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Mediating
Entrepreneurial orientation and effects of
performance of small and differentiation
strategy
medium-sized enterprises
Mediating effects of differentiation strategy 551
Syed Zulfiqar Ali Shah and Maqsood Ahmad Received 17 June 2018
Revised 18 November 2018
Faculty of Management Sciences, International Islamic University, Accepted 22 February 2019
Islamabad, Pakistan

Abstract
Purpose – This paper aims to investigate the effects of entrepreneurial orientation (EO) on the performance
of small and medium-sized enterprises (SMEs) with mediating role of differentiation strategy in Pakistan.
Design/methodology/approach – A theoretical framework has been developed to base the hypotheses, as
also to determine the exact approach in this study. To establish the influence of EO on the performance of SME, a
five-point Likert scale questionnaire has been used to collect data from middle and senior managers who operate
in SMEs in the manufacturing sectors. The sample illustrates 166 incumbents, comprising 68.07 per cent from
middle management and 31.93 per cent from senior management operating in manufacturing sector of SMEs, by
means of a stratified random sampling technique. The collected data were analyzed using SPSS and Amos
graphics software. Hypotheses were tested by using structural equation modeling (SEM) technique.
Findings – EO, as a whole, presents a significant positive effect on the performance of SMEs. Moreover,
differentiation strategy partially mediated the relationship between EO and performance of SMEs. Two
dimensions of EO, proactiveness and risk-taking propensity, strongly increased firm performance while
innovativeness, competitive aggressiveness, autonomy and competitive energy did not cause any significant
change. The findings differ from the current view of western enterprises that innovativeness (INO) played a
major role by increasing performance of SMEs. The results transpired that innovativeness (INO) tends to
reduce performance of SMEs, but the p-value did not reach a high significance value.
Research limitations/implications – The main limitation of this empirical study is comparatively a
small size of the sample. The analysis of power suggests that a larger sample could have provided more
reliable and extensive results. Regardless of that, the analysis of reliability, using the Cronbach’s alpha,
exhibited the consistency of outcomes in providing an accurate portrait of the EO influences on the
performance of SME.
Practical implications – The study verifies that two dimensions of EO have considerable effects on the
performance of SMEs, while the others have not, whereas, the EO, as whole, has significant positive effect
on performance of SMEs. These findings should be helpful for researchers looking for appropriate
performance measures, and for entrepreneurs aiming at getting support for their decisions and evaluating
their performance.
Originality/value – The current study appears to be first of its kind focusing on the link between EOs, as
whole, and its dimensions, to performance of SMEs and differentiation strategies within the specific context of
Pakistan.
Keywords Competitive strategies, SMEs in Pakistan, Entrepreneurial orientation, Innovativeness,
Risk taking propensity, Structural equation modeling
Paper type Research paper
Competitiveness Review: An
International Business Journal
1. Introduction Vol. 29 No. 5, 2019
pp. 551-572
Entrepreneurial orientation (EO) has currently been acknowledged as one of the most © Emerald Publishing Limited
1059-5422
important factors of a firm’s performance, such as growth and profitability, as indicated by DOI 10.1108/CR-06-2018-0038
CR Stevenson and Jarillo (1990) high growth (sale growth, profit growth and market share
29,5 growth etc.) associates with a firm’s EO. Therefore, growth can be aligned with
proactiveness, innovativeness, autonomy, risk taking propensity, competitive
aggressiveness and competitive energy of the firm, which alludes to an EO dimension. The
link between the EO of the firm and its performance has been widely discussed,
conceptually (Lumpkin and Dess, 1996) and empirically (Lumpkin and Dess, 2001; Wiklund
552 and Shepherd, 2005). Yet, many questions remain unanswered (Moreno and Cassilas, 2008).
In the literature of competitive strategy, numerous scholars (Wiklund and Shephard,
2005; Zahra and Covin, 1995) have contemplated the significance of EO on firm performance.
EO is a firm level model, and allied to strategic decision-making processes and strategic
management (Birkinshaw, 1997; Lumpkin and Dess, 1996; Covin and Slevin, 1991).
Globalization, overall rivalry, focusing on firm performance for growth, profitability, and
inadequacy of old-style managerial practices because of the fluctuating economic situations
can be the purposes behind the expansion in the value of corporate entrepreneurship (Morris
and Kuratko, 2002). A lot of competitive strategy research has concentrated on the
significance of best management (Hambrick and Mason, 1984) and entrepreneurial conduct
(Lumpkin and Dess, 1996; Covin and Slevin, 1989) in deciding firm performance.
Today, owing to the globalization, all segments, institutions, companies and individuals
are confronting extraordinary worldwide rivalry. Under this challenge, for firms, it is being
more problematic to outperform their opponents and contenders. Keeping in mind the
ultimate goal to perform better than the competitors the organizations should strive to gain
“competitive advantage” which is extremely significant focus of administration area. Cost
leadership and differentiation are two basic competitive advantages suggested by Porter
(1980). Cost leadership means manufacturing products and services by bring down the
expenses than rivals and accomplishing a more extensive customer share. “Differentiation
strategy” comprises the firm producing a product and/or service, which is considered unique
or different in some features that the customer values (Porter, 1985). Barney (1991) argued
that keeping in mind the end goal to gain a competitive advantage a firm needs to execute a
value creating strategy that is not executed simultaneously by some other potential
opponents. Therefore, differentiation strategy is suitable to create more sustainable
competitive advantage and its imitation is very costly and/or very difficult (Carter and
Ruefli, 2006; Grant, 1991). Banker et al. (2014) demonstrated that in the long run
“differentiation strategy” builds sustainable higher financial performance. Innovativeness is
most fundamental measurements of EO, basic for differentiation strategy and essential for
higher performance (Hull and Rothenberg, 2008; Miller, 1983; Porter, 1990).
In relation to both developed and developing economies, the manufacturing sectors small
and medium-sized enterprises (SMEs) possess a vital role in the present business system.
Small businesses play a key role in creating jobs, contributing to tax, export and import
revenues, facilitating the distribution of goods, and in addition adding to human asset
improvement. SMEs are the support of advancements and entrepreneurship (Agyapong,
2010). Likewise, SMEs are critical in the battle against destitution. They also employ poor
and low-income and are in some cases the main wellspring of work in the rural areas; their
contribution cannot be neglected (Ackah and Vuvor, 2011).
In the present literature, investigation of business growth, in SMEs, plays a critical role
(Casillas and Moreno, 2010). There are different purposes behind this; among them, first
reason, because firms that accomplish more prominent levels of growth generally produce
more employments (Littunen and Tohmo, 2003). Secondly, because growth represents one of
the most important dimensions of performance and it is ordinarily connected with different
factors, for example, benefit (Rumelt, 1991; Porter, 1985).
 In literature, there is an expanded enthusiasm by investigators, academics and experts of Mediating
entrepreneurism about the significance of EO in organizations, primarily in SMEs (Casillas effects of
and Moreno, 2010). Knight (2012) argued that better performing SMEs are relevant to the EO
and they have endeavored to enhance their performances. In addition, this is also supported
differentiation
by a study conducted by Zahra and Garvis (2000). The latest research (Maldonado-Guzman strategy
et al., 2017) shows that EO has significant positive effect on the growth of SMEs.
Pakistani SMEs, in manufacturing industry, have potential to contribute significantly to
the economy. However, there are challenges that they face in the process of growth. It is 553
generally recognized that SMEs face unique challenges that affect their growth and
profitability and hence, diminish their ability to contribute effectively to sustainable
development. The major challenges include limited market access, limited access to
information, finance, technology and unfavorable policy and regulatory environment among
others (Sherazi, et al., 2013). Nevertheless, to survive and thrive in unique business
circumstance, SMEs need to formulate and implement their strategy by engaging in
entrepreneurial activities. One prominent concept of strategy making in entrepreneurship
and strategic management literature is the EO. Past investigations, proposed that
conceptually and empirically EO influence the firm performance. Subsequently, it is
expected that implementing EO may enhance performance of manufacturing sectors of
SMEs in Pakistan. The effect of EO on firms’ performance appears to have been quite
controversial topic within the field of entrepreneurship and strategic management, for years.
Lumpkin and Dess (1996) have drawn attention to the complexity of EO on performance
relationship and recommended that the connection between EO and performance was
context specific. As such, external environment and, in addition, internal organizational
processes influence the level of the relationship between EO and firm performance.
So far, EO research has been conducted mostly in the context of the United States or
other developed countries and has rarely been conducted in emerging economies like
Pakistan. As indicated by Shirokova et al. (2016) the study was conducted with firms from
developed and transition economy. They recommended replicating this study in different
countries to magnify the external validity of their findings. In addition, absence of
consistency exists in the outcome of the past studies, and particularly in light of the fact that
adopting an EO requires resources (Hughes and Morgan, 2007), the results fluctuate from a
strong positive relationship to no significant direct relationship between EO and firm
performance (Rauch et al., 2009). Subsequently, there is need for empirical research to fill
this gap in the literature and to decide in which context an EO might be valuable or gainful.
Furthermore, the majority of the studies, with one identifiable exception (Hughes and
Morgan, 2007), have just measured EO, as a whole, and have not tested the relationship of its
individual dimensions and performance. Since it has, yet, been recommended that every
dimensions of EO may not generally be favorable or advantageous for firm performance
(Hughes and Morgan, 2007), value was added by expanding the understanding of the
impacts of EO on SMEs performance, by also looking at the impact of each dimension on
SMEs performance. The latest research (Okeyo et al., 2016) recommended using a
contingency framework to focus on how other factors are likely to affect EO and
performance relationship. Therefore, the study focused on EO specifically, and investigated
the effects of EO as a whole and its dimensions on SMEs performance with mediating role of
differentiation strategy and, using data collected from SMEs of Pakistan, contributes to
filling this gap in the literature.
The resource-based view (RBV) theory supports this research phenomenon. It
bolstered on the possibility that successful companies maintain “competitive
advantages” by enabling access to higher quality instruments and resources which are
CR scarce and unique (Ray et al., 2004). Early work by Okeyo et al. (2016) demonstrated
29,5 that managing resources in a firm are explained within the framework of RBV. Penrose
(1959) spearheaded RBV as a theory to explain how intangible or tangible resources can
enable a firm to accomplish prevalent performance and competitive advantage.
Tangible resources are physical, including finances and technology, while intangible
resources are nonphysical, including human capital, and accumulated organizational
554 knowledge. According to Barney et al. (2011), EO can be treated as a dynamic intangible
resource that contributes to sustainable competitive advantage for higher returns. A
study conducted by Kibui et al. (2014) found evidence that competitive advantage is
accomplished through differentiated application of valuable, rare, and unique
resources. RBV along these lines regards a firm’s resources as a fundamental factor
when undertaking entrepreneurial activities. Consequently, it can be considered
relevant and used in explaining EO and performance relationship in this article.
The remaining article proceeds as follows: In the next section, we discuss previous
studies regarding the relationships of entrepreneurial orientation and differentiation
strategy, with SMEs performance and develop the hypotheses of our study. In the third
section, we describe the method of data collection and how we operationalized our construct
measures. The results of our study are presented in section four. In the fifth section, we
discuss the results of our study. In section six, we discuss the implications of our results, and
in the seventh section, we suggest avenues for future research.

2. Literature review
Many scholars have investigated the effect of EO on firm performance in different cultures
or environments, as also probed the relationship of EO with differentiation strategy. Some of
their conclusions have been found important and valuable for the present study. A limited
review of prior studies regarding relationship of EO with firm performance and
differentiation strategy are cited hereunder;

2.1 The definition of small and medium-sized enterprises in Pakistan

A study, on the topic, by Chittithaworn et al. (2011) asserts that definition of SMEs varies all
over the world. These distinctions are because of the contrasts between economic sectors
(sustenance, mining, and so forth.) and in the levels of advancement among nations, and in
addition, the presence of different criteria that can be depended upon for the meaning of
SMEs. The criteria that define SMEs recognized from studies relating with SMEs include
number of workers, annual sales, annual productions, kind of clients, value of assets, capital
and the level of authoritative and technical organization (Alhajeri, 2012). However, it is
manifested that the most commonly utilized criteria for the definition of SMEs are the
numbers of workers or the span of capital, or both. According to Chittithaworn et al. (2011),
an enterprise is considered to be an SME based on number of full-time employees or value of
assets.
In Pakistan all business enterprises having employment size up to 250, annual sales up to
Rs 250m, and paid up capital up to Rs 25m are considered as SMEs, as approved in SME
Policy 2007. The State Bank of Pakistan (SBP) has proposed separate definition for small
and medium-sized enterprises (SMEs). According to SBP, an enterprise is termed small
enterprise, if it has up to 20 employees and an annual sales turnover of Rs 100m. An
enterprise is said to be medium enterprise if it is having employment size up to 250
employees and an annual sales turnover between Rs 100m and Rs 800m. According to the
criterion worked out by the Small and Medium Enterprises Development Authority
(SMEDA), all those business enterprises having employment size of 10 to 40 employees,
with productive assets cost, (excluding building and land) Rs 2 to Rs 20m are considered as Mediating
small business enterprises. Those having employees between 40 and 99 and productive effects of
assets cost over Rs 40m have been classified as medium size business enterprises.
The concept of SMEs emerged in Pakistan during the administration of Mr. Zulfiqar Ali
differentiation
Bhutto. The Government, through an Act of Parliament established Small Business Finance strategy
Corporation (SBFC) in 1972, with the broad objective to assist small entrepreneurs for self-
employment and for setting up cottage industry. SBFC facilitated the masses of small
entrepreneurs by disbursing funds on easy terms with reasonable interest charges (Tanveer, 555
2001). In late 1998, the government of Pakistan established SMEs Development Authority
with the objective to take on the challenges of developing SMEs in Pakistan. SMEDA is a
leading institute of Pakistan which is giving the vital platforms to enable SMEs to conquer
the shortcomings that are endogenous to their extreme nature. It is an autonomous body
working under the umbrella of the Ministry of Industries and Production and contributes
towards the development and advancement of SMEs in Pakistan. It is not only an SME
policy-advisory body for the government of Pakistan but also acts as a one-stop-shop for its
SME clients.

2.2 Firm performance

Performance of firm is defined as “subset of organizational effectiveness that covers
operational and financial outcomes” (Santos and Brito, 2012). Organizational effectiveness
covers some additional characteristics allied to the functioning of the organization
as achievement of identified goals, resource acquisition, engagement in legitimate activities,
absence of faults and inner strain (Cameron, 1986). According to Venkatraman and
Ramanujam (1986), firm performance is relevant to the strategic management. Definition of
firm performance depends on how one defines performance of firm. Some scholars relate
firm performance with value a firm creates for stakeholders and customers (Richard et al.,
2009) while others looked at performance from the perspective of objectives
accomplishment. Bature and Hin (2017) assert that firm performance is actual financial or
non-financial outcomes of the efforts of a firm on accomplishing its specified objectives and
goals. Thus firm performance, which reflects the view of “strategic management”, is a
subcategory of the inclusive concept of “organizational effectiveness”.
The definition of firm performance and its measurement continues to challenge scholars
due to its complexity (Santos and Brito, 2012). A measure of firm performance may not just
rely upon the efficiency of the firm itself, but also on the market where it operates. Neely
et al. (1995), suggesting that performance measurement alludes to the way toward
measuring the action’s efficiency and effectiveness. The empirical literature indicates high
diversity of performance indicators used by scholars to evaluate the firm performance
(Gathungu et al., 2014; Combs et al., 2005). Scholars have adapted or adopted different
indicators of performance measurement depending on the objectives of their investigation
and categorized as financial and non-financial measure of performance (Rauch et al., 2009).
Financial indicators that are expected to reflect the satisfaction of the economic or
financial objectives of the firm, allude as financial performance, which has been the
prevailing model in empirical strategy study (Hofer, 1983). Typical of this approach can
further be categorized as subjective and objective financial performance measures (Keh
et al., 2007). Subjective financial performance measures, which are self-reported in nature,
are based on the perception of the respondents about performance of the firm and objective
financial performance measures, which are based on past documented records of the firm
(Keh et al., 2007). Bature and Hin (2017) documented that objective of financial performance
would be to examine indicators such as profitability (reflected by ratios such as return on
CR sale, gross profit margin, net profit margin and pre-tax profit), efficiency (based on ratios
29,5 such as ROA, ROE, ROI and return on net worth), leverage (measures the ratio of debt to
asset and debt to equity), growth (measured in terms of total asset growth, sales growth,
change in net income margin, market share growth and employee growth), liquidity
(reflected by ratio such as current ratio, quick ratio, cash flow, sales level, ability to fund
growth and total asset turnover) and market share (based on its product sales).
556 Subjective performance measures indicators, such as shareholder satisfaction, customer
satisfaction, employee satisfaction, marketing effectiveness, service quality, product quality,
new product introduction and perceived overall firm performance. These are also known as
judgmental measures (Agarwal et al., 2003). Although firm performance can be measured by
financial or non-financial indicators, or both, additional concern in its operationalization is
the sources of data. The data sources have been either primary or secondary. Using the
conceptualization of firm performance (financial versus non-financial indicators) and
sources of data (primary versus secondary) as two basic but diverse concerns in the overall
process of evaluating firm performance, a “four-celled classificatory scheme” was developed
(Venkatraman and Ramanujam, 1986).
In the field of management, many scholars have looked into the issue of firm
performance, specifically in strategic management perspective (Venkatraman and
Ramanujam, 1986). According to Schendel and Hofer, (1979) evaluating performance is
essential as it provides a yardstick for examining specific strategies fulfilled in the
organization. The valuation of firm performance is helpful in advancement and upgrading a
firm surviving policy and program (Rozana and Abdul Hakim, 2005). The empirical
literature indicates few weaknesses in the firm performance, particularly about revenue
compensations (Kaur, 2006). Kaur (2006) conducted a study in Malaysian context and found
that big gap exists in the performance of small and large firms. Smaller firms have been
recommended to emphasize on improving their firm performance.
According to Soboh, et al. (2009) with a specific end goal to produce a positive firm
performance, the firm should have the capacity to give better support of its individuals. The
previous literature suggesting that EO also plays significant role in improving firm
performance (Bature and Hin, 2017; Gupta and Batra, 2016; Zehir et al., 2015; Dzulkarnain
et al., 2014; Vij and Bedi, 2012). Discussion regarding EO and their relationship with firm
performance are cited hereinafter.

2.3 Entrepreneurial orientation

EO has its underlying foundations in the field of strategy making process literature
(Mintzberg, 1973; Miles et al., 1978). According to Mintzberg, strategy can be categorized as
planning, adaptive, and entrepreneurial, although Miles and Snow expounded on
“prospector firms” and the part that an entrepreneurial way to deal with strategy plays
when firms are confronted with choice, for example, what markets to enter or products to
offer. Strategy making is an organization wide marvel that integrates decision-making,
planning, analysis, and numerous parts of an organizations, way of life, mission, and value
system (Hart, 1992).According to Mintzberg et al. (1976). Strategy making is “important, in
terms of the resources committed, the actions taken, or the precedents set.”
EO epitomizes the policies and practices that give a premise to entrepreneurial choices
and activities. According to Rauch, et al. (2009), it can be viewed as the entrepreneurial
strategy-making procedures that key chiefs use to establish their organizations hierarchical
reason, manage its vision, and create competitive advantages. It depicts the level of
entrepreneurial practices that a firm carries out (Covin and Wales, 2012). It is the main
thrust that clarifies how entrepreneurial firm works (Lumpkin and Dess, 1996). As per
Rauch et al. (2009) views, EO depicts firm strategic level processes that organizations use to Mediating
increase gain competitive advantage. According to Lumpkin and Dess (1996), EO can be effects of
defined as an entrepreneurial process that depicted organizations strategies, activities, and
its manager’s practices, and decision-making styles to act entrepreneurially. They also
differentiation
suggest that organizations, which have higher level of EO, would perform better as strategy
compared to organizations, which have lower level of EO.
In short, EO is a firm-level strategic orientation, which captures an organization’s
managerial philosophies, strategy-making practices, and its strategic behavior that are 557
entrepreneurial in nature (Wales, 2016; Anderson et al., 2009). Thus, broadly speaking, EO is
an organizational decision-making tendency towards entrepreneurial activities (Covin and
Wales, 2012).
Miller (1983) has identified three dimensions of EO namely; risk taking propensity,
proactiveness and innovativeness (Mason et al., 2015; Abebe, 2014; Kam-Sing Wong, 2014).
Lumpkin and Dess (1996) added two additional dimensions to Miller’s three dimensions,
which include competitive aggressiveness and autonomy (Lumpkin et al., 2009). Augusto
Felício et al. (2012) acknowledged additional dimensions of EO namely, competitive energy.
Thus EO of an organization is reflected by dimensions such as innovativeness,
proactiveness, risk taking propensity, competitive aggressiveness, autonomy and
competitive energy (Miller, 1983; Lumpkin and Dess, 1996; Augusto Felício et al., 2012). A
limited review about the dimensions of EO and their relationship with firm performance is
discussed here below.
2.3.1 Innovativeness. Schumpeter (1947) was the first person, who highlighted the
significance of innovativeness in “entrepreneurial processes” and demarcated
“innovativeness” as doing new things or doing existing things in new ways. Innovativeness
is defined as the firm’s propensity to supporting and encouraging creativity and
experimentation in introducing new ideas, new products/services, as well as innovation,
technological leadership and R&D in evolving in new procedures (Lumpkin and Dess, 1996;
Lechner and Gudmundsson, 2014).
2.3.2 Innovativeness and firm performance. According to Nikoomaram and Ma’atoofi
(2011), the unique quality from the innovative process would guarantee better business
performance, subsequently the firm’s capability to attract new customers and additionally
keep up its existing clients (Li et al., 2009). Many studies have been conducted to find out the
relationship between innovativeness and firm performance and some of them found that
innovativeness had no correlation with firm performance (Gautam, 2016).
Some scholars disagree with above views that innovativeness had no relationship with
firm performance. This negating school of thoughts is the motivating idea for this research.
Numerous studies have concluded that innovativeness had significant positive correlation
with firm performance (Maldonado-Guzman et al., 2017; Zeebaree and Siron, 2017; Haider
et al., 2017; Belgacem, 2015; Mason et al., 2015; Dzulkarnain et al., 2014; Fairoz et al., 2010;
Wijetunge and Pushpakumari, 2014; Hughes and Morgan, 2007). Based on the empirical
literature following relationship is expected:

H1. Innovativeness has a significant positive relationship with performance of SMEs.

2.3.3 Proactiveness. Proactiveness is related to opportunity recognition or taking of
initiative (Okeyo et al., 2016). According to Venkatraman (1989) it can be defined as looking
for novel opportunities in the market and firms can be pro-active by foreseeing demands of
future and new opportunities in the market, taking an interest in developing markets,
shaping the environment, and launching new products and services ahead of their
competitors. Pro-active organizations perform better as compared to their opponents and
CR progress toward becoming pioneers of the industry with novel opportunities they find
29,5 (Lumpkin and Dess, 1996), because they retort market fluctuations promptly (Hughes and
Morgan, 2007). Additionally, the firm ought to have the ability to foresee any changes in the
market or any problems, which may emerge (Rauch et al., 2009).
2.3.4 Proactiveness and firm performance. Lieberman and Montgomery (1988)
documented that a firm’s proactive viewpoint provides a “good strategy” as its rapid and
558 prompt action helps to guarantee exceptional yields as well as strengthens the firm’s
existence and brand. Previous literature suggested that proactiveness has a significant
positive impact over firm performance (Maldonado-Guzman et al., 2017; Haider et al., 2017;
Mojikon et al., 2016; Gautam, 2016; Belgacem, 2015; Mason et al., 2015; Dzulkarnain et al.,
2014; Fairoz et al., 2010; Hughes and Morgan, 2007). Based on the literature following
relationship is expected:

H2. Proactiveness has a significant positive relationship with performance of SMEs.

2.3.5 Risk taking propensity. Risk is crucial representative of entrepreneurial behavior
(Belgacem, 2015). Risk taking behavior is reflected by “Willingness to take risk” “dealing
with uncertainty” “exploring potential opportunities” (Wijetunge and Pushpakumari, 2014).
According to Lumpkin and Dess (1996), risk taking propensity is defined as a reflection of
entrepreneurial firm’s activities, for example, borrowing heavy debt or committing large
resource, in the interest of obtaining significant yields by snatching opportunities in the
marketplace. Risk taking comportment is an essential factor that distinguishes
entrepreneurs from others because due to this behavior losses occur and create
inconsistencies in the firm performance (Morris and Kuratko, 2002). Therefore, risk taking
propensity involves taking strong actions by venturing into the anonymous, incurring
heavy debt and/or making large resource obligations to ventures in uncertain environments
(Rauch et al., 2009).
2.3.6 Risk taking propensity and firm performance. According to Coulthard (2007), risk-
taking includes decision-making process, which is planned and taken into consideration by
the firm. He also documented that prior consideration and careful planning on the risk
empowers the firm to acquire positive outcomes. Risk taking propensity plays significant
role in maintaining market share of a firm and/or seeking aggressive growth in the business
(Kreiser, et al., 2002). According to Yang (2006) and Covin et al. (2006), the risk-taking
element would be beneficial for the targets of improved firm performance and profit
acquisition. Many scholars have investigated the effect of risk taking propensity on firm
performance and some of them found that risk-taking propensity had significant negative
correlation with firm performance (Hughes and Morgan, 2007) and others concluded that
risk-taking propensity had no correlation with firm performance (Dzulkarnain et al., 2014).
While a few others have acknowledged that risk-taking propensity had a significant positive
impact over the firm performance (Maldonado-Guzman et al., 2017; Haider et al., 2017;
Gautam, 2016; Belgacem, 2015; Mason et al., 2015; Fairoz et al., 2010). Based on the prior
literature, the following relationship is expected:

H3. Risk-taking propensity has a significant positive relationship with performance of

SMEs.
2.3.7 Autonomy. Autonomy related to the “independent spirit” (Lumpkin and Dess, 1996)
comprises the idea of free action and independent decision taken, as well as freedom of
entrepreneurs (Lechner and Gudmundsson, 2014; Callaghan and Venter, 2011). According to
Gautam (2016), autonomy is defined as an independent action and decision taken by an
individual or team to accomplish organizational objectives, and carrying it through to Mediating
accomplishment. effects of
2.3.8 Autonomy and firm performance. According to Basu et al. (2008), any
advancement in “entrepreneurship” takes place when individuals who are open-minded and
differentiation
autonomous lead by the novel business ventures. Such autonomy and freedom in the strategy
organization encourages the firm to flourish and construct new ideas. The ideas put forward
by the staff with support of management, would enhance performance of firm and thus
bring more profit to the organization (Monsen and Wayne Boss, 2009). The entrepreneurial
559
firm performance is dependent upon the accomplishment of new ideas spawned through the
autonomy required by the workers, which subsequently empowers the new ideas to become
a reality (Lisboa et al., 2011). Many studies have been conducted to find out the relationship
between autonomy and firm performance and some of them found that autonomy had no
correlation with firm performance (Dzulkarnain et al., 2014; Hughes and Morgan, 2007).
Some scholars gainsay the above views that autonomy had no relationship with firm
performance. This negating school of thoughts is also the motivating idea for this research.
Numerous Scholars have concluded that autonomy had significant positive correlation with
firm performance (e.g. Maldonado-Guzman et al., 2017; Mojikon et al., 2016; Gautam, 2016;
Mason et al., 2015). Based on the empirical literature, following relationship is expected:

H4. Autonomy has a significant positive relationship with performance of SMEs.

2.3.9 Competitive aggressiveness. As indicated by Lumpkin and Dess (1996), “competitive
aggressiveness” characterized as the intensity of a firm’s efforts to beat industry rivals in
the marketplace and taking them head on at every opportunity. Additionally, they looked at
competitive aggressiveness as reactions of enterprises to accomplish competitive advantage
in the marketplace. Venkatraman (1989) documented that competitive aggressiveness is
refined by setting goals, ambitious market share and finding a way to accomplish them; for
example, cutting costs and sacrificing profitability (Lechner and Gudmundsson, 2014).
2.3.10 Competitive aggressiveness and firm performance. The connection between
“competitive aggressiveness” and “firms’ performance” appears to be quite controversial.
Some researchers concluded that “competitive aggressiveness” had no correlation with firm
performance (Dzulkarnain et al., 2014; Hughes and Morgan, 2007) while some a scholars
demonstrated a negative relationship between competitive aggressiveness and firm
performance (Mason et al., 2015).
Some scholars disagree with both above views that competitive aggressiveness had no
relationship and/or had significant negative relationship with firm performance. This
negating school of thought is also the motivating idea for this research. Several Scholars
arrived at the conclusion that competitive aggressiveness had significant positive
correlation with firm performance (Maldonado-Guzman et al., 2017; Gautam, 2016). Based on
the empirical literature following relationship is expected:

H5. Competitive aggressiveness has a significant positive relationship with

performance of SMEs.
2.3.11 Competitive energy. Competitive energy is a colossal idea. It reflects the intensity of
firms’ efforts to conquer their rivals in the business. Aggressive position and overwhelming
in responding to contenders’ actions are major characteristics of competitive energy
(Augusto Felício et al., 2012).
2.3.12 Competitive energy and firm performance. The scholars, who identified this
dimension of EO, namely, Augusto Felício et al. (2012) demonstrated positive link between
CR competitive energy and firm performance. Mason et al. (2015) also concluded that
29,5 competitive energy had a significant positive impact over the performance of SMEs. Based
on previous literature following relationship is expected:

H6. Competitive energy has a significant positive relationship with performance of

SMEs.
560 2.3.13 Entrepreneurial orientation and firm performance. A strong positive linkage exists
between EO and performance of SMEs. Several studies accomplished the relationship
between EO and firm performance that indicated overall EO had significant positive effect
on firms’ performance (Bature and Hin, 2017; Gupta and Batra, 2016; Engelen et al., 2015; Su
et al., 2011; Fairoz et al., 2010; Li et al., 2009; Richard et al., 2009; Wiklund and Shepherd,
2005) Based on the empirical literature, following relationship is expected:

H7. EO has a significant positive relationship with performance of SMEs.

2.4 Differentiation strategies

Differentiation strategies include using assets through innovative work, marketing new
products and services and advancing brand image (Porter, 1985). Like differentiation
strategy, innovation occurs in various sorts; for example, product innovation, process
innovation, service innovation and technological innovation. Differentiation strategy is
related to being unique in the market with the exceptional or distinctive items and
administrations/organizations offer.
A study on the topic by Calori and Ardisson (1988) asserts that differentiation
strategies are powerful and profitable substitutes to the typical strategic
recommendations. The knowledge of consumers’ conduct shows up some opportunities
for differentiation, hidden up by some sort of “strategic presbyopia”. “Zero default”
strategy (short delivery times, quickly and correct answers to requests, product quality
regularity, quick response to unexpected orders, and punctuality of deliveries) is the
significant opportunity for differentiation. Such techniques are perfect with a low-cost
position; excellent companies which prevail with regards to building this ’total
advantage’ (differentiation þ low cost) over their rivals appreciate the highest market
share growth and profitability. Differentiation strategy is an endeavor to create value
that buyers perceive as unique, thus empowering the firm to build customer reliability
and charge premium price that surpasses the additional expenses related with the
strategy (Myers and Harvey, 2001). The research by Banker et al. (2014) shows
differentiation strategy leads to more sustainable financial performance. According to
Hill and Jones (2010), SMEs can gain a competitive advantage over other competitors
through differentiation strategies.
2.4.1 Mediating role of differentiation strategies. There are varieties in the past
research discoveries. Accordingly, scholars started to look for inner and outer
components that intervene the connection amongst EO and firm performance, instead
of measuring the immediate link between them (Alegra and Chiva, 2013; Wang, 2008).
Therefore, in this study, efforts are made to explore mediating effect of differentiation
strategy on the relationship between EO and firm performance. Zehir et al. (2015)
suggested that differentiation strategy mediated the relationship between EO and firm
performance. It is expected that perfect implementation of differentiation strategy can
increase firm performance of organizations. Likewise, contingent upon the literature; it
is argued that differentiation strategy will enhance EO and performance relationship. Mediating
Based on the empirical literature following relationship is expected: effects of
H8. Differentiation strategy mediates the relationship between EO and performance of differentiation
SMEs. strategy

3. Research methodology 561

According to Shah et al. (2018), a research methodology is an approach to problem solving
and arriving at new knowledge of the subject in question. Everything that contributes to the
goal’s achievement is part of the research methodology. A detailed discussion of the
research methodology is presented below.

3.1 Target population

The population for this study is middle and senior managers of manufacturing sector SMEs
located in twin cities (Rawalpindi-Islamabad) of Pakistan. This is in line with Zehir et al.
(2015) they collected data from middle and senior managers operating in the SME
manufacturing sectors.

3.2 Sampling and data collection

The main objective of the research is to investigate the effects of EO, as a whole, and its
dimensions on SMEs performance with mediating role of differentiation strategy using data
collected from SMEs of Pakistan. To achieve this research objective, a questionnaire was
used as the data collection method. It was done so, because of the time and cost savings as
compared to other methods, such as interviews, video conferencing and brainstorming
(Bryman and Bell, 2007). Another reason was that, as the respondents were middle and
senior managers, they might have not much time for interviews, so questionnaires are the
best methods for data collection in such cases, for they can complete it whenever they have
free time.
A total number of 315 questionnaires were directly delivered to middle and senior
managers operating in manufacturing sector SMEs, located within twin cities of Pakistan,
with employment size up to 250 employees. The firms surveyed were randomly selected
from Islamabad Chamber of Commerce and Industry (ICCI) directories of SMEs, which was
obtained from SMEDA. The sample is stratified with quotas for geographical location (twin
cities of Pakistan regions) sector, and firm size interval. Of these, 217 were returned, but only
166 questionnaires were fully completed by managers and used for analysis, representing a
response rate 68.89 per cent. The sample size depended on the availability of resources, such
as time, human capital, financial resources and the ability of researchers (Saunders et al.,
2009). Hair et al. (1998) documented that, in quantitative research, data collected from at
least 100 respondents is needed to get reliable results from the data analysis statistical tools.

3.3 Instrumentation for data collection

Primary data were collected using five-point Likert scales in the questionnaire. The target
population was asked closed questions in the questionnaire. All items in the questionnaire
were responded to using a five-point Likert scale from 1 (strongly disagree) to 5 (strongly
agree), unless otherwise stated. The questionnaire consisted of three sections. At the end of
the questionnaire, the respondents were asked questions about their personal information.
Details of other sections are discussed below.
CR 3.3.1 Section A: entrepreneurial orientation. Twenty-six items were used to measure EO.
29,5 The questions were divided into six dimensions: innovativeness, proactiveness, risk taking
propensity, competitive aggressiveness, autonomy and competitive energy. The Items were
adopted from Piirala, (2012), Augusto Felício Rodrigues and Caldeirinha, (2012) and Zehir
et al. (2015).
3.3.2 Section B: firm performance. Four items were used to measure Firm performance.
562 The questionnaire was adopted from the study by Piirala (2012).
3.3.3 Section C: differentiation strategy. Ten items were used to measure the
differentiation strategy. The questionnaire was adopted from the study by Zehir et al. (2015).

3.4 Data analysis method

The data gathered through survey were examined by utilizing SPSS and Amos graphics
software. Firstly, pilot test was conducted for checking validity and reliability of instrument.
Statistical techniques used to achieve the research objectives, include Cronbach’s Alpha test,
and Structural equation modeling (SEM) technique.

4. Empirical findings
4.1 Reliability analysis
The Cronbach’s Alpha coefficient estimated the degree of the variables consistence. Overall,
the variables presented values ranging between 0.70 and 0.861 (Table I), thus being
classified as satisfactory. Therefore, the estimation of all components incorporated into the
variables provided a good representation of each one of the variables under study, thus
allowing proceeding with further analysis (regression analysis and structural equation
modeling). The value of composite reliability (CR) and average variance extracted (AVE)
demonstrate data reliability by showing high values for each one of the selected variables.

4.2 Regression analyses

The results of regression analysis illustrate the influences of EO on the performance of
SMEs for Pakistani firms. It is observed that risk-taking propensity (RTR) presented the
strongest influence on firm performance (FP) by increasing it to the ratio of 0.46.
Proactiveness (PRO) also played a major role by increasing Pakistani firm’s performance by
a ratio of 0.38. Interestingly, the results illustrated that innovativeness (INO) tends to reduce
FP by a ratio of 0.15, but the p-value did not reach a high significance value. Also observed
are the weak and non-significant influence of competitive aggressiveness (CA), Autonomy
(AUT), and Competitive energy (CE) with coefficients raging from a weak influence (0.08 in
AUT) to no influence at all (0.00 in CA). It is also noted that some EO variables correlated
with each other. Therefore, the results prove that only RTR and PRO improve significantly
the firm performance of Pakistani SMEs.

Variables Cronbach’s alpha F (sig) CR AVE

Innovativeness (INO) 0.812 4.389 (0.002) 0.817 0.574

Proactiveness (PRO) 0.700 7.883 (0.000) 0.696 0.498
Table I.
risk-taking propensity (RTR) 0.761 4.659 (0.001) 0.761 0.546
Analysis of variables Competitive aggressiveness (CA) 0.711 2.268 (0.080) 0.715 0.588
reliability using the Autonomy (AUT) 0.745 2.549 (0.055) 0.765 0.569
cronbach’s alpha, CR Competitive energy (CE) 0.861 0.828 (0.479) 0.866 0.620
and AVE Firm performance (FP) 0.845 `4.044(0.040) 0.851 0.591
4.2.1 Firm performance. The hypotheses predict that competitive energy, innovativeness, Mediating
risk taking propensity, competitive aggressiveness, autonomy and proactiveness are effects of
positively associated to firm performance. To test these predictions, the firm performance differentiation
was regressed on competitive energy innovativeness, risk taking propensity, competitive
aggressiveness, autonomy and, proactiveness. Results reported in Table II show that strategy
innovativeness ( b = 0.148, p = 0.176), Competitive aggressiveness ( b = 0.000, p = 0.998),
Autonomy ( b = 0.076, p = 0.567), and Competitive energy ( b = 0.031, p = 0.751), have 563
insignificant relationship with firm performance, so H1, H4, H5 and H6 were rejected.
Proactiveness was a significant predictor of firm performance ( b = 0.385, p = 0.000), so H2
was accepted. Similarly, a significant positive relationship with firm performance was found
for the risk-taking propensity ( b = 0.457, p = 0.000), lending support to H3.

4.3 Mediator analyses

Results show that direct impact of independent variable on dependent variables without
mediator was significant (see Table III). The EO positively influenced the firm performance
( b = 1.010, p = 0.000) (before mediator variable including in the model), providing support
for H7. After including mediator variable in the model a significant relationship between EO
and firm performance was found, likewise the value of beta was also reduced ( b = 0.976,
p = 0.000). Therefore, these findings suggest that differentiation strategy partially mediated
the relationship between EO and firm performance. Thus, H8 is accepted.

5. Discussion
Firm performance is a complex task for all types of managers these days. The managers
mostly confront unstable financial conditions with elevated levels of uncertainty. This

Dependent variable Independent variables Beta estimate p-value

FP / INO 0.148 0.176

FP / PRO 0.385 0.000
FP / RTP 0.457 0.000
FP / CA 0.000 0.998
FP / AUT 0.076 0.567
Table II.
FP / CE 0.031 0.751
Result of regression
Notes: N = 166, FP = firm performance, INO = Innovativeness, PRO = Proactiveness, RIP = Risk taking analyses for firm
propensity CA = Competitive aggressiveness AUT = Autonomy CE = Competitive energy performance

Dependent variables Independent variables Beta estimate p-value Result

Before mediator (differentiation strategy) variable enter the model

FP / EO 1.010 0.000 Significant
After mediator (differentiation strategy) variable enter the model
FP / EO 0.976 0.000 Significant
DS / EO 0.091 0.031 Significant
FP / DS 0.377 0.019 Significant Table III.
Result of mediator
Notes: N = 166; FP = firm performance, EO = Entrepreneurial orientation, DS = differentiation strategy regression analyses
CR instability makes decision-making process more intricate as compared to any other time. In
29,5 rapidly evolving conditions, it is quite challenging to utilize available opportunities and
resources and making decisions by using all available information in a better way as
compared to competitors. In such complex circumstances, the EOs play an important role in
decision-making process and performance of SMEs.
The results of the study confirm that organizations, which have higher level of EO,
564 would perform better as compared to the organizations, that have lower level of EO, but
each dimension of EO may not generally be favorable for the performance of SMEs. The
current study provides empirical evidence for the effect of EO on performance of SMEs as
partially mediated by differentiation strategy. This finding is consistent with the finding of
Zehir et al. (2015). In addition, the empirical findings contrasted and supported in the light of
literature review, as illustrated hereunder.

5.1 Innovativeness
The results of the study suggest that innovativeness has no correlation with firm
performance of SMEs. The finding is consistent with research by Gautam (2016) who
reported non-significant correlations between innovativeness and firm performance of
SMEs.

5.2 Proactiveness
The results indicate that proactiveness has a significant positive relationship with firm
performance of SMEs. This finding is consistent with research by Maldonado-Guzman et al.
(2017), Haider et al. (2017), Mojikon et al. (2016) who reported that proactiveness has a
significant positive impact over firm performance of SMEs.

5.3 Risk-taking propensity

The results interpret that risk-taking propensity has a significant positive relationship with
firm performance of SMEs. This finding is matching with the finding by Maldonado-
Guzman et al. (2017), Haider et al. (2017), Gautam (2016), Belgacem (2015) who argued that
risk-taking propensity had a significant positive impact over the firm performance.

5.4 Competitive aggressiveness

Competitive aggressiveness has no correlation with firm performance of SMEs, which is
consistent with the study by Dzulkarnain et al. (2014) that proved there is no link between
competitive aggressiveness and firm performance.

5.5 Autonomy
Autonomy has no correlation with firm performance of SMEs that is in line with the
research conducted by Dzulkarnain et al. (2014), who reported that Autonomy has not
significant impact over firm performance of SMEs.

5.6 Competitive energy

The results indicate that Competitive energy has insignificant positive relationship with
firm performance of SMEs.
5.7 Entrepreneurial orientation Mediating
The results of the study suggest that EO, as a whole, has a significant positive relationship effects of
with firm performance of SMEs that is consistent with research by Bature and Hin, (2017)
and Gupta and Batra, (2016).
differentiation
strategy
5.8 Differentiation strategies
The results show that Differentiation strategies partially mediate the relationship
between EO and performance of SMEs. This finding matches with the findings of Zehir
565
et al. (2015).

6. Conclusion
The purpose of this paper is to explore the effects of EO as whole and its dimensions on
SMEs performance with mediating role of differentiation strategy, using data collected
from middle and senior managers working in manufacturing sector SMEs. To achieve
the objectives a questionnaire was used as data collection method. The collected data
were analyzed by using SPSS and Amos graphics software. The sample consisted of
166 middle and senior managers of SMEs, selected by using Stratified random
sampling technique. The hypotheses were tested by using SEM technique.
The results suggest that EO as whole has significant positive effect on performance
of SMEs. Similarly, the two dimensions of EO, proactiveness and risk-taking
propensity, have significant positive effect on performance of SMEs, providing support
for the idea of the overall positive advantages firms can acquire from adopting an
entrepreneurial strategic attitude recommended by the RBV. This finding is in
accordance with the conventional debate that EO is a firm’s special resource beneficial
to superior firm performance (Van Doorn et al., 2013; Clausen and Korneliussen, 2012;
Soininen et al., 2012). On the other hand, innovativeness, competitive aggressiveness,
autonomy and competitive energy have no correlation with performance of SMEs,
contradicting the idea of overall positive advantages firms can acquire from adopting
an entrepreneurial strategic attitude as suggested by the theory of RBV. This finding is
in line with the conventional debate that every one of the dimensions of EO may not
generally be favorable or advantageous for firm performance (Hughes and Morgan,
2007). The findings of this study confirm that the organizations, which have higher
level of EO, would perform better as compared to organizations, which have lower level
of EO, but every one of the dimensions of EO may not generally be favorable for the
performance of SMEs.
The findings of this study differ from the current view of western enterprises that
innovativeness plays a major role by increasing performance of SMEs. The results interpret
that innovativeness tends to reduce firm perform by a ratio of 0.15, but the p-value did not
reach a high significance value. The limited access to entrepreneurial finance is a factor
inhibiting entrepreneurship and influencing growth, negatively (Rwigema and Venter,
2004). In Pakistani context, mostly entrepreneurial firms spend funds on developing
innovative ideas but fail to commercialize it due to lack of financial resources and as a result,
financial performance of firm is affected negatively. This may be the reasons that
innovativeness reduces the performance of SMEs for Pakistan firms.
The results also put forward that differentiation strategy positively mediates the
relationship between EO and performance of SMEs, which means that differentiation
strategy enhances the EO and performance relationship. This finding is consistent with
the mainstream contention that differentiation strategy leads towards more sustainable
financial performance (Banker et al., 2014) and SMEs can gain a competitive advantage
CR over other competitors by using differentiation strategies (Hill and Jones, 2010). The
29,5 results of this study confirm that EO is a special resource or ability that SMEs can used
for differentiation, and as a result, their financial performance can improve. Since,
differentiation strategy is an endeavor to create value that buyers perceive, as unique,
in this manner it is empowering the firm to build customer loyalty and charge premium
costs that surpass the additional expenses related with the strategy (Myers and Harvey,
566 2001).
The findings of this research contribute to the existing literature twofold. First, it
throws light on the overall EO-performance relationship by elaborating on how EO, as
whole, and its dimensions affect the firm performance of SMEs. Pervious literature
enlightens that scholars have just measured EO as a whole and have not tested the
relationship of its individual dimensions and performance. The current study is the
first of its kind focusing on the link between EO as whole and its dimensions, with
differentiation strategies and performance of SMEs. Previous researchers used four or
five EO dimensions in their studies. The mediating effect of differentiation strategy on
the relationship between EO and performance of SMEs is examined for the first time
through this survey by using six EO dimensions, together with the individual
relationship of its dimensions with the performance of SMEs, which differentiates this

Figure 1.
Structural model 1

Figure 2.
Structural model 2
survey from others. The research study conducted by Maldonado-Guzman et al. (2017) Mediating
implying that test the relationship of EO and performance of SMEs by using more than effects of
five EO dimensions. The current study provides new insight into the relationship
innovativeness and performance of SMEs, which also differentiates this survey from
differentiation
others. strategy
Second, most studies focus on well-developed financial markets and very little is known
about performance of SMEs in less developed financial markets or emerging markets like
Pakistan. The present study contributes to filling this gap in the literature. Early work by 567
Vu (2017) signified the relationship of EO dimension with performance of SMEs by taking in
to account the context of devolving economies.

7. Directions for future research

This study walks around the influence of EO on the performance of SMEs, specifically in the
context of Pakistani enterprises only. Moreover, the sample size is relatively small. It would,
therefore, be imperative for researchers, to substantiate the findings of this research with
larger samples and greater diversity of respondents from other areas of the country as well.
It is also recommended, for further research, to probe the link of EO and performance of
SMEs by taking others suitable mediators and moderator variables to understand
comprehensively, how the EO impacts performance of SMEs.

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Further reading
Casson, M., Yeung, B. and Basu, A. (2008), The Oxford Handbook of Entrepreneurship, University
Press on Demand, Oxford.
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performance of SMEs in the services industry”, Journal of Organizational Change Management,
Vol. 28 No. 2, pp. 194-212.
Vij, S. and Bedi, H.S. (2012), “Relationship between entrepreneurial orientation and business
performance: a review of literature”.

Corresponding author
Maqsood Ahmad can be contacted at: [email protected]

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