Description
Document tell dynamic capabilities facilitating innovative strategies in smes.
Int. J. Technoentrepreneurship, Vol. 1, No. 1, 2007 109
Copyright © 2007 Inderscience Enterprises Ltd.
Dynamic capabilities facilitating innovative
strategies in SMEs
Odd J arl Borch* and Einar Lier Madsen
Bodø Graduate School of Business
Nordland Research Institute,
NO 8049 Bodø, Norway
E-mail: [email protected]
E-mail: [email protected]
*Corresponding author
Abstract: In this study we present dynamic capabilities that facilitate
innovative strategies (proactive-creativity strategy and growth-risk orientation)
in Small- and Medium-sized Enterprises (SMEs). Corporate entrepreneurship is
seen as the integration of opportunity-seeking and advantage-seeking
actions providing new, valuable and unique business concepts. We build
upon the Resource-Based View (RBV) of the firm and in particular
elaborate on the accumulation of dynamic capabilities contributing to
innovation and growth-oriented strategies. Based on the literature and
an explorative study of 235 small- and medium-sized firms, we develop
four categories of dynamic capabilities that are critical for the SMEs
entrepreneurial position: internal and external reconfiguration and integration
capabilities, resource acquisition capability, learning network capabilities and
strategic path aligning capabilities. Most of the relations are medium to highly
statistical significant for dynamic capabilities relationships with innovative
strategies. Thus, the results indicated support for all the hypotheses, except of
the relation between path aligning capabilities and the proactive-creativity
strategy.
Keywords: small- and medium-sized enterprise; SME; entrepreneurship;
innovative strategies; dynamic capabilities.
Reference to this paper should be made as follows: Borch, O.J. and
Madsen, E.L. (2007) ‘Dynamic capabilities facilitating innovative strategies in
SMEs’, Int. J. Technoentrepreneurship, Vol. 1, No. 1, pp.109–125.
Biographical notes: Odd Jarl Borch is a Professor of Strategy and
Entrepreneurship at Bodo Graduate School of Business (HHB) and Senior
Researcher at Nordland Research Institute (NF) in Bodo, Norway. He received
his MSc from The Norwegian School of Economics and Business
Administration in Norway and his PhD from Umea University, Sweden in
1991. He is conducting research within the field of competitive strategy,
entrepreneurship and regional development. He has published in various
international journals, including Advances in Strategic Management, Journal of
Management Studies, Entrepreneurship, Theory and Practice, Scandinavian
Journal of Management, Decision Support Systems and Journal of Small
Business and Enterprise Development.
Einar Lier Madsen is a Researcher at NF and a PhD student at HHB. He is
conducting research within the area of entrepreneurship, strategic management
and small business studies and is for the moment finishing his PhD dissertation
110 O.J. Borch and E.L. Madsen
‘Developing Dynamic Capabilities in SME’s’. His bacground from former
positions as Managing Director, Finance Manager, Project Supervisor and
Local Politician.
1 Introduction
With more intensive competition and turbulence in the market, established firms have to
increase their entrepreneurial capacity and drive towards innovative and growth-oriented
business concepts. In this paper, we focus on the organisational mechanisms leading to
new innovative strategies in small firms. We elaborate on the capabilities related to
discovering, creating and exploiting new opportunities in the environment. In particular,
we emphasise the ability of established firms to create new resources and transform its
present resources into new valuable and competitive strategies (Burgelman, 1984; Dess
et al., 1999; Venkataraman et al., 1992). A fundamental challenge within an established
firm is how to pursue new opportunity search and exploration activities without
hampering the exploitation of its present business platform (Hitt and Ireland, 2000; Hitt
et al., 2003). The entrepreneurial action may prove costly and collide with the interest of
the short-term strategic implementation. The Small- and Medium-sized Enterprise (SME)
face special problems. The liability of smallness implies that SMEs are short of most
resources (Stinchcombe, 1965). This situation may call for specific capabilities within
the smaller firms, such as for developing resources for innovative and growth-oriented
strategies.
In this paper, we look closer into the resources within the SME that may contribute to
the launch of new innovative business platforms without destroying its present income
base. We define dynamic capabilities as the ability to build, integrate and reconfigure
both external and internal resources and routines (Eisenhardt and Martin, 2000; Teece
et al., 1997; Zahra and George, 2002; Zahra et al., 2006). We believe that focus on
dynamic capabilities is of special importance for entrepreneurial small firms. We still
know too little about what types of organisational capabilities that are needed in pursuing
new and innovative strategies within SMEs. Smaller established firms may need other
capabilities than new or larger firms (Zahra et al., 2006). Within the smaller firm, the
dynamic processes towards new business platforms have to include efforts for protecting
its present activities and provide a smooth transfer towards new market strategies.
Transformation of existing resources into new business platforms has to be an
integral part of the entrepreneurial process (Hitt and Ireland, 2000; McGrath and
MacMillan, 2000).
The range of organisational capabilities needed to pursue new challenges and
opportunities is not well explored (Zahra et al., 2006). We are in need of theoretical
models emphasising entrepreneurship at corporate level that are linked to strategy.
We build upon the Resource-Based View (RBV) of the firm emphasising the role of
capabilities that may create new resources and reconfigure old resources controlled by
the firm into unique, valuable resource configurations (Amit and Shoemaker, 1993;
Barney, 1991; Peteraf, 1993). The RBV literature emphasises that it is not the resources
per se that contribute to competitive advantage. Rather, it is the capability of rearranging
the resources into resource configuration supporting the chosen strategies that are critical
(Grant, 1991). New valuable market strategies are the product of superior configuration
Dynamic capabilities facilitating innovative strategies in SMEs 111
of specific resources (Brush et al., 2001; Mauri and Michaels, 1998). To reach such
configurations, the resources that are present have to be linked to new ones.
In this explorative study, we look closer into capabilities that may contribute to
entrepreneurial strategies within small firms. The Dynamic Capability (DC) approach
provides a closer picture of the action patterns towards renewal of the firm. The DC
literature emphasises activities like resource acquisition, transformation and
reconfiguration to generate new value creating strategies (Eisenhardt and Martin, 2000;
Grant, 1996; Teece et al., 1997). We still, however, do not know types of capabilities that
are most critical in facilitating innovative strategies. An increased understanding of this
type of capabilities may safeguard SMEs from being ‘stuck in the middle’ with
non-targeted competitive positioning tools, especially in a situation where there is a need
for strategic turnaround to meet market jolts.
This paper is structured as follows. In Section 1, the challenges of SMEs in creating
innovative strategies are discussed. The dynamic capabilities perspective is
then presented and several hypotheses are derived. The research methodology is then
examined. In the following section results are analysed and finally, conclusions and
implications are discussed.
2 Theoretical framework
2.1 The SME and the resource platform for innovative strategies
The development of business strategy is often regarded as one of the most important
decisions for a company. Previous research regards the entrepreneurial dimensions of
strategy to be of great importance in general (Miller and Friesen, 1978). Miller (1983)
assumes that the degree of entrepreneurship of a company is linked to risk taking,
innovation and acting proactively. Small firms with limited opportunities for direct
influence on the market structure have to be creative in launching new business concepts
(Messenghem, 2003; Zahra et al., 1999). This type of firms is characterised by a
simple structure, a local market and often high family and/or founder–owner dominance
(D’Amboise and Muldowney, 1988). This may serve as an entrepreneurial advantage
through, for example, increasing the speed of decision-making and reducing the costs of
implementation and control. On the other hand, the simple structure, the lack of a
significant strategic apex and the family and owner–manager dominance may create path
dependencies with reduced efforts towards new business strategies. This may result in
only incremental innovation and limited experimental and proactive behaviour
(Dess et al., 1999).
The entrepreneurial process towards firm renewal is dependent upon the acquisition
and reconfiguration of resources serving as a platform for new innovations
(Grant, 1991). Thus, we are in need of theories guiding the repositioning of existing
capacities and capabilities and the acquisition of new adequate and strategic valuable
resources at lowest possible costs. Within resource-based theory (RBV) the focus is on
unique and valuable resources controlled by a company and which are difficult to copy
(i.e. valuable, rare, not imitable and difficult to substitute) (Barney, 1991). The
exploitation of such resources is a source for competitive advantage (Barney, 1991).
To ensure maximum profit, the firm has to utilise internal resources and resources
acquired externally (Penrose, 1959).
112 O.J. Borch and E.L. Madsen
Resources are defined in various ways in literature (Greene et al., 1997). The RBV
deepens our understanding of how resources are applied and combined to create
competitive advantage. A major contribution of the RBV is the explanation of
long-lived differences in firm profitability that may originate in the firm’s internal
resource configuration. However, only few resources are productive. Productive
activity requires cooperation and coordination of groups of resources. Grant (1991)
introduces the concept of capability to denote the capacity on the part of a group’s
resources to carry out tasks and activities. Barney (2002) claims that capabilities are
internal company properties putting the company in the position to coordinate
and exploit the rest of their resources. Both these definitions are in line with Penrose’s
(1959) notion that the ability to use resources is a crucial element. In this context
Grant (1991, p.113) argues that: “While resources are the source of a firm’s capabilities,
capabilities are the main source of its competitive advantage”. Implicit here is the
notion that resources alone are not sufficient to generate such advantages. The firm
must transform resources into capabilities that may generate certain dividends in order
to gain competitive advantages (Chandler and Hanks, 1994). To create new
competitive platforms is not just a matter of collecting a bunch of resources. Some
types of capabilities cannot simply be bought but has to be developed gradually
(Teece et al., 1997).
Another challenge in the new configuration process is that the firm has to take into
consideration the present resources. Some of these cannot be removed because they are
seen as sunken costs or are needed for the present strategy. Also, the smaller firm has
limited financial capacity for buying new resources on the market. Thus, the SME
managers have to select an appropriate strategy that make the most effective use of the
available and achievable resources and capabilities (Grant, 1991). A firm’s current
resources will influence managerial perceptions and thus the direction for growth
(Wernerfelt, 1984). Present resources may limit the choice of markets entered and the
levels of profits expected.
2.2 The DC perspective
The RBV has been criticised for encouraging a strategy content focus and not
emphasising how the superior strategic assets are achieved and developed (Hamel, 2000;
McGuinness and Morgan, 2000; Priem and Butler, 2001). The RBV of the firm may be
criticised for only discussing why firms have success in the present context. Brush et al.
(2001) claim that entrepreneurial ventures that are innovative and growth-oriented
require a different set of resources from small slow-growth firms. So far, there has been a
limited empirical focus on SME capabilities that lead to the development of new
innovative business platforms. One reason for this lack of focus is that such mechanisms
are not easily tracked or managed; they are often individualised, based on
tacit knowledge and socially and emotionally embedded (McGuinness and
Morgan, 2000).
The DC approach has been developed partly as a response to the critique of too static
theories on firm growth. This approach is concerned with organisational mechanisms and
processes adapting the firm to a changing and at times turbulent external environment
and the firm’s market-product portfolio (Eisenhardt and Martin, 2000; Grant, 1996;
Pisano, 1994). It is oriented towards ‘the why and where’ questions of the firm (Priem
and Butler, 2001). The DC literature is concerned with preparing the firm for the
Dynamic capabilities facilitating innovative strategies in SMEs 113
exploitation of new opportunities in future markets. In particular, there is a focus on the
latent rules and mechanisms that facilitates the creation of new distinctive and difficult to
imitate advantages.
However, dynamic capabilities are often described in vague terms such as ‘routines
to learn routines’ that have been criticised as being tautological, endlessly recursive and
non-operational (Mosakowski and McKelvey, 1997; Priem and Butler, 2001;
Williamson, 1999). Yet, Eisenhardt and Martin claim that “dynamic capabilities actually
consist of identifiable and specific routines that often have been the subject of extensive
empirical research in their own right outside of resource-based view” (2000, p.1107).
They classify dynamic capabilities in three groups:
1 dynamic capabilities that integrate resources (i.e. strategic decision-making
routines and product development routines)
2 dynamic capabilities that focus on reconfiguration of resources within firms
(i.e. transfer processes including routines for replication and brokering,
resource allocation routines and patching as a strategic process that
centres on routines to realign the match-up of businesses)
3 dynamic capabilities that are related to the gain and release of resources
(i.e. knowledge creation routines whereby managers and others build new
thinking within the firm, alliance and acquisition routines and exit
routines that jettison resource).
Teece et al. (1997) identify three organisational and managerial key processes which are
essential for dynamic capabilities:
1 coordination/integration of both internal and external activities
2 learning seen as social and collective and defined as repetition and
experimentation which enables tasks to be performed better and
quicker and
3 reconfiguration and transformation of resources based on the ability to scan the
environment to evaluate the markets and competitors.
We are here talking about the capacity of the firm to renew competences and physical
resources at a high pace and achieve congruence with the changing business environment
(Collis, 1994; Winter, 2003). Teece et al. (1997) as well as Eisenhardt and Martin (2000)
highlight mechanisms that build, gain, integrate, reconfigure and release internal and
external resources to address rapidly changing environments. Thus, these authors are
concerned both with resources inside the firm’s borders and the processes towards
gaining control over resources owned by others through relational building (Barney,
2001; Greene et al., 1999; Hitt et al., 2001). Thus, the dynamic capabilities do not only
have a direct effect on the output of the firm in which they reside, but also have indirect
effects on the configuration of more basic, operational resources (Helfat and Peteraf,
2003). Second, balancing present and future activities of the firm is also a part of these
capabilities. This includes managing both the creation of new products and the
operational management of present production, improvements of present competence and
routines and the removal of competences and traces of earlier paths that may hamper the
renewal processes of the firm (Eisenhardt and Martin, 2000; Pisano, 1994).
In the following, we elaborate on the distinctive dynamic capabilities that may
contribute to the development of innovative strategies within the SMEs. Figure 1
summarises the connections between the independent variables.
114 O.J. Borch and E.L. Madsen
Figure 1 Research framework and hypotheses
2.3 Resource reconfiguration/integration capabilities
and innovative strategies
Among the most important strategic features of an SME is the capability to patch or
realign business concepts where resources are added, combined or split (Eisenhardt and
Brown, 1999). SMEs often have a simple organisation where the manager is closely
linked to operational day-to-day operations. This gives the manager a unique overview of
all available resources and their potential. Greene et al. (1999) argue that small
entrepreneurial firms have to map the broad set of resource bases and competencies that
are existent and emergent within the firm. The competitive strategy and the value chain
needed for serving the present strategy serve as the basis of this process (Argyres and
McGahan, 2002). The recombination of resources is, however, the driver for the new
venture creation process. The firm has to identify new combinations of productive
resources within the firm and to extend the frontiers of capabilities. This is facilitated by
a discussion of synergies between old resource combinations within and new resources
outside the firm (Venkataraman et al., 1992).
Connecting several ventures with different resources also enhances the organisation’s
ongoing adaptation, since the linkage improves overall innovation management, enables
the firm to reconfigure its resources and provides ways to experiment with new
ideas (Dougherty, 1995). SMEs may here benefit from a simple organisational structure
with few internal borders increasing flexibility, direct ownership involvement and low
formalisation increasing the speed of decision making and few organisational boundaries
increasing opportunities for linking resources in different parts of the organisation
(D’Amboise and Muldowney, 1988; Miller and Toulouse, 1986). This also includes a
trust base platform for linking up towards resources in the environment (Borch, 1994).
The small firm may not serve as a direct threat to other firms. It may, therefore, more
easily link up and draw on the skills of partners and develop complicated webs of
relationships with business partners that include customers, suppliers, competitors,
research institutes and financial resources. We, therefore, present the following
postulate
Dynamic capabilities facilitating innovative strategies in SMEs 115
Hypothesis 1: There is a positive relation between (a) internal flexibility
capability and (b) external reconfiguration and integration capability and
SMEs’ innovative strategies.
2.4 Resource acquisition capabilities
A fundamental challenge for SMEs in their struggle to be entrepreneurial is the access to
new valuable and unique resources (Bush et al., 2001). The acquisition of new
resources through the accumulation of own equity capital may take very long time in a
dynamic market and the resources may not be easily accessed. Also, the risk of investing
in the wrong resources and being manipulated is high, in particular when dealing with
larger counterparts. A solution to this challenge is the development of business relations
characterised by person-to-person contact and trust that may give access to
complementary resources and reduce the risk of opportunistic behaviour and thereby
transaction costs. Organisational networks are essentially concerned with
human relations that transcend the requirements of organisational structure, commercial
relationship, etc. (Hall, 1993). The bundle of network resources typically include
reciprocity and focus on win-win exchange relations, emotional or cultural-based ties
such as family relations, similar background as to education, race and ethnicity and
political connections (Aldrich and Zimmer, 1986; Borch, 1992; Johannisson, 1992).
Hall (1993) ranks networks, reputation and culture, in addition to employee
know-how, as the intangible resources most important for business success. The network
context in which the firm operates may be important for firm growth (Johannisson et al.,
1994). Networks incorporating functional relations and social and emotional ties are
considered to be of special importance in understanding small business development
(Johannisson et al., 1994; Larsson, 1991). The network acts as a buffer against shocks or
surprises from the global market. It can support the firm in its early stages of
development and it can help the firm to process information. Imperfect mobility is
critical to achieve sustainable competitive advantage. Mobility may be reduced through
the linking of internal resources with external networks and creating network systems at
a higher complexity level (Black and Boal, 1994). According to the above arguments, we
posit the following hypothesis:
Hypothesis 2: There is a positive relation between resource acquisition
capability and SMEs’ innovative strategies.
2.5 Learning network capabilities
Superior capabilities in learning play a very important role in creating sustained
competitive advantage. Increasing skills in all parts of the organisation creates a not
easily located and intangible contribution to strategy (Teece et al., 1997). It serves as a
source of continuous renewal of all the resources in the firm and not the least the basic
operational competence needed for efficient implementation of the strategy in action
(Zollo and Winter, 2002). Organisational learning effort is about the incremental
improvement of existing knowledge, skills and processes. More important in this setting,
it is about exploration developing new knowledge skills and processes (Cohen and
Levinthal, 1990; Levinthal and March, 1993). In smaller firms, the manager(s) play a
more significant role in shaping the firm’s future and the learning process has to be
closely linked to the strategic apex.
116 O.J. Borch and E.L. Madsen
Radical learning involves challenging the dogmas and the orthodoxies of the
incumbents. It includes bringing in new perspectives, diversity in views and critical
confrontation of present knowledge perspectives and power structures, routines and
rules. The advanced learning process demands improvisation based on a platform of
practised performance routines for articulation, codification and accumulation of
experiences (Zollo and Winter, 2002) together with more systematic experimentation.
Radical change often comes from long term and diverse experimentation within the
firm and in cooperation with external actors. This demands broad channels of
information exchange, cross-functional teams that bring together different sources of
expertise. The learning process includes routines that provide exchange of joint
experience among the teams and functions, extensive communication links out of the
firm increases the amount of new impulses. We postulate that:
Hypothesis 3: There is a positive relation between learning network capabilities
and SMEs’ innovative strategies.
2.6 Strategic path aligning capabilities
Small firms are often criticised for being preoccupied with the present strategy. One
reason for this may be their links to family ownership and traditions where it is difficult
to make dramatic changes in the strategies of ‘the founding father’. Often such firms do
not have a board of directors that functions strategically. Strategic decision making is the
DC where managers pool their various business activities and opportunities, decide upon
functional links and invest in resources. This is the process where the choices that shape
the major strategic moves of the firm are made (Eisenhardt, 1989; Fredrickson, 1984;
Judge and Miller, 1991). Within the strategic decision-making process, the vision of the
future is created to give a picture of what the firm will look like in the years to come
(Hambrick and Fredrickson, 2001; Helfat and Peteraf, 2003). As such this process sets
the framework for the whole strategic change activity of the firm. Among others, this
process decides upon the paths of change within the firm, not the least the bindings to
earlier solutions and action patterns, the degree of experimentation and the range of
external search and integration. The notion of path dependencies recognises that history
matters because previous dispositions constrain future behaviour. Paths are referred to as
the strategic alternatives available to the organisation (Teece et al., 1977). Within the
strategic decision-making process, a central capability is to balance continuity and
change and create the necessary platform of stability (Pettigrew, 1998). Therefore, we
postulate that:
Hypothesis 4: There is a positive relation between strategic path aligning
capabilities and SMEs’ innovative strategies.
3 Methodology
3.1 Sample
In this explorative study we emphasised the development and testing of measures
representing the DC of the firm. Data were collected from small- and medium-sized
firms, defined as firms having up to 500 employees. A sample of innovation oriented
Dynamic capabilities facilitating innovative strategies in SMEs 117
firms participating in a regional innovation programme was chosen. The objective of this
programme was to contribute towards enhancing the innovation capabilities of SMEs.
One may expect the firms in this survey to be more entrepreneurial and therefore suitable
for studying entrepreneurial action.
The firms represent all types of companies: limited companies, general
partnership and one-man businesses. Data were collected through a combination of
questionnaire and telephone interview. Firstly, the questionnaires were sent to the
firms and subsequently the firms were called up and interviewed based on the questions
in the questionnaire. The survey targeted the most senior manager of the firms, most
often the entrepreneur or top manager, because of their knowledge of the companies’
operations.
The survey was conducted in 2004. All the 563 firms which were contacted
had received grants, public grant or loans from a government innovation
programme. 282 (50%) firms answered the questionnaire. Of these, 235 answered all
the questions. A chi-square test was carried out to see if there were differences
between those who had complete answers and the others (the original 563 firms).
No significant differences were found for the type of industry, firm
size or geography. Most of the firms are small firms. About 60% (141 firms)
had 0–9 employees, whilst 8% (18 firms) had 50 employees or more. Industries
were stratified in five groups. The largest of this is manufacturing (55%), followed by
services (23%), trade, hotels and restaurants (7%), primary industry (7%) and other
classifications (8%).
3.2 Measures
Innovative strategies: innovative strategies were measured through 19 self-reported items
on strategy. We integrated the entrepreneurial dimensions derived from Covin
et al. (1990). Principal Component factor Analysis (PCA) was used to identify different
types of renewal activity. Two of the self-reported items were taken out of the
analysis due to low communalities. We emphasised two distinctive renewal strategies.
One was labelled ‘Proactive-creativity’ (Cronbach’s alpha 0.88) and the other
‘Growth-risk orientation’ (Cronbach’s alpha 0.79). Twelve of the 17 remaining items
loaded on these two strategies. The Proactive-creativity strategy was measured through
seven items: development of new products, first with new products, continuous
development of business ideas, exploring new market opportunities, continually
improving existing products, search for new creative solutions and first with
technological development. The Growth-risk orientation strategy was measured
through five items: acceptance of high risk, fast-growth policy, encourage bold and
risky market solutions, changes in products/services have usually been quite
dramatic and aggressive in new marketing. Component scores related to these two
components were considered as dependent variables. The two other strategies were
traditional competitive strategies emphasising price- and product orientation and is not
used in the analysis.
The DC variables: the independent variables in this study represent the four
dimensions of DC identified in the literature. To measure these, we developed a
15-item measurement scale. The items were measured on 7-point Likert-scales ranging
from ‘strongly disagree’ (coded 1) to strongly agree (coded 7). An exploratory factor
analysis showed that 14 items loaded on four factors. One item had substantial
118 O.J. Borch and E.L. Madsen
side-loadings and was, therefore, excluded.
1
Path aligning capability was measured using
two items covering questions about importance of the board’s advisory roles and
importance of the board’s networking roles (Cronbach’s alpha 0.82). Learning network
capability was measured through the items cooperation with university/research institute
a. within and b. outside the region and cooperation with investors/investment milieu.
In order to obtain normalisation, the indexes were log-transformed (Cronbach’s
alpha 0.78). The resource acquisition capability was measured through the items use of
manager’s own networks, network as a knowledge-resource, use of networks to
influence the environment and high management competence (Cronbach’s alpha 0.83).
Employees’ networks as an information source loaded on the factor, but was
taken out of the analysis due to low communalities. External reconfiguration and
integration capability was measured using a composite index of the following
five items: communication with employees and suppliers/customers by e-mail/internet,
continuous search for collaborators for building competence, frequent contact
with R&D milieus and regular preparation of written strategies (Cronbach’s
alpha 0.82). These questions were all developed for this study except for the
last one. In addition to the four factors developed through the factor analysis, an
additional variable internal flexibility capability was utilised. This was
measured using the item: our employees accept frequent changes in tasks and
responsibility.
Control variables: we controlled firm size and industry. Firm size was
measured as the total number of employees within the firm. Due to skewness, the
variable was log-transformed. The basic resources of the firm were regarded
as control variables due to their possible influence as building platforms for
the dynamic capabilities. We controlled management resources measured as
business experience (years of practice) and leadership skills measured by
a dichotomous variable indicating whether he/she had a university degree (coded 1) or
not (coded 0).
4 Analysis
Table 1 presents the correlations among the study’s variables. The diagnostics tests
suggested by Neter et al. (1989) indicated that multicollinearity was not a serious
problem in our current sample. Therefore, multiple regression analyses tested the
study’s hypotheses.
Proactive-creativity and growth-risk orientation were the criteria variables. Five
different dynamic capabilities were considered as mediating variables. Firm size,
manufacturing industry and the basic management resources (manager’s experience and
leaderships skills) were treated as control variables. Tables 2 present the results of the
linear regression analysis.
All equations were significant. As supposed, none of the control variables were
related to the strategies. The results indicated support for all the hypotheses except that of
the relation between path aligning capabilities and the proactive-creativity strategy. Most
of the relations are medium to highly statistically significant.
Dynamic capabilities facilitating innovative strategies in SMEs 119
Table 1 Correlations between innovative strategies (dependent variables)
and independent variables
120 O.J. Borch and E.L. Madsen
Table 2 Linear regression model: innovative strategies and independent variables
(Std. beta coefficients)
Innovative strategies
Proactive-creativity Growth-risk orientation
VIF
Control variables
Firm size 0.044
?0.046
1.139
Leadership skills
?0.026
0.061 1.259
Manager’s business experience 0.024
?0.013
1.067
Manufacturing industry 0.074
?0.025
1.077
Independent variables
Internal flexibility capability 0.321*** 0.276*** 1.400
Resource acquisition capability 0.287*** 0.155** 1.124
Learning network capability 0.099* 0.200** 1.129
Path aligning capability 0.089 0.159** 1.064
External reconfiguration and
integration capability
0.397*** 0.202** 1.419
R
2
0.531 0.314
Adjusted R
2
0.512 0.287
F-statistics 28.312*** 11.446***
Sig.: *
Document tell dynamic capabilities facilitating innovative strategies in smes.
Int. J. Technoentrepreneurship, Vol. 1, No. 1, 2007 109
Copyright © 2007 Inderscience Enterprises Ltd.
Dynamic capabilities facilitating innovative
strategies in SMEs
Odd J arl Borch* and Einar Lier Madsen
Bodø Graduate School of Business
Nordland Research Institute,
NO 8049 Bodø, Norway
E-mail: [email protected]
E-mail: [email protected]
*Corresponding author
Abstract: In this study we present dynamic capabilities that facilitate
innovative strategies (proactive-creativity strategy and growth-risk orientation)
in Small- and Medium-sized Enterprises (SMEs). Corporate entrepreneurship is
seen as the integration of opportunity-seeking and advantage-seeking
actions providing new, valuable and unique business concepts. We build
upon the Resource-Based View (RBV) of the firm and in particular
elaborate on the accumulation of dynamic capabilities contributing to
innovation and growth-oriented strategies. Based on the literature and
an explorative study of 235 small- and medium-sized firms, we develop
four categories of dynamic capabilities that are critical for the SMEs
entrepreneurial position: internal and external reconfiguration and integration
capabilities, resource acquisition capability, learning network capabilities and
strategic path aligning capabilities. Most of the relations are medium to highly
statistical significant for dynamic capabilities relationships with innovative
strategies. Thus, the results indicated support for all the hypotheses, except of
the relation between path aligning capabilities and the proactive-creativity
strategy.
Keywords: small- and medium-sized enterprise; SME; entrepreneurship;
innovative strategies; dynamic capabilities.
Reference to this paper should be made as follows: Borch, O.J. and
Madsen, E.L. (2007) ‘Dynamic capabilities facilitating innovative strategies in
SMEs’, Int. J. Technoentrepreneurship, Vol. 1, No. 1, pp.109–125.
Biographical notes: Odd Jarl Borch is a Professor of Strategy and
Entrepreneurship at Bodo Graduate School of Business (HHB) and Senior
Researcher at Nordland Research Institute (NF) in Bodo, Norway. He received
his MSc from The Norwegian School of Economics and Business
Administration in Norway and his PhD from Umea University, Sweden in
1991. He is conducting research within the field of competitive strategy,
entrepreneurship and regional development. He has published in various
international journals, including Advances in Strategic Management, Journal of
Management Studies, Entrepreneurship, Theory and Practice, Scandinavian
Journal of Management, Decision Support Systems and Journal of Small
Business and Enterprise Development.
Einar Lier Madsen is a Researcher at NF and a PhD student at HHB. He is
conducting research within the area of entrepreneurship, strategic management
and small business studies and is for the moment finishing his PhD dissertation
110 O.J. Borch and E.L. Madsen
‘Developing Dynamic Capabilities in SME’s’. His bacground from former
positions as Managing Director, Finance Manager, Project Supervisor and
Local Politician.
1 Introduction
With more intensive competition and turbulence in the market, established firms have to
increase their entrepreneurial capacity and drive towards innovative and growth-oriented
business concepts. In this paper, we focus on the organisational mechanisms leading to
new innovative strategies in small firms. We elaborate on the capabilities related to
discovering, creating and exploiting new opportunities in the environment. In particular,
we emphasise the ability of established firms to create new resources and transform its
present resources into new valuable and competitive strategies (Burgelman, 1984; Dess
et al., 1999; Venkataraman et al., 1992). A fundamental challenge within an established
firm is how to pursue new opportunity search and exploration activities without
hampering the exploitation of its present business platform (Hitt and Ireland, 2000; Hitt
et al., 2003). The entrepreneurial action may prove costly and collide with the interest of
the short-term strategic implementation. The Small- and Medium-sized Enterprise (SME)
face special problems. The liability of smallness implies that SMEs are short of most
resources (Stinchcombe, 1965). This situation may call for specific capabilities within
the smaller firms, such as for developing resources for innovative and growth-oriented
strategies.
In this paper, we look closer into the resources within the SME that may contribute to
the launch of new innovative business platforms without destroying its present income
base. We define dynamic capabilities as the ability to build, integrate and reconfigure
both external and internal resources and routines (Eisenhardt and Martin, 2000; Teece
et al., 1997; Zahra and George, 2002; Zahra et al., 2006). We believe that focus on
dynamic capabilities is of special importance for entrepreneurial small firms. We still
know too little about what types of organisational capabilities that are needed in pursuing
new and innovative strategies within SMEs. Smaller established firms may need other
capabilities than new or larger firms (Zahra et al., 2006). Within the smaller firm, the
dynamic processes towards new business platforms have to include efforts for protecting
its present activities and provide a smooth transfer towards new market strategies.
Transformation of existing resources into new business platforms has to be an
integral part of the entrepreneurial process (Hitt and Ireland, 2000; McGrath and
MacMillan, 2000).
The range of organisational capabilities needed to pursue new challenges and
opportunities is not well explored (Zahra et al., 2006). We are in need of theoretical
models emphasising entrepreneurship at corporate level that are linked to strategy.
We build upon the Resource-Based View (RBV) of the firm emphasising the role of
capabilities that may create new resources and reconfigure old resources controlled by
the firm into unique, valuable resource configurations (Amit and Shoemaker, 1993;
Barney, 1991; Peteraf, 1993). The RBV literature emphasises that it is not the resources
per se that contribute to competitive advantage. Rather, it is the capability of rearranging
the resources into resource configuration supporting the chosen strategies that are critical
(Grant, 1991). New valuable market strategies are the product of superior configuration
Dynamic capabilities facilitating innovative strategies in SMEs 111
of specific resources (Brush et al., 2001; Mauri and Michaels, 1998). To reach such
configurations, the resources that are present have to be linked to new ones.
In this explorative study, we look closer into capabilities that may contribute to
entrepreneurial strategies within small firms. The Dynamic Capability (DC) approach
provides a closer picture of the action patterns towards renewal of the firm. The DC
literature emphasises activities like resource acquisition, transformation and
reconfiguration to generate new value creating strategies (Eisenhardt and Martin, 2000;
Grant, 1996; Teece et al., 1997). We still, however, do not know types of capabilities that
are most critical in facilitating innovative strategies. An increased understanding of this
type of capabilities may safeguard SMEs from being ‘stuck in the middle’ with
non-targeted competitive positioning tools, especially in a situation where there is a need
for strategic turnaround to meet market jolts.
This paper is structured as follows. In Section 1, the challenges of SMEs in creating
innovative strategies are discussed. The dynamic capabilities perspective is
then presented and several hypotheses are derived. The research methodology is then
examined. In the following section results are analysed and finally, conclusions and
implications are discussed.
2 Theoretical framework
2.1 The SME and the resource platform for innovative strategies
The development of business strategy is often regarded as one of the most important
decisions for a company. Previous research regards the entrepreneurial dimensions of
strategy to be of great importance in general (Miller and Friesen, 1978). Miller (1983)
assumes that the degree of entrepreneurship of a company is linked to risk taking,
innovation and acting proactively. Small firms with limited opportunities for direct
influence on the market structure have to be creative in launching new business concepts
(Messenghem, 2003; Zahra et al., 1999). This type of firms is characterised by a
simple structure, a local market and often high family and/or founder–owner dominance
(D’Amboise and Muldowney, 1988). This may serve as an entrepreneurial advantage
through, for example, increasing the speed of decision-making and reducing the costs of
implementation and control. On the other hand, the simple structure, the lack of a
significant strategic apex and the family and owner–manager dominance may create path
dependencies with reduced efforts towards new business strategies. This may result in
only incremental innovation and limited experimental and proactive behaviour
(Dess et al., 1999).
The entrepreneurial process towards firm renewal is dependent upon the acquisition
and reconfiguration of resources serving as a platform for new innovations
(Grant, 1991). Thus, we are in need of theories guiding the repositioning of existing
capacities and capabilities and the acquisition of new adequate and strategic valuable
resources at lowest possible costs. Within resource-based theory (RBV) the focus is on
unique and valuable resources controlled by a company and which are difficult to copy
(i.e. valuable, rare, not imitable and difficult to substitute) (Barney, 1991). The
exploitation of such resources is a source for competitive advantage (Barney, 1991).
To ensure maximum profit, the firm has to utilise internal resources and resources
acquired externally (Penrose, 1959).
112 O.J. Borch and E.L. Madsen
Resources are defined in various ways in literature (Greene et al., 1997). The RBV
deepens our understanding of how resources are applied and combined to create
competitive advantage. A major contribution of the RBV is the explanation of
long-lived differences in firm profitability that may originate in the firm’s internal
resource configuration. However, only few resources are productive. Productive
activity requires cooperation and coordination of groups of resources. Grant (1991)
introduces the concept of capability to denote the capacity on the part of a group’s
resources to carry out tasks and activities. Barney (2002) claims that capabilities are
internal company properties putting the company in the position to coordinate
and exploit the rest of their resources. Both these definitions are in line with Penrose’s
(1959) notion that the ability to use resources is a crucial element. In this context
Grant (1991, p.113) argues that: “While resources are the source of a firm’s capabilities,
capabilities are the main source of its competitive advantage”. Implicit here is the
notion that resources alone are not sufficient to generate such advantages. The firm
must transform resources into capabilities that may generate certain dividends in order
to gain competitive advantages (Chandler and Hanks, 1994). To create new
competitive platforms is not just a matter of collecting a bunch of resources. Some
types of capabilities cannot simply be bought but has to be developed gradually
(Teece et al., 1997).
Another challenge in the new configuration process is that the firm has to take into
consideration the present resources. Some of these cannot be removed because they are
seen as sunken costs or are needed for the present strategy. Also, the smaller firm has
limited financial capacity for buying new resources on the market. Thus, the SME
managers have to select an appropriate strategy that make the most effective use of the
available and achievable resources and capabilities (Grant, 1991). A firm’s current
resources will influence managerial perceptions and thus the direction for growth
(Wernerfelt, 1984). Present resources may limit the choice of markets entered and the
levels of profits expected.
2.2 The DC perspective
The RBV has been criticised for encouraging a strategy content focus and not
emphasising how the superior strategic assets are achieved and developed (Hamel, 2000;
McGuinness and Morgan, 2000; Priem and Butler, 2001). The RBV of the firm may be
criticised for only discussing why firms have success in the present context. Brush et al.
(2001) claim that entrepreneurial ventures that are innovative and growth-oriented
require a different set of resources from small slow-growth firms. So far, there has been a
limited empirical focus on SME capabilities that lead to the development of new
innovative business platforms. One reason for this lack of focus is that such mechanisms
are not easily tracked or managed; they are often individualised, based on
tacit knowledge and socially and emotionally embedded (McGuinness and
Morgan, 2000).
The DC approach has been developed partly as a response to the critique of too static
theories on firm growth. This approach is concerned with organisational mechanisms and
processes adapting the firm to a changing and at times turbulent external environment
and the firm’s market-product portfolio (Eisenhardt and Martin, 2000; Grant, 1996;
Pisano, 1994). It is oriented towards ‘the why and where’ questions of the firm (Priem
and Butler, 2001). The DC literature is concerned with preparing the firm for the
Dynamic capabilities facilitating innovative strategies in SMEs 113
exploitation of new opportunities in future markets. In particular, there is a focus on the
latent rules and mechanisms that facilitates the creation of new distinctive and difficult to
imitate advantages.
However, dynamic capabilities are often described in vague terms such as ‘routines
to learn routines’ that have been criticised as being tautological, endlessly recursive and
non-operational (Mosakowski and McKelvey, 1997; Priem and Butler, 2001;
Williamson, 1999). Yet, Eisenhardt and Martin claim that “dynamic capabilities actually
consist of identifiable and specific routines that often have been the subject of extensive
empirical research in their own right outside of resource-based view” (2000, p.1107).
They classify dynamic capabilities in three groups:
1 dynamic capabilities that integrate resources (i.e. strategic decision-making
routines and product development routines)
2 dynamic capabilities that focus on reconfiguration of resources within firms
(i.e. transfer processes including routines for replication and brokering,
resource allocation routines and patching as a strategic process that
centres on routines to realign the match-up of businesses)
3 dynamic capabilities that are related to the gain and release of resources
(i.e. knowledge creation routines whereby managers and others build new
thinking within the firm, alliance and acquisition routines and exit
routines that jettison resource).
Teece et al. (1997) identify three organisational and managerial key processes which are
essential for dynamic capabilities:
1 coordination/integration of both internal and external activities
2 learning seen as social and collective and defined as repetition and
experimentation which enables tasks to be performed better and
quicker and
3 reconfiguration and transformation of resources based on the ability to scan the
environment to evaluate the markets and competitors.
We are here talking about the capacity of the firm to renew competences and physical
resources at a high pace and achieve congruence with the changing business environment
(Collis, 1994; Winter, 2003). Teece et al. (1997) as well as Eisenhardt and Martin (2000)
highlight mechanisms that build, gain, integrate, reconfigure and release internal and
external resources to address rapidly changing environments. Thus, these authors are
concerned both with resources inside the firm’s borders and the processes towards
gaining control over resources owned by others through relational building (Barney,
2001; Greene et al., 1999; Hitt et al., 2001). Thus, the dynamic capabilities do not only
have a direct effect on the output of the firm in which they reside, but also have indirect
effects on the configuration of more basic, operational resources (Helfat and Peteraf,
2003). Second, balancing present and future activities of the firm is also a part of these
capabilities. This includes managing both the creation of new products and the
operational management of present production, improvements of present competence and
routines and the removal of competences and traces of earlier paths that may hamper the
renewal processes of the firm (Eisenhardt and Martin, 2000; Pisano, 1994).
In the following, we elaborate on the distinctive dynamic capabilities that may
contribute to the development of innovative strategies within the SMEs. Figure 1
summarises the connections between the independent variables.
114 O.J. Borch and E.L. Madsen
Figure 1 Research framework and hypotheses
2.3 Resource reconfiguration/integration capabilities
and innovative strategies
Among the most important strategic features of an SME is the capability to patch or
realign business concepts where resources are added, combined or split (Eisenhardt and
Brown, 1999). SMEs often have a simple organisation where the manager is closely
linked to operational day-to-day operations. This gives the manager a unique overview of
all available resources and their potential. Greene et al. (1999) argue that small
entrepreneurial firms have to map the broad set of resource bases and competencies that
are existent and emergent within the firm. The competitive strategy and the value chain
needed for serving the present strategy serve as the basis of this process (Argyres and
McGahan, 2002). The recombination of resources is, however, the driver for the new
venture creation process. The firm has to identify new combinations of productive
resources within the firm and to extend the frontiers of capabilities. This is facilitated by
a discussion of synergies between old resource combinations within and new resources
outside the firm (Venkataraman et al., 1992).
Connecting several ventures with different resources also enhances the organisation’s
ongoing adaptation, since the linkage improves overall innovation management, enables
the firm to reconfigure its resources and provides ways to experiment with new
ideas (Dougherty, 1995). SMEs may here benefit from a simple organisational structure
with few internal borders increasing flexibility, direct ownership involvement and low
formalisation increasing the speed of decision making and few organisational boundaries
increasing opportunities for linking resources in different parts of the organisation
(D’Amboise and Muldowney, 1988; Miller and Toulouse, 1986). This also includes a
trust base platform for linking up towards resources in the environment (Borch, 1994).
The small firm may not serve as a direct threat to other firms. It may, therefore, more
easily link up and draw on the skills of partners and develop complicated webs of
relationships with business partners that include customers, suppliers, competitors,
research institutes and financial resources. We, therefore, present the following
postulate
Dynamic capabilities facilitating innovative strategies in SMEs 115
Hypothesis 1: There is a positive relation between (a) internal flexibility
capability and (b) external reconfiguration and integration capability and
SMEs’ innovative strategies.
2.4 Resource acquisition capabilities
A fundamental challenge for SMEs in their struggle to be entrepreneurial is the access to
new valuable and unique resources (Bush et al., 2001). The acquisition of new
resources through the accumulation of own equity capital may take very long time in a
dynamic market and the resources may not be easily accessed. Also, the risk of investing
in the wrong resources and being manipulated is high, in particular when dealing with
larger counterparts. A solution to this challenge is the development of business relations
characterised by person-to-person contact and trust that may give access to
complementary resources and reduce the risk of opportunistic behaviour and thereby
transaction costs. Organisational networks are essentially concerned with
human relations that transcend the requirements of organisational structure, commercial
relationship, etc. (Hall, 1993). The bundle of network resources typically include
reciprocity and focus on win-win exchange relations, emotional or cultural-based ties
such as family relations, similar background as to education, race and ethnicity and
political connections (Aldrich and Zimmer, 1986; Borch, 1992; Johannisson, 1992).
Hall (1993) ranks networks, reputation and culture, in addition to employee
know-how, as the intangible resources most important for business success. The network
context in which the firm operates may be important for firm growth (Johannisson et al.,
1994). Networks incorporating functional relations and social and emotional ties are
considered to be of special importance in understanding small business development
(Johannisson et al., 1994; Larsson, 1991). The network acts as a buffer against shocks or
surprises from the global market. It can support the firm in its early stages of
development and it can help the firm to process information. Imperfect mobility is
critical to achieve sustainable competitive advantage. Mobility may be reduced through
the linking of internal resources with external networks and creating network systems at
a higher complexity level (Black and Boal, 1994). According to the above arguments, we
posit the following hypothesis:
Hypothesis 2: There is a positive relation between resource acquisition
capability and SMEs’ innovative strategies.
2.5 Learning network capabilities
Superior capabilities in learning play a very important role in creating sustained
competitive advantage. Increasing skills in all parts of the organisation creates a not
easily located and intangible contribution to strategy (Teece et al., 1997). It serves as a
source of continuous renewal of all the resources in the firm and not the least the basic
operational competence needed for efficient implementation of the strategy in action
(Zollo and Winter, 2002). Organisational learning effort is about the incremental
improvement of existing knowledge, skills and processes. More important in this setting,
it is about exploration developing new knowledge skills and processes (Cohen and
Levinthal, 1990; Levinthal and March, 1993). In smaller firms, the manager(s) play a
more significant role in shaping the firm’s future and the learning process has to be
closely linked to the strategic apex.
116 O.J. Borch and E.L. Madsen
Radical learning involves challenging the dogmas and the orthodoxies of the
incumbents. It includes bringing in new perspectives, diversity in views and critical
confrontation of present knowledge perspectives and power structures, routines and
rules. The advanced learning process demands improvisation based on a platform of
practised performance routines for articulation, codification and accumulation of
experiences (Zollo and Winter, 2002) together with more systematic experimentation.
Radical change often comes from long term and diverse experimentation within the
firm and in cooperation with external actors. This demands broad channels of
information exchange, cross-functional teams that bring together different sources of
expertise. The learning process includes routines that provide exchange of joint
experience among the teams and functions, extensive communication links out of the
firm increases the amount of new impulses. We postulate that:
Hypothesis 3: There is a positive relation between learning network capabilities
and SMEs’ innovative strategies.
2.6 Strategic path aligning capabilities
Small firms are often criticised for being preoccupied with the present strategy. One
reason for this may be their links to family ownership and traditions where it is difficult
to make dramatic changes in the strategies of ‘the founding father’. Often such firms do
not have a board of directors that functions strategically. Strategic decision making is the
DC where managers pool their various business activities and opportunities, decide upon
functional links and invest in resources. This is the process where the choices that shape
the major strategic moves of the firm are made (Eisenhardt, 1989; Fredrickson, 1984;
Judge and Miller, 1991). Within the strategic decision-making process, the vision of the
future is created to give a picture of what the firm will look like in the years to come
(Hambrick and Fredrickson, 2001; Helfat and Peteraf, 2003). As such this process sets
the framework for the whole strategic change activity of the firm. Among others, this
process decides upon the paths of change within the firm, not the least the bindings to
earlier solutions and action patterns, the degree of experimentation and the range of
external search and integration. The notion of path dependencies recognises that history
matters because previous dispositions constrain future behaviour. Paths are referred to as
the strategic alternatives available to the organisation (Teece et al., 1977). Within the
strategic decision-making process, a central capability is to balance continuity and
change and create the necessary platform of stability (Pettigrew, 1998). Therefore, we
postulate that:
Hypothesis 4: There is a positive relation between strategic path aligning
capabilities and SMEs’ innovative strategies.
3 Methodology
3.1 Sample
In this explorative study we emphasised the development and testing of measures
representing the DC of the firm. Data were collected from small- and medium-sized
firms, defined as firms having up to 500 employees. A sample of innovation oriented
Dynamic capabilities facilitating innovative strategies in SMEs 117
firms participating in a regional innovation programme was chosen. The objective of this
programme was to contribute towards enhancing the innovation capabilities of SMEs.
One may expect the firms in this survey to be more entrepreneurial and therefore suitable
for studying entrepreneurial action.
The firms represent all types of companies: limited companies, general
partnership and one-man businesses. Data were collected through a combination of
questionnaire and telephone interview. Firstly, the questionnaires were sent to the
firms and subsequently the firms were called up and interviewed based on the questions
in the questionnaire. The survey targeted the most senior manager of the firms, most
often the entrepreneur or top manager, because of their knowledge of the companies’
operations.
The survey was conducted in 2004. All the 563 firms which were contacted
had received grants, public grant or loans from a government innovation
programme. 282 (50%) firms answered the questionnaire. Of these, 235 answered all
the questions. A chi-square test was carried out to see if there were differences
between those who had complete answers and the others (the original 563 firms).
No significant differences were found for the type of industry, firm
size or geography. Most of the firms are small firms. About 60% (141 firms)
had 0–9 employees, whilst 8% (18 firms) had 50 employees or more. Industries
were stratified in five groups. The largest of this is manufacturing (55%), followed by
services (23%), trade, hotels and restaurants (7%), primary industry (7%) and other
classifications (8%).
3.2 Measures
Innovative strategies: innovative strategies were measured through 19 self-reported items
on strategy. We integrated the entrepreneurial dimensions derived from Covin
et al. (1990). Principal Component factor Analysis (PCA) was used to identify different
types of renewal activity. Two of the self-reported items were taken out of the
analysis due to low communalities. We emphasised two distinctive renewal strategies.
One was labelled ‘Proactive-creativity’ (Cronbach’s alpha 0.88) and the other
‘Growth-risk orientation’ (Cronbach’s alpha 0.79). Twelve of the 17 remaining items
loaded on these two strategies. The Proactive-creativity strategy was measured through
seven items: development of new products, first with new products, continuous
development of business ideas, exploring new market opportunities, continually
improving existing products, search for new creative solutions and first with
technological development. The Growth-risk orientation strategy was measured
through five items: acceptance of high risk, fast-growth policy, encourage bold and
risky market solutions, changes in products/services have usually been quite
dramatic and aggressive in new marketing. Component scores related to these two
components were considered as dependent variables. The two other strategies were
traditional competitive strategies emphasising price- and product orientation and is not
used in the analysis.
The DC variables: the independent variables in this study represent the four
dimensions of DC identified in the literature. To measure these, we developed a
15-item measurement scale. The items were measured on 7-point Likert-scales ranging
from ‘strongly disagree’ (coded 1) to strongly agree (coded 7). An exploratory factor
analysis showed that 14 items loaded on four factors. One item had substantial
118 O.J. Borch and E.L. Madsen
side-loadings and was, therefore, excluded.
1
Path aligning capability was measured using
two items covering questions about importance of the board’s advisory roles and
importance of the board’s networking roles (Cronbach’s alpha 0.82). Learning network
capability was measured through the items cooperation with university/research institute
a. within and b. outside the region and cooperation with investors/investment milieu.
In order to obtain normalisation, the indexes were log-transformed (Cronbach’s
alpha 0.78). The resource acquisition capability was measured through the items use of
manager’s own networks, network as a knowledge-resource, use of networks to
influence the environment and high management competence (Cronbach’s alpha 0.83).
Employees’ networks as an information source loaded on the factor, but was
taken out of the analysis due to low communalities. External reconfiguration and
integration capability was measured using a composite index of the following
five items: communication with employees and suppliers/customers by e-mail/internet,
continuous search for collaborators for building competence, frequent contact
with R&D milieus and regular preparation of written strategies (Cronbach’s
alpha 0.82). These questions were all developed for this study except for the
last one. In addition to the four factors developed through the factor analysis, an
additional variable internal flexibility capability was utilised. This was
measured using the item: our employees accept frequent changes in tasks and
responsibility.
Control variables: we controlled firm size and industry. Firm size was
measured as the total number of employees within the firm. Due to skewness, the
variable was log-transformed. The basic resources of the firm were regarded
as control variables due to their possible influence as building platforms for
the dynamic capabilities. We controlled management resources measured as
business experience (years of practice) and leadership skills measured by
a dichotomous variable indicating whether he/she had a university degree (coded 1) or
not (coded 0).
4 Analysis
Table 1 presents the correlations among the study’s variables. The diagnostics tests
suggested by Neter et al. (1989) indicated that multicollinearity was not a serious
problem in our current sample. Therefore, multiple regression analyses tested the
study’s hypotheses.
Proactive-creativity and growth-risk orientation were the criteria variables. Five
different dynamic capabilities were considered as mediating variables. Firm size,
manufacturing industry and the basic management resources (manager’s experience and
leaderships skills) were treated as control variables. Tables 2 present the results of the
linear regression analysis.
All equations were significant. As supposed, none of the control variables were
related to the strategies. The results indicated support for all the hypotheses except that of
the relation between path aligning capabilities and the proactive-creativity strategy. Most
of the relations are medium to highly statistically significant.
Dynamic capabilities facilitating innovative strategies in SMEs 119
Table 1 Correlations between innovative strategies (dependent variables)
and independent variables
120 O.J. Borch and E.L. Madsen
Table 2 Linear regression model: innovative strategies and independent variables
(Std. beta coefficients)
Innovative strategies
Proactive-creativity Growth-risk orientation
VIF
Control variables
Firm size 0.044
?0.046
1.139
Leadership skills
?0.026
0.061 1.259
Manager’s business experience 0.024
?0.013
1.067
Manufacturing industry 0.074
?0.025
1.077
Independent variables
Internal flexibility capability 0.321*** 0.276*** 1.400
Resource acquisition capability 0.287*** 0.155** 1.124
Learning network capability 0.099* 0.200** 1.129
Path aligning capability 0.089 0.159** 1.064
External reconfiguration and
integration capability
0.397*** 0.202** 1.419
R
2
0.531 0.314
Adjusted R
2
0.512 0.287
F-statistics 28.312*** 11.446***
Sig.: *