Academic journal article Journal of Small Business Strategy

Types of Product Innovations and Small Business Performance in Hostile and Benign Environments

Academic journal article Journal of Small Business Strategy

Types of Product Innovations and Small Business Performance in Hostile and Benign Environments

Article excerpt


The relationship between innovation and performance has been widely studied. In addition, many studies have examined moderating effects of types of competitive environments on this relationship. However, little work has been done to examine how specific types of product innovation strategies are related to performance in hostile and benign environments.

Using results from a survey of a sample of small businesses, this paper used regression analysis to examine how degree of change in new product offerings and number of new product lines were related to satisfaction with financial performance. While neither type of innovation was related to satisfaction with performance in benign environments, the number of new lines developed was positively related to satisfaction with financial performance in hostile environments. The results from this sample indicate that the strategy of innovation through development of more new product lines may be preferable to developing dramatic innovations for small businesses in a hostile external environment.


Innovation has been identified as a key source of competitive advantage for small firms (Changhanti & Changhanti, 1983; Figenbaum & Karnani, 1991; Meredith, 1987). Innovation has the potential to create new markets or change existing markets to create new patterns of competition and consumer behavior (Brown, 1992). Through innovation, small firms may gain first mover advantages in good or service markets (Carpenter & Nakamoto, 1989; Kallenberg, 1986), create markets and customers (Berthon, Mac Hulbert, & Pitt, 2004), respond in a timely manner to moves by competitors (Covin & Slevin, 1989), or more effectively differentiate goods or services on offer (Miller & Toulouse, 1986). Thus, innovation may contribute directly to profitability and long term viability of businesses.

Innovation by firms has been widely examined. Studies have typically focused on a general innovation strategy, where innovation is seen as a complex set of interacting factors which together affect financial performance (e.g., Covin & Slevin, 1989). However, little work has been done to evaluate how specific types of product innovation strategies affect financial performance in small businesses. Innovation in small firms is different than innovation in large firms (Verbees & Meulenberg, 2004). Unlike larger firms, small businesses typically have limited resources and may have to choose to pursue a limited number of innovative tactics rather than pursuing a broadbased, multi-faceted innovative strategy (Firth & Narayan, 1996).

After choosing a product innovation strategy, firms may choose to focus their efforts on developing a large number of product innovations, or they can focus their efforts on developing innovations that differ a great deal from present product offerings of the firm. deBrentani (2001) noted that many studies have overlooked the fact that degree of innovativeness of a product may be a key variable in the relationship between innovation and a firm's financial performance.

Product innovations may be dramatic, or they may be incremental (Garcia & Calantone, 2002). Dramatic product innovations vary greatly from current products; may be very costly to produce, requiring new equipment and technology (Garcia & Calantone, 2002); and typically require businesses to educate consumers as to the differential advantage of the new product, as well as how the product should be used. Dramatic product innovations may therefore require a substantial investment in promotional support (deBrentani, 2001). Substantial customer resistance may result in product failure and devastating losses for a small business.

Incremental product innovations may differ only slightly from existing products (Garcia & Calanatone, 2002). Cost of production tends to be much lower than for dramatic product innovations. Marketers need only convince the customer that the product is better than its competitors, rather than educate the customer on how to use the product, lowering the cost of promotional efforts. …

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