Similarities and Differences in the Strategic Orientation, Innovation

Patterns and Performance of SMEs and Large Companies

Dr. Kamalesh Kumar, University of Michigan-Dearborn, Dearborn, MI

ABSTRACT

This study examined the similarities and differences in the strategic orientation and innovation patterns of
SMEs and large companies and investigated their implications for company performance. Data collected over a two
year period was analyzed to determine the strategic orientations of SMEs and large firms, in terms of the Miles and
Snow typology. Results showed that while large firms operated with a “prospector” orientation, the vast majority of
SMEs possessed a “defender” or “reactor” orientation. Results also showed that, while in general, SMEs had taken a
defensive posture, introducing products that involve low novelty of innovation, a small number of SMEs were able
to innovate successfully in all product categories. An ex post facto investigation revealed that these firms had, in
effect followed an "open innovation model" (Chesbrough, 2003) that involve the use of external actors and sources
to help them achieve and sustain innovation. Implications of the finding for SME's competitive strategy and future
research are discussed.

INTRODUCTION

A survey of the strategy literature provides rather unequivocal evidence that a company’s strategic
orientation plays a major role in its innovativeness and that innovation is a key driver of competitiveness and
company performance. But there appears to be a relative lack of research that has examined the similarities and
differences in the strategic orientation, innovation pattern and performance of small (companies with less than 250
employees) and medium (companies with less than 500 employees) enterprises (SMEs) and large companies within
a single industry (Laforet, 2008; O’Regan and Ghobadian, 2005). Differences in the strategic orientation and
innovativeness of the SMEs and large companies become particularly relevant, when these companies are operating
in a dynamic market because the capability to adapt to changes in market can have a major effect on the profitability
and even survival of companies.

Purpose of the present study

The purpose of the present study is to examine the similarities and differences in the strategic orientation
and innovation patterns of SMEs and large companies within the same industry and to investigate their implications
for company performance. Given the problem of balancing the benefits and costs of adaptability, and the fact that
SMEs are known to approach changes in the industry environment in a tactical rather than strategic way (Laforet,
2008) it is possible that at one extreme, some SMEs may create a strategic orientation aimed at adapting to market
changes, but at a significant cost, while others may focus internally on a narrowly defined product-market, but with
the accompanying risk of failure to adapt to market changes, and the prospect of declining sales and profitability.

The findings of this study will make contributions to both theory and practice. From a theoretical
perspective, findings of this study should fill in a gap that currently exists in the literature by understanding the
similarities and differences in the strategic orientation, innovation pattern and performance of SMEs and large
companies in a dynamic industry environment. Results of this study will also provide some insight to managers of
new food product development, concerned about low rate of innovation and high rate of failure of new food
products (Boesso, Davcik and Favotto, 2009).

INDUSTRY AND COUNTRY SETTING FOR THIS STUDY

This study is based upon sales data collected every two weeks over a two year period, relating to yogurt
products introduced in the past five years in Italy. Recent product innovations in the Italian yogurt market is
characterized by increased emphasis on the health benefits of the product and introduction of new kinds of yogurts
that offer health benefits that reach beyond basic nutrition. Nearly all the competing companies have come up with
products that involve various levels of novelty. It is common in studies of innovation to examine the differences in
innovations based upon the degree of novelty. Also, a variety of empirical studies have shown that the level of
novelty of an innovation strongly influences the company performance (Garcia and Calatone, 2002). Determining
the level of novelty associated with new product introductions in yogurt is particularly important given this study’s

The Business Review, Cambridge * Vol. 16 * Num. 2 * December * 2010 50

focus on determining company’s strategic orientation and the relationship between innovation patterns and company
performance.

Following the guidelines provided by AcNielsen and other industry experts, the yogurt products introduced
during the past five years in the Italian market was classified into for distinguishable categories (AcNielsen, 2005).
In the first group are the “Natural Wellness” products that focus on reduced harmful ingredients (such as fat or
sodium) and/or highlight healthful components (such as vitamins and minerals). Most of the products offered in this
category largely involve redevelopment of old products to create new products, together with better labeling and
highlighting of the health benefits. In the second category are products labeled as “Organic”. These products claim
not to contain certain kinds of ingredients (such as growth hormones, antibiotics, genetically modified products etc),
and thus meet the organic product standards. Once again the level of innovation novelty associated with such
products is rather low. Products classified as “Natural Functional” (the third category) are enhanced or fortified with
added supplements such as vitamins or acidophilus cultures/probiotics and claim to promote health benefits. These
products are based on general research and knowledge and involve reformulation of existing ingredients and
manufacturing processes. Finally, products in the “Clinical Functional” category make claims based upon active
ingredients over which the company may have proprietary rights and the benefits of these ingredients have been
tested either in the company’s own laboratories or by external research institutions in independent clinical studies.
These products represent some of the most significant innovations that have occurred in the yogurt industry in the
recent years.

STRATEGIC ORIENTATION, INNOVATION AND PERFORMANCE

Strategic orientation refers to a pattern of responses that an organization makes as it responds to its
operating environment to achieve enhanced performance and competitive advantage (Hambrick, 1983). The Miles
and Snow typology focuses on the “dynamic process of adjusting to environmental change and uncertainty” (Miles
and Snow, 1978, p. 3), and effectively takes into consideration the tradeoff between external and internal factors
(Mckee et al., 1989). Since this study proposes to examine the differences in the innovation patterns of SMEs and
large companies based on data related to sales of newly introduced products, therefore, using the Miles and Snow
(1978) classification typology appears to be the most suitable framework. According to Miles and Snow (1978)
typology, “prospectors” are organizations with strong concern for product and market innovation; they maximize
new opportunities and pioneer innovations to meet market needs. “Defenders”, by contrast, have narrow product-
market domain, conduct little new product development, avoid unnecessary risks and focus on efficiency of existing
operations. “Analyzers” are hybrid of prospector and defender types. They use efficiency in stable product market
segment and innovate in dynamic product markets. Finally, “reactors” are not a stable strategy type, since they are
not able to respond effectively to environment, making adaptations only when forced to do so by the environmental
pressures.

Strategic Orientation and Innovation Patterns: SMEs vs. Large Companies

It has been noted that innovation is one of the key ways by which companies can adapt to and manage their
environments (Cohen and Cyert, 1973). However, all firms, in the same industry or even the same industry
segment, are known not to respond to the environmental changes in the same way (Garcia-Pont and Nohria, 2002).
One may find that some firms anchor their reactions to the changes in the environment primarily to the behaviors of
other firms who are strategically similar to them, while others may adopt a more independent stance, such as a
strong emphasis on new product or market innovation. Since SMEs have their own unique needs, and since their
decision making processes often differ significantly from those of larger firms (Shrader et al., 1989), this would
imply that SMEs and large firms will address the opportunities and threats perceived in the industry environment in
their own unique ways. Therefore, it is only logical to conclude that the strategic orientation of SMEs, as
determined by the way in which they change their products and markets, will differ from those of larger firms in the
same industry.

Based on available information regarding the general attitude of Italian SMEs towards R&D and innovation
one could reasonably anticipate their response patterns to the environmental change. Data provided by OECD
(2005) shows that Italian SMEs spend 1.1% of the GDP on R & D versus the European average of 1.8 percent and
OECD average of 2.3 percent. Given the propensity for low investment aimed at innovation, one would expect that
the vast majority of the Italian SMEs may tend to focus on a narrowly defined product market, creating a defender
orientation, while some in the minority may aim their innovation in terms of balancing the benefits and costs
associated with innovation efforts that help them better adapt to the environment, giving them analyzer orientation.

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On the other hand, research shows that larger organizations generally tend to have greater slack—“cushion of actual
or potential resources which allows…to initiate changes in strategy with respect to the external environment”
(Burgeois, 1980, p. 30). One would expect such organizations to make greater efforts aimed at adapting to market
changes, giving them a prospector orientation. Accordingly, it is hypothesized that:

H1 (a) More large firms will show a prospector orientation than SMEs.
H1 (b) More SMEs will show a defender and an analyzer orientation than large firms.
H1 (c) Reactor orientation will be limited to SMEs.

Innovation Orientation and Performance

Miles and Snow (1978) had initially suggested that none of their three stable strategy types (prospector,
defender and analyzer) would inherently exhibit superior performance. However, Hambrick (1983) found
differences in the performance of organizations classified as different innovation types. More recent research has
also shown a link between an organization’s strategic orientation, innovation capability and performance (Hughes
and Morgan, 2008). These findings would suggest that differences in the strategic orientations of SME and large
firms will also result in differences between the performance of SMEs and large firms. Since the earlier hypotheses
had predicted that more large firms will show a “prospector” orientation than SMEs, it appears logical to conclude
that large firms will have higher sales volume and will be able to command higher prices than SMEs in product
categories that involve considerable novelty of innovation. This is because the “prospector” organizations are able to
innovate better, devote more resources to products that meet the market needs and spend more on marketing related
activities (McDaniel and Kolari, 1987; O’Regan and Ghobadian, 2005) relative to other strategy types.

H2 (a): Large companies will have higher sales volume in the product categories that involve higher novelty of
innovation (“Clinical Functional” and “Natural Functional” products) than SMEs.

H2 (b): Large companies will be able to command higher prices in the product categories that involve higher
novelty of innovation (“Clinical Functional” and “Natural Functional” products) than SMEs.

Hypotheses 1 had predicted that more SMEs will show a defender and an analyzer orientation than large
firms and that reactor orientation will be limited to SMEs. While firms with a “defenders”, orientation will have a
narrow product market scope, a lower level of cost and therefore, a greater ability to compete aggressively in their
focused product category, firms with an analyzer orientation will offer more products across various product
categories, involving both high and low novelty of innovation. As such, in terms of overall performance comparison
between large firms and SMEs, one would expect that the competitive advantage of SMEs will be largely limited to
the product categories that involve lower novelty of innovation.
H2 (c): SMEs will have higher sales volume and sales revenue in product categories that involve lower novelty of innovations
(Natural Wellness and Organic products) than large firms.

Finally, one could argue that differences in strategic orientation and innovativeness of SMEs and large
companies are related to company type. As noted earlier, building strategic adaptability requires financial resources
and organizational support mechanisms-both of which are known to be relatively lacking among SMEs (O'Regan
and Ghobadian, 2005). Thus even while SMEs may be aware of the need for strategic adaptation and innovation,
they may suffer from the "liability of smallness", which would preclude their presence from product segments that
command higher price, thus making them settle for lower profitability (Laforet, 2008). Large companies on the
other hand devote more resources to products that meet the market needs and spend more on marketing related
activities. It is, therefore, hypothesized that:

H3: Company type (SMEs vs. large company) will be related to the overall pricing ability of a firm.

METHODOLOGY

Database
The data for this study consisted of 592 yogurt products that were introduced into the Italian market during
the past five years by the entire population of 62 companies that sell yogurt in Italy. Data was sourced from
AcNielsen, Italy, using their proprietary Consumer Panel Solutions and Homescan © research tool. The data set
included 107,000 actual yogurt purchases made by 10,282 Italian families, during a two year period from July 2005
to June 2007. According to AcNielsen, Homescan © consumer panel, “has emerged as the premiere consumer

The Business Review, Cambridge * Vol. 16 * Num. 2 * December * 2010 52

purchasing panel in the world, providing key insights in 27 countries, based on consumer purchase information from
over 260,000 households globally. The AcNielsen Homescan © panel of Italian families used for collecting data that
was used in this study involved sampling techniques that makes the consumer panel representative of the general
Italian household population.

Data Analysis
Data analysis for this study was conducted in three phases. Phase one involved the use of cluster analysis,
with the derived clusters serving as the basis for strategic orientation of the firms. The SPSS two-step cluster
analysis program was used to generate the clusters. This program uses an agglomerative hierarchical clustering
method and is capable of handling both categorical and continuous variables. The second phase of the data analysis
examined differences between SMEs and large companies in terms of type of product innovation, sales volume,
sales revenue, and product pricing. Finally, to test the relationships between company type (SMEs vs. large
companies), types of product innovation and company performance (as measured pricing ability), an OLS regression
was run, where price charged across all product categories was the dependent variable; company type and types of
product innovation were independent variables; and quantity purchased and promotional offers made by companies
were control variables. Controlling for the quantity purchased and promotional offers made by companies was
important, as they can influence the quantity purchased and price paid for the products.

Price Charged= C + β1 Type of Product Innovation+ β2 Company Type + β3 Quantity purchased + β4 Promotion + ε

RESULTS AND DISCUSSION

Table 1 presents the result of the cluster analysis for the 62 companies that formed the entire population of
companies that sell yogurt products in Italy. The analysis shows that 8 companies (13% of the total population)
have a “prospector” orientation, 9 companies (15%) follow an “analyzer” orientation, 28 (45%) of the companies
possess a “defender” orientation and finally, 17 companies (27%) were noted to operate with a “reactor” orientation.
In terms of company type, all of the large companies possessed a “prospector” orientation, while among the SMEs 9
possessed an “analyzer” orientation, 28 a “defender” orientation and 17 a “reactor” orientation.

These results provide strong support for hypotheses 1 (a) which had predicted that more large firms will
possess a “prospector” orientation than SMEs, and for hypotheses 1 (b) which had predicted that more SMEs will
show a defender and analyzer orientations than large firms. Results of cluster analysis also show that the reactor
orientation is limited to SMEs, as predicted by hypothesis 1 (c). The characteristics associated with the four clusters
derived in this study appeared to closely follow the characteristics described in the Miles and Snow typology (1978).
Firms with a “prospector” orientation clearly appeared to pioneer innovations to meet market needs as evidenced by
their offering of 112 products in the “Clinical Functional” product category vs. 31 and 5 product offerings by
companies with “analyzer” and “defender” orientations. The average price charged for products, sales volume and
sales revenue of firms in this strategic group also showed that these firms were able to maximize opportunities
associated with this new product category.

True to the typology, companies with an “analyzer” orientation offered products across the board, with a
significant number of products in categories that involve considerable novelty of innovation (“Clinical Functional”
and "Natural Functional" products) while maintaining a strong presence in other product categories. Firms with a
“defender” orientation appeared to have a narrow product domain, concentrating on “Organic” and “Natural
Functional” product categories. Finally, “reactor” firms offered the least number of products, almost all of which
involved low novelty of innovation. The fact that they were unable to respond effectively to new market
opportunities was evidenced by the relative dearth of products in categories that involve high novelty of innovations.
A review of their sales pattern across various product categories revealed that these firms largely offered products
that may be viewed as commodities by consumers. Although these companies may be able to survive as long as the
market for these product segments is large enough to support multiple players, but the slow growth rate and lower
price of products in this category raises doubts about their long-term viability.

Performance comparison of SMEs and large companies in terms of average sales volume, sales revenue,
and price charged for products in each product category is provided in Table 2. Results presented in this table test
hypotheses 2 (a) through 2 (c). Results show that large firms dominate the “clinical functional” product category in
terms of sales (408.54 vs. 138.75 for SMEs), sales revenue (€ 3,419.8 vs. €756.99 for SMEs) and pricing ability (€
5.68 vs. €5.08 for SMEs). However, SMEs appear to be have a similar dominance in the “natural functional”

The Business Review, Cambridge * Vol. 16 * Num. 2 * December * 2010 53

product categories, which is next in terms of innovation novelty. SMEs account for nearly ninety percent of the
average sales volume (42.96 vs. 4.35 for large firms) and sales revenue (€ 179.11 vs. €15.87 for large firms). SMEs
are also able to command a much higher price (€4.69 vs. € 3.63). When viewed together with the cluster analysis
results presented in Table 1, one can see that this product segment is dominated by SMEs with a defender
orientation. These results provide only partial support for hypotheses 2 (a) and 2 (b). It appears that while large
firms dominate the product category that involves the highest level of innovation novelty, the SMEs, dominate the
product category that follows next in terms of novelty of innovation. It is, however, worth noting that the “clinical
functional” product category is over twelve times larger (€290,544 vs. €22,749) than the natural functional product
category, providing the large companies with a commanding dominance of the market. Notwithstanding the
reasons, only a small number of SMEs had successfully capitalized on this growth opportunity.

Table 3 presents the results of the OLS regression designed to test hypothesis 3 which had predicted that
company type will be related to overall pricing ability of the firm. Results of the regression analysis show that the
ability to charge higher price is only influenced by the type of product innovation (coefficient .34, sig <.01).
Therefore, no support is found for hypothesis 3. This implies that the overall pricing ability is only determined by
the type of product innovation regardless of the company type. This unexpected finding may have important
implications for the SMEs ability to compete against large firms.

CONCLUSIONS AND MANAGERIAL IMPLICATIONS

Every organization, SMEs and large firms alike, has its perceived view of the operating environment, and
the strategic orientation adopted by the firm follows from this view. The strategic orientation, in turn, determines
the firm’s response to changes in the industry environment, and becomes a primary driver of the extent and kinds of
innovation efforts made by the organization. Results of this study show that the vast majority of SMEs have taken a
defensive posture in view of the industry changes. Based on the above results the overall conclusion regarding the
SMEs ability to compete against the large firms is rather obvious: SMEs suffer from important competitive
disadvantage in the product category that involved highest novelty of innovation and have highest growth and profit
potential. Interestingly however, SMEs appear to enjoy a clear competitive advantage in the product category that
follows next in terms of novelty of innovation, but has considerably smaller market. As such, there appears to be a
marked divergence in the approach adopted by the SMEs and large companies. One would be inclined to believe
that while large companies have capitalized on the most significant market opportunity, the majority of SMEs have
chosen to retreat to the next best available option.

A close scrutiny of the nature of innovation efforts involved in “clinical-functional” and "natural
functional" product categories provides an understanding into the potential reasons behind this divergence. Products
in the "clinical functional" category involve the use of active ingredients over which large companies have
proprietary rights, and the health related claims of these products are often validated by external, independent
research institutions. While products in the "natural functional" product category are based on general research and
knowledge and involve reformulation of existing ingredients and manufacturing processes. It, therefore, appears
reasonable to believe that the resource constraints faced by SMEs may have created encumbrances that prevented
them from capitalizing on this opportunity. Such an argument finds support in the "liability of smallness"
observations made by previous researchers. However, results of regression analysis had failed to provide support for
the fact that company type was related to company performance. This finding, when viewed with other findings of
this study created a paradoxical situation in which the SMEs appeared to suffer from a competitive disadvantage
compared to large firms, yet it was the nature of products innovation rather than the company type that appeared to
matter for company performance.

In order to find potential explanations for this dichotomy the researchers began an investigation into what,
if anything was done differently by those SMEs that did successfully introduce products in the Clinical Functional
product category. While not a part of the original study; this investigation appeared to be critical in understanding
the findings of this study. Although finding documented information about small companies is always a difficult
task, it was observed that many of the successful product introduction by SMEs involved the creation of some sort
of cooperative relationship with an external partner (such as a pharmaceutical company) or acquisition of proprietary
rights or patents from other value chain partners. In essence, these SMEs had created their own strategy to
overcome the "liability of smallness" in order to make successful strategic adaptations.

The Business Review, Cambridge * Vol. 16 * Num. 2 * December * 2010 54

 Further review of the research literature on innovation revealed that the innovation pattern of these SMEs
followed what Chesbrough (2003) has described as the “open innovation model.” Companies that follow the open
innovation process adopt strategies that involve the use of external actors and sources to help them achieve and
sustain innovation. Recent studies have found that success of this model goes well beyond high technology, into
industries such as automotive, banking, finance, insurance, health care and consumer packaged goods (Laursen and
Salter, 2005). Although ex post facto in nature, but based on the results and investigative findings of this study it
would be reasonable to conclude that the way in which SMEs perceive and attempt to deal with their environment
has an important bearing on their innovation orientation and performance. However, since the data used in this
study did not include any information about resource availability, resource deployment, strategic decision making
process or organizational mechanism used to foster innovation, one can not be certain about this conclusion. But
however tentative, such a finding has important implications for SMEs attempting to make successful strategic
adaptations in the presence of large companies and needs to be examined in a more detailed and systematic way in
future studies.
Table 1 Results of Cluster Analysis: Strategic Orientation
Cluster Variable Prospectors Analyzers Defenders Reactors Total
(n=8) (n=9) (n=28) (n=17) (N=62)
Company Type
Large 8 0 0 0 8
SMEs 0 9 28 17 54
Number of Products 166 187 153 86 592
Natural Wellness 15 70 11 59 155
Organic 4 56 51 20 131
Natural Functional 35 30 86 7 158
Clinical Functional 112 31 5 0 148
Average Price* € 5.08 €4.81 €4.80 €3.86 --
(1.30) (1.30) (1.32) (0.59)
Sales Volume (in Kg)
Natural Wellness 662 2,508 74 3896 7,140
Organic 44 1,478 514 917 2,953
Natural Functional 153 2,392 2,438 492 5,475
Clinical Functional 45,757 4.992 3 0 50,751
Sales Value (in €)
Natural Wellness 3,169 10,479 280 16,558 30,486
Organic 135 6,629 2,194 3,379 12,337
Natural Functional 561 8,501 12,333 1,354 22,749
Clinical Functional 264,546 25,986 12 0 290,544
*standard deviations are in parenthesis.

Table 2 Company Type and Average Sales Volume, Sales Revenue, and Price in each Innovation Category
Innovation Natural Wellness Organic Natural Clinical Functional Total
Category Functional
Large SME Large Large Large Large
Company Size SME SME SME SME
Firm Firm Firm Firm Firm
Average sales
46.13 47.66 22.90 11.00 42.96 4.35 138.75 408.54 46.04 284.24
volume in Kg
Difference -1.53 11.90 38.61 -269.79 -238.2
t (n=592) -0.80 2.09* 5.43** -4.43*** -5.83***
Average sales in € 194.47 227.93 96.08 33.85 179.11 15.87 756.99 3,419.8 204.91 1,636.65
Difference -33.46 62.23 163.24 -2,662.8 -1,431.7
t (n=592) -0.34 3.17** 5.83** -4.73*** -6.05***
Average per Kg
4.32 4.45 4.63 3.06 4.69 3.63 5.08 5.68 4.58 5.08
price in €
Difference -0.13 1.57 1.06 -0.60 -0.50
t (n=592) -0.31 4.52** 4.28** -2.42** -4.13***
* significant at <.10 ** significant at <.05 *** significant at <.01

In a study conducted a few years ago it was noted that senior managers of SMEs, “tend to have a shorter
tactical rather than longer term strategic outlook” (Stewart-Knox and Mitchell, 2003). In a prescriptive way one can
conclude that SMEs need to develop a greater awareness of and willingness to adapt to the changes in the industry
environment, and in the process should not become focused too internally. To succeed in a dynamic industry
environment SMEs need to become more receptive to new product innovation opportunities and be able to act on
them by making the boundary between their firm and surrounding environment more porous (Chesbrough, 2003).
While one cannot entirely discount the importance of resource availability in a company’s innovation capability; the

The Business Review, Cambridge * Vol. 16 * Num. 2 * December * 2010 55

ability of SMEs to foster innovation has to begin with organizational supporting mechanism and decision making
processes that encourage them to open behavior in their efforts to capitalize on the innovation opportunities.
Table 3 Regression Results of the Determinants of Price Charged
Dependent Variable Price Charged
Independent Variables Coefficients
(Constant) 4.20 ***
(.27)
Innovation category .34 ***
(.05)
Company type -.15
(.13)
Sales volume .01
(.00)
Promotion -.02
(.00)
F 15.25 ***
R2 .10
N 592
*** significant at <.01, standard errors are in parenthesis

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