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The purpose of this study is to examine the causal relation between SMEs’ corecompetency and competitive strategy, to analyze the effect of competitive strategy ontheir business performance, and therefore to make some contributions academicallyand practically. To this end, 255 SMEs were analyzed for the hypothesis test. As theresult of empirical analysis, it is shown that, regarding the effect of core competencyas an antecedent variable on business performance, SME’s marketing capability andtechnology capability both are not significant to its short-term financial performance. In addition, in terms of the relation between core competency as an antecedentvariable and competitive strategy as an independent variable, SME’s marketingcapability and technology capability both have significantly positive effects on costleadership strategy and differentiation strategy. It is also shown that industrialenvironment as a moderator variable affects partially how SME’s core competency isrelated to its competitive strategy. Moreover, in terms of the relation betweencompetitive strategy as an independent variable and business performance as adependent variable, SME’s competitive strategy affects positively its businessperformance except the effect of cost leadership strategy on customer performance. Based on these relations between core competency, competitive strategy, andbusiness performance, it appears that cost leadership strategy is more suitable forSMEs with relatively high marketing capability, and that differentiation strategy ismore appropriate for those with relatively high technology capability in thecorrelation of strategy with capability. It also indicates that implementing cost leadership strategy relatively stronger rather than differentiation strategy is requiredto achieve high financial performance.