SME performance: the role of networking, innovation breadth, and business model design

Abstract

Because small and medium-sized enterprises (SMEs) are pivotal to the health and vibrancy of economies, it is crucial for researchers to understand the factors that significantly underlie SME performance. Two of the most widely identified antecedents to SME performance are innovation and networking. However, despite widespread attention, the theoretical and empirical status of the relationships between innovation, networks and SME performance remain uncertain. Some researchers note that claims regarding a direct positive relationship between innovation and networks with performance fail to adequately account for the variables that mediate this relationship. In contrast, while much research has been undertaken into the performance benefits of innovation and networks, the exponential increase in the number of publications heralding the performance benefits of business model design and business model innovation received very scant empirical support, almost non-existent for SMEs. Business model design is seen as a powerful mechanism for unlocking and enhancing the value of business processes, including innovation. Empirical evidence presented in this thesis tangibly supports this assertion and thus creates a more solid foundation for future development of the business model view of the firm. The purpose of this thesis, comprising four studies, is to theorise and research the nature of the relationship between innovation breadth, networks and business model design with SME performance. The central research question of this thesis asks: How do innovation breadth, networks and business model design relate to SME performance? Study One systematically reviews a large sample of SME growth and performance literature to identify and interpret emergent concepts, themes, trends and gaps. Study One backgrounds the three empirical studies that that follow to argue, using Resource-Based Theory, that the resources required for developing competitive advantage are both physical and intangible; of the two, intangible resources have the greatest strategic potential. In other words, the thesis finds that SMEs lacking physical resources could develop more sustainable competitive advantage by relying more heavily on leveraging path dependent, socially complex, and causally ambiguous intangible resources. Social capital and technological competence, associated with networks and innovation, represent highly desired intangible resources. Business model design organises these resources to create value for the customer. Therefore, innovation across the elements of the business model when designing or reconfiguring the SME’s business model acts as dynamic capabilities that enhance SME performance. The systematic literature review is followed by three empirical studies that use longitudinal and cross-sectional datasets of Australian SMEs. Study Two introduces the concept of innovation breadth, as the number of distinct types of innovation that firms use, or their innovation diversity, and examines the linearity and temporality of its relationship with SME performance. This examination both confirms it to be positive and provides evidence of the diminishing and negative returns of innovation breadth. Such diminishing and negative returns are directly related to increased innovation breadth and the time lag between innovation implementation and performance measurement. Studies Three and Four examine the mediation effect of innovation breadth on the relationship between networks and SME performance (Study Three) as well as the mediation effect of business model design themes on the relationship between innovation breadth and SME performance (Study Four). The combined findings from the last three studies provide sound support that maintaining strong heterogeneous network ties will improve SME performance, but only when the social capital embedded in such network relationships supports innovation breadth. In addition, persistent implementation of moderate levels of innovation breadth would optimise SME performance, but the performance benefits of such innovations would only be unlocked if it is implemented within a coherent business model, designed around the novelty or transaction efficiency themes as primary value drivers. Collectively, the four empirical studies contribute to the SME innovation field by more precisely explaining the relationships between innovation breadth, networks, business model design and SME performance. This thesis therefore highlights and confirms the importance of intangible assets for SME performance and also accounts for the intermediate processes that translate these resources into SME performance by showing that innovation breadth and business model design act as dynamic capabilities. SMEs are advised to focus on building network relations that foster innovation breadth, to focus their innovation activities during any given year by limiting innovation diversity and to focus the design of their business models around either the novelty or efficiency value themes. Such knowledge offers guidance for SME managers who believe that all networking and innovation investments will improve their SME performance. Given the potential costs and risks of networking, innovation and business model design activities to SMEs, practitioners and policymakers are informed about the potential dangers of overextending limited resources and capabilities. A better understanding of how wide SMEs should cast their innovation net, how to construct optimal network structures, and how to design business models along dominant value themes may therefore greatly benefit theory, policy and practice.