Entrepreneurship features invariably and prominently in the socio economic agenda of the country. It is an initiative by individuals to take up business endeavor, stimulated by the desire and expertise and convert their ideas into profits. It is also the driving force for the economic growth of the country because entrepreneurship generates revenue and employment opportunities. The Small and Medium Enterprises play a vital in this direction and are the major engines for the country’s economy.

Factors which determine the entrepreneurship need to be contextualized based on the type of the business being explored. It is important to evaluate the factors which may impact the relationship between entrepreneurial orientation and firm’s performance. Such factors may be less suitable for entrepreneurial behavior. The entrepreneurial orientation comprises of five dimensions viz., innovativeness, risk taking, competitive aggressiveness, pro-activeness and autonomy. Innovativeness in the firm is the creativity and implementation of new products, services and bringing in novelty in the firm. Risk taking ability is taking bold decisions to get into unknown markets and investing huge amounts not knowing the outcomes. Competitive aggressiveness is firms’ inclination to challenge and beat competitors to gain an entry into the markets and outperform the competitors. Pro-activeness is seeking opportunities and anticipating the demand ahead of their competitors and introduce the products or services and change the environment of the business to beat the competitors. Autonomy refers to the independent actions performed by the individuals’ or teams for developing and bringing in new ideas or vision and taking them forward for implementation. Entrepreneurial Orientation has been recognized as beneficial to the firms to grow and succeed. Researchers have indicated the firms adopting good entrepreneurial orientation have grown and made good profits.

Two forms of organizational structure are operational in the firms viz., mechanistic structure and organic structure. Firms adopt one of these structures.

Mechanistic style is a bureaucratic form where the communication channels among employees are restricted, formalized planning systems, the decision making is centralized with tightly controlled systems. The organic structure is an adaptive form of structure where the firms operate on open channels of communication, participative style of decision making, lesser formalization with low vertical differentiation and high horizontal integration. The structure in the organization is a very important determinant as to how effectively it identifies the need for change and quickly respond to the required change.                

Entrepreneurial Culture in Sri Lanka

Entrepreneurial Culture is an environment or a platform created for individuals where they are motivated to innovate, create and take risk in setting up a business venture. It happens only when the people in the country are empowered to think, innovate, design and manage their own business and entrepreneurship is given the highest priority by the governments. In this direction, various initiatives were taken by the Sri Lanka Government to encourage people to become entrepreneurs. 

Sri Lanka has opened up for the growth of economy in 1977 to match with global trends and to achieve a greater level of economic development with country like Singapore. With the continuous battle of civil war and internal conflicts for thirty years, the expected development was not achieved. After the culmination of the internal conflicts and the civil war, Sri Lanka has paved the way for the achievement of the development through various ways and means.

Entrepreneurship as in any other countries, in Sri Lanka also, has an important role in the economic development. However, the entrepreneurs in Sri Lanka face lot more challenges in the present environment of business because of stiff competition, speed in the change of technologies and globalization.

As per the recent World Bank reports, Sri Lanka is ranked 13^th in Asia and 100^th in the world. Sri Lanka has shown gradual improvement and moved up by 11 positions (https://www.doingbusiness.org/con tent/dam/ doingBusiness/media /Annual- Reports/ English/DB2019-report_web-version.pdf).

The Small and Medium Enterprises in the rural areas play a vital role which can create business environment where other firms also flourish and become part of export earnings. The Sri Lankan government is giving benefits and promoting schemes for the people and encourage the entrepreneurs in the rural areas who will indirectly contribute to the growth and economy of the country and they get their share of benefits.

Literature Review

Entrepreneurial Orientation is beneficial for the firms irrespective of their size in a fast changing business environment to grow and succeed [1]. Entrepreneurial Orientation comprises of innovation, risk taking to try new products or services and act proactively than competitors [2]. The attention of the researchers is drawn towards the entrepreneurial orientation, because it offers several benefits [3].

Various researchers have defined entrepreneurial orientation differently. Zahra and Covin [4] defined EO as one of the tools which inspires the firms to achieve better performance through the dimensions of EO.

Lumpkin and Dess [5] have added competitive aggressiveness and autonomy to entrepreneurial orientation dimensions later. The relationship between the entrepreneurial orientation and business performance has been widely studied by researchers. However, the opinions of researchers differed significantly. Some have reported that positive relationship exists while some have reported negative relationship and some of them have found mixed result.

Wiklund and Shepherd [6] and Wang [7] have found that positive and significant relationship exists between two constructs, while negative relationship was reported by Anderson [8]. 

Richard et. al. [9] conducted a study on five hundred and seventy nine banks in US to investigate the impact of entrepreneurial orientation and firm’s performance and observed a strong and positive relationship exists. Faizol et. al. [10] examined the impact of entrepreneurial orientation and business performance of small and medium enterprises in Hambantota District in Sri Lanka. They have conducted the study on 125 listed SMEs and 25 manufacturing SMEs and used both qualitative and quantitative methods and found a strong linkage between the two constructs.

Sharma and Dave [11] conducted a survey on 319 SMEs family owned business in Chattisgarh in India and found a strong and positive association between entrepreneurial orientation and business performance. Herath and Mahmood [12] suggested a moderator to be included to the relationship of the strategic orientation and business performance. The business environment was suggested to be included as a moderating variable. Businesses will not operate in vacuum, the businesses should have a structure for its existence.

Covin and Slevin [2] defined the organizational structure as workflow arrangement, communication and relationships in authority within the organization. Altinay and Altinay [13] in their research study observed positive association of decentralized structure on the entrepreneurial orientation. The associations were found to be useful in assigning autonomy and control which helped the employees in the firm to take innovative ventures.

Sylvia et. al. [14] affirms that a decentralized and informal structure would lead to more information sharing, empowerment of lower level staff members, increasing participation from teams which ultimately promotes innovation unlike the open structures were considered critical for innovation. Pinchot [15] reported that excessive use of controls in the organization can inhibit EO and social relationships within the organization.

Variables for Measurement

Entrepreneurial Orientation: Entrepreneurial orientation comprises of 5 dimensions viz., innovation, risk taking, pro-activeness, competitive aggressiveness and autonomy. 

Innovativeness is the willingness of the firms to create new business ventures and also try various ways and means different from the existing practices, and enthusiastic to adopt new methods in their business strategies [16]

• Risk Taking Propensity: Risk taking is the ability of the firm in taking bold and courageous decision to allocate their resources in the unknown markets without knowing the outcomes. It is the willingness to earmark resources where probability of high failures exist [6]

• Pro-activeness: Pro-activeness is seeking opportunities and anticipating demand well ahead of their competitors to innovate, create and introduce new products and services to beat the competitors in the change environment [5] 

• Competitive Aggressiveness: It refers to the inclination of the firm to challenges and beat the competitor and gain the market share directly and intensely and outperform the competitors [17] 

• Autonomy: Autonomy is the freedom given to the employees in the firm to take actions for developing new vision and taking it forward for implementation and effective business operations [5] 

• Business Performance: Researchers have argued that objective measures are more appropriate for measuring the performance than the subjective measures. Objective measures of performance will be difficult as respondents will not like to share firm’s data [18]. Firms may provide firm’s subjective evaluation which may lack the reliability. However, parameters like sales, growth, service quality, customer satisfaction, employee satisfaction, product quality, product process etc. are considered for analysis

• Organizational Structure: Parameters pertaining to organizational structures such as adapting freely to changing environments, behaviour, participative style of decision making, knowledge distribution, willingness to favour open channels of communication were considered

• A structured questionnaire was developed to collect the data on these variables on a Likert 5 point scale (1 = strongly disagree, 2 = agree, 3 = neither agree nor disagree, 4 = Agree and 5 = Strongly Agree). The demographic profile of respondents is given in table 1

Research Framework

The idea for the current study came up from the research question: Does organizational structure moderate the relationship of EO and Business Performance? This allows us to formulate the hypothesis: H_i: Organizational Structure moderates the relationship between the entrepreneurial orientation and business performance. The research framework is given in figure 1.

Figure 1: Moderating Effect of Organizational Structure (OS) on Entrepreneurial Orientation (EO), Business Performance (BP)

Data Analysis and Results

The study was conducted on 275 product oriented and service oriented Small and Medium Enterprises in Kurunegala, Sri Lanka. The questionnaires were distributed to the owners or managers in the firms. 72% respondents (n = 198) were owners and 28% (n = 77) were managers working in the firm. 47% of the firms (n = 130) were less than 10 years old and only 5% of firms (n = 14) were more than 15 years old. 52% firms (n = 143) have less than 10 employees. 54% of the respondents (n = 149) are from service oriented and 45.8% of the respondents (n = 126) from product oriented sector. 50% of the firms’ turnover is less than 50 million SLR and 6% of the firms’ turnover is more than 20 0 million SLR. It indicates that there are few firms with higher investments in Kurunegala District. 

To capture different aspects of small business performance, characteristics such as Sales growth, employment growth, market share growth and employees and owner’s satisfaction were used to evaluate business performance. The internal consistency was tested using Cronbach Alpha coefficient. Overall for the dimensions of Entrepreneurial Orientation, business performance and Organizational Structure, the alpha value obtained was 0.743 (alpha>0.7) which validated the use of these measures for further analysis. The correlations are given in table 1.

 Table 1: Correlation Matrix

* Correlation is significant at the 0.05 level ; ** Correlation is significant at the 0.01 level IN – Innovativeness; RK – Risk Taking ; PR – Pro-activeness; CA – Competitive Aggressiveness;AU- Autonomy; OS – Organizational Structure

Table 1 indicates the descriptive statistics and correlation matrix for the dimensions of Entrepreneurial Orientation, Organizational Structure. It is observed that the SMEs have moderate to high levels of risk taking propensity (mean = 3.97) and moderate level of innovation (mean = 3.55), competitive aggressiveness (mean = 3.47) and but low levels of pro-activeness (mean = 3.12) and autonomy (mean= 2.39). The mean score for organizational structure is 3.70.

The results indicated that the correlation among the dimensions of entrepreneurial orientation, organizational structure and business performance is positive and significant except for the correlation between autonomy and organizational structure.

The results indicated that the correlation matrix of all the entrepreneurial orientation dimensions, organizational structure and business performance illustrating the inter-relationships among all these constructs. It is observed that innovation, risk taking propensity, pro-activeness, competitive aggressiveness and autonomy are positively correlated with organizational structure significant at 1% level. This indicates that SMEs are adopting both mechanistic and organic style of organizational structure. Innovation has higher correlation with pro-activeness and autonomy shows that innovation is a vibrant component for the success of the firm because firms have to be vigilant and bring in new products ahead of their competitors.

Results from Multiple Regression analysis to study the moderating effect of organizational structure on the entrepreneurial orientation dimensions and the business performance are presented in Table 2. 

Table 2: Results on the Moderating Effect of Organizational Structure on EO Dimensions

The results from the above table (F-value 78.018 , p<0.001) indicating that the model is significant and thus valuable in predicting the firm’s performance. Model 1 indicates that innovativeness, risk taking propensity, pro-activeness and competitive aggressiveness had significant positive influence on the business performance of the SMEs except autonomy. 

Model 2 where all the entrepreneurial orientation dimensions and the moderating factor (organizational structure) is included as independent variables and the business performance as dependent variable. The results indicated the significance of the model with the probability of F-value significant (F value= 67.208, p<0.001).

Adding Organizational Structure to the model had little effect on the model as its prediction power had no significant increase (R² change = 1.8%), however the relationship between the organizational structure and the business performance was positive and significant. 

Model 3 where entrepreneurial dimensions, organizational structure and all interactions of entrepreneurial dimensions with the organization structure were included in the model against the business performance as dependent variable. The F-value shows that the model is significant (F = 39.167, p<0.001) indicating a good entrepreneurial orientation predictor of the firm’s business performance. With the interaction variables included, the increased variance explained by the model was 10.1% (R² change). The organizational structure showed a significant moderating effect only for risk taking propensity (β = 2.401, p<0.05) and competitive aggressiveness (β = 2.080; p<0.05) which indicates that organizational structure has a positive moderating effect on the relationship between risk taking propensity and business performance and competitive aggressiveness and business performance. It means that firms which are taking more risk always perform better.

The performance of the firm can be improved by adopting an appropriate entrepreneurial orientation behavior. Only few dimensions of entrepreneurial orientation significantly influences the performance of the SMEs. It is in line with the views of Lumpkin and Dess [5] who affirmed that different dimensions of entrepreneurial orientation affect the firm’s performance differently at firm’s life cycle. While results indicate positive influence of risk taking propensity on the business performance, it also indicates that this relationship is negatively moderated by organizational structure. It is important for the small and medium enterprises adopting different styles of organizational structures to be strategic risk takers and work out the level of risk they can afford to take without losing their profits. Similarly, positive influence of competitive aggressiveness on the performance moderated by the organizational structure indicates that firms which are aggressive in grabing the opportunity in introduction of new products, services resulting in consumers preferences ahead of their competitors have shown better business performance.

Moderating Effect of Organizational Structure on the relationship of Entrepreneurial Orientation and Business Performance

The earlier sections have discussed the moderating effect of organizational structure on the relationship of entrepreneurial dimensions and business performance. This section discusses the moderating effect of organizational structure on the relationship of entrepreneurial orientation (summation of all the dimensions) and business performance. The correlations are given in Table 3.

Table 3: Correlations

***. Correlation is significant at the 0.001 level

The results from the above table indicate that the correlation between entrepreneurial orientation and the business performance is positive and significant (r = .757, p<.001) and the correlation between the entrepreneurial orientation and organization structure is significant (r = 2.241, p<0.001).

Regression analysis from table 4 indicate the significance of the model with F-value of 130.965 significant at p<0.001. The results from the above model demonstrated that the interaction effect of entrepreneurial orientation x Organizational Structure is significant (β=.249, p<0.05) means that the Organizational Structure moderates the relationship between the entrepreneurial orientation and the business performance. With the change of styles in the organizational structure, there will be change in the entrepreneurial orientation and also on the business performance.

Table 4: Moderating Effect of Organizational Structure on the Relation of EO and BP

***. Correlation is significant at the 0.001 level; * significant at 0.05 level

The summated score of organizational structure has been classified into two categories viz., mechanistic firms and organic firms. The average of organizational structure was 18. All the firms whose organizational score is less than 18 reflects the inclination of a firm towards mechanistic style of organizations where very restricted channels of communication, decision is centralized, planning systems are formalized, very low level of flexibility and tight controls exist. Organic style of organizations on the contrary portrays firm’s with open channels of communication, participative style of decision making or team building, very low levels of differentiation, higher integration with lesser formalization.

Table 5: Number of Firms in Different Style of Organizational Structure

The Small and Medium Enterprises where the study has been conducted, out of 275 firms, 165 firms are adopting organic style of organizational structure because they are adoptable to changing environment. It allows the employees to have freedom to work and take decisions within the framework of the rules and regulations of the firm. This helps the employees more and be able to think out of box and encourages to seek opportunities beyond the firms current capabilities. These results are in line with the Quinn et al. [19]. It is appropriate for reinforcing the past behavior but because of the high levels of bureaucracy exist in the mechanistic style, it may not be really suitable for handling situations where a creative and rapid response is required. The practices that are being followed from the past may become inappropriate where the business environment changes quickly.

The study was conducted to investigate the moderating role of organizational structure on the entrepreneurial orientation and business performance relationship. The results revealed that the relationship between the entrepreneurial orientation and business performance is positive and significant. This result is in conformity of the research by Lumpkin and Dess [5] that positive entrepreneurial orientation will lead to a good business performance. The results also revealed that the interaction effect of entrepreneurial orientation and organizational structure was significant indicating that organizational structure moderates the relationships between EO and Business performance. 

165 Small and Medium Enterprises in Kurunegala, Sri Lanka are adopting organic style or organizational structure and 110 firms are adopting mechanistic style of organizational structure. Firms adopting organic style have been complete freedom to their employees to ventilate their ideas, take bold decisions on their own within the framework of the firm’s rules and regulations, to think out of box always and seek opportunities. This helps in improving their business performance. Research cites that firms apply high degree of mechanistic style makes them more bureaucratic and becomes impediment in creativity and novelty but may bring uniformity and discipline in the behavior of the employees and will reduce unwarranted situations.

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