Academic journal article Journal of Business and Entrepreneurship

The Relationship of Incremental Innovations and Performance: An Empirical Investigation of Small Business Types

Academic journal article Journal of Business and Entrepreneurship

The Relationship of Incremental Innovations and Performance: An Empirical Investigation of Small Business Types

Article excerpt

ABSTRACT

Small businesses within a stable mature industry were investigated to determine the relationship of strategic orientation and level of risk. Level of risk, for the purpose of this paper, was defined as variability of returns. The results of the empirical investigation were supportive of combination strategies as the most successful type of small business within the context of this stable industry.

INTRODUCTION

Schumpeter has had a substantial influence on the literature dealing with the role of new technology on competition. But he emphasized revolutionary technological change that revamps the nature of competition - "competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives" (Schumpeter, 1950: 84). More recently, however, research has concentrated on the importance of incremental technological innovations (Abernathy, 1978; Nelson & Winter, 1982; Tushman & Anderson, 1986; Tushman & Nelson, 1990). Incremental process and product innovations call for considerable creativity and skill that culminate in a higher level of competition with significant ensuing consequences for industry and business performance (Henderson & Clark, 1990). These industries are often the ones in which small businesses must compete - fragmented industries.

In a recent article, Jackson, Watts and Wright (1993), articulated a strategic typology for small businesses. It was suggested within their work that small businesses could be classified using a correlation with the well known typology developed by Michael Porter (1980). The relationship was: differentiation focus = entrepreneurial firms; low cost focus=marginal firms; and, combination low cost/differentiation focus = successful small businesses. At the heart of their reasoning was the concept of risk as defined by variability of returns. Their logic held that both high and low levels of innovation as characterized by entrepreneurial and marginal small businesses respectively would have higher levels of variability of returns, and, therefore, have higher levels of risk. On the other hand, firms that were able to balance innovation with cost controls (successful small businesses) would have lower variability of returns.

The purpose of this article will be to empirically explore this reasoning within the small business community. To remove the influence of major technological discontinuity (Weinzimmer, Robinson & Fink, 1994) a stable mature industry was selected for analysis. This industry - the paints and allied products industry - is typically characterized as one involved with incremental rather than major change. It is also one that experiences both product and process innovations which will allow for a better understanding of all strategic groups.

To accomplish the goal of the paper, the literature relating to the concept of innovation and risk will be explored. Next, the method of the study will be specified. The results of the study are then discussed. Finally, limitations and suggests for future research are presented.

LITERATURE REVIEW AND PROPOSITIONS

Technological innovations are not in their final form when they emerge. Rather, they continue to develop in internal and external parameters that "rely on each other for synergies to achieve full potential" (Schroeder, 1990:26). Viewed in this context, most innovations evolve from borrowing from internal and external sources rather than from invention (Cohen & Levinthal, 1990). Internal sources may include a business* functional areas borrowing from each other. External sources may encompass the business' industry, other industries, as well as government and university sources.

As may be expected, incremental technological innovations are not simultaneously adopted by all the businesses in the industry (Schroeder, 1990). …

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