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How SMEs capitalize on their innovative potential

October 25, 2017

They are small, hence they can be quick and more innovative!

Though there is not much common ground between Joseph Schumpeter and Karl Marx, both economists were convinced of one thing: In the long run, big businesses would be the ones to prevail. They predicted businesses that lacked capital, market power and huge laboratories would eventually disappear. Decades later, one thing is clear: Their predictions were wrong. Not only have SMEs not disappeared, but they are alive and kicking. And their success continues to grow—for a systematic reason. They are small, and hence they can be quick. Their smallness and reduced organizational complexity make it possible for them to immediately respond to trends, disruptive change and new business opportunities. The long and the short of it is—small businesses can be more innovative.

A lightbulb in a speechbubble
The middle-class still exists. A small organization size creates possibilities for innovation and high responsiveness.

Businesses need to capitalize on their potentials, but not all SMEs do this. While there are outstandingly innovative SMEs, there are also many others whose future hangs in the balance: Will they make a consistent effort to enhance their focus on innovation in the coming years, thereby laying the foundations for future success? Or will they play a waiting game and fall victim to creative destruction?

In my capacity as the academic director of the biggest innovation competition for SMEs (TOP 100), I have, for 15 years, analyzed what factors make it possible for SMEs to achieve innovation success. The results of benchmarking thousands of companies reveal the systematic differences that exist between the particularly successful innovators, i.e. the TOP 100, and their “average” counterparts, providing insights into how to achieve innovation success. The numerous influencing factors can be broken down into four categories.

Graphical illustration of innovation processes
There are numerous factors which are responsible for the innovation success of SMEs. Photo © CC0 License

Innovation starts at the very top

To begin with, management is important. Innovation means breaking new ground. It requires energy and involves risks. If management fails to provide impetus and support and does not lead the way, the business in question will very quickly fall back into its “comfort zone”. It will continue to do what it has always done, but innovation is, by definition, no routine task. A business cannot innovate, unless management develops strategic innovation objectives, helps bring projects to fruition and makes a constant effort to provide support when it comes to overcoming market and internal resistance to innovation. Numerous indicators illustrate the crucial role that management plays in the context of innovation. Resource allocation is one of them: The TOP 100 invest, on average, 13.5% of their turnover in innovation—that is nine times as much as SMEs spend on it in general.

The climate makes all the difference

Management is also key with regard to the second factor: the right climate for innovation. In order to be able to achieve innovation success, there needs to be a corporate culture that is conducive to, and rewards, ideas and creativity. There is plenty of research evidence that employees cannot be “ordered” to be innovative. Businesses seeking to tap into the creative potential of their employees with a view to stimulating innovation have to give people room for maneuver and need to encourage them to act autonomously, take risks and interact with one another. Our figures show that companies that accomplish this in smart ways receive 2.5 suggestions for improvement and ideas for new products and processes per employee and year, for instance—that is more than three times the usual average.

Structures and processes—but flexible ones

It goes without saying that a positive climate and good ideas alone are not enough. There also have to be organizational structures. When it comes to innovation, it is important to share tasks; hence, approaches need to be coordinated in order to avoid chaos. What is striking is that in terms of organization many businesses place a one-sided emphasis on cost reduction and short-term efficiency. Clearly defined innovation processes exist in fewer than one SME in four, irrespective of the fact that innovation requires flexible, project-like structures and at all stages—from coming up with innovative ideas to entering the market—a succession of creativity and level-headed business decisions. Virtually all of the TOP-100 SMEs (97%) have such processes in place.

The fourth factor is outward orientation. In the age of open innovation and crowdsourcing, it is crucially important for businesses to tap into external knowledge, know-how and ideas. Whether this input comes from research facilities, clients or other sources does not matter. Businesses need to keep in mind that they are small compared to the rest of the world. Given the significance of external input, it comes as no surprise that, for instance, two thirds of the TOP-100 SMEs actively collaborate with universities—among normal SMEs, that figure is only 11%.

Graphical display of the four categories
The influencing factors can be broken down into four categories.

These four areas complement and mutually reinforce one another. In some businesses, management plays a key role in this context, others have managed to create environments that are uniquely conducive to innovation, and yet others have put in place exemplary processes or are role models as far as outward orientation is concerned.

Conclusion:

What is crucially important from a business point of view is to translate these potentials into innovation success—i.e. successful new products, services, processes or business models. These, in turn, have to create value. Our figures show that the top innovators generate six times as much turnover through innovation as their average counterparts, and consequently also grow six times as fast.

So innovation is evidently the single most important success factor for SMEs—and the main reason why leading lights such as Karl Marx and Joseph Schumpeter were wrong in their predictions.

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