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Strategic Management Journal
Strat. Mgmt. J., 31: 892–902 (2010) Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.841 Received 6 July 2006; Final revision received 18 December 2009

Department of Management and Marketing, Faculty of Business and Economics, The University of Melbourne, Victoria, Australia

Small and medium enterprises (SMEs) in the manufacturing sector make a significant contribution to economic growth, yet most of the research into innovation management in the manufacturing sector has focused on large organizations. This article,however, identifies innovation drivers and their performance implications in manufacturing SMEs. Its study gathered survey data from a sample of 600 Australian SMEs and found that SMEs are similar to large firms with respect to the way that innovation strategy and formal structure are the key drivers of their performance, but do not appear to utilize innovation culture in a strategic and structuredmanner. This study therefore concludes that SMEs’ performance is likely to improve as they increase the degree to which they mirror large manufacturing firms with respect to formal strategy and structure, and to which they recognize that innovation culture and strategy are closely aligned throughout the innovation process. Copyright  2010 John Wiley & Sons, Ltd.

Small and mediumenterprises (SMEs) are different from large organizations. These differences primarily relate to such defining SME characteristics as a reactive, fire-fighting mentality, resource limitations, informal strategies, and flexible structures (Hudson, Smart, and Bourne, 2001; Qian and Li, 2003). As a consequence, they tend to have
Keywords: innovation; performance; strategy; SME; model; manufacturing*Correspondence to: Mil´ Terziovski, Department of Managee ment and Marketing, Faculty of Economics and Commerce, The University of Melbourne, Level 10, 198 Berkeley Street, VIC 3010 Australia. E-mail: milet@unimelb.edu.au

a failure rate higher than that of large organizations. The United States Small Business Administration (SBA) found that 24 percent of all new businesses in the United Statesfailed within two years, and that 63 percent failed within six years (Wheelen and Hunger, 1999). Lu and Beamish (2001) observed similar failure rates in Australia, the United Kingdom, Japan, Taiwan, and Hong Kong. Wheelen and Hunger (1999) found the high failure rate to be largely due to informal strategic planning processes and a lack of systems to keep track of the SMEs’ performance. SMEs in themanufacturing sector are also confronted with increased competition from cheaper manufactured products from such countries as

Copyright  2010 John Wiley & Sons, Ltd.

Research Notes and Commentaries
China and India (Bessant and Tidd, 2007), and are consequently struggling to develop appropriate strategies for competing with them. In light of the SBA’s findings noted earlier, it is reasonableto assume that SMEs need to formalize their structures and systems in order to become more competitive (Bessant and Tidd, 2007), yet a long-running debate has been taking place in the innovation literature on the relative strengths and weaknesses of formality and informality in SMEs (Wheelen and Hunger, 1999; Qian and Li, 2003). The supporters of formality have argued that SMEs need to improvetheir organizational capabilities by formalizing their structures and systems in order to become more efficient (Bessant and Tidd, 2007; Prakash and Gupta, 2008). Innovation in the manufacturing sector generally focuses on process improvements, for which formal structures and systems are necessary to squeeze costs out, and large manufacturing firms have generally succeeded with this strategy by...
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