In today’s technological environment, organizational capabilities for managing change are regarded as important for business survival and growth. In particular, dynamic organizational capabilities have attracted considerable research interest over the past decade. Recently several studies have suggested that dynamic capabilities may be associated with a concept termed organizational fitness. What is not clear in this emerging research stream is whether firms with superior organizational fitness are more likely to prosper than unfit firms. In addition, relatively little attention has been directed toward creating a systemic model of dynamic capabilities that explains organizational fitness. The nature of fitness has been intensively debated in the biological sciences over a period of several decades. A confusing variety of fitness definitions have emerged from this literature. The lack of an agreed definition of fitness has resulted in several streams of research on organizational fitness. As a result of this fragmentation, there has been little progress toward answering the question of how to measure organizational fitness. The fragmentation in organizational fitness literature is problematic, because research into the relationship between organizational fitness and firm performance is not well-advanced. In this study, organizational fitness is defined in terms of organizational capability to produce variation. By defining fitness in this way, the tautological criticisms leveled against existing concepts of fitness are avoided. The definition of fitness proposed here accommodates both an evolutionary learning perspective and a perspective of strategic management, and thus reflects an integrative approach to the concept. A notable feature of the literature exploring organizational fitness is that it has been focused on large corporations. However, a growing body of literature suggests that SMEs are different from large firms and need to be examined in their own right. SMEs are important contributors to business in most countries throughout the world. This study addresses that perceived gap in the literature and asks: What relationship, if any, is there between organizational fitness and business performance for SMEs? Theory is developed and tested here by means of a large sample of SMEs in New Zealand. Two distinct aspects of organizational fitness are identified for SMEs. First, survival fitness is associated with generic combinative capabilities. Second, growth fitness is associated with knowledge assimilation and transformation. SME growth fitness and survival fitness are each found to be positively related to business performance under a variety of contexts. Further, an increase of growth fitness and survival fitness provides a means of alleviating selection pressures for SMEs. That is, dynamic capabilities of knowledge assimilation and integration are found to be positively associated with SME business performance. In contrast to studies that advocate SME development of context-dependent capabilities, the findings of this study suggest an alternative perspective: variable selection pressures can be influenced by SMEs with a high level of survival and growth fitness.