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Business Model Innovation and SMEs Performance — Does Competitive

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Business Model Innovation and SMEs Performance — Does Competitive

Advantage Mediate?

Article in International Journal of Innovation Management · February 2018

DOI: 10.1142/S1363919618500573

CITATIONS READS

132 5,555

1 author:

Muhammad Anwar
Universität Witten/Herdecke
37 PUBLICATIONS 655 CITATIONS

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SMEs Internationalization; CPEC Perspective View project

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International Journal of Innovation Management
Vol. 22, No. 7 (October 2018) 1850057 (31 pages)
© World Scientific Publishing Europe Ltd.
DOI: 10.1142/S1363919618500573

BUSINESS MODEL INNOVATION

AND SMEs PERFORMANCE — DOES COMPETITIVE
ADVANTAGE MEDIATE?

MUHAMMAD ANWAR
International Islamic University Islamabad
H.10, Islamabad (44000), Pakistan
m.anwar.ims@gmail.com

Published 15 February 2018

In the era of globalisation and dynamic market, firms look for competitive advantage and
survival using different sources and resources. Prior studies have indicated that Business
Model Innovation (BMI) is a core driver for firm’s survival and superior performance
especially in growing industries. However, the role of BMI has been discussed theoreti-
cally and exploratory while empirical studies are still lacking. Hence, this study examines
the importance of BMI in SME performance and the mediating role of competitive ad-
vantage. Data were collected through structured questionnaires using a sample size of 303
manufacturing SMEs operating in the emerging market of Pakistan. Hypotheses were
tested through Structural Equation Modelling (SEM) using AMOS.21. The results indicate
that BMI has a significant positive impact on competitive advantage and SME perfor-
mance. Competitive advantage partially mediates the relationship between BMI and SME
performance. Firms are required to create an effective business model to acquire com-
petitive advantage and superior financial performance. Implications for practice have been
discussed.

Keywords: Business model innovation; competitive advantage; SME performance.

Introduction
In today era of competitive market and globalisation, industries undergo dramatic
changes (Kim and Min, 2015; Sun et al., 2016; Remane et al., 2017). Thus, firms
have started search for unique strategy and innovative tactics to survive in the
markets (Sun et al., 2016; Carayannis et al., 2014). In such circumstance, Business
Model Innovation (BMI) works as a core driver to gain competitiveness and

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superior performance (Carayannis et al., 2014; Kim and Min, 2015; Evans et al.,
2017; Cucculelli and Bettinelli, 2015). BMI is a recently emerged term and authors
have explained it with different concepts and dimensions. However, the core
theme of BMI links to firm’s competitive advantage and superior performance
(Casadesus-Masanell and Ricart, 2010; Zott and Amit, 2008; Kim and Min, 2015;
Ranjith, 2016; Evans et al., 2017). For instance, Teece (2017) recently defined
BMI as an architecture that demonstrates how a firm can create and deliver values
to customers. Simply, it refers to “how business operates and create values for
shareholders” (Cosenz and Noto, 2017). However, it should be noted that unlike
product and service innovation, BMI pertains to different innovative activities of a
firm such as process, structure, delivery and interaction that are performed to gain
sustainable competitive advantage and superior performance.
BMI is the arena that has received ample attention of recent scholars and
academia (Clauss, 2017; Futterer et al., 2017; Cosenz and Noto, 2017; Foss and
Saebi, 2017; Velu and Stiles, 2013). Many top management’s journals have given
opportunity to discuss BMI. However, empirical research on the outcomes of BMI
is still rare (Schneider and Spieth, 2013; Carayannis et al., 2015; Futterer et al.,
2017). Despite, it is doubtless that BMI plays a significant role in the achievement
of sustainable competitive advantage and superior financial performance in dy-
namic markets (Casadesus-Masanell and Ricart, 2010; Osterwalder et al., 2008).
Firms with proactive BM capture and generate higher value in dynamic markets as
compared to reactive BM (Hacklin et al., 2017).
This study addresses the concept of BMI towards competitive advantage and
performance of SMEs operating in the emerging market of Pakistan. In addition,
this study aims to provide ample evidence for supporting Resource-based View
Theory (RBVT) and Schumpeter (1934) theory of economic development. For
instance, it is scrutinised that BM significantly contributes to competitive advan-
tage of the firms operating in emerging markets (Ranjith, 2016). However, studies
have ignored to examine the mediating role of Porter (1980) competitive strategy
(differentiation and cost leadership strategy) and it is rare to find an empirical study
of this nature in SMEs. This study answers the questions “Does BMI influence
competitive advantage and SME performance? and Does competitive advantage
mediate the relationship?”. The findings are beneficial for owners and managers of
SME who are looking for competitive advantage and superior performance.
The first section of the study discusses about the key terms including BMI,
competitive advantage and SME performance. The next section discusses about
theoretical background followed by hypothesis development. In the last section,
methodology and data analysis have been discussed.

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 BMI and SMEs Performance

Literature Review
Business model and business model innovation
Schumpeter (1934) differentiated among five types of innovations: innovation
about products, innovation about production’s methods, innovation about supply’s
sources, exploitation of innovative markets, and innovative ways to organise
business. However, scholars have deliberately merged all the types of innovation
into a single phenomenon that is called “Business Model”. Yet, no single definition
of BMI has been finalised (Zott et al., 2011). Scholars interpret BM with several
dimensions. For instance, Stewart and Zhao (2000, p. 290) defined BM as “How a
firm will make money” as well as Gambardella and McGahan (2010) defined “when
firms implement novel approaches to commercialise their underlying assets”.
Despite having a good BM, sometime well-established companies fail because
of dramatic changes in the external environment, competition and turbulent
markets (Schneider and Spieth, 2013). However, these rapid changes have a
significant influence on the existing resource, capabilities and values creation
process of the firms. For the purpose, firms have started search for new tactics to
gain competitive advantage (Schneider and Spieth, 2013). Thus, in response to
these challenges, the new approach “BMI” has emerged which demonstrates about
firm’s innovative actions simultaneously considering all internal and external
factors (Schneider and Spieth, 2013). Hence, it is argued that the BMI is recently
emerged term in BM that has received enough attention of the present day scholars
(Sanchez and Ricart, 2010; Ranjith, 2016; Trapp et al., 2017; Zhu et al., 2017).
Yet in many cases, authors have not defined BMI thoroughly, and they applied
idiosyncratic definition to suit to the specific study (Björkdahl and Holmén, 2013).
The terms BM and BMI are still use interchangeably in the literature. For instance,
Sanchez and Ricart (2010) suggested two types of BMI. One is “Isolated business
model” that focusses on entrance into new market by leveraging firm’s present
capabilities and resources to take the advantage of existing opportunity. The other
one is “Interactive business model ” that requires to combine, integrate and leverage
firm’s internal and external capabilities to create new business opportunity. The
present study interprets BMI with respect to Bucherer et al. (2012, p. 184) who
defined it as “the practice that purposefully changes the fundamental elements of a
firm and its business logic is called BMI” and Frankenberger et al. (2013, p. 253)
who defined BMI as “an innovative way how to generate and capture value”.

Competitive advantage
Strategy is typically defined as “a contingent plan of action intended to attain a
specific goal” (Casadesus-Masanell and Ricart, 2010). However, it is difficult to
1850057-3
M. Anwar

operationalise competitive advantage because researchers have suggested that

managers might be pitiable at addressing their firm’s competitive advantage
(Greene and Mole, 2007). Still, competitive advantage is defined as “the strategic
benefit of a firm over its rival firms within the industry, which allows to perform
over competitors and rival firms” (Porter, 1980). Thus, initially, Porter has
suggested four major competitive strategies: differentiation strategy, cost lead-
ership strategy, differentiation focus and cost focus strategy. The first two
strategies i.e., differentiation and cost leadership are the strategic arms and
deemed as sovereign logic of competitive advantage. However, the focus strat-
egy is not so special by itself, it is something duplicate that a firm adds to other
strategies to search in depth about market or customer. Focus strategy is asso-
ciated to narrow market which may not result in above fair performance (Porter,
1985, p. 15). Firm can acquire competitive advantage and superior performance
using the two major strategies: differentiation and cost leadership (Lechner and
Gudmundsson, 2014). Differentiation Strategy enables firms to gain differential-
based advantage by offering unique and novel products to customers. The
novelty and newness can be merged into product’s feature, design and structure
(Porter, 1980). Cost Leadership Strategy enables firms to achieve cost-based
advantage by reducing various costs associated with materials, products devel-
opment, marketing expenses, operational, suppliers, wages and management
which in turn give the advantage of higher performance (Porter, 1980). These
strategies also refer business strategy that has the most significant role in SMEs
(Parnell, 2008).

SME performance
There is no universal definition of firm’s performance. Scholars define it according
to their research’s objectives. In the case of SMEs, performance refers to the
“value” contributed to customers, owners and top managers (Porter, 1990). In
addition, Laitinen (2002, p. 66) defined firm’s performance as “the capability of an
entity/business/firm to generate results in predetermined dimensions in relation to
a target”. Typically, firm’s performance can be measured with Return on Assets
(ROA), Return on Equity (ROAE) and Return on Investment (ROI) when archived
data are available. However, in the case of SMEs, it is difficult to obtain financial
data (Dibrell et al., 2014), thus authors have suggested self-reported approach to
measure performance where SMEs are asked to rate their performance on the basis
of ROA, ROE, ROI, etc. for last three or five years compared with their major
competitors and industry rivals (Davis et al., 2010; Engelen et al., 2015; Semrau
et al., 2016).

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 BMI and SMEs Performance

Underpinning theory
Despite discussed for more than two decades, theories development about BMI are
still rare (Tuncdogan et al., 2016; Foss and Saebi, 2017). The core theme of this
study is associated with competitive advantage and SME performance that (both)
can be incremented through BMI. However, BMI should not be mixed with
business strategy because business strategy is what that specifically focusses on
products and services while BMI underlines the firm’s core attributes that are akin
to change in product, structure, delivery and process (Zott and Amit, 2008).
For instance, Bashir and Verma (2017) suggested that BMI is a significant
predictor of competitive advantage (Porter’s competitive strategy). Firms that
create a unique BMI can achieve four times more return over those firms who
focus innovation associated to products and services only. Casadesus-Masanell
and Ricart (2010) suggested that the concept of strategy and BMI seem close but
there is difference between the two terms. Particularly the difference can be raised
when there are important contingences upon which well-formulated strategy must
be based. They further stated that BM denotes the logic of a firm, the way it drives
and how it creates value for stakeholders while strategy demonstrates the choice of
BM through which a firm will compete in the market.
This study again recalls that BMI has broad and vague concept. For instance,
Magretta defined BM as “the approach how business works”. Obviously, this idea
demonstrates how a firm earns money, how it recognises and generates values for
customers and how it captures profit from this value. Researchers have suggested
that BM supports firms to unlock the value creation process through potential
technological change in the market place (Desyllas and Sako, 2013; Gambardella
and McGahan, 2010). Going to the domain of the importance of BMI in firm’s
performance, Schumpeter (1934) argued that innovation happens due to “creative
destruction”. This phenomenon reflects the firm’s innovative ability to generate
useful output from destructive or useless resources. This marvel can be merged in
the notion of Cavalcante et al. (2011) who argued that BMI starts with new BM
creation which requires to remove, abandon or to close a business unit or area that
allied with old BM. This usually follows to extend the new BM or add core
processes to the old/present BM. Hence, this approach demonstrates the attributes
of firm to gain performance through expanding, adding and exploring alternative
processes or by gradually removing useless areas from the existing BM.
One of recent studies argue that BM research does not necessary need to have
“Theory on its own” but it can be understood through combining different theo-
retical mechanisms and stream of literature (Ritter and Lettl, 2017). In spite of the
fact that BMI has discussed in various contexts but the structured dimensions of
BMI are associated with the theme “gaining sustainable competitive advantage and

1850057-5
M. Anwar

superior performance” (Casadesus-Masanell and Ricart, 2010; Zott and Amit,

2008). Hence, it is argued that the theme of BMI is based on the fundamental
concept of RBVT. For instance, RBVT describes that firms have resources
with features: rare, imperfectly imitable, valuable and exploitable through which
(efficient uses of these resources) they can get sustainable competitive advantage
and superior performance (Barney, 1991). In this prospective, Zott and Amit
(2010) discussed that BM is the pattern that demonstrates how a firm conducts
business, provides value to owners and connects factors and product according to
market trend. Thus, BM tells which activities should be executed, by whom
and how the players can be connected together. It advocates that a firm’s per-
formance is not only the function of financial capital but also affected by social
facets of a BM.
In addition, OECD (2005) suggested that innovation in business encompasses
new processes and procedures such as establishment of the best database, workers
retention and introduction of innovative management system for firm’s routine.
Moreover, innovation in workplace comprises the application of new concepts to
structure activities, novel approaches for allocating responsibilities, tasks assign-
ment and decision making among employees for the division of work. Finally,
innovation in organisation practices for external interactions and facilitates new
methods to organise relationships with other businesses or public institutions. The
aim of these practices leads to competitiveness and superior performance.
This study (by objectives) allies the theoretical concepts to RBVT and
Schumpeter’s notions. The study agrees with Morris et al. (2005) that BM
represents the combination of firm’s unique resources through which customer’s
values and organisation’s values can be generated. In addition, they also
highlighted the significant of Schumpeter's (1934) theory of economic develop-
ment which demonstrates about values creation through combination of resources.
Hence, the theoretical logic of this study follows these two theories that have also
debated in the prior studies in this prospective (DaSilva and Trkman, 2014; Amit
and Zott, 2001; George and Bock, 2011). It is noteworthy to say that the firm’s
resources will not generate positive outputs rather than a firm’s ability or inno-
vative capabilities to use the resources in efficient ways. For instance, BMI
requires strong innovative activities that are necessary for understanding the
customer’s needs, policies, future forecast about competitor actions and customer
perceptions (Sosna et al., 2010; Teece, 2010). Scholars suggest that BMI searches
for firm’s competitive advantage, values and superior performance that can be
achieved by developing new and unique product, alignment of different actor’s
incentive, new values delivery and distribution channels (Markides, 2006;
Sandström and Osborne, 2011; Teece, 2017) that are addressed in this study.

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 BMI and SMEs Performance

Hypothesis Development
Business model innovation and firm performance
Firms with updated BM get superior performance over those firms who have
traditional BM (Cucculelli and Bettinelli, 2015). BMI is the practice of assimi-
lating a novel logic of doing business into an established firm to increase profit-
ability or to exploit newfangled business opportunities (Trapp et al., 2017). Firms
are now shifting from technological innovation towards BMI (Remane et al.,
2017) because an effective BMI offers high level of profitability and return to the
established ventures rather than traditional model (Arnold et al., 2016). It helps
firm to enhance ROE and significantly contributes to overall financial performance
(Bouncken and Fredrich, 2016). BMI has become an important factor for im-
proving performance of small firms operating in turbulent markets (Brannon and
Wiklund, 2016). New ventures may fail in high volatile market due to low per-
formance. But BMI supports new ventures to compete and survive in the dynamic
market for long term (Velu, 2015).
BMI is different than product innovation because BMI enables SMEs on the
spot when new opportunity in the form of new market appears. The exploitation of
new opportunity in turn may help firms to sustain performance (Velu and Stiles,
2013). BMI provides more significant financial performance in developing
economies as compared to other BM and activities (Gerdoçi et al., 2017). BMI is a
new logic to improve profitability of especially established ventures (Trapp et al.,
2017). For instance, a unique and effective BMI provides four times more return
over innovation that allied to only products and services (Bashir and Verma,
2017). Similarly, researches in this field have argued that SMEs with an effective
BMI perform over other firms (Carayannis et al., 2015; Kim and Min, 2015;
Karimi and Walter, 2016; Futterer et al., 2017; Carayannis et al., 2017). Therefore,

H1. BMI has a significant influence on SME performance.

Business model innovation and competitive advantage

BMI has now become a core driver for long term business sustainability because it
significantly and positively contributes to value creation, delivery and sustain-
ability as well as it helps SMEs to seize new opportunities (Yang et al., 2017;
Evans et al., 2017). Recently manufacturing firms have given adequate attention to
offer new products and to replace the existing products by adding new features to
gain sustainable competitive advantage (Kastalli and Van Looy, 2013; Cucculelli
and Bettinelli, 2015). It is ensued that BMI is a significant predictor of competitive
advantage (Porter’s competitive strategy). When a firm endures BMI, competitors

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M. Anwar

follow the approach directly, thus firms are required to change the BM persistently
to gain more stable position over their competitors (Mitchell and Coles, 2003).
SMEs with updated and proactive BMI achieve higher value and capture great
attention of customers in dynamic markets as compared to a reactive BM (Hacklin
et al., 2017; Shahzad et al., 2017). The main drivers for firm’s sustainability and
values are the cost reduction, risk reduction, reputation, brand image, attractive-
ness for employees and innovative capabilities that can be covered by BMI
(Schaltegger et al., 2012). Firms operating in the emerging markets strive for
getting competiveness, in such market, BM is the choice that facilitates SMEs to
get competitive advantage (Bashir and Verma, 2017; Ranjith, 2016). Therefore,

H2. BMI has a significant influence on competitive advantage.

Competitive advantage and firm performance

In today dynamic market, competitive advantage has received sufficient attention
of firms because it significantly contributes to firm’s financial and market per-
formance (Batista et al., 2016). Porter (1980) suggested that firms with adaptation
of differentiation strategy offer unique products to their customers in the markets,
the products give monopoly advantage over competitors and rival firms. Thus, the
firms charge higher prices which contribute to profitability. Similarly, firms with
adoration of cost leadership strategy reduce different kinds of costs related to
material, supply, product development, operation, etc. which on one side improve
profitability and on the other side, customers purchase the products in bulk which
leads to higher profits. It is also highlighted that high competitive advantage results
in high performance in the market, in contrast, firms with lower competitive
advantage lose their performance and are afraid of failure in markets (Kakati and
Dhar, 2002). Hence, firms with unique and novel products can gain high profit
because customers perceived the products as new. Some customers are cost
conscious and prefer to lower cost products and purchase in bulk, thus pursing
competitive strategy results higher in profitability. Several empirical studies have
found a significant positive relationship between competitive advantage and SME
performance (Lechner and Gudmundsson, 2014; Bapat and Mazumdar, 2015;
Saeidi et al., 2015). Therefore,

H3. Competitive advantage has a significant influence on SME performance.

Mediating role of competitive advantage between BMI

and firm performance
Where business operates, its core objective and theme will be associated with
value creation for customer, employees, business and profit gain. Enterprises
1850057-8
 BMI and SMEs Performance

having a novel BM create more customer values and stay competitive which in
turn lead to high performance and profitability (Teece, 2010). BMI enhances SME
performance with the help of refining differentiation and cost leadership strategy
(Haggège et al., 2017; Zott and Amit, 2008). It provides effective-centered solu-
tions by assembling resources that target customer’s change and demand prefer-
ence which in turn provide the advantage of rapid increase in market shares and
industry structure. Particularly SMEs operating in emerging markets are more
benefitted by BMI because of market volatility (Zhu et al., 2017). The notion of
BMI associated in the root of strategic flexibility and industry change which in
turn provide superior performance to SMEs (Djaja and Arief, 2015). Small firms
face a tough competition in turbulent markets. Thus they need to build an effective
BMI which facilitates their competitiveness and position in the market that results
in superior performance (Pellikka and Malinen, 2014).
BMI creates useful insights for strategic behavior of firms and helps firms to
organise the resources in the way to get higher performance. Thus, it is extensively
accepted especially by SMEs operating in emerging markets (Spieth et al., 2016).
It helps to form strategic actions that are required for getting competitive advan-
tage. Obviously this advantage in turn leads to gain higher performance
(Purkayastha and Sharma, 2016). There is a strong relationship between firm’s
capabilities, BMI and firm’s performance and it is true that BMI is closely linked
to firm’s strategic capabilities and results high performance (Pucci et al., 2017).
Thus, it is argued that BMI leads to gain sustainable competitive advantage
through different novel approaches which in turn lead to higher profitability and
success of SMEs. Therefore,

H4. Competitive advantage mediates the relationship between BMI and firm’s
performance.

Methodology
Sample and data
The purpose of the study is to examine the influence of BMI on SME performance
with mediating role of competitive advantage. Motivated by the fact that
manufacturing firms are more innovative, competitive, commoditised and more
concerned with strategic approaches related to products, services and structure
unlike services and trading firms (Kastalli and Van Looy, 2013). Thus, this study
selected manufacturing SMEs operating in the emerging market of Pakistan. Three
major cities of Pakistan: Rawalpindi, Islamabad and Peshawar were selected be-
cause most of the firms have their head offices in these regions. Registered firm

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M. Anwar

lists were taken from Rawalpindi Chamber of Commerce and Industry (RCCI),
Islamabad Chamber of Commerce and Industry (ICCI) and Khyber Pakhtunkhwa
Chamber of Commerce and Industry (KPCCI), respectively. Total registered firms
with RCCI were 5817, ICCI were 3753 and KPCCI were 2072, registered firms
including manufacturing, trading and services. However, this research focussed
only on manufacturing firms specifically industries of chemical, pipes and fittings,
pharmaceutical, software, cosmetics and engineering. There were almost 1500
firms in the specific industries in these regions. Probability-based sampling method
was used and calculated the sample size of 303 firms.
Although, there is no single definition of SMEs, every country has its own
definition and scope of SMEs. Small and Medium Enterprises Development Au-
thority (SMEDA) established by Government of Pakistan is responsible for SME
policies, financing, training and other responsibilities. SMEDA defines SMEs as
“firms having employees up to maximum 250”. Hence, this study focussed firms
with maximum employees 20 to 250 as per SMEDA definition of SMEs. Self-
reported questionnaire was used to collect data from owners and top managers
because they are more responsible for strategic planning and performance of firms
(Tajeddini and Mueller, 2012). Total 600 questionnaires were distributed of which
200 among SMEs operating in Rawalpindi, 200 in Islamabad and 200 in Pesha-
war, respectively. One questionnaire was filled by each firm with request to be
filled by owners or surrogated managers. On return, 97 usable questionnaires from
Peshawar, 89 usable questionnaires from Rawalpindi and 117 usable ques-
tionnaires from Islamabad were received with response rate 48.5%, 44.5%, 58.5%,
respectively. Hence total 303 usable questionnaires were analysed with an effec-
tive response rate 50.5%.

Profile of the firms

Table 1 shows the profile of the firms. There were 113 owners with 37.30% who
participated in the study. The ratio is lower than the ratio of senior managers
because majority of owners in Pakistan surrogate managers to work and look for
firm activities. Hence, where owners were not applicable, senior and top managers
(responsible) were asked to participate in the survey. Total 190 senior managers
have participated in the survey. As discussed earlier that this study is conducted in
manufacturing based firms, thus 69 owners/managers from chemical industry, 33
firms from pipes and fittings, 57 from pharmaceutical, 49 from software, 53 from
cosmetics and 42 firms from engineering sectors were participated in the survey.
Thirty owners and managers were participated from those firms having employees
from 20 to 50, 56 from 51 to 100 employees, 62 from 101 to 150 employees, 96
from 151 to 200 while 59 from 201 to 250 SMEs. This shows that majority of
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 BMI and SMEs Performance

Table 1. Profile of the firms.

Description Frequency Percentage

Owners/managers
Owners 113 37.30
Senior managers a 190 62.70
Manufacturing industry
Chemical 69 22.80
Pipes and fittings 33 10.90
Pharmaceutical 57 18.80
Software 49 16.17
Cosmetics 53 17.50
Engineering 42 13.80
Size of firms
20–50 employees 30 9.90
51–100 employees 56 18.50
101–150 employees 62 20.50
151–200 employees 96 31.70
201–250 employees 59 19.50
Age of firms
10 years and less 125 41.30
11–20 years 94 31.00
21 and above years 84 27.70
N 303 100

Notes: a Senior managers include those top managers

who were responsible for firm’s activities and were
surrogated by owners. They include operational man-
agers, financial managers, strategic managers, etc.

firms have employees from 151 to 200 who participated in the study. Hundred and
twenty five firms were those who have started their operation since last 10 years,
94 firms were started operation since 11 to 20 years while 84 were those firms who
were working for more than 21 years. This indicates that the ratio of new firms
increasing in the emerging markets comparatively.

Measurement of variables
BMI has explained in different theoretical and exploratory concepts. However, as
discussed earlier that BMI should not be mixed with business strategy because
business strategy specifically focusses on products and services while BMI
underlines the firm’s core attributes that allied to bring newness in product,
structure, delivery and process (Zott and Amit, 2008). In addition, it is argued that
BMI has a significant influence on differentiation-based and cost leadership-based
1850057-11
M. Anwar

advantage (Bashir and Verma, 2017). To measure BMI, this study relied on six
items validated and tested by Karimi and Walter (2016). These measures focused
on different aspects of firm’s innovativeness such as product and service, delivery,
process and structure. However, the measures were slightly modified as per the
study requirement to suit to manufacturing firms. A sample item is “How many
new formal or informal arrangements for information exchange with your partners
have been created in the past three years?”. Five Likert scale was given to rate the
suitable option range as “no new arrangement 1 to 5 many new arrangements.
Competitive Advantage also refers as competitive strategy that includes differ-
entiation-based and cost-based advantage (Porter, 1980; Lechner and Gudmunds-
son, 2014). Differentiation-based competitive advantage focusses on offering
unique and differentiated products rather than those offered by competitors. Cost-
based advantage focusses on cost minimisation related to product and industry
(Porter, 1980). This study relied on eight items of which five items for differentiation
and three items for cost-based strategy that have validated and tested by Lee et al.
(2015). To measure differentiation advantage, the sample item is “We successfully
differentiate ourselves from others through effective design: brand, appearance,
feature, etc.” To measure cost-based advantage, a representative item is
“Manufacturing costs are lower than that of our competitors”. Five Likert scale was
given as the option that were range from strongly disagree 1 to strongly agree 5.
SME Performance can be measured with archive-based data and self-reported
survey. Where financial data are available, the authors measure performance with
proxies: ROE, ROI, etc. However, in the case of SMEs, it is difficult to obtain
financial data from firms (Dibrell et al., 2014). Thus, scholars use self-reported
approaches to measure SME performance. Prior studies have argued that there is a
significant association between archive-based and self-reported-performance
measures (Davis et al., 2010; Engelen et al., 2015). In addition, Semrau et al.
(2016) suggested that self-reported measures provide more fruitful and adequate
insights in emerging economies such as China, India, etc. Hence, this study used
self-reported approach to measure financial performance of the manufacturing firms.
Six items were used where respondents were asked to rate their firm’s performance
on the basis of ROE, return on sales, ROI, ROA, sales growth and net profitability
since last three years compared to major competitors. Five Likert scale was given
ranging from extremely declined 1 to extremely improved 5. These measures were
mostly cited in prior studies (Engelen et al., 2015; Semrau et al., 2016).

Control variables
In order to reduce spurious results, age and size of firms were controlled to test the
impact of BMI on SME performance with competitive advantage as mediator.
1850057-12
 BMI and SMEs Performance

Mason et al. (2015) recommended to control firm’s age and size in order to get
better results. Since this study was conducted in the specific industry i.e.,
manufacturing, so there was no need to control for nature of industry. Age and size
of firms were controlled towards competitive advantage and SME performance.
The overall results indicated that both the factors i.e., age and size of firms play a
significant role in the model. Similar results have derived in prior study that age
and size of firms have a significant impact on firm’s performance (Semrau et al.,
2016).

Data Analysis and Results

Since the items adopted from prior studies were modified which required
validation. Thus, Confirmatory Factor Analysis (CFA) and Structural Equation
Modelling (SEM) using AMOS.21 were performed. However, there are certain
assumptions such as minimum sample size, data normality, etc. that are required to
be addressed before conducting AMOS. Sample size was enough as it was
above 300.
For testing data normality, skewness and kurtosis were performed in SPSS and
the results have presented in Table 2. The results show normality in data as all the
constructs have skewness and kurtosis values in the accepted range
2 (George
and Mallery, 2010). In addition, mean and S.D showed in Table 2 where BMI has
(mean ¼ 3.01 and S.D ¼ 0.96), competitive advantage has (mean ¼ 3.61 and
S.D ¼ 0.40) and SME performance has (mean ¼ 3.87 and S.D ¼ 0.42).

Confirmatory factor analysis

This study performed CFA by using Maximum Likelihood procedure to ensure the
factor loadings, validity and reliability of the scales and constructs used in the
study. Figure 1 shows the measurement model of the study. In the first attempt of
measurement model, the results did not generate a good model fit. Although, the
items have acceptable factor loadings (above 0.70). Hence, Modification Indices
(MI) were checked and found that there were redundant items. So covariance was

Table 2. Mean, S.D and normality.

Constructs Mean Std. Deviation Skewness Kurtosis

BMI 3.0116 0.29505 0.199 1.695
Competitive advantage 3.6061 0.40220 0.115 0.490
SME performance 3.8659 0.42361 0.404 0.545

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M. Anwar

Fig. 1. Measurement model.

drawn between the error terms of the redundancy items such as between e1 and e3,
e9 and e10, e12 and e13, e12 and e14 as well as between e17 and e19 to solve the
problem. Thus, in the second attempt, the results generated a good model fit
indicate that chisq/df value 2.294 is in the acceptable range (less than 3) suggested
by Tanaka (1993), Hu and Bentler (1999) and Hair et al. (2010). The values of
GFI ¼ 0.90, AGFI ¼ 0.86, CFI ¼ 0.95, TLI ¼ 0.95, NFI ¼ 0.92 indicated a

1850057-14
 BMI and SMEs Performance

good model fit as the values suggested to be above 0.90 (Hu and Bentler, 1999;
Hair et al., 2010). GFI above 0.80 is also considered acceptable as per Browne and
Cudeck (1993). RMR ¼ 0.012 and RMSEA ¼ 0.065 also generated a good
model fit as the values close to 0.05 indicate a good model fit (Hu and Bentler,
1999; Hair et al., 2010). MI values found in the accepted range 4–15 as per
recommendation of (Zainudin, 2014, Chap. 7). All the items were significantly
loaded (p < 0:001) on their respective constructs and almost all the items have
acceptable standardised factor loading (above 0.70). The factor loadings of the
items were presented in Table 3.
However, before testing the hypothesis using structural model, it has recom-
mended to test validity and reliability of the items and constructs (Barclay et al.,
1995). Thus, convergent validity, discriminant validity and composite reliability
were ensured in the study (see Table 3). Convergent validity indicated the ac-
cepted value for all the constructs (above 0.50) as recommended by Hu and

Table 3. Factor loadings, validity and reliability.

p
Items Estimate AVE AVE Composite reliability
BMI 0.55 0.74 0.88
bmi1 0.704***
bmi2 0.718***
bmi3 0.664***
bmi4 0.841***
bmi5 0.858***
bmi6 0.651***
Competitive advantage 0.65 0.80 0.94
ca1 0.794***
ca2 0.839***
ca3 0.836***
ca4 0.816***
ca5 0.830***
ca6 0.760***
ca7 0.739***
ca8 0.815***
SME performance 0.67 0.82 0.92
fp1 0.934***
fp2 0.669***
fp3 0.743***
fp4 0.925***
fp5 0.642***
fp6 0.929***

Note: ***Significant (p < 0.001).

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M. Anwar

Bentler (1999) and Hair et al. (2010). Discriminant validity also gave acceptable
values for all the constructs (above 0.70) as suggested by Hu and Bentler (1999)
and Hair et al. (2010). Moreover, it has also suggested that the discriminant
validity of the construct will be higher than the correlation values of the construct
with other constructs, this study met the condition (Hu and Bentler, 1999; Hair
et al., 2010). Composite reliability of each constructs has higher than 0.70 that has
accepted as per recommendation of Nunnally and Bernstein (1994). Thus, all the
criteria were met which allowed to test the hypothesis through structural model.

Common method bias

This research collected data through a single source, from the same respondent and
on the same time, this approach may lead to Common Method Bias (CMB) that
may threat the results (Podsakoff and Organ, 1986). Hence, in order to know about
this issue, Harman’s one factor test was performed using Exploratory Factor
Analysis with extraction method of Principle Component Analysis in SPSS. The
results indicated three factors with eigenvalues above 1 of which the first factor
explained only 39% variance. This confirmed that there is no potential problem of
CBM as the first factor of the study does not explain a major variance and none of
the factor was apparent (Podsakoff and Organ, 1986; Hair et al., 2010).

Correlation
Table 4 shows correlation among the study’s constructs. It gives the early support
to the hypothesis in the study. The relationship between BMI and SME perfor-
mance is positive (r ¼ 0:719), positive relationship was found between BMI and
competitive advantage (r ¼ 0:319) and also between competitive advantage and
SME performance (r ¼ 0:296). There is no multicollinearity issue in the study as
all the constructs have correlation values below 0.80 (Jalali et al., 2014).

Structural models
In order to gain more fruitful results for mediating role of competitive advantage,
this study performed separate structural model for each step. The first structural

Table 4. Correlation coefficients.

Constructs BMI Competitive advantage Firm performance

BMI — — —
Competitive advantage 0.319 — —
SME performance 0.712 0.296 —

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 BMI and SMEs Performance

Fig. 2. Structural Model 1.

model (see Fig. 2) was performed to test the influence of BMI on SME perfor-
mance, second structural model (see Fig. 3) was performed for testing BMI in-
fluence on competitive advantage and the third structural model (see Fig. 4) was
tested the impact of competitive advantage on SME performance. Last, fourth
structural model (Fig. 5) was performed to check either competitive advantage
fully or partially mediates the relationship between BMI and SMEs performance.
In addition, to check mediating role in the framework, bootstrapping method was
followed that is recommend more than Sobel test (Zhao et al., 2010; Bryan et al.,
2013). Thus, the hypotheses were tested by performing bootstrapping 2000
(resampling), 95% bias-corrected confidence interval and using the p-value for a
two-tailed significance (*p, 0.05, **p, 0.01, ***p, 0.001).
Structural Model 1: This model was performed to check the impact of BMI on
SME performance and controlling for size and age of the firm (Fig. 2). The model
fits have shown in Table 5, indicate that the value in of chisq/df ¼ 2.80 is in the
acceptable range (less than 3) recommended by Hu and Bentler (1999) and Hair
et al. (2010). The values of GFI ¼ 0.91, AGFI ¼ 0.87, CFI ¼ 0.95, TLI ¼ 0.94,
NFI ¼ 0.93 indicated a good model fit as the values suggested to be above 0.90
(Bentler and Bonett, 1980; Tanaka, 1993; Hu and Bentler, 1999; Hair et al., 2010).
RMR ¼ 0.04 and RMSEA ¼ 0.078 also created a good model fit as the values
close to 0.05 specify a good model fit (Hu and Bentler, 1999; Hair et al., 2010).
The result related to hypothesis (see Table 6) indicated that BMI has a sig-
nificant influence on SME performance (
¼ 0:619, p < 0:01) that accepted the
H1. Thus the first criteria of the mediation existence achieved.

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M. Anwar

Table 5. Models fits.

Models Chisq df Chisq/df GFI AGFI CFI TLI NFI RMR RMSEA
Measurement model 371.695 162 2.294 0.90 0.86 0.95 0.95 0.92 0.012 0.065
Structure Model 1
BMI ! FP 205.899 72 2.80 0.91 0.87 0.95 0.94 0.93 0.04 0.078
Structure Model 2
BMI ! CA 190.432 97 1.963 0.93 0.90 0.97 0.96 0.94 0.030 0.056
Structure Model 3
CA ! FP 255.044 98 2.602 0.90 0.87 0.96 0.95 0.93 0.028 0.073
Structure Model 4 439.301 197 2.230 0.89 0.85 0.95 0.94 0.91 0.029 0.064
Acceptable range* — — 1–3 >0.90 >0.80 >0.90 >0.90 >0.90 <0.09 <0.08

Note: FP ¼ Firm performance, CA ¼ Competitive advantage; *Significant (p < 0.001).

Structural Model 2: To check for the second criteria of mediation, this model was
performed to check the influence of BMI on competitive advantage (see Fig. 3).
The model fitness (see Table 5) was confirmed as chisq/df ¼ 2.602 found in the
accepted range (less than 3) recommended by Hu and Bentler (1999) and Hair
et al. (2010). The values of GFI ¼ 0.90, AGFI ¼ 0.87, CFI ¼ 0.96, TLI ¼ 0.95,
NFI ¼ 0.93 showed a good model fit as the values suggested to be above 0.90 and
close to 1 (Tanaka, 1993; Hu and Bentler, 1999; Hair et al., 2010). RMR ¼ 0.028
and RMSEA ¼ 0.073 also produced a good model fit as the values close to 0.05
indicate a good model fit (Hu and Bentler, 1999; Hair et al., 2010).

Fig. 3. Structural Model 2.

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 BMI and SMEs Performance

Table 6. Hypothesis testing (without mediating role).

Model 1 Model 2 Model 3

Hypothesis
p
p
p
H1. FP BMI 0.619 0.000
FP Size 0.135 0.000
FP Age 0.146 0.000
H2. CA BMI 0.414 0.000
CA Size 0.081 0.007
CA Age 0.039 0.081
H3. FP CA 0.194 0.000
FP Size 0.197 0.000
FP Age 0.168 0.000

Note: FP ¼ Firm performance, CA ¼ Competitive advantage.

The results (Table 6) indicated that BMI has a significant positive impact on
competitive advantage (
¼ 0:414, p < 0:01) that supported H2 of the study.
Hence, the second condition for existence of mediation met.
Structural Model 3: To examine the impact of competitive advantage on SME
performance, the third structural model (see Fig. 4) was performed for being
checking the third criteria of mediation existence. The model fit (e.g., Table 5)
engendered accepted values as chisq/df ¼ 2.602 that is in the accepted range (less

Fig. 4. Structural Model 3.

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M. Anwar

than 3) recommended by Hu and Bentler (1999) and Hair et al. (2010). The values
of GFI ¼ 0.91, AGFI ¼ 0.87, CFI ¼ 0.95, TLI ¼ 0.94, NFI ¼ 0.93 indicated a
good model fit as the values recommended to be close to 1 (Tanaka, 1993; Hu and
Bentler, 1999; Hair et al., 2010). RMR ¼ 0.04 and RMSEA ¼ 0.078 also pro-
duced a good model fit as the values close to 0.05 indicate a good model fit (Hu
and Bentler, 1999; Hair et al., 2010).
The results (Table 6) shown that competitive advantage has a significant in-
fluence on SME performance (
¼ 0:194, p < 0:01) that supported H3 and met
the third condition of mediating role played by competitive advantage. Hence, all
the three models provided significant results and confirmed that competitive ad-
vantage mediates the relationship between BMI and SME performance.
Structural Model 4: This structural model (see Fig. 5) was performed to check
either competitive advantage fully or partially mediates the relationship between

Fig. 5. Structural Model 4.

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 BMI and SMEs Performance

Table 7. Hypothesis testing (with mediating role).

Hypothesis Direct effect p Indirect effect p Total effect p

H4. FP BMI (through CA) 0.450 0.001 0.026 0.031 0.477 0.001
CA BMI 0.321 0.001 — — 0.321 0.001
FP CA 0.081 0.040 — — 0.081 0.040
FP Size (through CA) 0.404 0.001 0.009 0.06 0.395 0.001
FP Age (through CA) 0.274 0.001 0.013 0.031 0.287 0.001
CA Size 0.113 0.078 — — — —
CA Age 0.159 0.010 — — — —

Note: FP ¼ Firm performance, CA ¼ Competitive advantage.

BMI and SME performance. Table 5 shows the model fitness as the value of chisq/
df ¼ 2.230 is in the acceptable range (less than 3) recommended by Hu and
Bentler (1999) and Hair et al. (2010). The values of GFI ¼ 0.89, AGFI ¼ 0.85,
CFI ¼ 0.95, TLI ¼ 0.94, NFI ¼ 0.91 showed a good model fit as the values
suggested to be above 0.90 (Bentler and Bonett, 1980; Tanaka, 1993; Hu and
Bentler, 1999; Hair et al., 2010). RMR ¼ 0.029 and RMSEA ¼ 0.064 also en-
gendered a good model fit as the values close to 0.05 indicate a good model fit (Hu
and Bentler, 1999; Hair et al., 2010).
The final results about hypothesis have shown in Table 7 that indicated the
indirect effect of BMI on SME performance is significant (
¼ 0:026, p < 0:05)
while direct impact of BMI on SME performance also remained significant
(
¼ 0:450, p < 0:01) which indicated that competitive advantage partially me-
diated the relationship between BMI and SME performance. Hence, H4 of the
study partially supported in this study.
The total effect of BMI on SME performance (through competitive advantage)
is significant (
¼ 0:477, p < 0:01) that is higher than the direct impact of BMI
on SME performance (
¼ 0:450, p < 0:01). R 2 indicates that BMI through
competitive advantage explains 67% variance in SME performance.

Discussion
Although prior studies in the context of BMI have given more attention to the
theoretical and exploratory discussion over empirical evidences (Teece, 2010;
Sanchez and Ricart, 2010; Schneider and Spieth, 2013; DaSilva and Trkman,
2014; Foss and Saebi, 2017; Evans et al., 2017). The role of BMI in SME
performance is still remained elusive due to lack of empirical evidence. This study
empirically examines the role of BMI towards competitive advantage and SME
performance in an emerging market. In addition, this study makes additional
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M. Anwar

contribution to RBVT and Schumpeter’s theory by signifying the new antecedents

(being BMI) for competitive advantage and SME performance. For instance,
RBVT suggests that firm’s internal capabilities have more significant influence on
sustainable competitive and performance as compared to external capabilities.
However, BMI (being an internal capability of a firm) has still received minor
attention of researchers that lead to weak theoretical contribution (Tuncdogan
et al., 2016; Foss and Saebi, 2017). In addition, this study extends the finding of
prior studies which have argued that SMEs are more likely to adopt innovative
approaches because of external pressure and competitive environment (Kastalli
and Van Looy, 2013; Sahut and Ortiz, 2014).
First, the study examined the influence of BMI on SME performance and found
significant positive results. Similar to prior studies, Arnold et al. (2016) scrutinised
that BMI makes significant contribution to firm’s profitability. Trapp et al. (2017)
argued that BMI is a practice of integrating a unique logic of doing business into
an established firm to increase profitability. In addition, Cucculelli and Bettinelli
(2015) suggested that firms with strong BMI perform over those firms who have
traditional models. There is no doubt that BM is a significant driver to improve
SME performance. Thus H1 of the study supported.
Second, this study examined the impact of BMI on competitive advantage and
found significant positive results. In the line with prior studies, Schaltegger et al.
(2012) argued that BMI helps firms to reduce cost, makes image, increases
reputation and introduces unique delivery process that creates values for firms.
Bashir and Verma (2017) resulted that firms with better BMI gain sustainable
competitive advantage unlike those firms who have traditional approaches which
result lower advantage. Moreover, they resulted that BMI has a significant in-
fluence on both competitive strategies i.e., differentiation strategy and cost
leadership strategy. Mitchell and Coles (2003) scrutinised that firms have to keep
update their BMI to gain sustainable competitive advantage over competitors and
rival firms. Ranjith (2016) revealed that BMI is the best choice for firms who are
looking for competitive advantage in emerging markets. Hence, H2 of the study
supported.
Third, this study scrutinised a significant positive influence of competitive
advantage on SME performance. Consistent with prior studies, Porter (1980)
suggested that firms with differentiation-based strategy offer unique products, thus
customer purchase the products because they perceive the products as new that
results in higher profitability. Firms with cost leadership strategy lower different
kinds of cost that contribute directly to profitability. Similar results were found in
other empirical studies (Lechner and Gudmundsson, 2014; Saeidi et al., 2015;
Batista et al., 2016). Hence, H3 of the study supported.

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 BMI and SMEs Performance

Fourth, mediating role of competitive advantage between BMI and SME per-
formance examined and found partial mediating role. For instance, Spieth et al.
(2016) argued that BMI is concerned with strategic resources of firms, thus it
creates high performance for ventures operating in emerging markets. Pucci et al.
(2017) argued that BMI is closely linked to competitive advantage which results
higher performance. It is argued that competitive advantage partially mediates the
relationship between BMI and the financial performance of manufacturing SMEs
in Pakistan. Thus H4 of the study partially supported.

Managerial implications
This study provides implications for owners and managers of SMEs as well as for
policy makers. For instance, managers of SMEs and large firms, manufacturing,
trading or services, etc. seek competitive advantage and superior performance
using different resources and sources. This study suggests that BMI is the sig-
nificant driver that contributes significantly positively to firm’s performance and
competitive advantage. Owners and managers of SMEs especially in emerging
markets face countless challenges to compete in turbulent market. In such markets,
BMI is a key factor that significantly contributes to competitive advantage and
performance (Ranjith, 2016; Spieth et al., 2016; Zhu et al., 2017). Although,
SMEs from manufacturing sector invest lots of resources into tangible and risky
projects that may cause a big loss. Thus, owners and managers from
manufacturing sector are required to give considerable attention to BMI in order to
survive in the market. For instance, growth and position cannot gain through lots
of investment into technological development, tangible resources and risky and
long term projects, BMI gives alternative and easy approach to stay competitive
and survive over rival firms. The findings also reveal that large firms and matured
firms should not ignore the adaptation of BMI because it gives a significant
advantage to large (Karimi and Walter, 2016) in emerging markets. Owners and
managers of SMEs are required to observe deep into their business activities
related to products development, delivery, organisation structure, cost, processes
and procedure that all can come under the umbrella of BMI.
Underlining the important of the study for policy makers, this research suggests
for SMEDA to support SMEs in the context of innovation either through trainings
or seminars, so they may be able to build an effective BMI. For instance, SMEDA
is responsible for all the policies and survival of SMEs operating in Pakistan.
Thus, it should be benefitted to arrange special support programs to facilitate
SMEs regarding product development at lower cost. Similarly, government can
also advice SMEDA in this regard to initiate programs about BMI that has not yet
launched.
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M. Anwar

Limitations and future research

Despite significant theoretical and practical implications, this study has several
limitations that give chance to potential researchers to address and generate more
fruitful insights. For instance, this study has conducted only in the specific
manufacturing industry, however BMI is not limited to a specific business unit but
it is associated with organisation’s designs and strategic decision making. A firm
can apply BM to improve performance while other can apply it to service customer
and to use the resources efficiently (Snihur and Tarzijan, 2017). Future researchers
are encouraged to extend the study in other industries to get more valid insights.
Although prior studies have given more attention to theoretical and exploratory
discussion of BMI (Markides and Sosa, 2013; DaSilva and Trkman, 2014; Zott
et al., 2011). This study empirically scrutinised and argued that BMI has a sig-
nificant influence on firm’s outcomes which unlocks a new zone for potential
researchers to examine the influence of BMI in various organisation units.
Researchers can empirically examine the other possible moderator(s) and mediator
(s) to add more fruitful insights to BMI literatures. In addition, this research can be
extended in other economies and comparative study between emerging and de-
veloped market can provide more beneficial insights.

Conclusion
This study empirically tested the impact of BMI on competitive advantage and
performance of SMEs from manufacturing sector operating in the emerging
markets of Pakistan. Data were collected through structured questionnaires using
sample size of 303 firms and then analysed through AMOS.21. The results indi-
cate that BMI has a significant impact on competitive advantage and SME fi-
nancial performance. Competitive advantage partially mediates the relationship
between BMI and financial performance of SMEs. The results highlight that BMI
plays a significant role in the success and survival of SMEs operating in the
emerging market. Implications for practice have been discussed.

Appendix A
Business Model Innovation
How much of revenue from noncore products are generated through traditional
revenue sources such as circulation, display advertising, and classified operations?
Almost all 1 2 3 4 5 Almost none
How do you sell your noncore products?

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 BMI and SMEs Performance

Existing sales force sells both core and noncore products. 1 2 3 4 5 Noncore
products are exclusively sold through digital media sales force.
How many new formal or informal arrangements for information exchange with
your partners have been created in the past 3 years?
No new arrangements 1 2 3 4 5 Very many new arrangements
In the last 3 years, have you changed your pricing structure for raw material, product and
services?
We have made no changes to our pricing structure. 12345 We have
completely changed our pricing structure.
Please compare the value propositions offered by your products/services now with
those offered 3 years ago.
They are pretty much the same 1 2 3 4 5 They are dramatically different
Please compare the cost structure of means employed to produce the noncore
products with that employed to produce the core products.
Cost structure for noncore product is much higher 1 2 3 4 5 Cost structure
for noncore products is much lower.
Competitive Advantage

1. Our new products and service development offer superior bene ts to customers
2. We make great efforts in building a strong brand name
3. We successfully differentiate ourselves from others through effective adver-
tising and promotional campaigns
4. We successfully differentiate ourselves from others through effective design
(ex. Brand & store identity)
5. We constantly offer overall differential advantage
6. Internal operation system has decreased the cost of our products
7. Manufacturing costs are lower than that of our competitors
8. We constantly offer low opening costs than our competitors.

SMEs Performance

1. Return on equity
2. Return on sales
3. Return on investment
4. Return on assets
5. Sales growth
6. Net profitability

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M. Anwar

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