IDENTIFYING ENTREPRENEURIAL LEADERS IN TODAY’S DYNAMIC MARKETS Ayman Tarabishy, Doctoral Student, The George Washington University 2115 G St. N.W. Suite 403 Washington DC 20052 USA Tel: +1 (202)-468-3133 Fax: +1 202 994-4930 E-mail: [email protected] Lloyd Fernald, University of Central Florida Abstract Organizations regardless of size and industry now exist in the competitive landscape. This landscape is characterized by 1) increasing business risk, 2) decreasing ability to forecast, 3) fluid organizational and industrial boundaries, and 4) a managerial mind-set that demands unlearning many traditional management practices. Researchers and practitioners have proposed that organizations with an entrepreneurial strategic posture will be able to compete in such dynamic markets. Researchers and practitioners have also called for a new type of person to lead these organizations in the new dynamic market arena. They have coined this new person as the “entrepreneurial leader.” This paper will offer an operational definition of the term “entrepreneurial leader” based on the conceptual literature in leadership, entrepreneurship and the results of a pilot study. Executive Summary This paper attempts to explain that today’s markets can be best described as dynamic in nature. Regardless if the organization is established or a new venture they need to be able to deal with a dynamic market that is primarily revolutionary rather than evolutionary in nature. Researchers and practitioners have proposed that organizations need to have an entrepreneurial strategic posture that allows them to compete in such a dynamic market. An entrepreneurial strategic posture means that the organization needs to be innovative, risk-taking and proactive. Researchers and practitioners have also called for a new type of person to lead these organizations in the new dynamic market arena. They have coined this new person as the “entrepreneurial leader.” This paper will attempt to operationalize the term “entrepreneurial leader.” The importance of such research can help identify these individuals that will lead organizations in today’s dynamic markets. Introduction In today's connective global environment, it is impossible to isolate change by borders or industry. Teece, Pisano and Shuen (1997) describe today's markets as “dynamic markets.” They equate “dynamic markets” to "the Schumpeterian world of innovation-based competition, price/performance rivalry, increasing returns, and the 'creative destruction' of existing competencies." (p. 509). Schumpeter's (1934) theory states that "waves of creative destruction" create continuous states of disequilibrium. This concept is in the mainstream of current thinking on entrepreneurial strategy (Meyer & Heppard, 2000; McGrath & MacMillan (2000); Ireland & Hitt, 1999; McGrath, 1999; Teece, Piscano & Shuen, 1997; Venkataraman, 1997).

In a dynamic market the pace, magnitude, and direction of change continuously accelerates. The common feature in the current landscape is continuous change; i.e., change in technologies, markets, financial systems, demographic patterns, customer groupings, alliances and networks, complementary products and services, and the global situation. McGrath and MacMillan (2000) propose that a new type of business leader must emerge ready to lead organizations that face increased competitiveness and uncertainty in these dynamic markets. They defined these new types of business leaders as “entrepreneurial leaders.” Is there such a thing as entrepreneurial leader? Is it different then a leader alone and/ or entrepreneur? Is their commonality between them both, which makes it logical to combine such distinct concepts? Entrepreneurial Leadership Researchers have attempted in the past fifteen years to merge these two distinct concepts into an integrative one. The commonality between all of the research is that most defined some of the main elements of what they thought entrepreneurial leadership meant. These theoretical models do agree that the combinations of leadership and entrepreneurship constructs exist and the combination of both can identify and explain the presumable powerful effects on the organization especially if the organization is competing in dynamic markets. Yet, none did the due diligence in attempting to operationalize the term “entrepreneurial leadership.” Arguably, at a fundamental level, too much attention has been paid to grandiose theory and not enough research at the item level. What is needed is a clear vigorous “operational definition” of entrepreneurial leadership. One method of operationalizing the term “entrepreneurial leadership” is to investigate the concept of entrepreneurial strategic posture of an organization as well as the type of organizational leadership prevalent. For this paper, we looked at transformational leadership and its relationship to the organization’s strategic posture. In the following section we will explain what we mean by entrepreneurial strategic posture. Overview of Entrepreneurial Strategic Posture (ESP) Entrepreneurship researchers have often considered entrepreneurial organizations as possessing three main characteristics: innovation, risk-taking and proactiveness (Miller & Friesen, 1982; Miller, 1983) and adopted or extended by several other studies (Covin & Slevin, 1989; Lumpkin & Dess, 1996). Researchers have identified three main characteristics that describe an organization with an entrepreneurial strategic posture. They are; Innovativeness- the extensiveness and frequency of product innovation and technological leadership in order to obtain a competitive advantage for the firm; Risk-taking – the extent to which top managers are inclined to take business-related risks with regard to investment decisions and strategic actions in the face of uncertainty; Proactiveness- the pioneering nature of the firm as evident in its propensity to compete aggressively and proactively with other firms. An entrepreneurial strategic posture (ESP) is a "strategic posture" that organizational leaders adopt to implement a strategy of developing revenue from new sources. ESP represents the leaders, the founder's or senior management's chosen strategic posture, rather than the shared values, beliefs, and norms of organizational members.

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The studies conducted on ESP provide evidence that ESP is indicative of a firm's entrepreneurial intensity. ESP correlates with objective and subjective measures of corporate entrepreneurship. In his 1996 study of 138 Fortune 500 firms, Zahra (1991) found that ESP correlated with the 3year average percentage of revenue from new products, number of new products, and R&D expenditure. From the preceding review of the entrepreneurial strategic posture research, one can conclude that the ESP construct is a valid indicator of a firm's entrepreneurial strategic posture. In the following section we will explain the relationship between leadership and an organization’s ESP. The Relationship between Leadership and ESP Leadership is a central construct in organizational theory related to how certain individuals (i.e. entrepreneurs) influence the actions of others, both individually and collectively. House (1988) indicated that in contrast to microlevel research that focuses on the leader in relation to his or her subordinates and immediate superiors, and to macro-level research, that focuses on the aggregated data concerning the total organization and its environment, more meso-level research is needed. Meso-level research involves the individual leader, on one hand, and the total organization and environment surrounding the leader on the other. Our attempt to operationalize the term “entrepreneurial leader” takes a meso-level analysis and that is the leader, on one hand, and the organization’s entrepreneurial strategic posture, on the other. In the following section, we will present our pilot study attempting to define entrepreneurial leadership based on the meso-level approach. Methodology The design used in this study was an exploratory empirical investigation examining the relationship between transformational and transactional leadership and an organization’s entrepreneurial orientation. This was a one-time field-based study examining the leaders’ behaviors and characteristics and their organization’s entrepreneurial orientation. Research Questions HA1: Is there is a relationship between the leaders’ transformational leadership behavior scores and their organization’s entrepreneurial orientation score? HA2: Is there is a relationship between leaders’ transformational leadership characteristics scores and their organization’s entrepreneurial orientation score? HA3: Is there is a relationship between leaders’ transactional leadership scores and their organizations entrepreneurial orientation score. Instrument To test the above hypotheses, two instruments were used: the Covin and Slevin (1989) Entrepreneurial Orientation (EO) Questionnaire and Sashkin’s (1995) questionnaire, The Leadership Profile (TLP). The EO scale was first operationalized as a survey instrument by Covin and Slevin (1986) as a six-item, seven-point Likert scale measure. Adapted from Miller and Freisen (1982) and Khandwalla (1976/77), it aggregates the three dimensions of entrepreneurship discussed by Miller (1983). It was subsequently expanded from six to nine items (Covin & Slevin, 1988). In this study we are using Covin and Slevin’s (1989) instrument, which has nine seven-point Likert type scales. The mean of ratings by top management on the EO were used as a measure of degree of EO. The higher the score, the greater the degree to which the firm is entrepreneurially oriented (Covin & Slevin, 1989). The first three items on the

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scale assess a firm’s tendency toward innovation. The second three items assess the proactive orientation of the firm. The final three items assess a firm’s risk-taking propensity (Covin & Slevin, 1989). The Transformational Leadership Profile (TLP) is a 50-item questionnaire consisting of statements answered using five-point Likert scales. Responses are based on how characteristic each item is of the leadership behavior of the focal individual and range from “to a very great extent” to “to little or no extent.” The instrument measures both the transactional and transformational leadership dimensions. Each scale consists of five items. Transactional leadership is measured using two scales (scales 1 and 2). Transformational leadership is measured using the remaining eight scales. These eight scales are further subdivided to measure different aspects of transformational leadership. Four scales (scales 3 through 6) measure four different transformational leadership behaviors. Three scales (scales 7 through 9) measure personal characteristics necessary for transformational leaders to positively affect their group or organization. A final scale (10) assesses leaders’ culture building activity. Preliminary Data Runs and Sampling The population for this pilot study was CEOs and their senior managers in the Washington DC metropolitan area. Leaders that participated in the study were asked to complete Covin and Slevin’s (1989) Entrepreneurial Orientation (EO) Questionnaire and Sashkin’s (1995) questionnaire, The Leadership Profile (TLP). Both questionnaires were presented in online form and the web address (url link) was sent to each CEO. In addition, each leader was directed to provide the url link of the TLP and the EO instrument to five associates who regularly and frequently interacted with the leader. This procedure was used to avoid same-source bias that would be introduced if the leaders’ perceptions alone were used as the basis for both the leadership measures and the entrepreneurial orientation assessment. Neither the CEOs nor their associates could view each other’s online survey or results. Data Analysis The statistical software used for the analysis was SPSS. The primary analysis was to analyze the relationship between the leadership measures and the organizational entrepreneurial orientation. These relationships were examined using correlation analyses. The primary analysis tested for significant relationships between the TLP scores, as reported by associates, and leaders’ perceptions of the organizational EO. A correlation analysis was used to determine the level of association between the transactional (HA1) and transformational (HA2 + HA3) leadership measures and organization’s entrepreneurial orientation. R2 was be calculated between leaders’ EO and top managers’ reports of the leader transactional and transformational behaviors. The advantage to this procedure is that it eliminates same source data bias. However top managers EO that may represent a better measure of an organization than from the CEO’s perception of EO. Therefore a second analysis was used. CEOs were categorized as “in-agreement” with top managers on TLP scores or as “not-inagreement” based on the population defined by Atwater and Yammarino (1992). For the “inagreement” sub group a correlation was calculated between CEO’s TLP and the average of top managers’ EO scores. This again, limits same source data bias while making of the most directly relevant data scores to assess EO and TLP.

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Results Table 2 presents correlations among the CEO’s EO scores and their TLP scores, as reported by his/her top managers’ perceptions. As can be seen from the correlation table, the CEO’s EO scores strongly correlates with their TLP scores as reported by his/her top managers’ perceptions. _________________________ Insert Table 2_______ Table 3 presents correlations among the CEO’s TLP scores and the organization’s EO scores, as reported by his/her top managers. As can seen from the table, the CEO TLP scores strongly correlate with their organization’s EO scores as reported by his/her top managers. _________________________ Insert Table 3_______ Limitations As with any research, there are potential limitations to this study. The most significant limitation was the collection of data from only ten organizations from a convenient sample. This problem may have been resolved with a larger data sample. Discussion The results of my study show a relationship between a CEO’s transformational leadership scores and the organization’s entrepreneurial orientation score. One can present the ‘So What?’ question. So what if we have shown a strong relationship between transformational leadership and an organization’s entrepreneurial orientation? Isn’t it intuitive that we find a transformational leader with an entrepreneurial orientation? To start to answer such a question, we would like to make the following initial statement, isn’t it obvious that if an apple falls from a tree it hits the ground? The answer is even though it might seem intuitive that, yes, a transformational leader and an organization with entrepreneurial orientation should go together, how will you explain then an organization with a high entrepreneurial orientation and a low or no transformational leader? Is that a sign of organizational doom? What about finding a transformational leader in an organization that has a low or no entrepreneurial orientation? Will the transformational leader remain or exit? We are bringing to the forefront the issue of the outliers (the mismatch) and not the intuitive obvious interpretation. What if the apple does not hit the ground after it falls from the tree? The results of our study only present a relationship between an organization’s entrepreneurial orientation and transformational leadership. One can state that organizations with entrepreneurial orientation may also have a transformational leadership. Therefore as discussed earlier if researchers and practitioners are stating that organizations need to have an entrepreneurial strategic posture in order to compete in dynamic markets and that also an entrepreneurial leader is needed to lead such organizations, then one can argue these individuals may also be transformational leaders. Thus, one operational definition of an entrepreneurial leader can be of a transformational leader in an entrepreneurial oriented firm. This study did not attempt to identify if the transformational leader influences the organization’s entrepreneurial orientation. This can be done in future studies. We also believe that the entrepreneurial leader

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does not play a critical role until the organization reaches a certain developmental stage. We will apply Flamholtz (1990) organization stages framework to explain. Stage I: New Venture Stage I of organizational growth involves the inception of a new venture. During stage I, the firm has to perform all the critical tasks necessary for organizational survival, and the greatest emphasis is on the two primary tasks: defining markets and developing products/services. Many firms have successes in establishing new ventures because the entrepreneur was able to identify a viable market and product/service, Flamholtz (1990). Stage II: Expansion If an organization successfully completes the key developmental tasks of stage I, it will reach stage II. This stage involves the rapid expansion of the firm in terms of sales revenues, number of employees, and so on. Stage II presents a new set of developmental problems and challenges. Organizational resources are stretched to the limit when increasing sales require a seemingly endless increase in people, financing, equipment and space. The major problems that occur during stage II are problems of growth rather than survival, Flamholtz (1990). We believe that stages I and II, the new venture and expansion stages, constitute the entrepreneurial phase of organizational development. It is during these two stages of growth that the classic skills of the entrepreneur are needed. It is also during this phase that the need to make the transition from an entrepreneurial firm to a professionally managed firm begins to occur. Stage III: Professionalism Somewhere during the period of explosive growth that characterizes stage II, senior managers realize (or ought to realize) that a need for a qualitative change in the firm is arising. The company cannot merely add people, money, equipment and space to cope with its growth; it must undergo a transition or metamorphosis and become somewhat different type of organization. Until this point, the firm has been entrepreneurial. It has operated with a considerable degree of informality. It may have lacked well-defined goals, responsibilities, plans, or controls but still prospered. The sheer size of the organization then requires more formal plans, regularly scheduled meetings, defined organizational roles and responsibilities a performance appraisal system, and management control systems. We believe at this stage is where the entrepreneurial leader is mostly needed. It is taking the firm from being purely entrepreneurial to a professional managed firm. The transformational leader creates the awareness of the importance of achieving valued outcomes Sashkin (1996). To do this, the transformational leader works to define shared values and beliefs. This is what enables followers to get beyond their own self-interests and commit themselves to team, group, or organizational goals. The transformational leader then helps followers develop strategies for accomplishing goals. They enable followers to develop a mental picture of the vision and transform purpose into action. Transactional or managerial leadership, is in its own, just as important as transformational leadership. After all, if things aren’t done right it probably doesn’t matter whether or not they are the right things to do. Yet, leadership, in the sense most people mean, is in essence what Burns (1978) called transformational. Being an effective transformational leader calls for both specific skills and certain personal characteristics.

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Stage IV: Consolidation Once an organization has made the transition to a professionally managed firm with workable systems for planning, organization, management development, and control, the firm must turn its attention to an intangible but nevertheless real and significant asset: the corporate culture, Flamholtz (1990). Even though one can argue that the entrepreneurial leader is also needed in this stage, we have limited my discussion to stage three. It will be an interesting area to explore in future research. New Definition of an Entrepreneurial Leader We believe the entrepreneurial leader is a transformational leader that leads an entrepreneurially oriented firm in a dynamic market. This person will able to take the organization from a stage two, which is Expansion, to a professional well-managed firm. The entrepreneurial leader will articulate a clear vision and get buy-in from all his/her staff. Not only the entrepreneurial leader is able to articulate a clear vision, but they will also have the skills to manage the tasks at hand. It is the combination of looking at the macro environment and how to lead their organization through a dynamic market but also being able to organize the internal operations of the firm to be nimble. Conclusion Till today, we do not have a clear operational definition of what is an entrepreneurial leader. Our definition of an entrepreneurial leader is that of a transformational leader that leads an entrepreneurial oriented firm in a dynamic market. The entrepreneurial leader takes the firm from a level two, Expansion, to a level three, which is Professionalism. Such a definition will allow us to operationalize this new term coined by researchers and practitioners calling for this type of person to lead such organizations. It will also allow us to develop training courses to better help prepare these individuals. We should no longer look at entrepreneurs in the start-up phase of the organization, but we should further investigate if they are capable in being transformational leaders to help lead their organization through today’s dynamic markets. References Atwater, L. E. & Yammarino, F. J. (1992). Does self-other agreement on leadership perceptions moderate the validity of leadership and performance predictions? Personnel Psychology, 45, 141-164. Covin, J. G., & D. P. Slevin (1989). Strategic Management of Small Firms in Hostile and Benign Environments. Strategic Management Journal 10, no. 1 (1989): 75-87. Eisenhardt, K.M., S. L. Brown, & H. M. Neck. (2000). Competing on the entrepreneurial edge. In G.D.Meyer & K.A. Heppard (Ed.), Entrepreneurial as strategy. Thousand Oaks: Sage Publications, Inc. Flamholtz, E. (1990). Growing Pains : How to Make the Transition from an Entrepreneurship to a Professionally Managed Firm, California, Jossey -Bass Publishers House, R. J. (1988). Leadership research: Some forgotten, ignored, or overlooked findings. In G. G. Hunt, B. R. Baliga, H.P. Dachler, & C. A. Schriesheim (Eds). Ireland, R.D. & M. A. Hitt. (1999). Achieving and maintaining strategic competitiveness in the 21st century: The role of strategic leadership. Academy of Management Executive, 13(1): 43-57. Khandwalla, P. (1976/77). The Design of Organization. New York: Harcourt, Brace Jovanovich. Lumpkin, G. T., & Dess, D.L. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management, 21(1): 135-172. McGrath, R.G. (1999). Falling forward: real options reasoning and entrepreneurial failure. Academy of Management Review, 24(1). 13-30. McGrath, R.G. & I. C. MacMillan. (2000). The Entrepreneurial Mindset: Boston, MA Harvard Business School Press

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Meyer, G.D. & K. A. Heppard. (2000). Entrepreneurial strategies: the dominant logic of entrepreneurship. In G.D. Meyer & K.A. Heppard (Ed.), Entrepreneurial as strategy. Thousand Oaks: Sage Publications, Inc. Miller, D. (1983). The correlates of entrepreneurship in three types of firms. Management Science, 29: 770-791. Sashkin, M. (1996). The visionary leader: The leader behavior questionnaire trainer guide. Amherst, MA: Human Resource Development Press. Schumpeter, J. (1934). The Theory of Economic Development, Irwin University Books, New York, New York. Teece, D.J., G. Pisano, & A. Shuen. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533. Venkataraman, S. (1997). The distinctive domain of entrepreneurship research: An editor's perspective. In J. Katz & R. Brockhaus (Eds), Advances in entrepreneurship, firm emergences, and growth, vol. 3: 119-138. Greenwich, CT: JAI Press. Zahra, Shaker H. (1991): Predictors and Financial Outcomes of Corporate Entrepreneurship: An Exploratory Study. Journal of Business Venturing 6, no. 4 (1991): 259-285.

Table 1 Research Model Leadership Behavior Transformational Leadership Characteristics

Transformational Leadership Behavior

H1

H2

Transactional Leadership Behavior H3

Organizational Strategic Posture (Entrepreneurial Orientation) Table 2 presents correlations among the CEO’s EO scores and their TLP scores, as reported by his/her top managers’ perceptions.

EO-Innovation By associates EO-Proactivity By associates EO-Risk by associates EO-Total score by associates

CEO Transactional Leadership

CEO Transformational behavior

.974

.961

.955

.962

.984

.957

.946

.958

.972

.957

.941

.955

.984

.984

.955

.962

Pearson Correlation Pearson Correlation Pearson Correlation Pearson Correlation

CEO Transformational CEO Transforcharacteristics mational leadership

Significance (2-tailed); N=10

Table 3 presents correlations among the CEO’s TLP scores and the organization’s EO scores, as reported by his/her top managers.

EO-Innovation By associates Pearson Correlation EO-Proactivity By associates Pearson Correlation EO-Risk By associates Pearson Correlation EO-Total score By associates Pearson Correlation Significance (2-tailed); N=10

CEO Transactional Leadership

CEO Transformational behavior

CEO Transformational characteristics

CEO Transformational leadership

.717

.777

.789

.726

.724

.826

.798

.731

.705

.813

.774

.697

.704

.810

.793

.704

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