Small-Firm Performance: Modeling the Role of Product and Process Improvements*

Entrepreneurial and small and medium-sized enterprises (SMEs) firm performance is a complex, multifaceted construct that should be examined with an eye toward its complexity. Our research study seeks to accomplish this examination by proposing a conceptual model of SME performance with two distinct but related outcome dimensions--growth as one dimension and profitability as another. We propose hypotheses for relationships between four antecedent factor conditions--environmental hostility, firm size, innovation capability, and internationalization--and an SME's likelihood to pursue either product improvement or process improvement as their primary strategic orientation. Furthermore, we propose that an SME product improvement orientation likely has greater influence on growth and profit performance than will a process improvement orientation. The findings of the study suggest that internationalization and innovator position have a positive impact on new product and process improvements, while environmental hostility, internationalization, and product improvement have positive influences on growth as a performance dimension. In addition and as hypothesized, the product improvement orientation is positively associated with growth and in turn profitability, whereas the process improvement orientation showed no statistical relationship to growth and ultimately profitability. Introduction An important subset of the small- and medium-sized enterprise (SME) and entrepreneurship literature is that which examines venture-related performance and the various antecedent factors and conditions thought to affect firm performance. Through this examination, researchers hope to provide SME managers and entrepreneurs some guidance with respect to successful venture performance. Researchers have found solid support for the effects of market attractiveness and resource-based capabilities on performance (Chandler and Hanks 1994). Covin and Covin (1990) found counterintuitive relationships among the level of competitive aggressiveness, environmental context, and the ultimate performance of small firms. Zahra and George (2000) revealed a strong association between commercialization capability, establishment of a reputation for quality, and SME technology firm sales growth. Also, innovation has demonstrated a strong and influential relationship with SME performance (Verhees and Meulenberg 2004; Qian and Li 2003). By their numbers alone, SMEs and entrepreneurial firms are a key segment and driver for most (if not all) national economies. Understanding how SMEs achieve high performance has significant implications for SME owners/managers, SME employees, and the economies in which the SME operates. High levels of performance can facilitate firm growth and subsequent profit performance, which in turn can yield employment gains and contribute to the general economic health of a state, region, or nation. Conversely, low performance may lead to firm stagnation or failure, and the negative economic ramifications commensurate with these outcomes. Given the resource constraints of small firms (Acs 1999) and their susceptibility to distress, hardship, and outright failure with respect to environment change and uncertainty, a better understanding of the contributing factors and mechanisms for high performance is desirable. The goal of this study was to expand our understanding of the factors contributing to firm performance by examining a set of related conditions and actions that we propose are of consequence to high SME performance. Our empirical research paper examines two characteristics of entrepreneurial SMEs--innovator position and the propensity to internationalize--in conjunction with two contextual variables (environmental hostility and firm size). We propose hypotheses for relationships between the four factors mentioned, and an SME's likelihood to pursue either product improvement or process improvement as their primary strategic orientation. …