INNOVATION IN SMALL BUSINESS

By Michel Tunney, BA, MRUP, MSc (Innovation Management), C.Dip AF.

CEO Donegal County Enterprise Board.

Last year I attended a seminar given by Professor John Bessant, then of the Centre for Research and Innovation Management at the University of Brighton on the topic of innovation management and small business.  In his introduction Professor Bessant quoted from the first page of A. A. Milne’s ‘The World of Pooh’ – an unlikely source of insight for innovation!  For all parents the story of Christopher Robbin and Winnie the Pooh is very familiar.  The first paragraph of the book goes as follows “Here is Edward Bear, coming downstairs now, bump, bump, bump, on the back of his head behind Christopher Robbin.  It is, as far as he knows, the only way of coming down stairs, but sometimes he feels that there really is another way, if only he could stop bumping for a moment”. Generally speaking there is always a better way if we could only make the time to think about what we do, how we do it and how we could do it better? 

Doing things differently, better, quicker and more cost efficiently are all what innovation is about in small businesses. Unfortunately too many  see innovation as only the application of new technologies or the carrying out or application of formal research and development.  This reflects one of the main difficulties when discussing innovation in relation to its application to small businesses – what exactly do we mean by innovation and what do we mean by innovation in small business?

Drucker (1985) defined innovation as ‘the means by which the entrepreneur creates new wealth producing resources or endows existing resources with enhanced potential for creating wealth’. Drucker in his definition clearly relates innovation to entrepreneurs and states clearly that innovation is a specific instrument of entrepreneurship.  Innovation is that process by which companies seek to gain a competitive advantage in the market place and to increase their capacity to generate wealth.

For the purpose of this article the definition of innovation which we will use is as follows “the identification, application and exploitation of a new product, process or marketing opportunity by the business which increases its capability to generate wealth and strengthens its competitive position” (Frances 2001).  Thus for a firm to engage in innovation it will require the ability to access new information, have the capability to turn this information into knowledge, and have processes, procedures and resources to apply this knowledge to exploit the opportunity or opportunities arising.  It is also likely that the capability of a firm to innovate will change as it grows and develops.

Innovation has now become one of the key elements within a business. As competition for customers and resources become more and more intense the ability of a company to innovate is often more important than any other factor in its sustainability.  Innovation therefore needs to transcend all areas of operation - production, finance, planning, human resource management and marketing. However in the small business many of these functions are carried out by the owner manager and thus often leads to a lack of realisation of the processes needed to implement innovation within the small business.

If innovation is used merely as a one dimensional function, as it very often is within the small business, there is a real chance that innovation will only be sought through major technological breakthrough or as an output of once-off events or difficulties to be overcome.  For most businesses innovation and the quest for innovation, must be a continuous process of improvement and change.  Therefore if we regard innovation as change it is more purposeful to consider it as a continuous process aimed at seeking competitive advantage. 

However for the small company a critical issue to be considered is where innovation will come from.  Within any business or organisation innovation generally comes from five areas as indicated in the diagram below:

Top Down: this is where innovation is driven by the owner manager of the small firm.

Side - In: through formal research and development which leads to new products or processes which are then manufactured or implemented within the business.

3

MUD
 
R&D
 
2 Side In
 
4 Spin Out
 
5 Bottom Up
 
1 Top Down

Middle – Up - Down (MUD): this is where innovation occurs within the business either through the development by either incremental improvements, applications of new ideas and creativity by staff or through an internal culture which supports and drives innovation.

Spin-outs: where a new opportunity is identified either within the business or by an individual in the business which leads to a spin off company out of the existing business.

Bottom-up: where the innovation is driven from the workshop floor up through the business.  This may be a result of formal processes such as quality circles, lean manufacturing, or other such management techniques.

For the small business, irrespective of the source of innovation, the small business can develop an innovation strategy specific to its needs and the needs of its owner managers and staff.  Examples of such strategies could be as follows:

For the lifestyle (static) small business - “if we just continue as we are that’s ok”. 
In this type of business innovation can be used to maintain profitability and reduce dependency on the owner.   Targets for this type of innovation strategy would include labour saving techniques, improved and simplified processes, new processes to be owned by others within the business thus being less dependent on the boss or owner manager and increased visibility of problem areas which need to be addressed.

Generative small businesses - “We don’t want to be big but we want to be better and make more money!”
The innovation strategy in this type of business is to increase profitability and build strategic and operational robustness.  The targets for innovation in this type of business would include new or improved products developed and offered to customers, the development of lean processes, the development and implementation of new management techniques and being open to best practice ideas and external influences.

These are but two possible strategies but in reality for the small business it is likely that an innovation strategy will reflect some if not all of the elements within these possible strategy scenarios.  Irrespective of the scenario of the strategy adopted by the small business it is imperative that the small business implements a formal process for the implementation of innovation.  A simple process would have six stages - defining the strategic intent, searching for ideas and pathways, mapping the development process, application of decision making processes, implementation of the decision/s and reviewing to learn. Each of these steps are worthy of more detailed discussion which is outside the scope of this article.

Obviously if innovation is an in built process within a small business this formal six step innovation process would be ongoing within the business.  Indeed in many small businesses it is an unconscious process engaged in by the owner manager, but if implemented as a formal process, it is likely to have a higher level of success and greater positive effect on the sustainability and competitiveness of the business.

For small businesses the key advantages relating to innovation is their entrepreneurial dynamism, their internal flexibility and responsiveness to changing circumstances i.e. their behavioural advantages.  However many small firms are put off by the very idea and word innovation, not to mention the over emphasis by agencies and policy-makers on formal research and development which so often has become the yardstick for measuring the levels of innovation in the small business community.  While the advantages of the small businesses in relation to innovation are those which relate specifically to their size – dynamism, internal flexibility, short lead times and responsiveness to change, the barriers to innovation have been identified in general as:

• A general lack of suitably qualified technical specialists within small firms.  Thus the small firms are generally unable to support a formal R & D effort on an appreciable scale.
• Small businesses often lack the time and resources to identify and use external sources of information, technical and scientific expertise.  Thus small firms in general are unable to access formal R & D Programmes and generally engage in product and process improvement rather than radical or new technological developments.
• Small businesses often experience great difficulty in attracting capital, especially risk capital.  Innovation, especially new product development, will generally represent a disproportionately large financial risk for the small firm and therefore more often than not becomes impossible for small firms to fund.  Added to this is the inability of the small firm to spread the risk over a portfolio of projects due to their limited resources.
• In some areas/sectors the scale of economics forms a substantial entry barrier to small firms, as small firms experience an inability to offer integrated product lines or services.
• Small firms experience difficulty in acquiring external capital necessary for rapid growth and many entrepreneurial managers are often unable to cope with the increasing complex organisational and decision making processes necessary to manage such growth.

Having looked at what innovation, is its importance to the sustainability of small business, the sources of innovation and the implementation of innovation within small business the question remains as to how both the public and private sectors can promote and support innovation.  It is suggested that the fostering and implementation of innovation within the small business sectors requires additional actions along the following lines:

• A demystification of innovation, the innovation process and the management of innovation within and to small businesses.
• The provision of a seamless support structure from the public sector agencies to support innovation in the small firms sector.  This support must not be based on only measurable research and development expenditure and outputs but rather on quantifiable outputs such as improved management development capability, improved access to information, improved decision making processes, improved knowledge generation and procedures and increased empowerment within the firms.  The basis of such a support structure to a company would be based on an initial innovation audit linked to the development of a development strategy for the company.
• The provision of a dedicated resource at local county level, actively promoted to small firms, providing access to current market information backed by supported-access to experienced sector specific professionals.  The objective of this action would be to make available current market information to small businesses and to enable them to use this information to generate new knowledge.
• The development and implementation of a programme aimed at facilitating inter company alliances/relationships in which companies are assisted in identifying, developing, maintaining and where necessary ending relationships and alliances.  The rationale and objective of each strategic relationship would be set by the firms involved and could be either long term or short term, depending on their objectives. 
• The development of a practical innovation management programme to be rolled out on a national basis through County and City Enterprise Boards aimed at improving and developing the innovative capacity and management development capability of local firms and in particular the owner manager and his/her key staff.
• The implementation of an innovation graduate placement programme which would enable small local firms to hire technical graduates thus helping them overcome  one of the key barriers in the innovation process.

 “Innovation tempered with the ability to think and manage strategically, are the key factors that distinguish the innovative entrepreneurial firm from the small business venture” (Beaver and Price, 2002).  The capacity and capability of a firm to innovate can and does lead to substantial and profitable business development.  Provided that these are the objectives of the firm and its stakeholders, small firms need to grasp the opportunities which innovation can offer. For the future development and sustainability of small firm it is essential that they are fully supported in doing so.

By Michel Tunney, BA, MRUP, MSc (Innovation Management), C.Dip AF.

CEO Donegal County Enterprise Board.