1.  What is innovation?

Put simply, innovation is the process of improving your business; whether it’s by creating a better product or service, by finding a more effective way to communicate with your customers, or by introducing new technology to reduce your costs.  

The OECD (Organisation for Economic Cooperation and Development) defines ‘innovation’ as all the scientific, technological, organizational, financial, and commercial activities necessary to create, implement, and market new or improved products or processes (OECD, 1997).
Innovation is also seen as a way to better prepare for an uncertain future. It has been defined in terms of uncertainty, indeed as an “exercise in the management and reduction of uncertainty” (Kline and Rosenberg, 1986).

2.  Why should small businesses innovate?

Evidence from numerous studies around the world proves that businesses with a tendency to innovate will enjoy more success than their non-innovating peers. Technology and consumer demands from businesses are changing continually – small businesses must adapt and innovate just to keep up.

One study in the UK determined that innovative small businesses grow twice as fast, in both employment and sales as firms that do not innovate. Many businesses have responded to tough times by striving to become more agile—to both reduce waste and innovate more quickly.  Particularly during periods of austerity, businesses need to innovate to take advantage of both new technologies and new ways of working—and, ultimately, to stay ahead of their competitors. Governments are keen on innovation, because countries prosper when their businesses thrive.  

Innovation is positively linked with exporting, and SMEs with a track record of innovation are more likely to export, more likely to export successfully, and more likely to generate growth from exporting than non-innovating firms. For businesses of all sizes, innovation, exporting and productivity and/or growth are all positively linked. Innovation and exporting work jointly together to improve business performance.  

The German Institute for Economic Research notes that important stakeholders such as the Commission for Africa and the UN Millennium Project emphasize the role of innovation – including investment in the creation of new knowledge, and the use of new knowledge – as a basis for economic transformation.

Innovation is clearly a powerful tool for small businesses that want to grow.

3.  What types of action should be considered?

There are many innovation theories, and most identify different ways to select the types of actions that can be considered. The following three models are included as examples, but there are many more that could also have been included.

The OECD has piloted work on ‘mixed modes of innovation’ highlighting five areas for attention:

•    IP/Technological Innovating – core IPRs, in-house R&D, and ‘new-to-market’ activity; this type of innovation is the classic innovation, for example inventing new products
•    Marketing based Innovating – innovating around existing products, including ‘new-to-firm’ innovation (this requires information from other businesses)
•    Process modernising Innovating – links process innovations with expenditure on new equipment; this type of innovation typically focuses on improving the processes involved
•    Wider Innovating – management and business strategy changes, including new methods of sales and distribution; this may involve introducing new channels to communicate or deliver your service / product to your customers
•    Networked Innovating – bought-in R&D, licenses / formal collaborations; this would include introducing partners, or other ‘players’,  into the way your business operates    

One comprehensive approach (Keeley et al 2013) cites 10 different types of innovation, within four fields of business operation:

•    Finance: Business Model and Networking
•    Process: Enabling processes, and Core processes
•    Offering: Product Performance, Product System, and Service
•    Delivery: Channel, Brand and Customer Experience

Keeley’s model is useful, in that he cites specific well-known (large company) examples, to help our understanding and put innovation into context.  The examples used by Keeley demonstrate very well how identifying an innovation can ‘disrupt’ a market:

•    Dell Computers – introduced a new way for customers to buy computers (i.e. direct from Dell, as the manufacturer / assembler)
•    Tata Motors – identified that millions of people around the world cannot afford a car, but would like to own one; Tata Motors introduced the world’s lowest-cost car, by finding a way to produce a reliable car much more cheaply than other manufacturers
•    Apple – apple focus on creating a strong brand and attractively designed products with simple functionality – the products can then be extended, e.g. the iPod and iTunes; the iPod is a good example of a product which wasn’t the first to market, but which effectively completely took over all predecessors after it was launched

Boston Consulting Group homed in on the Business Model as a way to examine potential areas for innovation. They see a Business Model as having two elements – the Value Proposition, and the Operating Model, and suggest three areas for potential innovation from each.

Value proposition:

•    Target Segment – who are our customers? Which of their needs do we meet?
•    Product / Service Offering – how do we meet their needs? (what are we offering them?)
•    Revenue Model – how are we compensated for our offering?

Operating model:

•    Value Chain – how do we deliver? (what is in-house / what is outsourced?)
•    Cost Model – how do we deliver our value proposition profitably?
•    Organisation – how do we deploy / develop our people to enhance competitive advantage?

As you can see, each of these models deconstructs the way a business operates, in order to identify different perspectives for potential improvement via innovation.  

What follows are some practical examples of how you, as the owner of a small business, might want to consider innovating in your business.

4.  Practical steps

What is especially helpful is to understand that an innovation may only apply to one small, specific aspect of your business – but understanding how to improve that one aspect may make a big difference to your future success, and your profits.

Most models of innovation segment the business process into different stages, and a useful way to think about innovation is as ‘unique combinations of tried and tested components’. So it is helpful to understand the different components in your business, to assess whether one component can be improved.

Areas that you may want to consider as a focus for your Top Ten Innovators’ application could include, for example:

•    The design approach used to develop your product or service
•    The way you source any specific products or parts that contribute to your offering
•    The way you assemble the various components that make up your service or product
•    The technology, machinery or processes you use to produce your product or service
•    The duration or location of any storage you might need
•    The way customers find out about your service or product
•    The way customers pay for your products
•    The logistics involved in delivering your products
•    Which types of partners, distributors or agents you may work with
•    The range of offers / deals you use to communicate with customers
•    Any innovation that is enabling your business to contribute solutions to the Energy Transition and Climate Change challenge
•    Any innovation your business has introduced that is improving the sustainability of major supply chains (including Shell’s)

This list is a selection, you will probably be able to identify others; the important thing is to understand your ‘inputs’ and how much flexibility you might have over them. Investigating your different options, and ways to enhance your inputs, will lead to innovation in your business, and benefits for you, and your customers.

5.   Bibliography

•    NESTA (2009), ‘Business Growth & Innovation: the Wider Impact of Rapidly Growing Firms in UK City Regions’, Research Report by Mason, G. Bishop, K. and Robinson, C.
•    German Institute for Economic Research (2007),’ Innovation Theories: Relevance and Implications for Developing Country Innovation’, Discussion paper 743.
•    Keeley, L; Walters, H; Pikkel, R; and Quinn, B. (2013) ‘Ten Types of Innovation: The Discipline of Building Breakthroughs’, Wiley.
•    Boston Consulting Group (2009) ‘Business Model Innovation: When the Game gets Tough, Change the Game’
•    Kline, S.J. and N. Rosenberg (1986) ‘An Overview of Innovation’, in R. Landau and N. Rosenberg (eds) The Positive Sum Strategy: Harnessing Technology for Economic Growth, National Academy Press, pp.275-304
•    Enterprise Research Centre (2013), ERC Working Paper 5, SME Innovation, Exporting & Growth
•    OECD (2012), ‘Mixed Modes of Innovation: an Empiric Approach to Capturing Firms Innovation Behaviour’, OECD Working Paper 2012/06 by  Frenz, M  and R. Lambert
•    www.oecd.org