In this paper, the authors examine and analyzed the effect of business strategy on innovation and firm performance in the small industrial sector. Especially, to analyzed partially the effect of business strategy on innovation, the effect business strategy on firm performance, and the effect innovation on firm performance. The sample using purposive sampling of 55 business units. Primary data collection instrument is done by giving a questionnaire to the owner-managers of the wooden furniture manufacturing. Analysis of the data used to test the hypotheses of Partial Least Squares (PLS).