Entrepreneurial orientation and generic competitive strategies for emerging SMEs: Financial and nonfinancial performance perspective

• Published date: 01 February 2021
• Author: Muhammad Anwar,Syed Z. A. Shah
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2125

ACADEMIC PAPER

Entrepreneurial orientation and generic competitive

strategies for emerging SMEs: Financial and nonfinancial

performance perspective

Muhammad Anwar

1

| Syed Z. A. Shah

2

1

College of Economics and Management,

Beijing University of Technology, Beijing,

China

2

Faculty of Management Sciences,

International Islamic University, Islamabad,

Pakistan

Correspondence

Muhammad Anwar, College of Economics and

Management, Beijing University of

Technology, Beijing, China.

Email: m.anwar.ims@gmail.com

Funding information

Higher Education Commision, Pakistan

In the competitive markets, business ventures have not only emphasized financial

performancebut nonfinancial performance has alsobecome the need of the day due to

its significantrole in increasing customers.However, minor attentionis given to the rela-

tionshipbetween entrepreneurialorientation, business strategyand nonfinancial perfor-

mance of emerging small and medium enterprises (SMEs). This study scrutinizes the

effect of each dimensionof entrepreneurial orientation (i.e.,innovativeness, risk-taking,

and proactiveness) and each of generic competitive strategies (i.e., differentiation and

cost leadership)on the performance (financial andnonfinancial) of emerging SMEs. We

surveyed 373 SMEs operating in Pakistan through a structured questionnaire. For the

data analysisand hypotheses testing, we usedAMOS.21. The findings displaythat inno-

vativeness, proactiveness, and risk-taking significantly improve financial performance

while insignificantly impact nonfinancial performance. Differentiation and cost leader-

ship strategies significantly spur financial as well as nonfinancial performance of SMEs.

This study advisesthat top managers of SMEs in the emergingeconomies need to main-

tain a focus onentrepreneurial activitiesand formulate unique competitivestrategies to

attain higher performance. This research further recommends policymakers to initiate

entrepreneurship programs for SMEs to configure entrepreneurial posture of the busi-

nessmen.Further recommendationshave stated.

1|INTRODUCTION

Due to globalization, entrepreneurial orientation (EO) has received

considerable attention of researchers and academia over the last two

decades (Iqbal & Malik, 2019; Kraus, Rigtering, Hughes, & Hosman,

2012; Shah & Bhutta, 2013) and the relationship between EO and

small and medium enterprises (SMEs) performance has been discussed

broadly in developed (Martin & Javalgi, 2016; Soininen, Martikainen,

Puumalainen, & Kyläheiko, 2012) and developing countries (Boso,

Story, & Cadogan, 2013; Jiang, Liu, Fey, & Jiang, 2018). Again, several

meta-analyses have revealed a significant relationship between EO

and SMEs' performance (e.g., Rauch, Wiklund, Lumpkin, & Frese,

2009; Saeed, Yousafzai, & Engelen, 2014). A plethora of research has

discussed the role of EO in financial performance (Anwar, Khan, &

Khan, 2018; Jiang et al., 2018; Rezaei & Ortt, 2018) and also in mixed

performance, for example, financial performance and nonfinancial

performance (De Clercq & Rius, 2007; Wiklund & Shepherd, 2003).

Also, both financial performance and nonfinancial performance have

been assessed (Keh, Nguyen, & Ng, 2007) but the results are still frag-

mented. More precisely, there are big shortfalls and several limitations

in the previous studies. For instance, studies have not distinguished

between the importance of EO in financial performance and non-

financial performance; most studies often mix both the aspects with-

out adequately focusing on either. Moreover, many studies have

focused on manufacturing SMEs while service and trading industry

have received minor consideration. Additionally, it appears that while

the role of EO in venture performance has been adequately debated

in the developed economies including United States and Europe; the

relationship has rarely been explored in emerging economies despite

the crucial role of SMEs in these economies (Bhutta & Ali Shah, 2015;

Received: 28 January 2020 Revised: 9 February 2020 Accepted: 9 March 2020

DOI: 10.1002/pa.2125

J Public Affairs. 2021;21:e2125. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of17

https://doi.org/10.1002/pa.2125

Reijonen, Hirvonen, Nagy, Laukkanen, & Gabrielsson, 2015). Espe-

cially SME firms in the emerging market Pakistan have rarely been

touched in this perspective (Anwar, Khan, & Khan, 2018; Bhutta & Ali

Shah, 2015). The existing research plugs the gap and unleashes the

importance of EO in financial and nonfinancial performance of

manufacturing, trading and services SMEs in an emerging market,

Pakistan. Notably, prior studies have claimed that only EO is not suffi-

cient to gain a superior performance. SMEs must have unique strategy

in addition to EO in order to constitute their endurance in the tempes-

tuous markets (Brenes, Montoya, & Ciravegna, 2014; Teti, Perrini, &

Tirapelle, 2014; Yuliansyah, Rammal, & Rose, 2016). Though, previous

literature has discussed a variety of strategies but Porter's (1980)

strategy is generally rated as the most essential tool for SMEs success.

As argued by Linton and Kask (2017) that EO and Porter's generic

competitive strategy (GCS) have become fundamental paradigms

within recent entrepreneurship and strategic management research.

Thus, both are necessary, and complementary, for the upgrading

enterprises performance. Following any one of them without the

other does not produce desired results. Hence, the second gap that is

filled by this work is to dissect the protagonist of generic competitive

strategy in financial and nonfinancial performance of SMEs.

Examining the roleof EO and competitive strategy is significantfor

several reasons. First, small firms persistently try to achieve competi-

tiveness and superior performance over their competitors. One of the

possible sources to achieve this goal is either to develop unique prod-

ucts or innovationprocesses (Palmer, Wright, & Powers, 2015)which is

not possible unless a firm develops high EO and a unique strategy. A

competitive strategy is considered a key element of SMEs success in

the dynamic markets (Javalgi, Gross, Benoy Joseph, & Granot, 2011;

Mokaya, 2012). Executives, owners and top managers need unique

strategies and entrepreneurial activities to compete in the market

(Anwar, Shah, & Khan, 2018). Second, SMEs are often anxious with

entrepreneurial activities as well as distinctiveness of policies because

of their relative small size and lack of resources. Thus, SMEs provide

more appropriate environment of EO that may not be necessarily

offered by large firms (Sahut & Peris-Ortiz, 2014). For instance, more

than 50% of SMEs nosedive due to privation of resources and skills.

Hereafter, they needalternative sources, for example,EO and strategy

to avoid the greatloss (Anwar et al., 2018). Third,previous studies have

over-emphasized financial performance of SMEs while nonfinancial

performance, despite its apparent importance, remains virtually

touched. It is claimed that a firm first gains nonfinancial performance in

a saturated market which in turn helps it to improve financial perfor-

mance (Hernaus,Peji

cBach,&BosiljVukši

c, 2012).

This study does not only help Pakistani firms but its impact will

also be felt on the country's economy that relies heavily on SMEs. For

instance, Pakistan has geographical advantages in term of trade and

more than 95% of businesses are SMEs (Akhtar, Ismail, Hussain, &

Umair-ur-Rehman, 2015). Due to the location, Pakistan country has

many topographies in conjoint with other developing and developed

economies (Anwar, 2018). For instance, from business perspective,

Pakistan has opened trade with the emerging markets such as China

and Turkey and with developed markets such as France and Russia

(e.g., Masood, Farooq, & Hussain, 2016). Hence, the discoveries of

this homework are claimed to be correspondingly imperative for other

evolving and developed economies. Policy makers in Pakistan can ini-

tiate special programs for SMEs to enhance the entrepreneurial abili-

ties of the businessmen. This study addresses the theme of recourse

base view theory (RBVT) to highlight the importance of firm's entre-

preneurial activities and competitive strategy toward SMEs perfor-

mance. The findings of the study beneficiate owners, managers, and

policy makers responsible for firm's performance. This research dis-

closes how a venture's internal capabilities, for example, EO and strat-

egy can relief ventures to gain a sustainable competitive advantage

which is the central theme of RBVT. This study also gives new insights

in this nature through experimental evidence obtained from the enter-

prises working in the developing marketplace. Using EO and strategy

can help owners and managers to invest in more suitable and stable

projects rather than uncertain and high risk projects. However, infor-

mation in the milieu of financial and nonfinancial outputs is still elu-

sive and fragmented which need to be discussed.

2|THEORETICAL BACKGROUND

2.1 |Entrepreneurial orientation

EO has not yet received a single definition, different researchers have

explained this concept differently (Lechner & Gudmundsson, 2014).

EO's theory was simplified in the early attempt by Miller (1983, p

770) who opined that “EO highlights as hostile product-market inno-

vation, risky projects, and a tendency to find innovations that prevent

the competition.”The theory was further expanded in the literature

and defined as “EO as the processes, structures and behavior of a firm

characterized by innovativeness, risk taking and proactiveness”

(Lechner & Gudmundsson, 2014; Lumpkin & Dess, 1996).

Later Lumpkin and Dess (1996) added two extra dimensions;

autonomy and competitive aggressiveness. Many studies have been

based on five dimensions (Lechner & Gudmundsson, 2014; Wiklund &

Shepherd, 2005) while others have preferred to confine themselves

to only three major dimensions; innovativeness, risk taking and

proactiveness (Anwar, Khan, & Khan, 2018; Shirokova, Bogatyreva,

Beliaeva, & Puffer, 2016). In 2009, Rauch and colleagues all con-

ducted a meta-analysis of 160 studies and argued that three dimen-

sions of EO; innovativeness, risk taking and proactiveness provide

complete picture of EO. Hence, the present study relied on three

dimensions. Moreover, we have already included GSC in our model,

so in order to avoid overlapping, for parsimonious reason, we skipped

the additional dimensions (autonomy and competitive aggressiveness)

from our model.

2.1.1 |Innovativeness

It indicates the firm's predisposition to engage and sustenance new

philosophies through imaginative methods, process and investigation

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