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. Introduction 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 EDI. 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 Information Systems Small Business Economics 19: 341–354, 2002.  2002 Kluwer Academic Publishers. Printed in the Netherlands. Final version accepted on August 15, 2001 Margi Levy Warwick Business School University of Warwick Coventry CV4 7AL, U.K. E-mail: orsml@razor.wbs.warwick.ac.uk Philip Powell Centre for Information Management School of Management University of Bath Bath BA2 7AY, U.K. E-mail: mnspp@management.bath.ac.uk and Philip Yetton Fujitsu Centre Australian Graduate School of Management University of New South Wales Sydney 2052 Australia E-mail: phily@agsm.edu.au Margi Levy Philip Powell Philip Yetton