Page 1 of 13

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 79

The Role of Organizational Capability in the

Relationship between Entrepreneurial Orientation

and Firm Performance: A Conceptual Paper

**1

Samson Waibe Bature

Federal College of Education (Technical) Gusau, Nigeria/Universiti Utara, Malaysia.

samwebs2014@gmail.com

2

Rasdan Mohd Sallehuddin

Universiti Utara, Malaysia. rashdan@uum.edu.my

3

Cheng Wei Hin

Universiti Utara, Malaysia. cheng.wh@uum.edu.my

ABSTRACT

The rapid changes taking place in today’s business environment, necessitate that business

firms should develop a somewhat wholistic approach to the marketplace to achieve their

business objectives. The purpose of this study is to make propositional statements and

propose a framework to be tested empirically in future studies. The researchers reviewed

scholarly articles on the variables with the aim of stating valid propositions in line with

theoretical perspectives. Based on dynamic capability theory, we proposed that there will be

positive relationship among innovativeness, proactiveness, risk-taking and organizational

capability which in turn will positively predict improved performance of small and medium

enterprises (SMEs). We recommend that owners or managers of SMEs should take proactive

majors, be innovative, take calculated risk, as well as improve their capabilities to achieve

sustainable and superior performance over their competitors. In line with dynamic capability

perspective, this paper extends research on SME performance by proposing a model which

need to be tested empirically.

Keywords: Innovativeness, proactiveness, risk-taking, organizational capability and firm

performance

INTRODUCTION

Business organizations, most especially

small and medium enterprises (SMEs) need

to reinvigorate efforts to keep pace with

changes in the global market environment.

This call is eminent not only because of the

proportion of SMEs compared to large firms

around the globe but also due to the

prominent role they play in terms of creating

employment opportunity and contributing to

GDP across the globe. For instance,

considering the proportion of SMEs from a

global perspective, about 95 percent of

enterprises in the private sector businesses

are SMEs (Rodríguez-Gutiérrez, Moreno, &

Tejada, 2015). In the same vein,

Organization for Economic Cooperation and

Development-OECD, and World Bank

(2015) report that about 95 percent business

firms across the world are SMEs,

approximately 60 percent of workers in the

private sector in some economies around the

globe are engaged by SMEs. Also, the report

stated that SMEs contribute an average of 50

percent to World Gross Value Added

(WGVA). In recognition of the vital role of

SMEs in the process of economic growth,

many nations from both developed and

emerging economies had long initiated

programs, policies, schemes or projects at

different times to provide support in various

aspects toward improved performance of the

SME industrial sub-sector. A very good

example of such programs includes

Page 2 of 13

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 80

Executive Agency for SME in the European

Union, SME Corporation Malaysia, as well

as Small and Medium Enterprises

Development Agency of Nigeria

(SMEDAN).

The performance of SMEs in some countries

have been quite encouraging and impressive,

while in other countries it has been abysmal.

In Spain for example, the contribution of

SMEs in terms of job creation in private

business sector and GDP amounted to 63.9

percent and 65.7 respectively (Rodríguez- Gutiérrez et al., 2015). Also, based on the

report of SME Corporation Malaysia (2016),

SMEs contributed 65.3 percent to

employment and 36.6 percent to GDP, the

contributions of which were quite

impressive. On the other hand, SMEs in

some emerging economies are still

struggling to actualize their potentials as

agents of economic growth.

Specifically, SMEs constitute majority of

business establishments in emerging

economies in Africa. In Nigeria for example,

about 96 percent of private business

enterprises are SMEs but their overall

contribution to the GDP in real terms is less

five percent (Du & Banwo, 2015). Most

often than not, prior studies have attributed

the poor performance of SME in emerging

economies to gross infrastructural facility

inadequacy coupled with resource limitation

characteristics of SMEs (Selomon, Urassa,

& Allan, 2016; Vij & Bedi, 2016). To

expatiate further, the commonly identified

challenges of SMEs in the literature include

poor entrepreneurial initiatives, as well as

poor managerial skills (Chukwunweike, Ani,

Ocheje, Akunna & Gladys, 2015).

Bearing the challenges of SMEs in mind,

Uchegbulam, Akinyele, and lbidunni (2015)

suggested that SMEs must develop

capabilities not only to design strategic

actions but to equally emplement and

monitor such actions adequately to enhance

their competitiveness in achieving

sustainable superior performance in a

business environment that is rapidly

becoming dynamic in nature. Thus, in this

study, we suggest that business

organizations could find entrepreneurial

orientation (EO) a suitable strategic

direction to develop the necessary

capabilities to tackle the challenges of

rapidly changing business environment.

Entrepreneurial orientation is often used to

describe firms that exhibit innovative

tendency or willingness, proactive attitude,

as well as readiness to take calculated risk

(Covin & Slevin, 1989). These features of

entrepreneurial firms are popularly referred

to as dimensions of EO (Covin & Slevin,

1989; Covin & Wales, 2012). In line with

Anderson, Kreiser, Kuratko, Hornsby, and

Eshima (2015), We argue that

entrepreneurially orientated firms would be

better placed in positions to cope with the

changes in business environment than firms

that are not.

Although EO study is mostly associated

with firm performance as a main dependent

variable (Rauch et al., 2009; Wales et al.,

2013), Lumpkin and Dess (1996) view EO

as a process construct which is primarily

concerned with methods, practices, and

decision-making in organizations. From the

afore-mentioned, we argue that EO as a

process leads to development of

organizational capability which in turn

affect firm performance. Despite the volume

of research on EO-firm performance

relationship, very little is known about the

role of EO in developing organizational

capability which is in turn regarded as key

determining factor of superior firm

performance. Organizational capability

appears to be omitted/missing in most

researches that examined the influence of

EO on firm performance. Consequently, we

proposed that the effect or impact of EO on

firm performance is better explained through

organizational capability.

Furthermore, we observe that the role of EO

in any business organizational setting is

complex in nature and extend beyond mere

direct relationship of the construct with firm

performance. Thus, we support the

suggestion that EO is better viewed as a

Page 3 of 13

Journal for Studies in Management and Planning

Available at

http://edupediapublications.org/journals/index.php/JSMaP/

ISSN: 2395-0463

Volume 04 Issue 06

June 2018

Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 81

multidimensional construct (Lumpkin &

Dess, 1996) and suggest that the extent of

relationship between EO dimensions and

firm performance depends on the capability

of the organization. Our suggestion is

supported by the theory of dynamic

capability which states that sustainable

superior performance of a firm is the

outcome of a well thought combination,

integration, and/or reconfiguration of

internal factors such as strategies, resources,

and capabilities to address changing market

demands or needs (Eisenhardt & Martin,

2000; Teece, Pisano, & Shuen, 1997). To

this end, we proposed that SMEs need to

effectively scout, integrate and reconfigure

strategic actions or resources with respect to

entrepreneurial orientation and capabilities

to develop new capabilities that could lead

to superior performance in the marketplace.

Hence, this study draws inspiration from

dynamic capability theory to propose a

framework that will evaluate the role of each

dimension of EO in capability building, as

well as their indirect influence on SME

performance.

To forge ahead, the remaining part of this

study is fashioned as follows: theoretical

background, review of literature which

linked EO with organizational capability,

relationship between organizational

capability and firm performance and

research propositions. Then, presentation of

the proposed research model, a description

of the methodological process to achieve the

objectives of the study and conclusion.

THEORETICAL

BACKGROUND/LITERATURE

REVIEW

Dynamic capabilities theory

Previous studies have widely employed

Barney’s (1991) resource-based view (RBV)

theory in strategic management literature to

adduce reasons for differences in the

performance of business organizations even

though they operate in and face the same

dynamic and challenging business

environment. However, RBV theory has

been observed to have some limitations as

its assumptions are based on a static

business environmental condition which is

not true. Therefore, the dynamic capability

view (DCV) is adjudged as a veritable

theory in a dynamic business environment

(Eisenhardt & Martin, 2000; Teece et al.,

1997). DCV postulates that constant

integration, reconfiguration, renewal, as well

as recreation of resources and capabilities in

line with changing market environment will

bring about competitive advantage and

subsequently superior performance in the

marketplace. The relevance of DCV theory

in the present study, is that since today’s

market environment is highly dynamic and

competitive, firms must acquire, deploy and

continuously upgrade resources and

capabilities in such a way and manner that

best fit market demands or needs to

actualize their objective of better

performance. Also, the theory portrays the

notion that respective resource of an

enterprise forms a range of assets for such

enterprise (Grant, 2002), but these assets

may not add significant value to the

enterprise without robust capabilities to

sense and seize opportunities to coordinate

and transform the assets effectively and

efficiently to achieve superior performance.

Dynamic capability process as identified by

Teece et al. (1997) include sensing and

coordinating, learning and

reconfiguring/transforming resources and

capabilities. Therefore, in this study, we

state that the capacity of enterprise to

reconfigure/transform resources to address

or cope with challenges of dynamic market

environment largely depend on the ability of

such enterprise to seize opportunities by

indulging in risk-taking and innovativeness

which is in turn dependent on its capability

to sense such opportunities as a

consequential outcome of intensive

proactive thinking. Thus, our position

support dynamic capability theory which

implies that the presence of proactive

thinking to generate innovative ideas, risk-