ABSTRACT. The process by which small firms (SMEs) invest
in and gain benefit from information systems (IS) is little
understood. This paper analyses two alternative models of IS-
based strategic change – the Focus-Dominance model (Levy
et al., 2001) and stages of growth models as applied to SMEs.
An analysis of the outcomes of IS strategy development under-
taken for 43 SMEs maps their IS use over time. The analysis
supports the Focus-Dominance model, some parts of the stages
of growth model and extends the critique of the latter. Further
variances are explained by the entrepreneur/owner’s values
and experience. One structural variable, namely, the industry
sector may also explain the variances. The implications for
theory and practice are discussed.
Information systems (IS) in large firms provide
major opportunities for obtaining added value
through exploitation of the information resource.
IS are also a major driver of strategic change.
There is less evidence of small and medium enter-
prises (SMEs) investing in information systems to
capture similar benefits. While many SMEs
have taken a reactive approach to investment in
IS/IT, primarily focused on cost (Hagmann and
McCahon, 1993), Yetton et al. (1994) describe the
adoption of IS by an SME for strategic competi-
tive advantage. More recently, Levy et al. (2001)
report that SMEs do in fact align their IS strategy
to the strategic context, as defined by the level of
customer dominance, to capture both cost advan-
tages and value added benefits.
Levy et al.’s model is one of fit between the
business and IS strategies and their data is cross
sectional. As such, the analytical framework is
essentially comparative statics. Yet, embedded in
their model is an implicit dynamic. Levy et al.
assume that the initial strategic context of the
typical SME is characterised by few customers and
a focus on cost, with IS investment supporting a
focus on efficiency using spreadsheet and accoun-
tancy packages. They then speculate that a
successful SME follows one of two trajectories.
In one, the customer base increases and the IS
strategy changes from a focus on efficiency to one
on co-ordination and IS investment in LANs and
databases. In the other trajectory, the customer
base does not increase significantly but collabo-
ration between the firm and its few major cus-
tomers improves, supported by IS investments in
In an earlier paper, Levy et al. (1998) offered
two propositions about the dynamics or lack of
dynamics concerning IS uses in SMEs. The first
is that an embedded stages model for IS use may
exist. The second is that many SMEs choose to
compete in one market and this tends to ossify
their use of IS. Storey (1994) is critical of applying
stages models developed for large firms to the
behaviour of SMEs. He agrees with Levy et al.’s
second contention that many SMEs do not
progress from their initial start up market position.
The Dynamics of SME
Small Business Economics 19: 341–354, 2002.
2002 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on August 15, 2001
Warwick Business School
University of Warwick
Coventry CV4 7AL, U.K.
Centre for Information Management
School of Management
University of Bath
Bath BA2 7AY, U.K.
Australian Graduate School of Management
University of New South Wales
Sydney 2052 Australia