Small-Firm Performance Modeling the Role of

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JournalofSmallBusinessManagement200644(2),pp.268–284Small-FirmPerformance:ModelingtheRoleofProductandProcessImprovements*byJamesA.WolffandTimothyL.PettEntrepreneurialandsmallandmedium-sizedenterprises(SMEs)firmperform-anceisacomplex,multifacetedconstructthatshouldbeexaminedwithaneyetowarditscomplexity.OurresearchstudyseekstoaccomplishthisexaminationbyproposingaconceptualmodelofSMEperformancewithtwodistinctbutrelatedoutcomedimensions—growthasonedimensionandprofitabilityasanother.Weproposehypothesesforrelationshipsbetweenfourantecedentfactorconditions—environmentalhostility,firmsize,innovationcapability,andinternationalization—andanSME’slikelihoodtopursueeitherproductimprovementorprocessimprove-mentastheirprimarystrategicorientation.Furthermore,weproposethatanSMEproductimprovementorientationlikelyhasgreaterinfluenceongrowthandprofitperformancethanwillaprocessimprovementorientation.Thefindingsofthestudysuggestthatinternationalizationandinnovatorpositionhaveapositiveimpactonnewproductandprocessimprovements,whileenvironmentalhostility,internation-alization,andproductimprovementhavepositiveinfluencesongrowthasaper-formancedimension.Inadditionandashypothesized,theproductimprovementorientationispositivelyassociatedwithgrowthandinturnprofitability,whereastheprocessimprovementorientationshowednostatisticalrelationshiptogrowthandultimatelyprofitability.IntroductionandthevariousantecedentfactorsandAnimportantsubsetofthesmall-andconditionsthoughttoaffectfirmper-medium-sizedenterprise(SME)andformance.Throughthisexamination,entrepreneurshipliteratureisthatwhichresearchershopetoprovideSMEman-examinesventure-relatedperformanceagersandentrepreneurssomeguidanceJamesA.Wolffisassociateprofessorofmanagement,DepartmentofManagement,W.F.BartonSchoolofBusiness,WichitaStateUniversity.TimothyL.Pettisdirector,CenterforEntrepreneurshipandassociateprofessor,Depart-mentofManagement,W.F.BartonSchoolofBusiness,WichitaStateUniversity.*Anearlierversionofthispaperwaspresentedatthe50thWorldConferenceoftheInterna-tionalCouncilofSmallBusiness(ICSB),June2005,Washington,D.C.268JOURNALOFSMALLBUSINESSMANAGEMENT withrespecttosuccessfulventureper-empiricalresearchpaperexaminestwoformance.ResearchershavefoundsolidcharacteristicsofentrepreneurialSMEs—supportfortheeffectsofmarketattrac-innovatorpositionandthepropensitytotivenessandresource-basedcapabilitiesinternationalize—inconjunctionwithonperformance(ChandlerandHankstwocontextualvariables(environmental1994).CovinandCovin(1990)foundhostilityandfirmsize).Weproposecounterintuitiverelationshipsamongthehypothesesforrelationshipsbetweenthelevelofcompetitiveaggressiveness,fourfactorsmentioned,andanSME’senvironmentalcontext,andtheultimatelikelihoodtopursueeitherproductperformanceofsmallfirms.ZahraandimprovementorprocessimprovementasGeorge(2000)revealedastrongasso-theirprimarystrategicorientation.Fur-ciationbetweencommercializationcapa-thermore,weproposethatSMEproductbility,establishmentofareputationforandprocessimprovementorientationsquality,andSMEtechnologyfirmsaleslikelyinfluencegrowthandprofitper-growth.Also,innovationhasdemon-formance.Thehypothesizedrelation-stratedastrongandinfluentialrela-shipsaredevelopedfrommuchofthetionshipwithSMEperformance(Verheessignificantresearchconductedinentre-andMeulenberg2004;QianandLipreneurship,smallbusinessmanage-2003).ment,andstrategicmanagementovertheBytheirnumbersalone,SMEsandrecentpast.Ourpostulatesareexplainedentrepreneurialfirmsareakeysegmentandillustratedusingastructuralequa-anddriverformost(ifnotall)nationaltionmodel.economies.UnderstandinghowSMEsThepaperisorganizedasfollows.achievehighperformancehassignificantFirst,weunderpinourformalhypothe-implicationsforSMEowners/managers,sesandtheassociatedmodelwithadis-SMEemployees,andtheeconomiesincussionofrelevanttheoryandpriorwhichtheSMEoperates.Highlevelsofresearchconclusions.Second,wepresentperformancecanfacilitatefirmgrowthadiscussionofthemethodologicalandsubsequentprofitperformance,issuesregardingdata,sampling,meas-whichinturncanyieldemploymentures,andanalyticaltoolsthatwereusedgainsandcontributetothegeneraltotestthehypotheses.Third,adiscus-economichealthofastate,region,orsionoftheresultsofouranalysisisnation.Conversely,lowperformanceincluded.Finally,wediscussourinter-mayleadtofirmstagnationorfailure,pretationandconclusionsregardingtheandthenegativeeconomicramifica-findings.Thelastsectionalsoincludestionscommensuratewiththeseout-discussionaboutthelimitationsofourcomes.Giventheresourceconstraintsofresearchandimplicationsforresearchsmallfirms(Acs1999)andtheirsuscep-andpractice.tibilitytodistress,hardship,andoutrightfailurewithrespecttoenvironmentTheoryReviewandHypothesischangeanduncertainty,abetterunder-DevelopmentstandingofthecontributingfactorsandThepredominantdependentvariablemechanismsforhighperformanceisofinterestinthestrategicmanagementdesirable.literatureisperformance(EisenhardtandThegoalofthisstudywastoexpandZbaracki1992;SchendelandHoferourunderstandingofthefactorscon-1979).MichaelPorter’sarticulationofthetributingtofirmperformancebyexam-“structure–conduct–performance”para-iningasetofrelatedconditionsanddigm(forexample,Porter1985,1980;actionsthatweproposeareofconse-Rumelt1974)analysisofdiversificationquencetohighSMEperformance.OurandJayBarney’s(1991)essayarticulat-WOLFFANDPETT269 ingtheresource-basedviewofthefirm1993).Firmperformancemayatvariousarebutafewexamplesofseminalstrate-timesbereflectedby,innoparticulargicmanagementresearchseekingtoorder,financialoutcomes,salesormarketexplainfirmperformance.WithinSMEgrowth,customersatisfaction,orestab-research,theissueoffirmperformancelishingafoundationuponwhichfuturehasalsotakenaplaceofprominenceasgrowthmaytakeplace(Dvir,Segev,andadependentvariable(forexample,Lau,Shenhar1993).CartonandHofer(2005)Man,andChow2004;Sadler-Smithetal.arguedthatfinancialperformanceisit-2003;SwierczekandHa2003;Covinandselfamultidimensionalconstruct,andCovin1990).Researchersattempttoevidenceisprovidedtosupporttheunderstandthedynamicsatworkonthenotion.Growthandprofitabilityhaveperformanceoffirmsbecausetodosobeenempiricallyshowntobedistinctmayhelptoimproveit.Improvedfirmandvaryingelementsofperformanceefficacycertainlycanfacilitateanumber(VenkatramanandRamanujam1987).Inofdesirableoutcomesrelatedtoeco-thefollowingsection,weexplainournomicdevelopment,growth,andresi-conceptualizationoftherelationshiplienceparticularlyinlightofthebetweengrowthandprofitability,whichdominance(>97percentoffirms)SMEsleadstoourfirsthypothesis.Fromtherepresenttotheeconomy.dependentvariables,wedevelopourHowever,researchersacknowledgemodelinreverseorder(righttoleftinthatperformanceisacomplexandFigure1),proposingtestablehypothesesmultidimensionalconstruct(Cartonandwithrespecttoproduct-andprocess-Hofer2005;Dvir,Segev,andShenharrelatedimprovementsandconditionsFigure1ResearchModelIllustration(AllHypothesesPositiveRelationships)H6EnvironmentalHostilityH4H5ProductImprovementH12FirmSizeH2H1H13GrowthProfitPerformancePerformanceH10H3InnovationCapabilityH11ProcessImprovementH7H8InternationalizationH9270JOURNALOFSMALLBUSINESSMANAGEMENT (environment,size,innovativeness,andpositiverelationshipbetweengrowthinternationalization),whichweargueareandprofitabilityduetooptimalsizerelatedtogrowthandprofitability.orefficientscale(Gupta1981;Mansfield,1979),experiencecurveef-GrowthandProfitabilityfects(SternandStalk1998),andfirst-Aspreviouslydiscussed,firmsalesmoveradvantages(LiebermanandgrowthandprofitabilityareseparableMontgomery1988).Inmanyinstances,componentsoftheperformancecon-thetwoarelikelypositivelyrelated,butstruct.Logically,thecorrelationbetweentherearesituationswheretherelation-growthandprofitabilitymeasuresshouldshipmaybemoretenuous.However,berelativelyhigh.However,thereareparticularlywithrespecttoSMEsintheconditionsunderwhichtherelationshipgeneralcase,thereislikelihoodthatmaynotbeasexpected.Forexample,growthispositivelyassociatedwiththeSMEowners/managersmayfinditusefulprofitabilityofanSME.Therefore,ornecessaryandunavoidabletopursuestrategiesthatsacrifice(short-term)prof-H1:Growthispositivelyrelatedtoitabilityforgrowth.Suchriskystrategiesprofitability.maybeduetoenvironmentalconditions(Lau,Man,andChow2004;CovinandGrowthistheoutcomeofinternalSlevin1989)ortoaparticulartimeinorganizationalprocessesrelativetocom-thefirm’sdevelopment(Oviattandpetitorsandthemarketplace.WeMcDougall1994).WithouttheabilitytoproposethatforSMEs,therearetworeacha“criticalmass”inrevenueatsomegeneralavenuesbywhichfirmscanpointintheearlydevelopmentofafirm,achievesalesgrowth.Thefirstisbytheissueofprofitabilityinthetraditionalinvestingorganizationalresourcesinthesenseismoot.Inotherwords,cashflowdevelopmentofnewproductsorintocoverexpensesmayfavorsalesgrowthproductimprovementeffort,henceoverprofitability.marketsmaybeexpanded.ThesecondisInasimilarfashion,majororganiza-byinvestingininternalorganizationaltionaltransformationstages(Millerandprocessestoimproveoperationaleffi-Friesen1984)duringthelifeofestab-ciencies,whichinturnfacilitatesgrowthlishedSMEsmaynecessarilyrequirethebyenhancedmarketcompetitiveness.(albeittemporary)abdicationofprofitinfavorofsalesgrowth.Suchtransforma-NewProducts,ProducttionsmaybetheresultofnewproductImprovement,andSMEGrowthdevelopmentandintroductioninitiatives,Growthmaybeachievedbygrowingcompetitivedynamicsinestablishedexistingproductmarketsordevelopingmarkets,ormajorchangesinthemarketnewones.SMEnewproductandproductfocusorscopeforthefirm’sproducts.improvementgrowthisrelatedtoTheindustrylifecyclestagemayhaveanresearchanddevelopment,innovation,effectonSMEgrowthemphasisversusitsandtheabilitytogainadvantageoverprofitemphasisaswell(EisenhardtandcompetitorsintheproductmarketSchoonhoven1990).(Romano1990).ProductimprovementsWepresentthepreviousdiscussionasandnewproductsprovidefirmstheawaytoillustratetheissuessurroundingmomentumformarketleadershipandthenotionthatsalesgrowthandprof-salesgrowth(Iansiti1995).Productinno-itabilityarecontemporaneousandsub-vationopensfirmstomarketsharestitutableassomeresearchhaspresentedgrowthandhencesalesgrowthby(forexample,QianandLi2003).Previ-increasingthecustomerbaseincurrentousresearchhasfoundevidenceforamarketsorattractingnewcustomersbyWOLFFANDPETT271 openingnewmarketstothefirm(ZahraEnvironmentalHostilityandNielsen2002).Environmentalhostilityisoftenasso-Newproductsandproductimprove-ciatedwithunpredictability,instability,menteffortbySMEscanopenthedoorsorgeneralunfavorablenesswithrespecttonewcustomersandmarkets.Thus,toafirm’sexternaloperatingenviron-ment.Unfavorablebusinessenviron-H2:Productimprovementispositivelymentsgenerallyleadtodifficultiesofrelatedtogrowth.varyingtypesformanybusinessfirms.However,themarginforerrorcanbeProcessImprovementandparticularlythinforSMEs.InresponsetoSMEGrowthsuchconditions,SMEsmayundertakeCovin(1991)examinedthecontrastupstream(supplierintelligence)andbetweenthecharacteristicsofhigh-anddownstream(customermarketintelli-low-performing“entrepreneurial”firmsgence)environmentalscanning(Verheesandthoseofhigh-andlow-performingandMeulenberg2004).Organizational“conservative”ones.Inthestudy,Covinflexibilityandentrepreneurialposturereportedseveralsignificantdifferences(thatis,innovation,proactiveness,andthatemergedfromthedata.However,anrisktaking)canmitigatetheeffectsofinterestingoutcomeofCovin’sresearchhostileenvironmentsforSMEs(Lau,thatisparticularlyrelevanttoourstudyMan,andChow2004;CovinandSlevinisthelackofdifferenceintheemphasis1989).SmallfirmsmayalsoassumeanonoperatingefficiencybetweentheaggressivepostureandbemuchmoreentrepreneurialandconservativeSMEs.proactiveintheirinternalactivitieswhenThelackofcontrastsuggeststhatoper-theyexperiencedifficultenvironmentalatingefficiencymaybeauniversallyconditions(CovinandCovin1990).importantaspectofSMEsandsmall-firmFollowingthisdiscussion,weproposemanagers.thatSMEmanagersarelikelytotakeaBecauseSMEsareresource-con-proactivepositionwithrespecttostrained,firmsmustgetmaximumpro-productdevelopmentandimprovementductivityandbenefitfromtheresourcesactivities.Thus,theypossess.Followingbasicmicroeco-nomictheory,firmsgrowtoachieveH4:Environmentalhostilityispositivelyoptimalsizeorminimumefficientscalerelatedtoproductimprovement.(Mansfield1979).Additionally,theby-nowwell-understoodprinciplesassoci-Second,innovationandproactivenessatedwithlearningeconomieswithinasaresponsetoenvironmentalhostilityoperationsandproduction(SternandmayleadtoprocessimprovementstoStalk1998)providesanimpetustogrow.lowercostsandtherebypreservefinan-Allthreeofthestatedreasonsforgrowthcialflexibility.canbefacilitatedbyorganizationalprocessimprovements.Processimprove-H5:Environmentalhostilityispositivelymentscanstretchresources,mayreducerelatedtoprocessimprovement.optimalsize,andfacilitatelearningcurveeffects.WepostulatethatoperationalInarecentstudyofmarketorienta-processimprovementsandsubsequenttion,productinnovationandsmall-firmoperationalefficienciespositivelyimpactperformanceVerheesandMeulenbergSMEgrowth.(2004)linkedmarketorientationandintelligencetoperformance.InformationH3:Processimprovementispositivelygathering,marketunderstanding,envi-relatedtogrowth.ronmentunderstanding,andsense-272JOURNALOFSMALLBUSINESSMANAGEMENT makingarenecessarypreconditionsforfromwhichtheymaypursueinter-highSMEperformance.Suchamarketnationalactivities—productorprocessorientationislikelytoelicitdevelopmentimprovements.oftheinternalresourcesandcapabilitiescommensuratewithadequatelymeetingH7:Internationalizationispositivelythemarket’sneedswithappropriaterelatedtoproductimprovement.products.ChandlerandHanks(1994)foundthat“[f]irmswithhigherlevelsandH8:Internationalizationispositivelybroadervarietiesofresource-basedcapa-relatedtoprocessimprovement.bilitiesgrewfasterandhadhigherlevelsofbusinessvolume”(p.343).WithfewerInternationalizationisamajorstrate-degreesoffreedomforsurvival,smallgicactionforanSME.Underthestagefirmswillseektoderivethebenefitstheorypremise,anSMEoperatesfromanattributabletosizetomoreeffectivelyestablishedbaseofbusinessactivity.fendofftheundesirableconsequencesofResearchhasreportedinternalcondi-environmentalconditions.tionsthatimpactSMEinternationaliza-tiontoincludespecialcompetitiveH6:Environmentalhostilityispositivelyadvantages(Jaffe,Pasternak,andNeben-relatedtogrowth.zahl1988),thepossessionofauniqueproduct,profitadvantage,andtechno-logicalcompetence(Koh1989),andInternationalizationunderutilizedproductioncapacity(Kay-FollowingJohansenandVahlne’snak,Ghauri,andOlofssonBredenlow(1977)stagetheorypropositions,small1987).firmsdeveloptheirbusinessactivityindomestichomecountrymarkets.SuccessH9:Internationalizationispositivelyindomesticmarketsprovidestherelatedtogrowth.capabilitytomoveintoforeignmarketsatfirstprimarilythroughexportactivity.FromthislimitedexposuretoforeignInnovationmarketsthroughexporting,firmscanTypically,SMEsarecharacterizedaslearnaboutacustomer’sproductneeds,resource-constrainedwhencomparisonpricingneeds,countrydistributionismadetolarge-sizedfirms.WhatSMEssystems,andculture,tonameafew.Ulti-lackinresourceendowmentsmaybemately,intimesuchlearningyieldscompensatedforbyflexibility,agility,greatercommitmenttointernationalandinnovation(QianandLi2003;Acsmarketsandpotentiallyenhancesper-andYeung1999;BuckleyandMirzaformanceforthefirm.1997).SMEinnovationisgenerallyman-Barkema,Bell,andPennings(1996)ifestedintheformofproductmodifica-suggestthatthelearningelementiskeytions(VerheesandMeulenberg2004).intheinternationalizationprocessofRomano(1990)revealedthattheinternalSMEs.Likewise,ReuberandFisherdriversforSMEgrowthfrominnovation(1997)contendthatpreviousinterna-weretechnology,R&D,andtheabilitytotionalknowledgeorlearningisessentialgenerateacompetitiveedgeinthefirm’stoSMEinternationalization.Thesecon-productmarket.Theabilitytoinnovatevergentthemessupportthepropositionandadaptnewtechnologytomakethatknowledgeand/orknow-howareproductmodificationsislikelybecauseimportantresourcesforaninternational-ofthegreatercreativityandinnovative-izationorientation.Mostoften,SMEsnessofsmall-firmemployees(AcsandhavetwogeneralstrategicorientationsYeung1999).WOLFFANDPETT273 H10:InnovationispositivelyrelatedtoMethodologyproductimprovement.ResearchDesignTheresearchdesignemployedtheSimilartotheproductimprove-surveymethodfordatagathering.Arep-mentargumentspresentedpreviously,resentativerandomsampleof855small-firmsmayalsopursueinnovationsinandmedium-sizedmanufacturingfirmstheirorganizationalandmanufacturingwasselectedfrom4,614firmscontainedprocessestobecomemoreproduc-inabiannualdirectorypublishedbytiveandimprovequality,reliability,andthelargestnewspaperinaMidwesternefficiency.state.Therandomsamplerepresentedabroadcross-sectionofpublicandprivateH11:Innovationispositivelyrelatedtofirmsfromawidearrayofstandardprocessimprovement.industryclassification(SIC)codeindus-tries.AcoverletterandsurveywereaddressedtothepresidentorownerFirmSizefromeachfirmsolicitingaresponsetoInthediscussion,westatedthatsmallthequestionnaire.Postcardremindersfirmsaretypicallycharacterizedasweremailedthreeweeksaftertheinitialresource-constrained.Largerfirmslikelyquestionnaires.possessagreaterarrayofresourcestoThemultiphaseapproachresultedincopewithcorporatelifecyclechangesatotalof192key-informantresponses,(MillerandFriesen1984).Zahraandoutofwhich182providedcompleteGeorge(2000)reportsignificantdiffer-information.Thisprovidedourstudyanencesinthemanufacturingstrategiesoverallusableresponserateof21betweencorporate(CVs)andindepend-percent,whichisconsistentwithsimilarentventures(IVs)inthebiotechindus-studiesthatsurveytopmanagementortry.Manyofthesedifferencesaredirectlyowners(Hambrick,Geletkanycz,andattributedtothedifferentresourceFredrickson1993).InourstudyofSMEs,endowmentsavailabletotheventures—68percentoftherespondentsreportedCVshavethewherewithaltodrawthemselvesasbeingthechiefexecutiveupontheircorporateparentresourcesofficer,president,orvicepresident.AnwhileIVsdonot.McDougall,Deane,examinationofthesamplethroughat-andD’Souza(1992)reportedsimilartestrevealednosignificantdifferencesoutcomesforcomputerandtelecom-forresponsesbetweenthisgroupandmunicationsequipmentmanufacturingtheremainderofthesample,whichwasventures.classifiedas“divisionhead”inouranaly-sis.Theaveragetenureforallrespon-H12:Firmsizeispositivelyrelatedtodentswasabouteightyears,whiletheproductimprovement.averageageoftheorganizationwas30years.H13:Firmsizeispositivelyrelatedtoprocessimprovement.MeasuresPerformance.Smallandmedium-sizedThediagrampresentedinFigure1privatefirmsareoftenreluctanttoprovidesagraphicillustrationofallprovidespecificinformationregardinghypothesizedassociativerelationshipsperformance.Thesensitivenatureofthatweretestedsimultaneouslywithourperformanceconstructsvis-à-visSMEsstatisticalmethods.Next,wediscussthemakesitsomewhatdifficulttomeasure.methodologyemployedtotestthetheo-Followingpreviousresearch(forreticalmodel.example,ZahraandGeorge2000;274JOURNALOFSMALLBUSINESSMANAGEMENT ChandlerandHanks1994),weemployednew,changed,orimprovedproductoracategoricalapproachtoassessfirmserviceofferingswithintheirfirms.Theperformance.Weaskedrespondentstofouritemsincluded:(1)leadingtheanswerfourquestionsconcerningtheirindustryinnewideas;(2)creatingadis-firm’sperformancelevelwhencomparedtinctimageforyourcompany;(3)devel-totheirindustry.Eachoftheitemsopingnewproducts;and(4)developingemployedafive-pointLikertscaleformatbrandidentity.Thescaleusedwasafive-(1=lowest20percentand5=highestitemmeasurewitha1=notatallimpor-20percent)todeterminerelativeper-tantand5=veryimportant.Aprincipalformancelevels.Becauseperformancecomponentfactoranalysiswithavar-canbeviewedfrommultipleperspec-imaxrotationwasusedforexploratorytives,respondentswereaskedtoanalysisandresultedinasingleunder-comparetheirfirmtotheindustryforlyingconstruct.Theconstructwasreturnonsales(ROS),salesgrowth,cre-deemedreliable(a=0.69)andlabeledationofnewproductsorservices,and“productimprovement.”returnonassets(ROA).ThisapproachprovidedmultipleassessmentsofeachProcessImprovement.Therespondentsrespondentfirm’sperformancelevel.wereaskedfourquestionstotapintoAlthoughwehadpriorknowledgeorwhatwebelieveisprocessimprovementexpectationsthatfirmsutilizedifferentwithinafirm.Thefouritemsincluded:(1)outcomeswhenitrelatestoperform-investinginnewfacilities;(2)incorporat-ance,littleresearchhasexaminedthisingthelatesttechnology;(3)ownershipphenomenonwithrespecttoSMEsofpatentsorotherproprietaryinforma-(ChandlerandHanks1994).Therefore,tion;and(4)manufacturingprocessinno-anexploratoryassessmentusingaprin-vation.Afive-itemLikert-typemeasurecipalcomponentfactoranalysiswithawasusedwith1=notatallimportantandvarimaxrotationwasemployedtodeter-5=veryimportant.Anexploratoryprin-mineifdifferentperformanceoutcomescipalcomponentfactoranalysiswithawerebeingutilizedbythesefirms.Thevarimaxrotationwasutilizedtoestablishresultfromthisanalysissuggeststhethepresenceofunidimensionality.Apresenceofatwo-factorsolutionregard-singleconstructemergedwithreliabilityingperformance.Thefindingsrevealedata=0.60—theminimumsignificancewhatwebelievearetwodistinctdimen-threshold(Nunnally1978).Wetermedsionsofperformance–growthandreturn.thisconstruct“processimprovement.”Basedonourinterpretationoftheunder-lyingfactorstructures,wedesignatedtheEnvironmentalHostility.Similartofirstdimension“growth”becauseitisCovinandSlevin(1989),environmentalcomposedofsalesgrowthandcreationhostilitywasmeasuredusingfivedistinctofnewproductsorservices.Welabeleditems.Therespondentswereasked“Howtheseconddimension“return”becausedoyouperceivethefollowingconditionsthecomponentsareROAandROS.duringthenextfewyearsforyourbusi-Theperformancemeasuresaredeemedness?”Thefive-responseitemsincluded:validbecausetheeigenvaluesareabove(1)economicconditions;(2)political/therecommendedthreshold(1.0)andlegal/regulatoryissues;(3)demographicCronbach’salphaforeachdimensionistrends;(4)international/globalfactors;strong—0.70and0.86,respectively.and(5)societalissuesfacingthefirm.ThescaleusedwasagainbasedonaProductImprovement.Productim-five-pointLikertscalewith1=highlyprovementwasmeasuredbyaskingunfavorableand5=highlyfavorable.respondentsfourquestionsregardingPrincipalcomponentfactoranalysisWOLFFANDPETT275 yieldedasingle,reliable(a=0.75)andislesslikelytobebiasedsignifi-constructwelabeled“environmentalcantlyfromtruelevels.Themeasureishostility.”alsoinkeepingwiththeU.S.govern-ment’sclassificationofbusinesssizeasInternationalization.TherespondentsreportedbytheBureauofCensusandiswereaskedthreequestionsconcerningwidelyacceptedintheliterature(Mil-eitherthefirm’scurrentinternationalliken,Martins,andMorgan1998).activitiesorintendedfutureinternationalactivities.TheseitemswerebasedonInnovation.TomeasureinnovationCampbell’s(1996)researchsuggestingcapability,weusedanapproachsimilarthatinternalconstraintsmayimpacttothatemployedbyQianandLi(2003)managerialdecisionsconcerningexport-butadaptedforprivatelyheldcompa-ingevenunderfreetradeagreementnies.R&Dexpendituresareageneralconditions.Weaskedrespondentstoindicatorofafirm’sefforttoimproveitsgaugeafirm’sintentionswithrespecttooperatingprocesses,createnewprod-continuanceordevelopmentofexportucts,orimprove/modifyexistingones.strategies.TheitemswerescaledonaTherefore,weaskedtherespondentstofive-pointLikertscalewith1=stronglyindicatetheirfirm’slevelofprioryearsdisagreeand5=stronglyagree.TheR&Dexpendituresrelativetotheaveragethreestatementswere(1)exportingisalevelofthoseintheirindustry.Thedesirabletaskformyfirm;(2)myfirmisresponseitemswerebasedonafive-planningtoexport;and(3)theNorthpointscalerangingfrom1=lowestAmericanFreeTradeAgreement(NAFTA)20percentoffirmsintheindustrytohasinfluencedmyfirm’sexportdecisions.5=highest20percentoffirmsintheAnexploratoryassessmentoftheseitemsindustry.throughaprincipalcomponentfactoranalysisusingavarimaxrotationpro-AnalysisandResultsvidedaone-factorsolutionwithgoodreli-ConstructValidationabilityasmeasuredbyCronbach’salphaInthisstudy,weusedatwo-step(a=0.84).ThisresultprovidesastrongprocessofanalysisfollowingAndersonindicationthatthequestionscapturetheandGerbing(1988).Thefirststepunderlying“internationalization”con-involvedamultistageprocesstovalidatestruct.Themeanscoreofthethreeitemstheoverallconstructvalidityofthewasusedindataanalysis.measuresusedinthisstudy.ThesecondstepemployedstructuralequationFirmSize.Firmsizewasmeasuredcat-modelingtotestourhypothesesegoricallybyaskingthenumberofsimultaneously.employeescurrentlyemployedbytheAconfirmatoryfactoranalysis(CFA)firm.Thescaleforthismeasurewas1wasundertakenusingAMOS4.0totest(1–24employees),2(25–49employees),forthemultidimensionalityandconver-3(50–149employees),4(150–249gentvalidityoftheconstructs(Arbuckleemployees),and5(250–500employees).andWothke1999).TheunderlyingResearchsuggeststherearemanypurposeoftheCFAwastoprovideevi-acceptedapproachesformeasuringfirmdencefortheviabilityoftheconstructssize(numberofemployees,salesandthemeasurementmodel.Withthisvolume,ortotalassets).However,SMEsevidence,wecanhavemoreconfidencearereluctanttoprovidefinancialmeas-inthefindingsresultingfromthetesturesassociatedwithsize.Numberofofthehypothesizedmodel.TheresultsemployeesisanunobtrusivemeasureoftheCFAloadingsandreliabilityarethatiseasilycomparedacrossstudiesreportedinTable1.Allcomposite276JOURNALOFSMALLBUSINESSMANAGEMENT Table1ConfirmatoryFactorAnalysisLoadingsandMeasurementausingAMOSScalesStandardizedLoadingsReturnsa=0.860Returnontotalassets(ROA)comparedtocompetitors0.907Returnontotalssales(ROS)comparedtocompetitors0.841Growtha=0.70Totalsalesgrowthcomparedtocompetitors0.809Creationofnewproductsorservicescomparedtocompetitors0.659ProductImprovementa=0.69Creatingadistinctimageforyourcompany0.582Leadingtheindustryinnewideas0.710Developbrandidentityproducts0.640Developnewproducts0.570ProcessImprovementa=0.60Incorporatingthelatesttechnology0.570Investinginnewfacilities0.503Ownershipofpatentsorotherproprietaryinformation0.679Innovationinmanufacturingprocesses0.550EnvironmentalHostilitya=0.75Political/legal/regulatory0.621International/global0.606Economic0.664Demographic0.646Societal0.549Internationalizationa=0.84Exportingisadesirabletaskformyfirm0.926Myfirmisplanningtoexport0.949NAFTAhasinfluencedmyfirm’sexportdecisions0.674a2Modelfitstatistics:c/df=1.79(p=0.00),RMSEA=0.05,NFI=0.97,NNFI=0.98,andCFI=0.99.Allitemswerescoredfrom1to5(n=182).constructsusingmultipleitemsweredegreesoffreedom(df)aswellasrootincludedintheanalysis.meansquareerrorofapproximationMultiplecriteriawereusedtoassess(RMSEA).Inaddition,thenormedfitthegoodnessoffitfortheconstructs.Theindex(NFI),nonnormalfitindex(NNFI),resultssuggestthatthestandardizedandcomparativefitindex(CFI)fitloadingsarehighlysignificantforallindicesforthemodelwereexamined.theseitems,whichindicatesthattheThecriteriamentionedwereusedtoindi-underlyingconstructsarevalid.Follow-catethatthedatafittheCFAsatisfacto-2ingKline(1998),thedescriptivefitwasrily(c/df=1.79,RMSEA=0.05,NFI=2assessedbytheratiofoundfromcto0.97,NNFI=0.98,andCFI=0.99).ThisWOLFFANDPETT277 Table2Correlations,Means,andStandardDeviationsofStudyVariablesVariableMeanSD123456781.Growth3.440.992.Profitability3.420.930.531**3.ProductImprovement3.820.750.373**0.1424.ProcessImprovement3.350.760.250*0.1110.399**5.EnvironmentHostility3.320.560.431**0.283*0.1490.0706.Internationalization3.331.010.392**0.290*0.346**0.239*0.380**7.FirmSize2.741.480.419**0.288*0.212*0.207*0.336*0.352**8.Innovation2.921.180.499**0.271*0.403**0.354**0.314**0.250*0.334***p<.01**p<.001confirmedthedimensionalityandcon-outcomesfromtheanalysisshowanade-vergentvalidityoftheconstructsinthequatemodelbasedonfitindicespro-model(AndersonandGerbing1988;vided(Table3).FornellandLarcker1981).Theresultsfromthestatisticalanaly-Convergentvalidityisobservedwhensissupportmost(butnotall)ofthetheitemcoefficientstothelatentcon-majorpremisesofthehypothesesdevel-structaresignificant.Andersonandoped(Table3).Briefly,wefindsupportGerbing(1988)suggestthatwhentheforthehypothesizedpositiverelation-correspondingt-valuesaregreaterthanshipsbetweeninnovatorpositionand2.0,thereisevidenceforconvergentproductimprovement(p<.001);inno-validity.WithintheAMOSsoftwarevatorpositionandprocessimprovementpackage,criticalratiosaregiveninstead(p<.001);internationalizationandoft-valuesbeingreported;thecriticalproductimprovement(p<.001);inter-ratiomeasureisasimilarmeasuretothenationalizationandprocessimprovementt-value.Inallcases,thecriticalratios(p<.01);internationalizationandloadedsignificantlyonthecorrespon-growth(p<.001);environmentalhostil-dinglatentconstruct.Thesefindingsityandgrowth(p<.001);productsuggestevidenceforconvergentvalidity.improvementandgrowth(p<.001);andTable2reportsthemeans,standarddevi-growthandprofitability(p<.001).Thereations,andcorrelationsoftheconstructs.wasnosignificantpositiverelationshipWefollowedAndersonandGerbing’sbetweenenvironmentalhostilityand(1988)suggestiontoemployamultistageeitherproductimprovementorprocessprocesstoverifyconstructvalidity.Bothimprovementandbetweenprocessdiscriminantandconvergentvaliditiesimprovementandgrowth.Thelastresultweredeterminedsatisfactorilythroughaindicatesthataprocessimprovementprocessofprincipalcomponentsandorientationmaynotyieldgrowthand,inconfirmatoryfactoranalysis.turn,profitability.ConverselyaproductWeusedstructuralequationmodelingimprovementorientationdoesyieldtotestallhypothesizedrelationshipshighergrowth,andinturn,higherprof-simultaneously.Again,followingtheitability.Finally,thefindingsdemon-methodofAndersonandGerbing(1988)stratednosupportforthehypotheses278JOURNALOFSMALLBUSINESSMANAGEMENT Table3StructuralModelParameterEstimatesandGoodness-of-FitStatisticsEstimatesandStandardizedCriticalFitStatistics2bEstimateRatiosRaModelParameterscEnvironmentHostility→ProductImprovement−0.098−1.10cFirmSize→ProductImprovement*0.0160.47Innovation→ProductImprovement0.2265.34Internationalization→ProductImprovement0.2054.160.21cEnvironmentHostility→ProcessImprovement−0.170−1.86cFirmSize→ProcessImprovement0.0441.25Innovation→ProcessImprovement0.2094.76Internationalization→ProcessImprovement0.1312.570.16EnvironmentHostility→Growth0.5925.30Internationalization→Growth0.1612.50ProductImprovement→Growth0.3133.57cProcessImprovement→Growth0.1271.500.24Growth→Returns0.5097.830.26Goodness-of-FitStatistics2c/df=2.62RMSEA=0.07NFI=0.95NNFI=0.96CFI=0.97aAllparametersaresignificantexceptfortheimpactoffirmsizeonproductandprocessimprovement,environmentalhostilityonproductandprocessimprovement,andprocessimprovementongrowth.bIndicatestheproportionofvarianceaccountedforproductimprovement,processimprovement,growth,andreturns.cNotsignificant.examiningfirmsizeoneitherproductortinctionbetweenproductimprovementprocessimprovements.Figure2showsaandprocessimprovementasanorienta-graphicillustrationofthesupportedtionforgrowth.Acs(1999,pp.12–13)relationships.statedthat“theimportanceoftherela-tionshipbetweeninnovationandfirmDiscussionandgrowthisalsoclear.ThesuccessfulConclusionentrantsthatgrowthemostarethoseTheprimarycontributionofthisthatdevelopsometypeofinnovativepapertotheliteratureonsmall-firmper-activityeitherwithnewproducts,newformance,namelySMEgrowthisthedis-technologyorhumanresources.”TheWOLFFANDPETT279 Figure2aResearchModelOutcomesEnvironmentalHostilityProductImprovementFirmSizeGrowthProfitPerformancePerformanceInnovationCapabilityProcessImprovementInternationalizationaSolidlines:statisticallysignificant;brokenlines:nonsignificant.resultsofourresearchsupportthisintimesofsignificantenvironmentalhos-premiseinpart.Innovation(andinter-tility.Theresultsfromthisstudywhennationalization)thatworksthroughnewcomparedtoCovinandSlevin(1989)productandproductimprovementraiseissuesthatfuturestudiesneedtoeffortsappearstoberelatedtogrowth.examine.However,ifnewtechnologyisinter-Theresultswithrespecttointer-pretedtomeannewprocessesandnationalizationrevealbothadirectprocessimprovements,ourdatadonotrelationshiptogrowth(H9)andasupportthiselementofthepremise.relationshiptoproductimprovementThesefindingsrevealthatamong(H7).Althoughinternationalizationhadasmallbusinesses,environmentalhostilitysignificantinfluenceonprocessimprove-onlyhasadirectrelationshiptogrowthment(H8),therelationshipbetween(H6),whilethehypothesizedrelation-processimprovementandgrowthwasshiptoeitherproduct(H4)orprocessnotsupported(H3).Theresultssuggestimprovements(H5)nevermaterialized.thattheSMEinternationalizationcon-Infact,contrarytothetheorydevelopedstructseemstobeasignificantfactorearlier,thenegativerelationships(eveninexplainingproductandprocessthoughnotsignificant)betweenenviron-improvementsandgrowthasitrelatestomentalhostilityandbothproductandproductimprovement.Indeed,interna-processimprovementswerenotatalltionalizationmaybereflectiveofaformwhatweexpected.Itcouldbethatsmalloflearningorcapabilitydevelopmentbusinessmanagersbecomeverydefen-thatenablesleapingofthestagesofsivetoconserveorganizationalresourcesinternationalizationbysmallfirms280JOURNALOFSMALLBUSINESSMANAGEMENT (VerheesandMeulenberg2004;JohansencatethattheeffectsofinnovationareandVahlne1977).morecomplexthansuchageneralstate-Theresultsofthestudyalsosuggestmentmightindicate.thatinnovationplaysasignificantroleThisstudyprovidesanexaminationofinbothproduct(H10)andprocesstherelationshipsofproductandprocessimprovements(H11)forsmallbusi-innovationactivitiesandSMEperform-nesses.Thesefindingsarenotsurprisingance;however,thisstudyhasitslimita-becauseproductandprocessimprove-tions.First,thesamplewaslimitedtoamentsarelikelyduetothegreatersinglerespondent,andgeographicallytocreativityandinnovativenessofsmalloneregion.Thedesigncanbedefendedbusinesses(AcsandYeung1999).fromtheperspectivethatSMEsinaAccordingtoRomano’s(1990)research,limitedgeographicalregionfacesimilaracentralthemerelatedtothegrowthexternalenvironmentuncertainlyaswelloffirmsistheinnovativenessofsmallasinternationalizationpressures.Thebusinesses.However,basedonourfind-designalsolimitsthegeneralizabilityofings,weareinclinedtosuggestthattheresults;however,webelievethattheinnovation’simpactongrowthisevidentresultsarereflectiveofissuesfacingwhenproductimprovementmediatesSMEstoday.Researchinthefuturesuchrelationships(H2).Certainly,shouldattempttoextendthesampletomoreresearchisneededinthisareamultipleregionsandincludemultipletounderstandallthecomplexitiesrespondentsfromeachSME.Asecondinvolved.Unexpectedly,firmsizehadissuedealswiththemeasurementofnoapparenteffectoneitherproductproductandprocessimprovements.(H12)orprocessimprovement(H13)Althoughweareconvincedthatwecap-forthissampleofsmallbusinesses.turedthesedimensionsofthesefirmAlthoughotherresearchers(forexample,activities,scaledevelopmentinthisareaZahraandGeorge1999)foundsignifi-wouldbeusefulforresearchersexamin-cantrelationshipsbetweenthesizeofaingtheseimportantissuesfacingSMEs.firmandmanufacturingapproaches,ResearchshouldalsoexamineSMEourstudyfoundnosupportforsuchproductandprocessimprovementsusingrelationships.multiplesources,forexample,relevantFinally,thedatasuggestthatproductarchivalsources.improvement(H2)isassociatedwithThesefindingspresentanumberofgreatergrowthofthefirm,whileprocessinterestingopportunitiesforresearchinimprovement(H3)didnotdemonstratethisarea.Forexample,researcherssucharelationship.Analysisofthedatashouldexaminewhenmanagersarealsosuggeststhatgrowthissignificantlylikelytoimplementproductorprocessrelatedtoprofitability(H1).Theseimprovements.ThecurrentfindingsarefindingssupportAcsandYeung’s(1999)basedoncross-sectiondata;certainlyawork,whichsuggestedthattheabilitylongitudinalstudyinvestigatingthisareatoinnovateandadapttomakeproductmayfindthatthetimingofrelationshipsimprovementsislikelyduetotheisalsoanimportantconsideration.Addi-greaterinnovativenessofsmallbusi-tionally,researchersshouldexplorewhynesses.Inaddition,wesuggestthatorhowSMEswithlimitedresourcesprofitabilitywillalsoimproveasaresultchoosebetweenproductandprocessofgrowthachievedbynewproductimprovementsinvestmentdecisions.Thisdevelopment.wouldbeofinteresttoresearchersintheIntuitively,therelationshipbetweenarea.Although,werationalizedthatbothinnovationandgrowthmayseemtobe(productandprocess)areimportantforclear.Theresultsfromourresearchindi-growthandeventuallyprofitability,inWOLFFANDPETT281 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