 2010 annual reports. Content analysis of a narrative text has helped researchers define key strategic decision-making processes (Short & Palmer, 2003), discover differences among communicators (Weber, 1990) and obtain information otherwise unavailable. In addition, the use of content analysis has displayed greater reliability and replicability compared to other techniques (Finkelstein & Hambrick, 1996) and recall biases are

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avoided (Barr, Stimpert, & Huff, 1992). These are some of the benefits that content analysis can offer that ultimately led me to choose this tool over other ones available. Most importantly, content analysis has also been successful in determining the perceptions and beliefs of the authors of a narrative text (DAveni & MacMillan, 1990). As a matter of fact, one of the main scopes of this project is being able to determine how entrepreneurial a firm is from the analysis of its MD&A. In this document the top management gives a description of their view on both the external and the internal environment, and they also write on the decisions taken, the strategic plans put in place to meet future goals and the results achieved throughout the year. In conducting the content analysis for this paper, I build a world list of semantically related words for each one of the five dimensions of EO described earlier (autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking). In performing this task, I decided to start from an already existing word list that was first created to conduct a similar research project on family firms. The original word list can be found in the article Family Firms and Entrepreneurial Orientation in Publicly Traded Firms: A Comparative Analysis of the S&P 500 (Short, Payne, Brigham, Lumpkin, & Broberg, 2009). The following reasons led me to use of this word list: the word list has been based on the EO Lumpkin and Dess definition of EO (1996), from which the five dimensions that I use in this paper are derived; it was created using on The Synonym Finder, which has been previously used to conduct semiotic analysis; the words are mutually exclusive and each word is associated with a single EO dimension; the validation process was conducted by using multiple steps to ensure the reliability of the word list.

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Finally, I carefully translated the word list from English to Italian with the assistance of multiple dictionaries. In some cases, due to the ambiguous meaning of some expressions, I had to add or delete words that otherwise would have created misleading results from the content analysis. Here is the word list I used:
Table 1: Word list for EO dimensions

Word Lists for EO Dimensions Dimension

Autonomy

Words
autogoverno, autonomia, autonomo, autorit, autorizzazione, deregulation, disconnessa, disconnesso, emancipazione, indipendente, indipendenza, ingovernato, liberalizzazione, libero, libert, non forzato, non governato, non controllato, permesso, permettersi, possibilit, sconfinata, sconfinato, senza affiliazioni, senza governo, senza regole, separato, separata, sovranit, sovrano, sovrana aggressivo, aggressivo, ambizione, ambiziosa, ambizioso, antagonista, antagonistico, aspirante, asta, avversaria, avversario, battaglia, capitalizzare, challenge, combattente, combattere, combattimento, combattivo, combattivo, competere, competitivo, competitiva, competitor, competizione, compimento, concorrente, conflitti, conflitto, conquista, contendere, difende, difendere, difendiamo, feroce, gara, gare, gareggiare, giocare, impegnarsi, impegnati, impegnato, intensificato, intenso, lotta, lotte, lottare, nemici, nemico, opporre, opporsi, opposizione, polemica, polemici, polemico, pronto a combattere, remare contro, risultati, risultato, rivale, rivali, sfidante, sfidanti, sforzare, sforzarsi, sfruttare, successi, successo, tornei, torneo abile, abilit, architettare, brevetti, brevetto, cambiamento, cambiare, cervello, concepire, crea, creare, creativit, creatore, creazione, creiamo, dotato, esperti, esperto, evocare, fare, formare, formulare, formulazione, genesi, geni, genio, idea, ideare, ideatore, immaginare, immaginati, immaginativo, immaginato, immaginazione, improvvisare, improvvisati, improvvisato, ingegnosit, ingegnoso, iniziamo, iniziare, iniziativa, iniziato, iniziatore, iniziatori, innovare, innovazione, intelligente, intelligenti, intelligenza, inventare, inventato, inventivo, inventore, invenzione, ispirato, ispirazione, macchinazione, marchi, marchio, nuova, nuove, nuovi, novit, nuovo, originale, originalit, , origine, pensare, pensatore, pensiero, pieno di risorse, prevedere, progettare, provenire, radicale, riformulare, riprogettare, rivoluzionare, scoperta, scoprire, sognare, sogno, strutturare, talenti, talento, trasformarsi, trasformata, trasformazione, vision, visionario, visione, visualizzare anticipatore, anticipatori, aspettarsi, controllare, controlli, controllo, domanda, domandare, domande, esplorare, esplorativi, esplorativo, esplorazione, esplorazioni, inchiesta, inchieste, indagine, indagini, investigare, investigazione, opportunit, prevedere, prevediamo, proattiva, proattivi, proattivo, pronosticare, prospettiva, ricerca, ricerche, sondaggi, sondaggio, sorveglianza, studi, studio, verifica, verifiche, visionari, visionario audace, audaci, avventarsi, avventata, avventati, avventato, avventura, avventure, avventurosa, avventurosi, avventurosi, avventuroso, avventuroso, azzardare, azzardati, azzardato, azzardo, coraggiosa, coraggiosi, coraggioso, impavidi, impavido, imprudenza, incauta, incauti, incauto, incerta, incerti, incerto, intraprendente, osare, pericoli, pericolo, pericoloso, precipitosamente, probabilit, rischi, rischiare, rischio, rischiosi, rischioso, scommessa, scommesse, scommettere, senza paura, sfida, sfide, spavalda, spavaldi, spavaldo, temerari, temeraria, temerariet, temerario, tuffarsi

Competitive aggressiveness

Innovativeness

Proactiveness

Risk taking

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Each MD&A was then scanned to determine the density of each one of the words above. The quantitative analysis software ATLAS.ti has been used to determine word usage. Computer-aided content analysis allows us to analyze documents at a faster pace, as well as increase the level of reliability. In this research the relative frequency of words was determined for each firm in each one of the five dimensions. Indeed, the presence or the absence of some words, as well as the frequency with which they appear in a text, allows us to determine the authors mental models (Carley, 1997). After collecting the data for each dimension, a cumulative score (EO Index) was calculated for each firm. The EO Index allowed me to compare the general level of entrepreneurial orientation among the different firms of my set. Indeed, according to Covin and Slevin (1989) EO is a unidimensional construct and most studies have summed across all dimensions of EO to create a single variable (Rauch, Wiklund, Lumpkin, & Frese, 2009, p. 22). Finally, as I later explain, this piece of information was compared to the measures of performance to determine the type of correlation between the two. The following table (Table 2) shows the means and the standard deviations for the data collected during the content analysis on the dimensions of EO.
Table 2: Means and Standard Deviations

Dimension Autonomy Competitive aggressiveness Innovativeness Proactiveness Risk taking EO Index

MAX 0.430 0.705 1.109 0.690 0.963 2.140

MIN 0.000 0.055 0.036 0.000 0.037 0.619

M 0.087 0.282 0.436 0.304 0.342 1.450

SD 0.079 0.126 0.229 0.156 0.230 0.395

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In conclusion, the content analysis allowed me to assign a score, reflective and proportional to the level of EO, to each one of the 49 companies analyzed. With the resulting scores I then ranked the firms by their level of entrepreneurial orientation. The following graph shows the complete ranking:

Figure 2: Ranking of companies based on their EO Index score

While Pirelli and C. Spa and Safilo Group Spa resulted the most entrepreneurial, Le Buone Societ Spa and Arena Spa turned out to be the least entrepreneurial ones.

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2.3. Financial Performance

As I wrote earlier, I decided to use financial measures of performance available on archival data. In particular, I used the annual reports for the year 2010 found in each companys website. Previous studies on EO have usually relied on either growth measures or accounting-based criteria. When using account-based criteria, financial ratios such as Return on Assets (ROA) and Return on Investment (ROI) were utilized (Rauch, Wiklund, Lumpkin, & Frese, 2009). To ensure a more complete set of data, during my research I decided to collect the following financial information: assets, liabilities, equity, sales, EBIT, net income, net capital invested. Although annual reports and financial websites often have a list of ratios already calculated, I made the decision to calculate them myself to ensure consistency and avoid possible errors due to slightly different data and formulas available. As I previously explained, I obtained the necessary financial data from the annual reports available in each companys website. Only in a few cases in which the annual report did not indicate some needed financial information (i.e. Net Capital Invested), I had to gather the missing data from financial websites, such as Morningstar.it and Reuters.com. I then calculated the following financial ratios2: ROI (Return on Investment) = EBIT / Net Capital Invested ROE (Return on Equity) = Net Income / Equity ROS (Return on Sales) = EBIT / Sales After determining the financial ratios for each one of the 49 companies selected for this study, I analyzed the results. The description of the analysis I conduced can be found in the next chapter.
2

Source for the financial ratios formulas: (Cortesi, Furlan, & Tettamanzi, 2008)

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3. Analysis
This chapter explores the results of my analysis on the relationship between the measures of entrepreneurial orientation and the financial performance of the companies selected for this study. Once all the necessary data was gathered, a correlation analysis was conducted on a series of dimensions to detect the existing relationships between variables. In particular, in this research I analyzed the correlation between each one of the five EO dimensions (autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking), including also the EO Index3, and a measure of financial performance. As previously stated, the measures of financial performance used in this study are ROI, ROE and ROS. The following sections of this chapter are dedicated to the presentation of the results of the correlation analyses that I conducted4. The graphical and numerical results will then be evaluated.
Table 3: Correlations between dimensions of EO and performance measures

Dimension Autonomy Competitive aggressiveness Innovativeness Proactiveness Risk taking EO Index

ROI -.104 .171 .139 .246 .042 .236

ROE .102 .058 .162 .168 .060 .235

ROS -.380 .343 .242 .104 .185 .323

EO Index is a cumulative score that reflects the level of entrepreneurial orientation inside an organization. It is calculated as the sum of the individual scores for each one of the five dimensions of EO. More information is available on chapter 2.2. 4 The software Tableau Public was used to create the graphs and calculate the statistical information presented in this following pages.

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3.1. EO ROI
The following graph shows the correlation between the entrepreneurial orientation of a firm and its Return on Investment (ROI).

Figure 3: EO Index - ROI Number of observations: 49 DF (degrees of freedom): 2 Residual DF: 47 SSE (sum squared error): 0.0007059 MSE (mean squared error): < 0.0001 Individual trend lines: Pane(r,c) p (1,1) 0.102462 R-Squared: Standard error: p (significance): 0.0557311 0.0038754 0.102462

Equation EO INDEX = 0.00608314*ROI + 0.0140291

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Figure 4: EO dimensions ROI

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3.2. EO ROE
The following graph shows the correlation between the entrepreneurial orientation of a firm and its Return on Equity (ROE).

Figure 5: EO Index - ROE Number of observations: 49 DF (degrees of freedom): 2 Residual DF: 47 SSE (sum squared error): 0.0007064 MSE (mean squared error): < 0.0001 Individual trend lines: Pane(r,c) p (1,1) 0.10444 R-Squared: Standard error: p (significance): 0.0551137 0.0038767 0.10444

Equation EO INDEX = 0.00179466*ROE + 0.0146985

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Figure 6: EO dimensions ROE

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3.3. EO ROS
The following graph shows the correlation between the entrepreneurial orientation of a firm and its Return on Sales (ROS).

Figure 7: EO Index ROS Number of observations: 49 DF (degrees of freedom): 2 Residual DF: 47 SSE (sum squared error): 0.0006697 MSE (mean squared error): < 0.0001 Individual trend lines: Pane(r,c) p (1,1) 0.0236827 R-Squared: Standard error: p (significance): 0.104203 0.0037747 0.0236827

Equation EO INDEX = 0.00331811*ROS + 0.0145408

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Figure 8: EO dimensions ROS

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4. Discussion
4.1. Results
In this chapter I will discuss the results displayed in the previous chapter and answer the research question. Regarding the relationship between the level of entrepreneurial orientation (EO Index) and the Return on Investment (ROI), my research found a positive correlation between the two (EO INDEX = 0.00608314*ROI+0.0140291). This correlation has displayed an R-Squared equal to 0.0557311 and a (significance) of 0.102462. A positive correlation can also be found when correlating the EO index and both the Return on Equity (ROE) and the Return on Sales (ROS). In particular, the following equation describes the relationship between the Return on Equity and the EO Index: EO INDEX = 0.00179466*ROE+0.0146985. In this second case, an R-Squared of 0.0551137 with a of 0.10444 were found. Finally, EO INDEX = 0.00331811*ROS+0.0145408 is the equation that describes the correlation between the level of entrepreneurial orientation of a firm and its Return on Sales. This relationship has shown an R-Squared of 0.104203 and a (significance) of 0.0236827. It is now important to understand how the findings of this study can be evaluated based on past research. Although the literature available on the relationship between entrepreneurial orientation and performance has been growing recently (Knight, 1997; Lyon, Lumpkin, & Dess 2000), to my knowledge a study that was conducted using the same method that I implemented in this research project has not yet been published. Indeed, most researchers have used surveys to directly question the top management of the firms on their level of EO (Covin & Slevin, 1989).

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Therefore, this study cannot be easily compared with previous ones because of the different methods used. However, we can discuss previous findings on the general relationship between EO and performance. For instance, a recent study analyzed 14,259 firms and found the correlation between EO and performance to be .242 (Rauch, Wiklund, Lumpkin, & Frese, 2009). The authors of the study considered this finding to indicate a moderately large correlation. My research found lowers levels of correlation, compared to those described above. Indeed, the values for the correlation were in the 0.002-0.006 range, while R ranged between 0.055-0.100. Having mentioned the differences in the methodology of research, we can affirm that according to the research I conducted a moderate positive relationship exists between the level of entrepreneurial orientation and the performance of a firm. In addition to the general EO Index, I also verified the type and intensity of the correlation between performance and each one of the five dimensions with which I measured the level of EO (autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.). However, in this case, a positive correlation was not always found. In particular, a negative correlation was found when analyzing the relationship between the level of autonomy and the ROI and ROS. The information in my possession does not allow me to determine the reasons for the negative relationship and future research should be conducted to understand this result. Indeed, existing research only proves the existing positive correlation between performance and the following EO dimensions: innovativeness, risk taking, and proactiveness (Rauch, Wiklund, Lumpkin, & Frese, 2009).

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Figure 9: Autonomy - ROI

Furthermore, it is important to acknowledge that the fact that different measures of entrepreneurial orientation display a different degree of correlation cannot lead us to the conclusion that some of these dimensions are more correlated than others to performance. Indeed, statistically these differences appear to be rather small and insignificant (Rauch, Wiklund, Lumpkin, & Frese, 2009). The study I conducted was based on a set of Italian public companies. However, research shows that the level of entrepreneurial orientation or some of its specific dimensions may change in intensity across different countries (Knight, 1997). Also, factors such as the type of industry and the size of the business are likely to affect the results. Moreover, research shows that companies that have an experimental approach to corporate entrepreneurship are more likely to achieve less meaningful results, while firms that fully embrace the principles of corporate entrepreneurship tend to see financial and non-financial improvements inside the organization (Morris, Kuratko, & Covin, 2010, p. 323).

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4.2. Conclusion
The purpose of this research is to determine whether incentivizing an entrepreneurial behavior inside established organizations can help achieve better financial results. In particular, the research question I wanted to answer was the following:

What is the relationship between the entrepreneurial orientation and the performance of a firm?
After gathering the financial information on performance for the year 2010 of a set of 49 Italian companies in the Consumers Good sector and analyzing their MD&As through the use of the content analysis, I concluded that a moderate positive relationship exists between the level of entrepreneurial orientation and the performance of a firm. Although the method used in this research project differs from previous studies, as I explained earlier, this finding is still coherent with the existing literature. Therefore, we can conclude that companies can benefit in terms of performance if they embrace the principles of corporate entrepreneurship, and in particular if they adopt an entrepreneurial orientation inside their established organization. Organizations can enhance entrepreneurial behavior by focusing on the development of the following five dimensions: autonomy, competitive aggressiveness, innovativeness, proactiveness, and risk taking.

4.3. Further Research

Further research should be conducted to determine if the findings of this research are supported across different industries and different countries. Furthermore, the method described earlier can be improved and other statistical tools can be used to reduce the uncertainty and improve the quality of results from the content analysis. For instance, the use of control variables such as

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age, size and industry should improve the quality of the results. Also, the correlation analyses conducted on the measures of performance and the dimensions of EO could be improved in further research by determining other useful statistical information, such as the significance of the data for each one of the correlations addressed. Regarding the type of data used in this research, several decisions have been made. For instance, this research project gathered data from the annual reports of 2010. Although this is a valid solution that allows us to answer the research question, alternative methods could be considered for further research. Data from multiple years could be gathered and the number of companies included in the set could be expanded. Also, similar future studies should focus on different sectors to determine whether or not they affect the results. Finally, I would like to suggest a new method that could be used in future research to determine the degree of EO of an organization. As I mentioned earlier, most of the existing research in this field has been based on the use of surveys to assess the level of entrepreneurial orientation. These surveys were sent to the top management of the firms, which was then supposed to evaluate its own behavior and sometimes its own performance as well. However, the use of surveys is always subject to a certain degree of error due to the fact that the data collected are self-reported and therefore they are subject to bias. Indeed, social desirability and memory decay are two examples of factors that influence the results of studies that use surveys (Rauch, Wiklund, Lumpkin, & Frese, 2009). Therefore, what I am proposing is a slightly different method that I believe could be able to increase the accuracy of the measurements of EO. According to this method of research, to determine the EO of a company, two different types of surveys should be designed and sent to each companys management. The first one should be used by the management to assess their own level

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of EO, while in the second one they would be asked to name one or more competitors and assess their level of EO. This method would allow the researchers to have both an internal and external perspective of a company, and in my opinion the reliability of the data collected should increase. However, only the implementation of this method in future research can either confirm or reject my hypothesis.

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