Innovation and Change - Assignment Example

Innovation and Change Introduction Entrepreneurship is more than merely establishing a business for that it involves a number of skills and abilities of the entrepreneur such as seeking better business opportunity, taking risks beyond security anticipation and having the tenacity to innovate (Kuratko, 2008, p. 3) by aligning newer ideas to technology, people, process and other resources. Joseph A. Schumpeter, widely renowned as the father of entrepreneurship, perceived entrepreneur as an innovator (Carsrud and Brannback , 2007, p. 7) and he argued that entrepreneurs are those who perform and carry out new combinations by finding and taking opportunities to be seized to create new products or service and to establish a new marketable contribution to the economy (McDaniel, 2002, p. 57). Innovation is one of the most vital constituents in advancing living standard and wealth creation. Innovation may occur from different guises, but the roles played by both large scale and small to medium sized enterprises in creating innovation and translating the same to useful needs and wants to be met by customers in the market are undeniably critical. Since Schumpeter argued that entrepreneur is an innovator in 1950s, many researchers investigated the relationship between innovation and performance and examined whether small to medium or large scale enterprises are better at innovating than the other (Gronum, Verreynne and Kastelle, 2012, p. 257). The importance of Small and Medium sized enterprises (SMEs) as drivers for economic development and for improved social wellbeing has been increasingly acknowledged. Moreover, innovation capacity is a critical requirement for the survival of SMEs (Wolf, Kaudela-Baum, Meissner, 2011, p. 242) mainly because better entrepreneurs are those who are good at innovating and therefore they are found to be successful. This piece of research paper investigates the argument that small to medium sized enterprises are better at innovating than large scale businesses and examines how successful are SMEs in innovating their goods or services. In order to analyze and critically evaluate the argument, this paper explains the meaning and conceptual framework of SMEs, addresses their role in the economy and explains why they are considered as important in terms of its contribution to innovation. Small and medium sized Enterprises (SMEs) Small and medium sized enterprises (SMEs) constitute the vast majority of all businesses in almost all the countries and they play a very central role in the economy. SMEs are the major sources of entrepreneurial skills, innovation and employment that in turn help the economy grow further. Analoui and Karami (2003, p. 25) defined SMEs as one that has only a small share of its concerned market and is managed in a personalized way by its owner or part-owner, but not through a medium of an elaborate management system. SMEs are not sufficiently large to get access to the capital market for publically issuing of securities. Researchers used different constructs such as annual sales, number of employees, value added, value of assets, annual profits etc to define and explain SMEs. Out of these constructs, number of employees and annual sales are most often used to delimit the category of SMEs. For most researchers, a small to medium sized firm is one that employs no more than 250 persons and is having annual sales of not more than £50 million (Analoui and Karami, 2003, p. 26). According to OECD, SMEs are non-subsidiary and independent firms that employ less than a given number of people. The most frequent upper limit to categorize a SME is 250 employees (OECD, 2000, p. 7). The Small Business Administration in the United States has fixed certain criteria to delimit the size of a SMEs. According to these criteria, SMEs are those that employ less than 500 people, although it may be as high as 1500 in some circumstances (Akcay and Soylemez, 2009, p. 215). Importance of SMEs to the economy SMEs play significant role in the economy mainly because they represent a vast majority of all the firms in many economies in terms of absolute numbers. As Bhaird (2010, p. 2) noted, more than 99 percent of enterprises in the US and EU are classified as SMEs. He argued that the contribution of SMEs to the macro-economy may also be gained by examination of numbers of employment, output, gross value added, innovation and regional development that SMEs bring about. SMEs function as major engine for the US economy filling niche markets, bringing innovation and being competitive and industrious while facing wider range of business conditions. OECD (2005, p. 362) found that SMEs in the EU generated USD 4 trillion of total annual economic output, 68 million jobs, more than 30 percent of foreign trade and representing around 40 percent of total economic activities. Since large firms increasingly outsource majority of their activities, the share of SMEs in the economy will further increase. There were almost 19 million SMEs in the European Union representing more than 99 percent of all enterprises in the early years of 2000 (OECD, 2005, 7). SMEs continue to increase its share in employment and GDP because larger firms with more than 500 employees are increasingly outsourcing majority of their activities. SMEs play a central role as backbone of the Asia-Pacific economy, accounting for around 90 percent of the enterprises. SMEs in Asia-Pacific region constitute between 32 and 48 percent of employment and between 60 to 80 percent of gross domestic product (Dowling, Festing and Engle, 2008, p. 65). From the economic point of view, SMEs perform a number of significant functions such as small-scale retailing, repairing facilities, subcontracting, individual contacts with customers etc that cannot be performed by large scale businesses. The SMEs make use of physical and human capital that otherwise may become idle. Since small firms are more flexible than larger firms, they can quickly respond to changes in demand and technology. One of the most important aspects of SMEs’ importance to economy is that they more often pioneer certain development of new processes or newer markets ideas and that are later taken up by the large businesses to bigger markets in large scale (Council of Europa, 1994, p. 11). SMEs and Innovation The main issue being debated in this research paper is related to the innovation role played by SMEs. Based on literatures and analysis of the facts, this paper will attempt to answer whether small to medium or large sized enterprises are better at innovating. In order to analyze the facts and reach to the conclusion, it is very important to detail the theoretical aspects of innovation and to examine how successfully SMEs innovate. Innovation as an entrepreneurial function Technology keeps on changing almost every day to greatly impact business contexts and social life. Technology by itself has not single objective value, but its economic value depends on how effectively and dynamically it is commercialized. A single technology may yield two different returns if it is commercialized in two different ways. In recent years, especially due to fierce competition among market players, both small and large scale enterprises are trying to find strategic newer ideas to bring innovation to their business with a view to achieve sustainable competitive advantage. Jaruzelski and Dehoff (2008, p. 3) stressed that innovation is becoming an increasingly important corporate strategy mainly through greater investment in R&D due to the increasing global business opportunities. If R&D is all about innovation, it is not possible to agree with the claim that SMEs are better at innovating as large corporations invest heavily on R&D. The fact that multinational and other large enterprises are good at investing in R&D has been well documented in many researches including Arzumanyan and Melin (2012). If technology, brand differentiation and new corporate strategies are major components of innovation, the answer would be almost the same as larger corporations adopt latest technology to commercialize their vision, to introduce new brands and to implement highly effective strategies. In order to analyze whether large enterprises or SMEs are better at innovating, it is imperative to examine what is innovation. Innovation refers to bringing or introducing something new of an idea, method or device. An enterprise can be said to be innovative when it attempts to introduce a new idea, method, process and technology or combinational of these to enhance improved performance in the firm. Endsley (2010, p. 1) defined innovation as the first, practical and concrete implementation of an idea carried out in a particular way to bring broad-based and extrinsic recognition to the individual or the firm. According to this explanation, innovation is not merely introducing an idea, but rather implementing the idea and establishing the same in to reality. Bessant and Tidd (2011, p. 10) also advocated the need for transforming an idea in to reality to accomplish innovation. According to them, innovation doesn’t occur automatically, but is driven by entrepreneurship, that necessarily requires a mixture of vision, energy, enthusiasm, insight, judgment and plain hard-work that enable good ideas to become a reality. Innovation involves converting a new knowledge or wisdom in to a new marketable product, service or process and putting these in to use through an appropriate marketing activity. Csath (2012, p. 10) perceived innovation in a broad sense and described innovation as any improvement anywhere in the business; not only in products, services and processes, but also in the field on leadership, HR, communication, organization, marketing and any other functional areas. Csath’s view about innovation seems to highlight the notion that there are basically four types of innovation, namely product, process, position and paradigm innovation. Porduct innovation implies the changes in the things such as products or services that a firm offers to its customers. Process innovation refers to changes in the ways in which these goods or services are created and delivered. Position innovation means changes in the context in which product or services are introduced and paradigm innovation means changes in the underlying mental models that frame an organization’s activities (Tidd and Bessant, 2011). From business and economic perspectives, entrepreneurs are essentially innovators. Entrepreneurs innovate and therefore they create new markets by finding new business idea, linking it with opportunities, exploiting the same for commercializing the idea and finally converting the idea in to a real marketable product or process. The idea of entrepreneurs as essentially innovators derive from Joseph A Schumpeter who asserted that entrepreneur is a dynamic force to disturb the economic equilibrium through innovation (Chell, 2001, p. 90). No matter whether it is large sized or small to medium sized businesses, theoretically, the entrepreneur who brought the idea of business and managed the business to survive in the market must be an innovator. However, all entrepreneurs are not equally innovators. More in numbers, but less in innovations As discussed earlier, SMEs account for more than 99 percent of all businesses in the EU and the US and more than 90 percent in Asia-pacific region. To be more specific about the worldwide statistics, small to medium sized enterprises account for more than 90 percent of all businesses in almost all the countries. It means that entrepreneurs are more in number in small to medium sized firms as compared to that in large enterprises. Entrepreneurs are business owners or those who brought business idea in to practice. More specifically, there are more than 90 percent entrepreneurs in the small to medium enterprises whereas they are just below 10 percent in large enterprises. Theoretically, small to medium sized enterprises must be better at innovating since they are more in number across the world. But, no SMEs are count in the list of world’s renowned innovation. Some of the world’s largest firms and multinational brands such as Apple, Samsung, BMW, and Canon etc will be counted as best innovators, but none may count a small or medium sized firm in the list. SMEs account for more than 90 percent of all firms, but they do not account for a considerable portion of world’s innovation is clear evidence for that SMEs are not better at innovating than large enterprises. Major determinants of innovation among SMEs It is critically important to analyze what mainly determines the innovation in a firm in order to see whether the firm is capable to innovate or not. Researchers have documented a number of determinants of innovation. Lewandowska (2009, p. 103) listed the most important determinants of innovation in a firm. They are; human capital, financial capital, material resources, culture, key competencies, legal norms, infrastructure and process. A firm that is rich in human capital, financial capital, competences, resources and infrastructure and has strong organizational culture as well as more advanced process for operation is very likely to better innovate than a firm that is not so. Impact of human capital on innovation Human capital is indisputably the most powerful, influential and dynamic asset in an organization. In economic perspective, human capital refers to the skills, knowledge, competencies, wisdom, abilities and behaviour of people in the organization acquired through education, training and experiences (Mankiw, 2011, p. 538). Human capital is commercially valuable skills (Marcus, Ippolito, & Zhang, 1998, p. 490) and are economically productive attributes that an individual or group of people may use for organizational use. Human capital plays significant role in promoting innovation. Innovation begins with information, idea and knowledge. Strategic human capital management involves managing knowledge, facilitating organizational learning and encouraging people to share their opinions for further development of the organization. Knowledge management, an emerging interdisciplinary in the field of management, enhances knowledge creation, knowledge sharing or exchanging and knowledge utilizing for organizational purposes (Noe, 2002, p. 168, Awad and Ghaziri, 2007, p. 26). As part of managing knowledge and managing human capital, the strategic management may encourage teamwork, collaboration, training and development and entertainment activities among people to enhance knowledge share among them. These sorts of knowledge management practices are found to help a firm discover new business idea, find potential marketing opportunity and introduce new business strategy to compete in the market. This is how a business begins to innovate. Bessant (2009, p. 42) stated that innovation has always been about weaving different strands of knowledge together to create new things. Human capital profoundly impacts the innovation within a firm. Lopez-Claros (2010, p. 167) stressed that human capital capacity has strongest association with the innovation capacity and productivity of a firm. Large enterprises are very rich in human capital and are very effective in managing their skills, knowledge and experiences. As there are more numbers of human resources in large firms as compared to SMEs, large firms are very likely to discover new business ideas or to find new potential business opportunity to innovate. Impact of financial capital on Innovation Finance is an inevitable requirement for innovation. Firms with greater and easy access to finance are more likely to better innovate than those that do not have access to wider financial capital. SMEs face constraints of getting sufficient capital for investing in Research and Development and installing latest technologies. Technology as well as R&D requires huge investment that SMEs find it difficult to gain. To invest in R&D, large scale initial spending is required and there may be uncertainty regarding the result as well. SMEs also experience restrictions to access foreign financing and to guarantee high interest rates. SMEs face difficulty in achieving economies of scale which is another requisite for innovating. SMEs have comparatively limited financial resources as they not only face difficult to access financing sources but also that they have limited budgetary control. Since SMEs are less bureaucratic and are willing to take risks, they tend to have limited funds to apply R&D or to speed up product or process development (Allocca and Kessler, 2006, 280). Since SMEs have limited access to financing for R&D, technology installment and for other development, they are less likely to be better innovators as compared to large enterprises as they have wider access to financing. Resources impact in Innovation Access to resources as well as resource-allocation can determine the innovation and speed of innovation in a firm. A firm that has greater access to resources and is very effective to allocate its resources is more likely to be a better innovator than a firm that doesn’t have access and doesn’t allocate resources effectively. Larger enterprises have wide and greater access to resources. Multinational corporations go global for gaining the advantage of accessing resources. In contrast, a small firm can more effectively allocate its resources based on whether they can boost the bottom line, but this bottom line effect may not be evident in a large enterprise. Availability of resources and their allocation impact innovation capability of a firm. Dodgson, Gann and Salter (2008) identified resource availability and possessing sufficient assets as important requirement for innovation. As far as resources accessibility and availability are concerned, larger firms are more likely to be better innovative, but as far as resource allocation is concerned, small to medium sized firms are better at innovating. Organizational culture impact on innovation Organizational culture, which is a system of shared values, actions, beliefs and norms that are developed and established in a firm that influence its members to guide, shape and promote their behaviour (Schermerhorn, Hunt and Osborn, 2005, p. 436), is an important determinant of innovation in an enterprise. A firm with innovation-culture will be more likely to be better innovative than a firm without innovation-culture. Large enterprises have access to resources, financing and technology and this may create an innovation-culture within the organization. Innovation-culture refers to a system of shared values and beliefs among the people who are good at innovating by bringing new ideas or discovering new process for operation. Wolf, et al (2011, p. 245) argued that SMEs are more likely to have less innovation-culture since innovation-culture in a firm is influenced by availability of adequate resources, financing, management support, technical competence of innovation among team members, good strategic direction etc. Process impact on innovation Many SMEs may not have process in place and that seems a reason why they cannot always drive innovation. Many small enterprises have not defined its process and these processes and these may not be carried out in time and in place. However, large enterprises have defined its processes and carry them out in right place and in right time so that they are very likely to drive process innovation. Competencies impacting the innovation Competency of a firm is its ability to deal appropriately with certain situations when they face. In order to effectively deal with situations, the firm may need to have technology, adequate human capital, proper processes, subject know-how etc. A large firm is very likely to have more competencies as compared to small to medium sized businesses because large firms have comparatively better know-how, technology, more human capital and effective systems within the firm. Koulopoulos (2010, p. 49) emphasized that competencies of an enterprise can largely impact the innovation-possibility within the firm. Legal Norms impacting innovation Large enterprises may easily get accustomed with legal norms and requirements whereas small and medium sized enterprises may take time to preoccupy themselves with rules and legal norms. For a firm to innovate in certain legally significant aspects and areas such as trade mark, new brand development, patent, registering new technology etc, it is critically important to know legal regulations related to the same. As legal norms can also determine innovation, large firms are very likely to be better at innovating than small and medium sized firms. Infrastructure impact on innovation A firm with improved infrastructure will be better at innovating than a firm without improved infrastructure. Infrastructure availability and infrastructure development largely influence the innovation performance in a firm because a firm with highest infrastructure can build and establish something new that can have commercial value. Conclusion SMEs constitute a vast majority of all firms across the world. SMEs are 99 % in EU, USA and more than 90 percent in Asia-Pacific region and their contribution to the economy in terms of employment, GDP, channelizing the market etc is invariably significant and widely acknowledged. However, whether the SMEs are better to innovate than large enterprises is a matter of debate. This paper has firmly disagreed with the claim that SMEs are better at innovating than large organization. This paper examined and hypothesized the proposition that large firms are better to innovate as it can be very evident from the fact that people generally list out major innovators such as Nokia, Canon, Apple, Samsung, BMW, Ford, Nestle etc, even though such large enterprises are as low in number as below 1 percent in US and EU and below 10 percent in some other countries. This research paper listed out eight specific reasons to support why large enterprises are better to innovate. These are; 1) large enterprises have greater number of human capital and are able to implement a number of strategic HRM practices including knowledge management to enhance people’s knowledge and information to generate new ideas and thus to innovate. 2) Large firms have better access to financing for R&D and for installing technology, and therefore they are very likely to innovate than SMEs. 3) Large enterprises have more access to resources to support innovation. 4) Large organizations have innovation-culture than in turn enhance innovation in the firm. 5) Large firms have process in right place to support innovation. 6) Large firms possess more competencies to encourage innovation. 7) Large firms preoccupied themselves with legal norms and therefore they can better innovate than SMEs. 8) Large firms have advanced infrastructure that can support and enhance innovation better than in SMEs. 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