Small firm performance: modelling the role of innovative differentiation

Ansoff (1965) theorises early on in the development of strategic management as a field of study that structure follows strategy. Although this assertion has been the basis for considerable debate (e.g. Peters, 1984), what has been widely accepted is that the use of different types of strategies under suitable conditions, including firm structure and environment, will improve firm performance (Anderson & Atkins, 2001; Borch, Huse, & Senneseth, 1999). This argument forms one of the cornerstones of strategic management theory, and has been the topic of a great number of studies (Dess & Davis, 1984; Porter, 1980). In particular, the role of business or competitive strategies in firm performance has been studies widely (Cooper, Willard, & Woo, 1986; Covin, 1991; Mosakowski, 1993; Smallbone, Leigh, & North, 1995; Porter, 1980). Best known of these studies is the seminal work of Michael Porter (1980), who developed a typology of business strategies, or generic strategies as he termed it, to describe how firms will compete in a particular market. He identifies differentiation, cost-leadership and focus strategies as the broad strategies which most firms will use to compete. Mintzberg (1988) builds on this work, explaining that most of these business strategies can be viewed as some form of differentiation. The existence of a refined typology of business strategies is supported by Miller (1988) who suggests that the richer examination of business strategies by the above mentioned authors, have allowed for an improved understanding of the relationship between strategy and the context in which it occurs. Miller studies 89 small and diversified firms in the province of Quebec, Canada, to explore the relationships between structure, environment and Porter's generic strategies, using such refined typology which includes innovative and marketing differentiation. Variyam and Kraybill (1993) explain that the business strategies adopted by small firms will differ from large firms due to a number of factors, including economies of scale and organisational structure. Although received wisdom holds that a focus or differentiation strategy is most likely to be associated with a high level of performance in small and/or new firms, this assertion has not been widely investigated in empirical studies, and the existing evidence is conflicting. For example, Variyam and Kraybill (1993) suggest that small firms use numerous strategies, including product development, marketing and innovation in order to gain competitive advantage. On the other hand, Scozzi, Garavelli and Crowston (2005) argue that the number of innovative small firms may be limited. More specifically, Miller (1988) compares the behaviour of high and poor performing firms and finds that innovative differentiation is most likely to be pursued by high performers in uncertain environments. Specifically, he suggests that for small firms the nature of the environment will have a significant effect on the choice of business strategies. A number of other environmental factors have been identified as influencing the choice and success of business strategies in small firms. Variyam and Kraybill (1993) state that business strategies differ depending on industry sector, for example wholesale and retail sectors may use quality and product effectiveness strategies. Miller (1988) finds that corporate life cycle may also influence the choice of strategy, in particular, that innovative and focus strategies are more common in young firms. The firms in Miller's study were defined as small, employing fewer than 500 employees. This and other studies (e.g. Kamien & Schwartz, 1975; Tushman & Nelson, 1990) show that Schumpeter's (1947) earlier assertion that large firm size is essential for innovation does not hold for all small firms.