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Submitted to the Family Business Special Issue in ‘Strategic Entrepreneurship Journal’

Entrepreneurial Orientation and Performance in Family Firms: The Joint Effect of Generational Involvement and Participative Strategy

Francesco Chirico Texas A&M University, Mays Business School

Department of Management College Station, TX 77843-4221

T: (979) 845-8195 F: (979) 845-9641

fchirico@mays.tamu.edu

David G. Sirmon Texas A&M University, Mays Business School

Department of Management College Station, TX 77843-4221

T: (979) 845-3881 F: (979) 845-9641

dsirmon@mays.tamu.edu

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Entrepreneurial Orientation and Performance in Family Firms: The Joint Effect of Generational Involvement and Participative Strategy

ABSTRACT

To better understand the EO/performance relationship in family firms, we consider the joint moderating effect of generational involvement and participative strategy. Based on 199 Swiss family firms, our results indicate that increased generational involvement, unless managed carefully, negatively moderates the EO/performance relationship. A participative strategy not only mitigates the negative effects of generational involvement, but also enables family firms to effectively bundle and leverage the heterogeneous yet complementary knowledge and experiences of multigenerational family members to convert entrepreneurial opportunities into high-performance outcomes. Our theory suggests that realizing the benefits of EO in family firms is a complicated matter, jointly affected by generational involvement and participative strategy. Keywords: Family Firm, Entrepreneurial Orientation, Generational Involvement, Participative Strategy, Bundling Knowledge, Performance.

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The competitive landscape of the twenty-first century is dynamic, heightening the need

for organizations to be entrepreneurial (Bettis and Hitt, 1995; Hamel, 2000). Indeed, scholars

argue that entrepreneurial efforts are central to firms’ survival and prosperity (e.g., Ireland, Hitt,

and Sirmon, 2003; Li and Atuahene-Gima, 2001). A significant amount of research has focused

on firms’ entrepreneurial orientation (EO): their tendency toward product innovation,

proactiveness, and risk-taking behaviors (e.g., Covin, Green, and Slevin, 2006; Lumpkin and

Dess, 1996; Miller, 1983). With a few exceptions, the empirical evidence generally indicates that

EO improves firm performance, growth, and survival (e.g., Covin et al., 2006; Rauch et al.,

2009; Wiklund, 1999; Wiklund and Shepherd, 2005; Zahra, 1991). Additionally, moderating

factors, mostly external to the firm, have been found to influence these relationships (e.g., Covin

and Slevin, 1989; Lumpkin and Dess, 2001; Zahra and Covin, 1995). However, moderating

factors within the firm have often been overlooked in prior EO-focused research. As Wiklund

and Shepherd (2003: 1308) explain, “EO scholars have empirically explored the independent

effect of EO on performance (e.g., Zahra and Covin, 1995) and its contingent relationship with

the external environment (e.g., Covin and Slevin, 1989) but have largely ignored Lumpkin and

Dess’s (1996) call for research that also investigates how characteristics internal to the firm

moderate and mediate the EO–performance relationship.”

Within the family firm literature, these comments take on even more salience, because

“there has been a surprisingly small amount of research on entrepreneurship in family firms”

(Lumpkin, Brigham, and Moss, 2010: 245). Besides a relative lack of research into the main

EO/performance relationship in family firms, even fewer studies have considered how unique

factors within family firms moderate that relationship (Casillas and Moreno, 2010; Casillas,

Moreno, and Barbero, 2010). Nevertheless, more research is needed considering the large role

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family firms play in the world’s economies, where estimates suggest family firms account for

85% of all companies worldwide (La Porta, Lopez-de-Silanes, and Shleifer, 1999), employing

more than 80% of the U.S. workforce and producing more than half of its GNP (Neubauer and

Lank, 1998).

For example, we know very little about how the active and simultaneous participation of

family members across generations – a hallmark of family firms – affects the EO/performance

relationship. On the one hand, increased generational involvement provides the potential for

intense conflict (Chirico and Nordqvist, 2010; Ling and Kellermanns, 2010) and myopic, path-

dependent behaviors (Davis and Harveston, 1999; Miller, Steier, and Le Breton-Miller, 2003;

Zahra, 2005), which may undermine the EO/performance relationship in family firms. Indeed,

family firms have been identified as “fertile fields for conflict” (Harvey and Evans, 1994: 331).

Yet, on the other hand, research indicates that some family firms exhibit high levels of successful

entrepreneurial efforts and subsequently higher performance (Upton, Teal, and Felan, 2001;

Zahra, Hayton, and Salvato, 2004). Thus, some family firms are seemingly able to harness

positive aspects of increased generational involvement. But our understanding of what drives

these disparate outcomes is limited. Therefore, in this research we work to better establish the

baseline EO/performance relationship in family firms, and more importantly, to theorize how

generational involvement and participative strategy, two important factors within family firms,

jointly affect the EO/performance relationship.

Guided by EO and family firm literatures, we argue that increased generational

involvement will intensify conflict and path dependency, thereby negatively moderating the

EO/performance relationship. However, if the conflict and path dependency generated by

increased generational involvement are managed carefully through a participative strategy in

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which decision making is based on increased team input, not only can these effects be mitigated

(Dess, Lumpkin, and Covin, 1997), but the heterogeneous yet complementary knowledge and

experiences of different generations can be better bundled and leveraged, thereby positively

moderating the EO/performance relationship. In short, our theory suggests that realizing the

benefits of EO in family firms is a complicated matter, jointly affected by generational

involvement and participative strategy.

With supportive empirical results, our theory offers several contributions to the literature.

First, we offer additional support for the baseline expectation that increased EO positively affects

the performance of family firms. Second, and more importantly, our study theoretically extends

this baseline model, developing a rich model of moderation – one in which generational

involvement inhibits the EO/performance relationship, unless high levels of participative strategy

are utilized. By coupling increased generational involvement with high participative strategy,

firms can not only avoid conflict and path-dependent behaviors, but also bundle and leverage the

knowledge and experiences of family members across generations more effectively to enhance

the performance gains of EO (Sirmon and Hitt, 2003; Sirmon, Hitt, and Ireland, 2007). Our

findings thus help to clarify previous work that offers mixed results regarding EO in the family

context (Casillas and Moreno, 2010; Casillas et al., 2010). Third, our study also extends the work

of Zahra (2005), Kellermanns and Eddleston (2006), and Kellermanns et al. (2008) by

theoretically and empirically examining the role of generational involvement as a moderator

within the EO/performance relationship. Fourth, we challenge previous research conducted with

non–family firm samples that depicts highly participative strategy decision making as

detrimental to resource-processing efficiency (Jansen, Van Den Bosch, and Volberda, 2005) and

EO effectiveness (Covin et al., 2006). Finally, this research responds to calls to investigate

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behavioral differences among family firms (Chrisman, Chua, and Sharma, 2005) by

demonstrating that family firms are not homogeneous, but instead differ in their strategic

behavior, which engenders variation in their performance.

We first review the EO and family firm literatures to form the foundation of our work.

We then discuss the EO/performance relationship in family firms, with an emphasis on

developing hypotheses that address the joint effect of generational involvement and participative

strategy on the EO/performance relationship. Next, we present our method and report our results.

We close with a discussion of the study’s contributions to theory and practice.

THEORETICAL FRAMEWORK

Entrepreneurial Orientation

As proposed by Miller (1983), an entrepreneurial company is one that “engages in

product market innovation, undertakes somewhat risky ventures, and is first to come up with

‘proactive’ innovations, beating competitors to the punch” (Miller, 1983: 771). Based on this

definition, EO has developed as a firm-level concept (Rauch et al., 2009) that reflects a firm’s

tendency toward product innovation, proactiveness, and risk-taking behaviors (e.g., Covin and

Slevin, 1991; Wiklund and Shepherd, 2003, 2005).

Product innovation reflects a firm’s propensity to engage in and support creativity and

experimentation, thereby leading to the creation of new products or the modification of existing

ones (Zahra and Covin, 1995) to meet the demands of current or future markets (Lumpkin and

Dess, 1996, 2001). Proactiveness is a forward-looking perspective characterized by the pursuit

and anticipation of future wants and needs in the marketplace. By being proactive, firms

capitalize on emerging opportunities and shape the evolving competitive environment. Risk

taking characterizes entrepreneurial behavior in which both the cost of failure and the potential

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returns are high (Lumpkin and Dess, 1996, 2001). Together, product innovation, proactiveness,

and risk taking form the firm’s EO (Covin and Slevin, 1991; Miller, 1983).

As such, Covin and Slevin (1991: 19) argue that EO “can lead to improved performance

in established organizations.” With these expectations, the desire to understand EO has increased

markedly over the years. In fact, EO has become a central concept in the domain of

entrepreneurship and has received a substantial amount of empirical attention, which provides

generally supportive evidence (for a review, see Rauch et al., 2009).

Entrepreneurial “or” Non-entrepreneurial Family Firms

Research on family firms – firms in which a family possesses a significant ownership

stake and in whose operations multiple family members are involved (Sirmon et al., 2008) – has

increased significantly over the past decade. These studies have often treated family firms as

homogeneous entities. In fact, they do tend to share certain characteristics – such as long-term

strategic orientation, strong collective identity, and extraordinary commitment to firm survival

(Arregle et al., 2007; Pearson, Carr, and Shaw, 2008; Sirmon and Hitt, 2003) – that lead them not

only to value financial outcomes, but also non-economic socio-emotional factors such as

maintaining family influence (Gómez-Mejía et al., 2007).

Despite sharing such characteristics, however, family firms are not homogeneous in all

aspects. Family firms vary significantly in the ways they pursue their financial and socio-

emotional objectives. For example, family firms differ in terms of their openness to changes

(Chirico and Nordqvist, 2010; Miller et al., 2003), their degree of generational involvement

(Kellermanns and Eddleston, 2006; Zahra, 2005), and the level of participation of each family

member/employee in shaping the firm’s strategy (Eddleston and Kellermanns, 2007; Eddleston,

Otondo, and Kellermanns, 2008a).

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Such variation has led scholars to reach two opposing views of family firms (Lumpkin et

al., 2010; Short et al., 2009). Some scholars claim that a family firm presents a unique setting for

entrepreneurship to flourish (Aldrich and Cliff, 2003). These scholars expect family firms to

exhibit high levels of entrepreneurial behavior as the family acts like “oxygen that feeds the fire

of entrepreneurship” (Rogoff and Heck, 2003: 559). Generally speaking, this school of thought

suggests that “the long-term nature of family firms’ ownership allows them to dedicate the

resources required for innovation and risk taking, thereby fostering entrepreneurship” (Zahra et

al., 2004: 363).

Other scholars depict family involvement in firms as a liability to entrepreneurial efforts.

Within this perspective, scholars suggest that the desire to protect the family wealth and the

prospects of future generations leads family members to resist taking risks (Naldi et al., 2007;

Short et al., 2009), prevent change (Chirico and Nordqvist, 2010; Vago, 2004), follow

conservative strategies (Martin and Lumpkin, 2003; Miller et al., 2003), and weakly integrate

competent external employees (Vinton, 1998). For instance, Barringer and Bluedorn (1999)

argue that the long-term planning horizons common in family firms run counter to a proactive

entrepreneurial process, and instead support conservative efforts promoting stability. From this

perspective, family firms are thought to delay, or deny change that may support their ongoing

competitiveness (Salvato, Chirico, and Sharma, 2010a, b).

However, perhaps neither of these perspectives is fully correct. Instead, it may be that

family firms understand the value of being entrepreneurial, but the challenges of effectively

integrating family and business in order to enjoy the benefits of EO are overly complex, thereby

limiting the number of firms that achieve EO-based performance gains. Thus, although the result

may seem to indicate two different types of family firms – entrepreneurial and non-

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entrepreneurial – the real difference may lie in the combination of attributes that allows EO to

prosper.

For this reason, it is not surprising that the few studies that have considered how factors

unique to family firms moderate the EO/performance relationship have produced mixed results

(Casillas and Moreno, 2010; Casillas et al., 2010). In fact, scholars have argued that EO has

“been applied only sparingly in the context of family firms” (Short et al., 2009: 10), such that

“the role of the family context for EO is not yet well understood” (Cruz and Nordqvist, 2010: 2).

To better address this gap in the literature, we consider how the EO/performance

relationship in family firms is jointly affected by 1) generational involvement, and 2)

participative strategy, which we expect to be important in determining how generational

involvement affects the firm. More specifically, we argue that the joint consideration of these

two factors within family firms will provide a better understanding of why and how family firms

differ in realizing the benefits of EO.

To develop new theory related to the joint moderating effects of generational

involvement and participative strategy, we first work to establish the baseline main effect.

Entrepreneurial Orientation and Performance in Family Firms

The expectation that EO improves performance is not new. In fact, while the empirical

record of EO in non–family firm samples is not unblemished, general empirical support exists

for a positive EO/performance relationship (e.g., Covin et al., 2006; Rauch et al., 2009). As

mentioned previously, much less work has addressed EO in family firms specifically. However,

this limited work, which often focuses on single components of EO, seems to mimic the more

general EO literature: That is, the results are not perfect, but growing evidence supports a

positive EO/performance relationship in family firms.

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For instance, Kellermanns et al. (2008) demonstrate that proactiveness increases

employment in the family firm, while Eddleston et al. (2008b) indicate that increased innovative

capacity is associated with increased performance in family firms. Likewise, Casillas and

colleagues (Casillas and Moreno, 2010; Casillas et al., 2010) show that innovation and

proactiveness improve the growth of the family firm. In further support of the positive

EO/performance relationship, Upton, Teal, and Felan (2001) found that 81% of fast-growth

family firms that had been Ernst and Young Entrepreneur of the Year winners were highly

proactive and risk-taking in pursuit of entrepreneurial opportunities. However, Naldi et al. (2007)

found risk taking negatively affects family firm performance, while Casillas and colleagues

(Casillas and Moreno, 2010; Casillas et al., 2010) did not find a statistically significant

relationship between risk taking and family firm growth.

Although these studies reveal mixed findings regarding the relationship between EO and

measures of family firm performance, the evidence appears to point toward a trend that provides

support for a positive EO/performance relationship. On the basis of this evidence, along with

prior conceptual work supporting a positive relationship (Rogoff and Heck, 2003), we expect

that EO will positively affect family firm performance. Formally:

Hypothesis 1: EO positively affects family firm performance.

Despite this general expectation, predicting the outcome of EO is complicated by the

unique combination of family and business elements within family firms. Lumpkin and Dess

(1996: 151) argue that “structural and managerial characteristics of an existing firm influence

how an EO will be configured to achieve high performance”; that is, EO is context-specific. In

an effort to better understand that context, we next consider the effect of generational

involvement.

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Generational Involvement

“Generational involvement” refers to the number of family generations simultaneously

involved in the management of the firm. Greater levels of generational involvement yield groups

of family employees who share similar knowledge, experiences, and expectations within each

generation; but across generations, dissimilarity grows. In other words, generational involvement

creates heterogeneity among the family employees’ knowledge, experiences, and expectations.

This heterogeneity leads to important differences in how multigenerational family employees 1)

notice cues for opportunities in the marketplace, 2) interpret these cues, and 3) respond in order

to exploit the opportunities (Casillas et al., 2010; Cruz and Nordqvist, 2010; Martin and

Lumpkin, 2003). Moreover, as Kellermanns and Eddleston note, expectations differ across

generations within family firms: “[W]hile first generation family firms tend to want to maintain

the status quo, later generations tend to push for new ways of doing things” (2006: 813). Given

such differences in knowledge and experiences as well as expectations, increased generational

involvement in a family firm can decrease knowledge sharing and effective communication, and

can even lead to strained relationships. In fact, some evidence suggests that increased

generational involvement heightens the chance of relational conflict within family firms (Chirico

and Nordqvist, 2010; Davis and Harveston, 1999; Ling and Kellermanns, 2010), where

differences in viewpoints among multigenerational family members “are often perceived as

personal attacks” (Jehn, 1997: 532).

Relational conflict is particularly detrimental to family firms because such conflict

among family members persists and surfaces in most aspects of their lives, including both family

and business environments (Harvey and Evans, 1994; Kellermanns and Eddleston, 2004). Thus,

the negative emotions that relational conflict creates – tension, hostility, irritation, suspicion,

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resentment – are especially damaging in family firms because they are difficult to escape (Jehn,

1995). In fact, Jehn (1995) recognizes that relational conflicts have greater negative effects in

highly closed and interdependent communities, such as family firms, than in other groups.

Persistent conflict and the negative emotions it engenders affect firms’ entrepreneurial

efforts. Previous research shows a negative association between relational conflict and

entrepreneurial behavior and performance in groups (Evan, 1965; Gladstein, 1984; Pelled, 1996).

Relational conflicts “reduce employees’ ability to recognize alternative approaches and can

prevent them from integrating diverse sources of information into innovative products” (Jehn and

Bendersky, 2003: 207), making it increasingly difficult to assess, accept, and incorporate others’

ideas in innovative efforts. In family firms, relational conflicts among multigenerational family

members can prevent the synergistic utilization of the family members’ complementary

knowledge and experiences.

Relational conflict can also interfere with the implementation of decisions (Jehn, 1995;

1997; Jehn and Bendersky, 2003). For instance, this conflict can lead some family members to

disagree with others even if they recognize that the decision is reasonable (Kellermanns and

Eddleston, 2004). Such a behavior stimulates “revenge, retaliation, and further escalation of

conflict” (Jehn and Bendersky, 2003: 207). Accordingly, Amason and Schweiger (1994) propose

that relational conflicts cause group members to misinterpret constructive debate as personal

criticism, which inhibits the implementation of decisions and de-motivates employees

(Gladstein, 1984). Thus, emotional distress prevents the integration of diverse ideas, thereby

hampering firm performance (Eisenhardt and Zbaracki, 1992).

When relational conflict undermines effective communication and cooperation among

family employees, the reasonable strategic alternative is maintaining the status quo, a course of

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action that does not require debate and provides familiarity for decision makers who perceive

past solutions as less risky than attempting a de novo solution to a problem (Hackman,

Brousseau, and Weiss, 1976). However, this promotes path dependency that mires “managers in

a single way of seeing and doing things” (Miller, 1993: 122). That is, path dependency increases

the risk of familiarity traps (Ahuja and Lampert, 2001), in which the search for new solutions is

limited. Thus, the relational conflict that increased generational involvement often yields may

cause family firms to attempt to suppress conflict by choosing myopic, path-dependent strategies

rather than supporting entrepreneurial initiatives to exploit opportunities.

In total, increased generational involvement can cause relational conflict that 1) creates

negative emotions, 2) reduces effective communication, 3) prevents the identification of

opportunity cues, 4) inhibits the implementation of decisions, and 5) promotes myopic, path-

dependent strategies – all of which undermine the EO/performance relationship. Therefore, we

argue that higher levels of generational involvement will negatively moderate the

EO/performance relationship. Formally:

Hypothesis 2: Increased generational involvement negatively moderates the EO/performance relationship.

Participative Strategy

However, some family firms, even those with increased generational involvement,

successfully engage entrepreneurial actions (Upton et al., 2001; Zahra et al., 2004). With care,

these family firms are apparently able to mitigate conflict generated by increased generational

involvement and even to turn increased generational involvement into a positive force supporting

the firm’s entrepreneurial efforts. We argue that participative strategy is crucial for family firms;

helping to mitigate relational conflict as well as enhance the bundling and leveraging of family

employees’ complementary knowledge and experiences.

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“Participative strategy” refers generally to strategic decision making through teamwork.

More specifically, in firms that utilize participative strategy, “strategic decisions are made

through consensus-seeking versus individualistic or autocratic processes by the formally

responsible executive ” (Covin et al., 2006: 59; Dess et al., 1997). When participative strategy is

practiced, the speed of decision making may be compromised; but flexibility, effective

communication, decision quality, and support of the final decision increase. Research suggests

that constructive, open group discussions, where participants share ideas, knowledge, and

experiences (Burgelman and Hitt, 2007), help members see problems from different angles,

which in turn leads to more creative and innovative ideas (Jehn, 1995; Jehn and Bendersky,

2003). Moreover, such discussions lead to shared understanding of a firm’s strategic objectives

as well as threats. Accordingly, participative strategy is helpful in supporting entrepreneurial

efforts where “new ideas and creativity are expected, risk taking is encouraged, failure is

tolerated, learning is promoted, product, process and administrative innovations are championed,

and continuous change is viewed as a conveyor of opportunities” (Ireland et al., 2003: 970).

In multigenerational family firms, where relational conflict is a very real threat,

participative strategy is especially important. Evidence demonstrates that fast-growing, high-

performing family firms often encourage family employees to participate in developing long-

term goals and strategies (Upton et al., 2001). With increased use of participative strategy, family

members across generations are expected to voice their perspectives, thereby enabling

constructive interactions that contribute to family members’ feelings of importance to the

business (Eddleston and Kellermanns, 2007). The benefits of participative strategy follow

Folger’s (1977) theory of “voice,” which argues that encouraging individuals to voice their

opinions mitigates conflict and enhances knowledge sharing.

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Miller (1993) views participation as valuable to counteract path-dependent behaviors and

foster entrepreneurship. In fact, when knowledge sharing increases, path dependency decreases

as the firm’s search for innovative and proactive products/services grows (De Clercq, Dimov,

and Thongpapanl, 2010). However, not every idea is worth pursing. Vetting ideas to ensure that

superior opportunities are pursued requires heterogeneous knowledge and experiences on the

part of participants (Foss et al., 2008), which is exactly the strength that increased generational

involvement offers family firms. With multiple generations offering heterogeneous yet

complementary knowledge about and experience with competitors, prior strategies, and new

opportunities, participative strategy can be highly supportive of entrepreneurial efforts.

Beyond identifying the best opportunities to pursue, the complementary knowledge of

multigenerational family firms provides the building blocks to pursue these opportunities.

Accordingly, Foss et al. (2008: 73) describe “entrepreneurship as a creative team act in which

heterogeneous managerial mental models interact to create and arrange resources to produce a

collective output that is creatively superior to individual output.” Participative strategy facilitates

the bundling of such synergistic knowledge sets into new capabilities, allowing the family firm

to innovate and grow (Chirico and Salvato, 2008; Sirmon and Hitt, 2003). Moreover, proactive

and even risky actions can be supported when family members share an understanding of the

benefits of pursuing certain opportunities. Fiol (1994) and Michie, Dooley, and Fryxell (2006)

found that high levels of team heterogeneity, paired with common understanding among team

members, are most positively related to innovative efforts and decision outcomes. Similarly,

Ling and Kellermanns (2010) found that family members’ heterogeneity is positively related to

firm performance when information exchange is high. In short, participative strategy leads

family firms to “reduce rancorous conflict and isolation between organizational units; create

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mechanisms for exchange of information and new ideas across organizational boundaries; ensure

multiple perspectives are taken into account in decisions, and provide coherence and direction to

the whole organization. In these team-oriented cooperative environments, innovation flourishes”

(Kanter, 1983: 28).

In total, we expect that participative strategy not only mitigates the relational conflict that

increased generational involvement generates, but also enhances family firms’ ability to utilize

the complementary knowledge and experiences that increased generational involvement offers.

Coupling increased generational involvement with participative strategy creates an environment

that is conducive for EO to positively affect performance. Our arguments suggest that a three-

way interaction among EO, generational involvement, and participative strategy will result in a

positive effect on family firm performance. Formally:

Hypothesis 3: A three-way interaction among EO, generational involvement, and participative strategy on family firm performance exists, such that the EO/performance relationship is positively affected by the joint moderation of increased generational involvement and participative strategy.

METHODS

Data for this study were collected with a survey of 199 Swiss family firms. Surveying

firms was necessary because secondary data for private family firms were not readily available,

especially for factors of theoretical interest in this study. To select firms for the survey, we

identified all the companies registered with the Chamber of Commerce in Canton Tessin,

Switzerland. This provided a sampling frame of 967 firms. Then, following Zahra (2005) and

Miller, Le Breton-Miller, and Scholnick (2008), we determined which of these firms were, in

accordance with our definition, family firms. A total of 592 firms were family firms. We sent the

survey to these firms, and we received 199 usable responses, a response rate of 33.61%.

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We compared the respondents’ size, age, and industry with those of non-respondents

(whose data were provided by SwissFirms), and found no statistically significant differences.

Moreover, no statistically significant differences were found between early and late respondents.

The survey targeted the firms’ two highest executives (the CEO and the next-highest senior

position). Collecting data from two respondents allowed us to avoid issues associated with

single-informant data. To address inter-respondent reliability, the responses per firm were

correlated. The result indicates significant inter-respondent reliability (r = .797; p < 0.001).

However, regarding generational involvement, we found differences in only a few cases. When a

mismatch occurred, we personally called the firm to find the accurate value.

Next, we addressed the issue of common methods bias in several ways. First, we used the

second respondent’s data for the dependent variable and the first respondent’s data for the

independent variables. We also took two additional steps to mitigate any remaining concerns

related to common methods bias. First, we used Harman’s one-factor test on items included in

our regression model. The results showed six factors with eigenvalues higher than 1, accounting

for 67.68% of the variance. The first factor explained 26.85% of the variance, and the remaining

factors accounted for 40.83%. Because the analysis found multiple factors, and the first factor

did not account for the majority of variance, this analysis shows that the factors structure is not

an artifact of the measurement process, thereby suggesting common method biasis not a threat..

Second, we used objective secondary data, where available, in our models.

We developed the survey in a series of steps. The questionnaire was first developed in

English, then translated into Italian through a translation and back-translation procedure by two

university academics fluent in both languages. Following this step, the questionnaire was pilot-

tested on six senior executives belonging to three family firms (two from each firm), and on five

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academics whose expertise focuses on research methodology and family firms. Their comments

on the content of the survey instrument, item wording, terminology, and clarity were

incorporated into a revised instrument. Next, the refined instrument was piloted again on a larger

sample of 53 family firms (which are not part of our final sample), and final revisions were

made. These revision efforts created an instrument that provides high reliability (Cronbach’s

ranging from 0.80 to 0.87). The study’s key constructs and items, which are measured on a 5-

point scale, are reported in Appendix 1.

Dependent and Independent Variables

Performance was assessed through four related financial items regarding net profit, sales

growth, cash flow, and growth of net worth ( = 0.85) (Naldi et al., 2007; Wiklund and

Shepherd, 2003).

While several measures of EO exist, we relied on the widely used instrument developed by

Miller (1983) (see, Kellermanns and Eddleston, 2006). The scale accounts for risk taking,

innovativeness, and proactiveness ( = 0.87).

In order to measure generational involvement, we asked the respondents to report the

number of generations (one, two, three, or more than three) simultaneously involved in the

management of the firm (see Kellermanns and Eddleston, 2006; Zahra, 2005).

Participative strategy was measured with the five-item scale Eddleston and Kellermanns

(2007) adapted from an information-processing structure scale originally developed by Thomas

and McDaniel (1990). The scales used assess the level of participation in an organization's

strategy-making process ( = 0.87).

Control Variables

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We also controlled for four variables (age, size, environmental dynamism, and industry)

believed to influence the relation between our dependent and independent variables. First,

because the age of a firm may affect both its entrepreneurial efforts and its performance

(Leonard-Barton, 1992), we controlled for age by measuring the number of years the firm had

been in existence. Second, because access to external resources is easier for larger firms, and this

access can affect entrepreneurship and performance (Zahra and Nielsen, 2002), we controlled for

size by measuring the number of full-time employees. This value was logged to address issues

with its raw distribution. Third, because firms that operate in dynamic environments are likely to

be technology-intensive, a factor that may affect our results, we controlled for environmental

dynamism. This factor was measured with a three-item index taken from Jansen et al. (2005):

“environmental changes in our local market are intense,” “customers regularly ask for complete

new products and services,” and “in our market, changes are taking place continuously” ( =

0.80). Lastly, because industries may differentially encourage companies to develop new and

innovative products, take risks, and be more proactive, we controlled for industry type. The

agriculture industry is used as the comparison industry, with dummy variables differentiating the

following industries: electronics, trade, construction, manufacturing,

transportation/communication, finance, services, and others.

RESULTS

The descriptive statistics and correlations of the study’s variables are presented in Table 1.

Before creating the interaction terms, we centered the variables to minimize multicollinearity

problems (Aiken and West, 1991). Inspection of the variance inflation factors (VIFs) showed

that multicollinearity was not a concern. All VIF coefficients were lower than 5 (Hamilton,

2006). Regression analysis was utilized for hypothesis testing. To test for heteroscedasticity, we

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screened the data with the help of the Breusch-Pagan/Cook-Weisberg test and the White test

(Cameron and Trivedi’s decomposition of the IM-test). The former tests whether the estimated

variance of the residuals from a regression are dependent on the values of the independent

variables; the latter establishes whether the residual variance of a variable in a regression model

is constant. Both the Breusch-Pagan/Cook-Weisberg test (2(1)= 0.088; prob>2=0.3470) and

the White test (2=95.35; p=0.9527) indicated that heteroscedasticity was not a concern in our

study (Hamilton, 2006). The results of our hypothesis testing are presented in Table 2.

_______________________________ Insert Tables 1 and 2 about here

_______________________________

We tested the hypotheses in nine models. Model 1 offers a test of the control variables

only. Hypothesis 1 argues that EO has a positive main effect on performance. As seen in Model

2, the coefficient for EO is positive and statistically significant. Thus, Hypothesis 1 is supported.

Hypothesis 2 argues that generational involvement negatively moderates the

EO/performance relationship. As seen in Model 4, the interaction term (EO * generational

involvement) was negative and statistically significant. Thus, Hypothesis 2 is supported. We also

graphed the interactions of generational involvement and EO on firm performance in Figure 1.

As expected, the plot reveals that the EO/performance relationship is negative when the number

of generations involved increases.

Hypothesis 3 argues that a three-way interaction among EO, generational involvement, and

participative strategy positively affects family firm performance. We tested Hypothesis 3 in two

ways: once in the full sample and once with split samples. Both approaches support Hypothesis

3. In Models 5 and 6, we built the model sequentially toward the three-way interaction. Then, in

Model 7, we entered the three-way interaction (EO * generational involvement * participative

21

strategy). This term is positive and statistically significant.

Next, we further probed three-way interaction by splitting the sample using a median split

of participative strategy (see Aiken and West, 1991; Hitt et al., 2001). This allowed us to

separately test the interaction in each subgroup (one group with high participative strategy and

the other group with low participative strategy). We ran separate regression analyses with each

subsample and, as expected, the interaction between EO and generational involvement is

negative and statistically significant in the low participative strategy subsample, and the

interaction between EO and generational involvement is positive and statistically significant in

the high participative strategy subsample.

We used the results in Models 8 and 9 to graph the effects in Figures 2a and 2b. As

expected, the EO/performance relationship with low participative strategy is positive when

generational involvement is low, and negative when generational involvement is medium or

high. The EO/performance relationship with high participative strategy is always positive.

Lastly, because the components of EO are often tested separately, we ran post-hoc analyses

to assess the robustness of our results. Specifically, we separately tested a three-way interaction

among generational involvement, participative strategy, and each of the components of EO

(product innovation, proactiveness, and risk taking). All results confirmed a statistically

significant three-way interaction (respectively, 0.221, p<0.05; 0.269, p<0.01; and 0.157, p<0.05).

_______________________________ Insert Figures 1, 2a, and 2b about here _______________________________

DISCUSSION

From neighborhood mom-and-pop stores to small and midsize companies to very large

firms such as BMW, Samsung, and Wal-Mart Stores, family firms are prevalent throughout the

22

world. In fact, over one-third of the S&P 500 still has significant family involvement (Business

Week, 2003). Thus, when we increase our understanding of the unique workings of family firms,

with a governance structure based on kinship ties, we strengthen both theory and practice. While

research on family firms has been very active over the past decade, one topic that remains

relatively under-investigated is the role of entrepreneurship in general and of EO in particular.

For example, Short et al. argue that EO has been “applied only sparingly in the context of family

firms” (2009: 10), and Cruz and Nordqvist argue that “the role of the family context for EO is

not yet well understood” (2010: 2). Moreover, the limited work that has addressed EO in family

firms has produced mixed results.

Therefore, in this research we endeavor to increase our understanding of EO in family

firms by developing and testing a model that builds upon and extends prior work. We extend our

model to consider two important factors within family firms that are expected to moderate the

EO/performance relationship. Specifically, we investigate how generational involvement and

participative strategy jointly influence the EO/performance relationship in family firms. To that

end, we developed three hypotheses, which build from the main effect of EO on performance to

a three-way interaction among EO, generational involvement, and participative strategy. Our

thesis is that without participative strategy, increased generational involvement inhibits the

EO/performance relationship because of increased levels of relational conflict and myopic, path-

dependent strategies. However, participative strategy enables the family firm not only to mitigate

relational conflict and path-dependent behaviors, but also to utilize the heterogeneous yet

complementary knowledge and experiences of multigenerational family members to convert

entrepreneurial opportunities into high-performance outcomes.

23

The first hypothesis, which argues that EO will positively affect the performance of

family firms, provides a baseline model for our further tests. However, in light of the dearth of

EO studies in the family firm literature, it also provides more evidence that EO is applicable to

family firms and that it is an important element driving their performance. Moreover, the Swiss-

based sample extends the generalization of EO in family firms to a non-US context.

The second hypothesis, which argues that generational involvement will negatively

moderate the EO/performance relationship, extends our baseline model. The empirical results

offer support for our theory that, as generational involvement increases, so do relational conflicts

and myopic, path-dependent behaviors that inhibit the EO/performance relationship. As depicted

in Figure 1, family firms that combine high levels of EO and generational involvement produce

the worst performance. However, as the number of generations involved in the family firm

decreases, the benefits of EO are more readily seen.

The results of the third and final hypothesis, which argues that participative strategy and

generational involvement jointly moderate the EO/performance relationship in a positive

manner, offer support for the paper’s most important theoretical argument. While groups – in our

case, family groups – are critical to organizations’ outcomes, their effect can be either positive or

negative. Without effective management, the relational conflict that generational involvement

can produce leads to negative outcomes. However, when properly managed, the bundling of

heterogeneous yet complementary knowledge of multigenerational family members produces a

context in which EO is implemented exceptionally well. Participative strategy thus seems to

bring out the best of a multigenerational family firm in terms entrepreneurial-driven

performance.

24

Reviewing the graphs of Hypothesis 3 provides a clear understanding of the joint effects

of generational involvement and participative strategy. As seen in Figure 2a, which graphs the

firms with low participative strategy, the highest level of performance is achieved when EO is

high and generational involvement is low. In particular, when only one generation actively

manages the business, the EO/performance relationship is positive, albeit only slightly positive.

Put differently, when participation is not promoted, having one generation involved in the

management of the firm (versus two or more generations) reduces family tensions, thereby

enhancing the context for EO. However, with an increase in the number of generations involved,

the slope is negative – that is, EO is inhibited.

However, neither Figure 1 nor Figure 2a resembles Figure 2b, where the slopes are

always positive. Figure 2b graphs the firms with high participative strategy. For these firms, the

highest level of performance is achieved when both EO and generational involvement are high. It

seems that when a firm operates in a participative-oriented environment, the presence of

multigenerational family members, who offer greater levels of heterogeneity in knowledge and

experiences, positively impacts the effect of EO on performance. In essence, for highly

participative family firms, the greater the generational involvement, the more positive the

EO/performance relationship.

These results offer several contributions to the literature. First, they offer additional

support for the baseline relationship between EO and performance in family firms. Second, this

research extends previous studies. While much of the prior research focused on identifying

external nonmanagement-related factors (e.g., environmental conditions) conducive to EO

effectiveness, we instead followed Lumpkin and Dess’s (1996) and Wiklund and Shepherd’s

(2003) calls for research that develops rich models of moderation based on factors internal to a

25

firm. Specifically, the arguments and empirical results herein extend and clarify how two factors

jointly affect the EO/performance relationship in family firms. While the limited work that

investigated single moderators of this relationship in family firms have produced mixed results

(Casillas and Moreno, 2010; Casillas et al., 2010), we see that the effect of generational

involvement on the EO/performance relationship depends on the degree of participative strategy.

We also extend the work of Zahra (2005), Kellermanns and Eddleston (2006), and Kellermanns

et al. (2008), who studied generational involvement as an antecedent of EO.

Third, we challenge previous research, based on non–family firm samples, that depicts

participative strategy as detrimental to resource-processing efficiency (Jansen et al., 2005) and

EO effectiveness (Covin et al., 2006) because of the difficulty of gaining consensus among

decision makers. Among family firms with multiple generations involved, we find that a

participative strategy is very valuable.

Fourth, while most research regards family firms as a homogeneous group, calls to

investigate behavioral differences among family firms are being issued with greater frequency

(Chrisman et al., 2005; Sharma, 2004). In response, we demonstrate how family firms’ behavior

with respect to generational involvement and participative strategy are crucial differentiators

across family firms. In particular, our study provides some explanations for the contradictory

results of the EO/performance relationship in the family firm literature (e,g., Kellermanns et al.,

2008; Naldi et al., 2007) by distinguishing firms based on their level of participative strategy.

Also, this finding might explain discrepancies in the non–family firm EO literature.

These results and the limitation of the research identify several issues that future research

might explore. First, we do not directly measure conflict in the family firm, but instead argue that

such conflict is the causal mechanism by which generational involvement inhibits the

26

EO/performance relationship. Moreover, we do not address conflicts among family employees

within the same generation. Thus, future work may draw upon longitudinal data to explore how

relational conflicts, path dependency, and participative strategy evolve across generations in the

family firm. This might help explain why only some family firms survive for multiple

generations. We would predict that those family firms that are most successful in integrating new

generations in decision making are most likely to be entrepreneurial.

Moreover, we depict participative strategy as a means through which multiple

generations in the family firm are effectively engaged. However, it may be that there is an

optimal level of participative strategy beyond which EO may diminish, thereby negatively

affecting performance. Even though open discussion has positive effects, too much discussion

may paralyze the firm. Additionally, family ownership concentration may affect these

relationships. Thus, future work could add value by addressing how ownership dispersion across

generations and in the hands of the current CEO may affect these relationships. We expect that

family firms with high generational ownership dispersion will have the highest relational

conflict, making participative strategy all the more important.

Additionally, extending this research to compare how relational conflicts and

participative strategy affect non-family firms may extend the EO/performance relationship more

generally. Determining the degree to which the hypotheses presented herein apply to other

organizational forms would be quite useful. For example, our focus has been on the uniqueness

of the family firm as a consequence of complex family ties. However, it may well be that similar

social structures occur in non-family organizations that are nonetheless characterized by a

dominant social group (Valentinov, 2008; Weick, Sutcliffe, and Obstfeld, 1999).

Implications for Practice

27

Our analysis also informs organizational practices. Basically, organizational members

with different knowledge and experiences offer the potential to strengthen the EO/performance

relationship. However, that heterogeneity of knowledge can offer little benefit to a group or firm

if those members cannot work together effectively. Hence, family firms may need to work

toward increasing their participative strategy. This will enable the members of multigenerational

family firms to interact intensively and to better draw upon complementary knowledge. As

Nonaka explains, “Although ideas are formed in the minds of individuals, interaction between

individuals typically plays a critical role in developing these ideas. That is to say, ‘communities

of interaction’ contribute to the amplification and development of new knowledge” (1994: 15).

Accordingly, social relations, which are essential for bundling and leveraging knowledge, need

to be “multifaceted so that there is always room for revision or negation,” and “participants in

the dialogue should be able to express their own ideas freely and candidly” (Nonaka 1994: 25).

In family firms, older generations should work to accept the knowledge of younger

generations. At the same time, the younger generation must appreciate the previous generation’s

knowledge and experience within a participative environment. To achieve this goal, processes of

continuous learning, free from bureaucratic constraints, should be pursued. Otherwise, even

when the need for radical change is acknowledged, entrepreneurial efforts will not likely

succeed.

In conclusion, we hope that this research informs, extends, and encourages future work

on EO family firms and helps these firms to better understand how family can be an advantage.

28

Table 1: Descriptive Statistics and Correlations

Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 11. Performance 3.918 0.563

2. Age 46.270 39.385 -0.038

3. Size 92.331 738.393 -0.069 0.82

4. Dynamism 3.266 .722 0.075 -0.064 -0.166

5. Electronics 0.040 .196 -0.243 -.102 -0.023 0.102

6. Trade 0.246 0.431 -0.031 0.175 -0.052 0.080 -0.117

7. Construction 0.140 0.348 0.046 0.117 -0.035 -0.002 -0.083 -0.231

8. Manufacturing 0.196 0.397 -0.092 0.150 -0.028 -0.106 -0.101 -0.282 -0.200

9. Transportation 0.030 0.171 0.065 0.033 -0.013 0.016 -0.036 -0.101 -0.071 -0.087

10. Finance 0.015 0.122 0.201 -0.064 -0.014 -0.027 -0.025 -0.071 -0.050 -0.061 -0.022

11. Services 0.211 0.409 0.064 -0.233 0.164 0.014 -0.106 -0.296 -0.209 -0.255 -0.091 -0.064

12. Others 0.090 0.287 0.100 -0.128 -0.033 -0.003 -0.065 -0.180 -0.128 -0.156 -0.056 -0.039 -0.163

13. EO 3.596 0.639 0.252 -0.083 0.009 0.329 0.078 -0.077 -0.110 0.083 0.059 0.088 -0.020 0.129

14. Generational 1.54 0.548 0.053 0.217 -0.043 -0.066 -0.155 0.057 0.078 0.001 0.095 -0.046 -0.058 -0.118 -0.103

15. Participative 3.839 0.596 0.616 0.053 -0.028 0.054 -0.013 0.013 -0.041 -0.033 0.067 0.061 0.007 0.068 0.205 -0.

N= 199; Correlations with values of |0.155| or greater are significant at p <0 .05; those with values of |0.200| or greater are significant at p <0 .01

29

Table 2: Results of Regression

N= 199; + p<0.10; * p<0.05; ** p<0.01; *** p<0.001

Dependent variable Perform Perform Perform Perform Perform Perform Perform Perform Perform

Controls Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Model 9

Age -0.050 -0.032 -0.040 -0.026 -0.075 -0.076 -0.081 -0.095 -0.027 Size 0.087 0.073 0.064 0.057 0.036 0.038 0.033 -0.042 0.079 Dynamism 0.092 0.001 0.001 -0.029 -0.019 -0.019 -0.017 -0.038 -0.051 Electronics -0.159 -0.207* -0.192+ -0.181+ -0.197* -0.181* -0.137+ -0.227+ -0.207 Trade 0.086 0.023 0.044 0.093 0.020 0.056 0.148 0.034 0.103 Construction 0.119 0.078 0.094 0.137 0.097 0.124 0.199 0.148 0.043 Manufacturing 0.015 -0.086 -0.063 -0.008 -0.036 -0.004 0.059 0.096 -0.101 Transportation 0.096 0.050 0.056 0.081 0.024 0.035 0.064 0.134 -0.059 Finance 0.259** 0.210** 0.217** 0.223** 0.177** 0.185** 0.218*** 0.289** 0.182 Services 0.167 0.096 0.117 0.167 0.091 0.126 0.197 0.165 0.082 Others 0.164 0.079 0.098 0.119 0.052 0.073 0.138 0.165 0.091 Variables EO 0.273*** 0.275*** 0.338*** 0.227*** 0.231*** 0.236*** 0.241* 0.423***Generational Involvement (GI)

0.048 0.030 0.069 0.066 0.043 0.147 0.016

EO x GI -0.151* -0.144* -0.120+ -0.068 -0.245* 0.252** Participative Strategy (PS)

0.559*** 0.549*** 0.593***

EO x PS 0.052 -0.102 GI x PS -0.022 0.017 EO x GI x PS 0.264** D R2 0.140** 0.061*** 0.002 0.017* 0.291*** 0.003 0.022** R2 0.140 0.201 0.203 0.220 0.511 0.514 0.536 0.282 0.343 Adjusted R2 0.090 0.149 0.147 0.161 0.471 0.468 0.490 0.162 0.235 f 2.772** 3.895*** 3.621*** 3.715*** 12.761*** 11.257*** 11.565*** 2.356** 3.175***

30

Figure 1: The Effect of Generational Involvement on the EO/Performance Relationship

0

2

4

6

8

10

12

14

16

Low entrepreneurial

orientation

Med entrepreneurial

orientation

High entrepreneurial

orientation

Low generational involvement

Med generational involvement

High generational involvement

Performance

31

Figure 2a, b: Interaction among EO, Generational Involvement and Participative Strategy

a) Low Participative Strategy N= 99

-6

-4

-2

0

2

4

6

8

10

12

14

Low entrepreneurial

orientation

Med entrepreneurial

orientation

High entrepreneurial

orientation

Low generational involvement

Med generational involvement

High generational involvement

b) High Participative Strategy (N= 100)

0

10

20

30

40

50

60

70

80

Low entrepreneurial

orientation

Med entrepreneurial

orientation

High entrepreneurial

orientation

Low generational involvement

Med generational involvement

High generational involvement

Performance

Performance

32

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Appendix 1: Key constructs and items Construct Items

Entrepreneurial orientation

= 0.87

Our company has introduced many new products or services over the past three years Our company has made many dramatic changes in the mix of its products and services over the past three years. Our company has emphasized making major innovations in its products and services over the past three years. Over the past three years, our company has shown a strong proclivity for high-risk projects (with chances of very high return). Our company has emphasized taking bold, wide-ranging action in positioning itself and its products or services over the past three years. Our company has shown a strong commitment to research & development, technological leadership and innovation. Our company has followed strategies that allow it to exploit opportunities in its external environment

Participative strategy

= 0.87

Over the last 3 years: - Decision-making in our company is participative - The top decision-makers in our company interact with all employees on an informal basis. - All employees in our company participate in strategic decision-making on a regular basis. - Decision-making in our company is interactive. - There is free and open exchange of ideas among family members about any strategic issue.

Performance = 0.85 How would you rate your company’s performance as compared to your competitors? Past three years:

- Net profit - Sales growth - Cash flow - Growth of net worth