Intrapreneurship and innovation in manufacturing firms: an empirical study of performance implications.

Pearce, James W. ; Carland, James W. "Trey" III

INTRODUCTION

Entrepreneurship has long been associated with small businesses and new ventures (Carland, Hoy, Boulton & Carland, 1984). The idea of an individual identifying an untapped market niche or inventing a new product goes hand in hand with the traditional perspective. In fact, Stevenson, Roberts and Grousbeck (1989) define entrepreneurship as a process of creating value by employing a unique set of resources to exploit an opportunity. However, in recent years, entrepreneurship researchers have increasingly recognized that entrepreneurial activity can and does take place in large businesses (de Chambeau & Mackenzie, 1986; Adams, Wortman & Spann, 1988; Ellis & Taylor, 1988; Morris, Avila & Allen, 1993). Brandt (1986) presents the position that the entrepreneurial process has applicability to organizations of all sizes. In the large firm setting, the term generally used is intrapreneurship and an intrapreneur is defined by Pinchot (1985) as "Those who take the hands-on responsibility for creating innovation of any kind within an organization" (p. ix).

In the small business setting, entrepreneurship is almost universally taken as a positive, beneficial phenomenon (Carland & Carland, 1993). It is intricately linked with innovation (Carland, et. al., 1984). Due to its rich background in the small business arena, the authors were interested in exploring the impact of entrepreneurship within the corporate setting. Given that intrapreneurship exists within large, established firms, how does it manifest itself? What is intrapreneurship and what effect does it have on a firm's performance? This paper represents an effort to investigate intrapreneurship and its linkage to financial performance.

INTRAPRENEURSHIP

The various definitions of intrapreneurship appearing in the literature are remarkably similar. De Chambeau & Mackenzie (1986) say that "Intrapreneurial activity ranges from the development of a new product to the creation of a more cost-efficient process (p. 45)." Jennings and Young (1990) define corporate entrepreneurship as the process of developing new products and/or markets. Hornsby, Montagno and Kuratko (1990) describe intrapreneurship as a means to increase corporate success through the creation of new corporate ventures. McGrath, Venkataraman, MacMillan and Boulind (1992) describe corporate entrepreneurship as a means for firms to change their pool of competencies to increase long term economic viability. Hornsby, Naffziger, Kuratko and Montagno (1993) refer to the development of new business endeavors within the corporate framework. Note that the intrapreneurial perspective is similar to the entrepreneurial in terms of its focus on innovation. In fact, the corporate entrepreneurial construct has three accepted dimensions in the literature (Morris, Avila & Allen, 1993). These include innovativeness, development of novel products, services, or processes; risk-taking; and proactiveness (Covin & Slevin, 1989; Ginsberg, 1985; Jennings & Young, 1990; Khandwalla, 1977; Miles & Arnold, 1991; Miller & Friesen, 1983). All of the definitions of intrapreneurship have been highly consistent (Cornwall & Hartman, 1988). Zahra (1986) examined the antecedents of corporate entrepreneurship and found that most people see it as being innovative activities within a firm.

EMPHASIS ON INNOVATION

Most researchers clearly see creativity and/or innovation as the focus of intrapreneurial activities. Intrapreneurs are innovators and idea generators. The outcomes of these innovations range from new products to new markets to new processes. However, Knight (1967) identifies new product/service innovations as the highest level results of intrapreneurial actions (Cornwall & Hartman, 1988). Jennings and Young (1990) defined intrapreneurship "as the process of developing new products and new markets" (p. 55). Morris, Pitt, Davis and Allen (1992) used the number of new products, services, and processes introduced by or within a firm to measure the frequency of entrepreneurship. Jennings and Young (1990) used Miller and Friesen's (1983) procedure to obtain a subjective measure of intrapreneurship. Jennings and Young (1990) gave CEOs a three question survey, which "focused on innovative activities with respect to the addition of new products" (p. 57). Clearly, the linkage between new product development and intrapreneurship is well established. Therefore, this research will focus only on the product innovation aspect of intrapreneurship.

THE PERFORMANCE LINKAGE

Several researchers have found links between performance and the presence of intrapreneurship. For example, Morris, Lewis and Sexton (1993) discovered higher performance in large firms with a high level of entrepreneurial intensity. Gough (1993) showed that firms with a high level of in-house innovation outperformed firms who pursued opportunities through joint ventures or acquisitions. Bailey (1992) found that Australian efforts to encourage and develop intrapreneurship in large firms resulted in significant profits. Kramer and Venkataraman (1993) discussed rapid, sustained growth as being a characteristic of entrepreneurial enterprises. In fact, there is considerable literature devoted to the tacit or explicit idea that identifying and fostering intrapreneurship within a large firm is justified precisely because the intrapreneurs will develop new products and ideas which will ultimately improve the firm's performance (i.e., Pinchot, 1985; de Chambeau & Mackenzie, 1986; Ellis & Taylor, 1988; Adams, Wortman & Spann, 1988; Cornwall & Hartman, 1988). Given the high level of agreement that intrapreneurial activity should lead to higher long term performance, the stage is set for an empirical assessment.

RESEARCH METHODOLOGY

The literature suggests that firms which emphasize intrapreneurship should have higher performance levels. The authors tested that relationship empirically. The research proceeded by establishing a hypothesis, preparing a survey and collecting data, partitioning the data set, and testing the hypothesis. The hypothesis examined in this study is as follows:

There is no difference in performance between firms which emphasize, and firms which do not emphasize, high levels of intrapreneurship through innovation.

A questionnaire was developed and pilot tested by seven executives in the Atlanta area. To improve response rate, the investigation was conducted using the Dillman (1978) methodology. To ensure maximum homogeneity among the firms to be investigated, the authors identified firms in the Standard Industrial Codes (SIC) 35 and 36: electronic, computer and computer-related manufacturing firms. Three criteria were used to select firms for inclusion in the study: annual net sales of at least $1 million, more than 15 employees, and products sold predominately to external customers. Using the Compac Disclosure database, 807 firms were identified as potential candidates. Telephone contacts resulted in eliminating 183 firms, producing a mail sample of 624 firms.

Of the 624 instruments which were mailed, 317 partially or fully completed questionnaires were returned, 304 of which were usable, for a net response rate of 49.03%. However, only 260 of the 304 firms sold their products predominately to external customers. All respondents were members of the upper levels of management in their firms, implying knowledge of overall firm performance.

The final sample contained firms in 39 states. A Chi-Square test was utilized to test for possible regional bias between the original sample of 807 firms and the usable sample of 260 firms across the eight U.S. Census regions. There was no evidence of regional bias in the usable sample compared to the original sample.

Ideally, the distribution of SIC codes within the usable responses would be similar to the distribution in the larger population. The distribution of firms in the 3500 and 3600 SIC codes were compared with Chi-Square goodness of fit tests. Employing an alpha level of .05, all computed test statistics were less than the critical value, implying that the sample is generally representative of the larger population.

Another issue of sample representation is the extent to which the respondents to the survey differ from the non-respondents. A test for non-response bias was conducted. First, profiles of the responding firms were developed. Variables which were reasonably stable and exhibited little variance across the sample were identified to establish a "norm" against which non-respondents could be compared. Six variables were identified as having a variance of 1.0 or less.

Fifteen weeks after the final follow-up mailing of the questionnaire, 25 non-respondents were contacted by telephone, and requested to verbally respond to the short list of norm variables. For each of the six norm variables, the mean for all respondents (N=304) was compared to the mean for the non-respondents (N=25) at alpha value of .05. For each of the six comparisons, the test statistic was less than the Z critical value, indicating that the sample contains little response bias.

A major concern is the extent to which the instrument results in reliable measures. Churchill (1979) provides a model for developing constructs. As a first measure of reliability, Churchill suggests the use of coefficient alpha to assess the quality of the instrument. Coefficient alpha (Cronbach, 1951) for the variables was found to be .87, a reasonable level of acceptance for the group of variables (Nunnally, 1978).

Reliability was also examined using a sample of survey respondents. Eight weeks after the final reminder letter was mailed, 100 firms were randomly selected from the responding firms. Another copy of the questionnaire was mailed to those firms, addressed to the attention of the contact person who originally completed the questionnaire. The enclosed cover letter requested that the additional questionnaire be passed to another production executive, ideally an executive equally familiar with the processes, for completion. Forty-nine of the questionnaires were returned, 37 of which were complete. Respondents from each plant were paired, and the correlations between responses on each variable were computed. Correlations between first and second respondents ranged from .10 to .77, averaged .32, and 19 of the 37 pairs were significant at an alpha level of .05 or less. Overall, the results suggest that data reliability is high.

As an indicator of intrapreneurial intensity, the researchers will employ new product introductions. The literature supports a postulate of a higher volume of new product introductions representing a greater intensity of intrapreneurship. Consequently, the researchers will employ volume of product introductions as a means to partition a database of firms.

The natural issue following the basis for database partitioning is how does one measure the volume of new product introductions? Given that all new products are not equal and that volume must be considered relative to an industry and a set of competitors, the question is not trivial. There is a considerable body of literature supporting the use of subjective measures (Jennings & Young, 1990). Recognizing the reality of scientific inquiry, Huber and Power (1985) defend the use of subjective evaluation from top managers. Dess and Robinson (1984) found that subjective measures of certain financial measures correlated significantly with their objective counterparts. In fact, Dess and Robinson (1984) suggest that such subjective measures could be used when objective indicators are unavailable, although their position is not without detractors (Sapienza, Smith & Gannon, 1988). Smith, Gannon and Sapienza (1989) examined the advantages and disadvantages of objective versus subjective measures and concluded that both types of data can enrich a study. Swamidass and Newell (1987) actually used subjective performance measures in a study of manufacturing strategy. Downey and Ireland (1979) suggest that the objective-subjective categorization has had dysfunctional effects on organization research in that it has tended to push research away from qualitative data that might be useful for assessing certain dimensions. They remind the scientific community that objectivity in scientific research refers to objectivity on the part of the researcher and they conclude that subjective behavior on the part of the subjects of scientific inquiry may well be a legitimate topic for study (Downey & Ireland, 1979).

The authors conclude that a subjective measure by top managers of the volume of new product introductions relative to their competitors is a legitimate measure. Accordingly, the methodology of this study involves obtaining such assessments and employing them as the basis for partitioning the database.

Accordingly, the survey instrument asked executives to evaluate the perceived importance given by management to product innovation and new product introduction within the firm. Respondents ranked the perceived importance on a seven point Likert scale.

For all respondents, the average ranking of perceived importance of product introduction is 5.1, on the seven point Likert scale. The authors employed the polar extreme approach to data partitioning (Hair, Anderson, Tatham, & Gradlowsky, 1979). Respondents with a ranking of 6 or 7 were assigned to the group classified as having a high emphasis on product introduction. Respondents with a ranking of 4 or below were classified as having a low emphasis on product introduction.

Of the 260 respondents, 135 were classified as having a high emphasis on product introduction, 88 were classified as having a low emphasis on product introduction, and 37 were excluded from further analysis. Accordingly, the data partitioning produced 135 firms deemed to have high intrapreneurial intensity and 88 firms which exhibit low intrapreneurial intensity.

As is the case with new product development, obtaining a measure of financial performance is difficult. The issue of interest is not an absolute measure, rather the question is whether firms exhibit performance which is superior to their competitors. Following the reasoning outlined above, the authors determined to use subjective measures by top managers of various types of performance. Accordingly, respondents were asked to rank their firm's performance relative to competitors on a seven point Likert scale. Rankings were requested for on-time delivery, sales growth, product durability, product reliability, profitability, profit growth from the previous year, labor productivity, market share, return on sales, return on investment, and return on assets.

DATA ANALYSIS AND RESULTS

In the first stage of analysis a vector of means was prepared for each of the two groups. The vector was composed of an indicator of average emphasis for each of the eleven performance variables (SAS Institute, 1989). Four criterion tests, Wilk's, Hotelling, Roy's Maximum Root, and Pillai's Trace, were used to test for significant differences between the vectors (SAS Institute, 1989). In each case the most restrictive test of the four criteria was employed as the basis for comparison. On each of the four tests, the performance vectors were significantly different at a probability level of .01 or less.

In the second stage of investigation, Analysis of Variance (ANOVA) was used to test for differences within the two groups. Table 1 shows the results of the ANOVA. Six performance variables were significantly different between high and low intrapreneurial intensity groups: on-time delivery, sales growth, profit margin, earnings growth from the previous year, market share, and return on sales.

The final stage of analysis examined the relative performance measures between the two groups. Relative performance is a measure of how well each performance variable compares, quantitatively, between each of the two groups of respondents (SAS Institute, 1989). Where performance means were significantly different at alpha < .05, means were compared using the Duncan Multiple Stage Test (SAS Institute, 1989). Results are shown in Table 2. Means that were not significantly different at alpha < .05 are indicated as NS for not significant. As the table shows, the respondents identified as displaying high intrapreneurial intensity exhibited higher levels of performance on 6 performance variables: on-time delivery, sales growth, profit margin, earnings growth from the previous year, market share, and return on sales.

The results of the empirical analysis demonstrated that for six of the eleven performance measures considered, firms which emphasize high levels of intrapreneurship, evidenced through their emphasis on product introduction, outperform firms that do not emphasize intrapreneurship. Consequently, the authors reject the research hypothesis.

CONCLUSIONS AND IMPLICATIONS OF THE FINDINGS

This research examined the performance implications of high levels of intrapreneurship. The respondents in this study whose firms exhibited high intrapreneurial intensity outperformed those respondents whose firms exhibited low intrapreneurial intensity. Extrapolation of the results to other populations is limited due to the high technology sector under examination and the limited sample size of the data base. Nevertheless, the results of this study support intrapreneurship as a valid focus for research and as a desirable strategy for implementation.

This study advances the search for determinants of competitive advantage and performance improvements in high-tech manufacturing. Future research could extend these results by including other likely variables influencing how firms can be more entrepreneurial. Additionally, it would be useful to extend this study into other industries to examine the impact of intrapreneurial intensity on the broader spectrum of business.

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James W. Pearce, Western Carolina University

James W. (Trey) Carland, III, Western Carolina University

Table 1

Analysis of Variance Within Intrapreneurship Strategies
Comparison of Mean Scores for Each Performance Variable
Within Each Intrapreneurship Strategy

 Performance
 Variable Source Df F

On Time Delivery Intrapreneurship 1 8.35
 Error 221
Sales Growth Intrapreneurship 1 5.90
 Error 221
Durability Intrapreneurship 1 .28
 Error 221
Reliability Intrapreneurship 1 .56
 Error 221
Profitability Intrapreneurship 1 4.79
 Error 221
Profit Growth Intrapreneurship 1 6.63
 Error 221
Labor Productivity Intrapreneurship 1 .81
 Error 221
Market Share Intrapreneurship 1 5.31
 Error 221
Return on Sales Intrapreneurship 1 4.43
 Error 221
Return on Invest Intrapreneurship 1 1.52
 Error 221
Return on Assets Intrapreneurship 1 .98
 Error 221

 Performance
 Variable Source P

On Time Delivery Intrapreneurship .0042
 Error
Sales Growth Intrapreneurship .0159
 Error
Durability Intrapreneurship .5951
 Error
Reliability Intrapreneurship .4569
 Error
Profitability Intrapreneurship .0296
 Error
Profit Growth Intrapreneurship .0107
 Error
Labor Productivity Intrapreneurship .3701
 Error
Market Share Intrapreneurship .0222
 Error
Return on Sales Intrapreneurship .0364
 Error
Return on Invest Intrapreneurship .2183
 Error
Return on Assets Intrapreneurship .3222
 Error

Table 2
Comparison of Performance Scores by Intrapreneurial Intensity
Performance Means Represent Averages of the 7 Point Likert
Scale Rankings for each of the two Groups

 High Low
Performance Intensity Intensity Duncan's
Variable (N=135) (N=88) Test

On Time Delivery 5.7 5.2 P<.05
Sales Growth 4.5 3.9 P<.05
Durability 5.8 5.7 NS
Reliability 5.9 5.8 NS
Profitability 4.6 4.2 P<.05
Profit Growth 4.3 3.8 P<.05
Labor Productivity 4.8 4.7 NS
Market Share 4.8 4.3 P<.05
Return on Sales 4.5 4 P<.05
Return on Investment 4.5 4.3 NS
Return on Assets 4.5 4.3 NS