Nature of Innovation - Essay Example

?Nature of Innovation Innovation has been recognized as the key to survival of firms as it affects their foundation and existence (Cefis and Marsili,2005). Innovation has also been found to be the only source of growth, competitive advantage and new wealth (Tucker, 2001). While firms see innovation as a way to beat competitors, nations see the need for an innovative environment for long-term productivity and economic prosperity (The Economic Intelligence Unit, 2007). This implies that innovation is critical for individual companies as well as for national economic growth. The drivers of innovation include competitive pressures, and the need to gain competitive advantage. Competitive advantage can also be achieved from firm size or possession of assets (Tidd and Besant, 2009, Ch 2, p1). Mobbs (2010) cites from a book by Baumal who noted that “virtually all the economic growth that has occurred since the 18th century is ultimately attributable to innovation”. Drivers of Innovation Internationalization, deregulation and globalization have compelled companies to find newer ways to enhance performance, productivity and growth. Innovation has become a strategic priority as it helps to survive adverse changes, to protect market share, to open new horizons and to become market leaders (Mobbs, 2010). As markets have become customer-driven, firms also need to innovate to cater to customer needs, preferences and wants. In addition, advanced communications and transportation technology have fuelled growth thereby increasing competitive pressures on firms to innovate (The Economic Intelligence Unit, 2007). Other drivers of innovation include education and technical skills of the workforce and investments in research and development as a percentage of the GDP. Innovation is the application of knowledge in some innovative way and it definitely boosts performance. Business leaders in both small and large companies have started focusing on top- and bottom-line growth and one of the best ways to achieve this is through innovation. They have started evaluating their products, services, processes and even their corporate culture to gain competitive advantage (Mobbs, 2010). This paper evaluates to what extent small and medium-sized companies are better at innovating than larger companies. Types of Innovation Various theories have been put forth by researchers and scholars as they evaluate the potential of SMEs and large firms to innovate. Firm size and age influence survival, but the direction of growth matters more than the firm size (Cefis and Marsili, 2005). According to the product life cycle (PLC) theory, both product and process innovation influence market competition in different stages of industry evolution. Process innovation gains prominence as the industry matures. However, product innovation has to be ongoing as in the case of cardiac pacemakers. Firms that could introduce intermittent incremental innovations could support themselves better. Smaller firms would focus on product innovation but there are other ways in which firms can obtain strategic advantage such as change in the process, position (changing identities) and paradigm (new ways of seeing the world). Schumpeter, the founder of innovative studies, believed that entrepreneurs have the propensity to innovate and also receive rewards as long as they enjoy monopoly (Tidd and Besant, 2008). However, they can soon be overtaken by competitors who copy and imitate. Therefore constant innovation keeps the capitalist engine in motion. Sources of Innovation However, this ability to innovate is more important than any other factor. Innovation transcends all functional areas such as marketing, planning, human resource management and finance. In SMEs most of these functions are carried out by owner-managers who may lack the realization of the process needed for implementing innovation. Moreover, SMEs consider innovation as a one-dimensional function and hence consider innovation only through a major technological breakthrough (Tunney, 2007). However, there is more to innovation than technology. If innovation has to be considered as a change, it should be a continuous process leading to competitive advantage. Advantage for SMEs in Innovation Innovation can come through different sources such as top down, middle up-down or bottom up. SMEs have an advantage as they can develop an innovation strategy specific to its needs and needs of its managers and staff (Tunney, 2007). Entrepreneurial dynamism is the key advantage that SMEs have in support of innovation. Because of internal flexibility they are able to respond to changes in the business environment much faster but many small firms do not have the risk-taking propensity. When the market does not exist for a product or service, small firms can come up with innovative strategies if they redefine “market-orientation” and come up with proactive market-driving behaviour (Schindehutte, Morris and Kocak 2008). Having a market-driving orientation, Jones Soda Co, developed its own carbonated soft drinks of usual colour although it had started off as a beverage distributor company. This was a radical approach to brand management as they redefined the market space and changed consumer perception. This is also known as opportunity recognition (OR), a necessary trait for entrepreneurs. Innovation requires entrepreneurial acumen to identify opportunities, to see connections and to take advantage of them (Tidd and Besant, 2009). Opportunity recognition is an entrepreneurial trait and can lead to innovation as in the case of David Fialkow who was prompted to start his own ATM when he had to pay a two-dollar fee at the airport (Silverthorne, 2005). Simultaneously he also delved in creating a credit card processing centre for supermarkets and duty-free shops on cruise ships. This suggests that start-ups can succeed if they have the vision, the resources such as finance and technology, trust their instincts and possess risk-taking propensity. This is radical innovation because of the high degree of novelty the processes involve. However, entrepreneurship is not confined to SMEs and can be found in leaders in larger organizations. Entrepreneurs are risk takers and such leaders and innovators can be found in both small and large firms. Innovation and entrepreneurship are linked with a common concern – creation of new phenomena. In fact for private organizations innovation has become the precondition for survival. The public sector organizations are compelled to innovate due to competitive pressures. Small-and medium-sized companies have advantage over the larger firms because of the agility and rapid decision making that is possible (Tidd and Besant, 2008). However, size is not the only factor as innovation is derived from the mobilization of knowledge and skills and experience, all of which can create novelty in the product/service, in the way they are delivered and offered. These are more likely to be found in the larger firms. The SMEs in New Zealand defy the theory that small firms are more likely to have lower levels of innovation due to resource scarcity (Clark, 2010). Firms both small and large develop new innovations with high sales volume. Besides the small firms have a formal process of innovation and they do not lack financial resources. However, external funding for growth is an issue with active innovators in New Zealand while government bureaucracy is high in the country. Disadvantages for SMEs to innovate The SMEs may be driven by profit motivation or to reduce dependency, or to build strategic and operational robustness. However, SMEs need to have a formal process for implementing innovation. The SMEs usually engage in innovation unconsciously but a formal process yields better sustainability and competitiveness (Tunney, 2007). Other barriers to innovation in SMEs have been identified as lack of scientific and technical expertise, lack of resources and time, difficulty in attracting capital, the inability to offer integrated product lines to compete with larger firms. The entrepreneurial managers are also unable to cope with complex organizational and decision-making processes. Small firms find themselves incompetent to develop and implement technology but they can overcome this through the strategy of co-opetition which pertains to simultaneously pursuing collaboration and competition (Gnyawali and Park 2009). SMEs are unable to absorb the rising costs of research and development but through this strategy they can keep expenses under control. The resource-based theory suggests that collaboration allows them to compete with large payers. Mips Computer Company created a constellation of several small semi-conductor firms in the computing industry which enabled them to compete with giants such as IBM and HP. Radical vs. Incremental Innovation Change in business model can be radical or incremental, usually implemented by companies when entering new markets. In mature industries business models are standardized. Business level strategy helps management focus on how to position against competitors (Johnson and Scholes, 2007). Incremental innovation can be challenging for SMEs as they introduce technology but this is perceived degree of novelty because they have not been exposed to it before. Networking technology for example, would be commonplace for companies such as IBM and they can introduce radical change. Xerox was a large company but failed to introduce innovation. They took eight years of mishaps and failures to introduce change by which time they lost substantial market share (Tidd and Besant, 2009). It has been argued that SMEs with low commitment to R&D are better positioned to innovate but in most cases they introduce incremental rather than radical innovations (Kalantaridis and Pheby, 1999). Even when SMEs work as a conglomeration, they fail to take advantage of their geographical proximity to the urban areas such as London, as in the case of SMEs in Bedfordshire. The locational advantages could not stimulate this cluster of SMEs, the barriers being modest levels of higher education among the adult population and limited development of networking practices among the SMEs. There is a relationship between the size of the SME and innovation as the larger SMEs or the medium-sized firms have higher propensity to innovate and have market-orientation. Non-hi-tech SMEs exhibit financial and strategic constraints, while the leaders also lack the risk-raking attitude (Laforet, 2008). Innovation and Culture Non-SMEs have also been successful while at the same time not all large firms have been successful. Regardless of the firm size, culture of innovation drives change. This is evident from the case of Broens Industries, Austalia which has been able to sustain competition in the tool-making and precision engineering sector as its capability is grounded in a culture of innovation (Tidd and Besant, 2009). Continuous investment in innovation is essential. Opening new markets intermittently is not innovation; to be able to serve the established and mature markets with continuous product development as in the case of Zara, is innovation. Innovation in services has been achieved by firms such as eBay that have changed the way auctions take place. Again, innovation cannot be confined only to individual enterprises but innovation is required at the national level for economic growth of the nation. No difference as far as innovation is concerned, has been found in developing economies and SMEs in the developed economies. SMEs may have high level of intellectual and reputational resources but this does not compensate for a low level of product innovation and marketing capabilities in achieving growth (O’Cass and Sok, 2013). Personal relationships and social ties help in enhancing performance in SMEs, particularly in the South east regions. It is also essential for the SMEs to maintain good relationship with all the external stakeholders and the government officials. According to Schumpeter large firms have access to greater and diverse resources enabling innovation. They also have the propensity to tolerate risk and absorb failure (Johnson and Scholes, 2007). Since they have the necessary infrastructure such as distribution channels, they have the incentive to innovate. In small firms knowledge is more easily shared as they are more cohesive. They can innovate faster because of low levels of bureaucracy and flexibility. Small firms have the motivation to innovate as it is the matter of survival. In general the larger firms are more innovative in service industries and less research intensive in high-technology industries. Management Innovation Innovation in management principles and processes can evoke talent and allow companies to take giant leaps ahead. This process, known as management innovation, is different from other kinds of innovation. Large conglomerates such as Visa, Linux (open source development), Proctor & Gamble (brand management) and General Electric (management discipline to scientific discovery), have all succeeded due to management innovation (Hamel, 2006). All of these companies started the process of management innovation in the initial years of their existence. Besides, they all had a novel principle/process that challenged the traditional management systems. In addition, their process of innovation was an ongoing program. One of the recent management innovation processes has been applied by Whole Foods even as other retailers are trying to compete with Wal-Mart. Whole Foods has been able to sustain competition as it engages employees and forms small teams to manage different departments. The employee involvement is further enhanced as the majority of the stock options have been granted to non-executives. However, all of these companies are large business houses and due to a distinctive management system they achieved success. This does not imply that SMEs cannot be innovative because such innovation requires determination and perseverance. However, not all large companies have been able to achieve such process innovation. Large organizations have their own disadvantages as they are caught behind the change curve as political power is concentrated in the hands of a few. Organizations have to be proactive and devolve power. The feeling of community has to be brought in because innovation does not thrive in hierarchy. Emotional satisfaction takes precedence over financial gains. Innovation at Google is the most remarkable as they allow employees to spend 20% of their time on whatever they feel will benefit Google’s users and advertisers (Hamel, 2006). The company has lateral communication and the developers can post their inventions on the Google Labs website. Transformational leadership and dynamic CEOs can bring about such change although this is not limited to large companies. In fact, smaller organizations have more such opportunities to work as a community, the principle that has been adopted by large organizations. Leadership and Innovation Strong leadership is paramount to innovation. There is a strong link between innovative activities and business performance such as at Nokia, Apple and Google (Tidd and Besant, 2009). However, in the case of the SMEs, innovation has consistently found to be the most important characteristic associated with success. Innovative enterprises achieve stronger growth than those that do not innovate. Innovative forms gain higher market share and profitability. Innovation is often associated with technology but Hamel (2006) refers to management innovation, critical to survival and growth. Apple gained competitive advantage because of its enhanced product features. New developing countries favour product innovation while maturing industries prefer process innovation and small new entrants have the opportunity to compete with new features (Johnson and Scholes, 2007). Larger firms are in a position to experiment with process innovation as they have achieved economies of scale. Sometimes product and process innovation have to be pursued in tandem. However, even without incorporating new technology, process innovation as in the case of easyJet can be found. Internet was an existing technology but easyJet simply exploited its potential. To achieve economies of scale and to sustain competition, easyJet brought together customers, suppliers and producers on the same platform through direct sales, thereby eliminating travel agents. Organizational innovation is also linked to CEO leadership and the traits essential are idealized influence and charisma (Jung, Wu and Chow, 2008). Such leaders place the followers’ needs before their own and share risks with followers. Transformational leaders can create personal and professional commitment from the subordinates which enhances their self-esteem, thereby creating intrinsic motivation. This is an important driver for firm innovation. Diffusion of Innovation The pace at which innovation is diffused is also important. Diffusion of innovation depends upon supply and demand over which the company has little control. It depends upon the degree of improvement. In the case of 3G lack of performance improvement discouraged people to switch over in many markets (Johnson and Scholes, 2007). Diffusion on the supply side also depends upon complexity, compatibility, experimentation and relationship management. On the demand side it depends upon market awareness and customer innovativeness. The Body Shop was not willing to accept product innovation and hence lost the market to its own employees. A small group of employees that had developed a new product, which was not accepted by the management, left the company to start in their own (Lush Cosmetics). Lush Cosmetics, having learned from their experience at The Body Shop, now involve customers in product development (Johnson and Scholes, 2007). Large organizations have the advantage of setting up a new division to start some innovative business unit which is not possible by SMEs. Model of Innovation Model of innovation has several phases and it starts with search, the need to bring new ideas into the system (Tidd and Besant, 2009). This requires extensive investments in research and development which might be a constraint for SMEs. Once the search reveals several options, strategic choice has to be made from the alternatives available – how and why things need to be done. The third phase is the implementation stage where change actually takes place. Managing innovation is the most challenging phase because this requires commitment of resources, and developing something that has never been done before. Discontinuity and the revolutionary business model introduced by the low cost carriers, demonstrates challenge of discontinuous innovation (Tidd and Besant, 2009). The mainstream airlines continued to operate what they were doing but shifts in technology and the emergence of a new business model created a new set of conditions for them. In such a situation the new players excel and move ahead while the existing players take time to shift. Innovation must be comprehensive and permeate every department in the organization and must embrace new processes, strategies and new business models (Tucker, 2001). Innovation has to be an ongoing process searching for new opportunities and must be organized and systematic. Creativity and passion are required right from the inception while it also requires involving everyone in the innovation process. It has become important to tap the dormant creativity and unleash potential. The founding chairman of Sony recognized that growth does not take place if all the thinking was left to the management. He insisted on mental contribution and not just manual labour from his employees. The only thing that separates an organization from its competitors is the skills and knowledge, commitment and the innovative abilities of its people. Large firms such as Microsoft, Xerox, Intel, Sony, Casio and Benetton, have all started as small firms but achieved high growth because of exploitation of a major invention. Small firms are able to exploit first-mover advantage like patent protection. Innovators are individuals and there are several instances when successful innovators offer their invention to large firms but are refused (Xerox, Polaroid, Lush Cosmetics). However these innovators or superstars, face challenges when they transition from the original innovation to new product line, or new management (Tidd and Besant, 2009, Ch 10, p424). New technology-based firms are small in size and very few of them have the propensity to sustain innovation. They fail to transition in an innovative manner. Owners of small firms often sell their firms after a few years and live off their investments. Most small firms fall into the supplier-dominated category and they depend on their suppliers for innovation. Links with sponsors and venture capitalists play a dominant role in the success of SMEs. Start-ups may initially benefit from local knowledge exchanges but as they grow, such benefits diminish and they suffer from barriers to innovation like larger firms. The larger SMEs are engaged in product and process innovation for international markets but the smaller SMEs are engaged in incremental innovation (Tidd and Besant, 2009). Firms can acquire external capabilities and discontinuous innovation management through joint venture as in the case of IBM when it decided to commercialize PCs (Junarsin, 2009). Since it could not manufacture all the parts in a short time, it subcontracted several parts to Intel, Microsoft and others. This strategy helped them remain focused on their mainframes. However, when companies cannot manage disruptive innovations, they acquire another company that has technologies and capabilities. Lenovo lacked the market knowledge and reputation and hence the quickest way was to acquire IBM’s PC division. Innovation, Business and Government The environment for innovation differs across regions and nations. Innovation intensity depends upon private sectors strategies and public sector policies and institutions (Porter and Stern, 2001). This implies that innovation, businesses and government are linked together (The Economic Intelligence Unit, 2007). Innovation is not limited to emerging economies but the developed economies too must have ongoing innovative products and processes. Reforms in government policies in Japan and innovative corporate management techniques have enhanced Japan’s ability to create innovative products and services. China’s opening up of the economy and accession into WTO not only attracted inward foreign direct investment, firms were encouraged to expand overseas (Fung, Iizaka and Tong, 2002). Relaxation of regulatory reforms created an environment conducive to innovation and growth in China. Social and economic reforms led to increase in disposable incomes and changes in consumer demand and preferences, which was an incentive or Chinese firms to innovate (Chan, 2005). Conclusion Therefore, it can be concluded that SMEs are better at innovating than the larger firms only to the extent that they enjoy low levels of bureaucracy, flexible and fast decision making, and the ability to quickly respond to the changing business environment. Innovation requires entrepreneurial dynamism and this can be found in both SMEs and the larger firms. Innovation requires breakthrough thinking, risk-taking attitude and access to resources. These qualifications are more relevant than the size of the firm. However, research suggests that the larger SMEs or the medium-sized firms are more likely to innovate. There are instances when start-ups have come up with breakthrough radical innovation. In fact, corporations such as Microsoft that are giants today started off as small companies. Through strategies such as market-driven orientation and coopetition, SMEs can innovate. SMEs prefer incremental innovation but to grow radical innovation becomes important. 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