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The rapid changes in the manufacturing environment have become the greatest challenge for a manufacturing unit. This leads to the demand for change from the traditional manufacturing strategies to more flexible strategies. To sustain in the hyper-competitive market, a flexible system strategy is required. For designing such strategies and policies, it is important to know the factors that influence the performance of the system. The aim of this paper is to establish the relationship between the flexibility of components of a manufacturing system (machine, material handling and worker), competitiveness and business performance of small and medium scale enterprises (SMEs). A survey was conducted in SMEs of northern India. Three sectors, namely automotive, machine tool and light engineering (mechanical components and equipment), were analysed under manufacturing SMEs. The study contributes towards investigating the effect of the machine, material handling and worker flexibility on competitiveness and further competitiveness on business performance of manufacturing firms. This paper presents a structural equation model displaying the relationship between the flexibility of manufacturing system components, competitiveness of SMEs, and business performance. [ABSTRACT FROM AUTHOR]