Do SMEs Lose their Appetite for Innovation During the Economic Crisis?

By: IMP³rove Academy

Innovation is always a result of taking risk and mastering these risks successfully. However, in the past few years the risks resulting from the overall economic situation seems to have increased for small and medium sized enterprises (SMEs). As they cannot control these external risks many of them seem to stay away from too risky innovation projects. This has implications for the SMEs and for those who provide innovation support for SMEs?

Declining level of ambition in innovation

The IMP³rove benchmarking database on innovation management in SMEs with more than 2000 valid datasets allows for a comparison of SMEs’ level of ambition over time. Analysing all companies from all industry sectors that entered their data between 2007 and 2009 shows that 35 per cent of the companies do not take risky leaps, however, seek to make rather small changes to existing products, processes, services and/or business models to add value.

About half of the companies (48 per cent) aim for substantial changes to either the business model or the technology (of products, services and processes) that provide changes to the competitive environment but are usually not disruptive or dramatic. And 17 per cent strive for radical innovation by making significant changes in the business model, products, services and processes of the organisation to fundamentally change the competitive environment (radical innovations – often called breakthrough innovations – that are totally new to the market). See also figure 1 below.

The economic crisis has little impact on the percentage of radical innovators, but on the ones who aim for substantial changes.

Taking a look at the datasets that have been entered between 2010 and 2013 the percentage of SMEs with the lowest level of ambition in innovation increases by almost 10 per cent points, while the percentage of companies that aim for substantial changes declines by 7 per cent points and the radical innovators by 2 per cent points.

Taking a look into various industry sectors, the picture in ICT (Information and Communication Technologies) and KIS (Knowledge Intensive Services) is similar. However, in the sector “Machinery and Equipment” the number of companies that strive for radical innovation has increased in the time of economic crisis compared to the years before the economic downturn.

The picture shows basically two main trends: The percentage of companies striving for radical innovation has not changed significantly during the economic crisis. However the percentage of companies that used to innovate without risky leaps has increased in all sectors. This group represents now almost half of the SMEs.

Figure 1: SMEs’ level of ambition in innovation

Implications for the SMEs

SMEs that reduced their level of ambition still can claim that the majority in their industry are doing the same. Therefore, there seems to be no need to change. However, the competitive pressure comes from the companies that even in times of economic crisis successfully aim for radical innovation. Therefore, SMEs should take an external and an internal view.

Taking no risky leaps is not a sustainable answer. SMEs need to do a sober view on measures to counter the crisis.

The external view includes the monitoring of the changes in customer demand, of the technological changes, of emerging trends that have the potential to change the rules of game for the SME. Taking a closer look into the changes in customer demand not only monitors the direct customers but also the customers along the value chain. Key questions that SMEs might ask are:

• If there is a decline in orders, what were the reasons for the lower sales?
• What are the direct customers’ concerns regarding the future demand? What kind of changes do they anticipate?
• If there is intensive price pressure, what could be additional features to the own offering where the customers are willing to pay a price premium?
• Can the own company offer these additional features at a competitive price within a reasonable time?
• What are technologies that might substitute the current one, and within which time frame?
• Can the own company adopt the new technology within the required time at reasonable cost?
• Does the new technology require new capabilities within the organisation that need to be developed? And can they be developed in due time and at reasonable cost?
• Are there any regulatory changes in the own country or in foreign countries that can have an impact on customer demand for the company’s own offerings? With the globalisation of markets, even SMEs are no longer protected against international competition.

The internal view is strongly related to the level of ambition that the management of the SMEs has defined. A company that has successfully survived in the market without taking risky leaps, but with small changes to existing products, processes, services and/or business models to add value has a different strategy, different processes and procedures and a different innovation culture in place than competitors that always have focussed on radical innovation. Based on a strategy of incremental changes usually small budgets are allocated to these projects. A limited amount of time is foreseen to implement the incremental changes. The staff is used to provide and implement ideas that can be implemented without taking too much risk and too much time.

Innovation support for SMEs needs to move away from “one-size-fits-all” to bespoke solutions

Companies that have the ambition for radical innovation in their DNA will try to maintain it also in times of economic downturn –especially in tough times. What we currently observe is that some of these successful innovators rather focus on efficiency of internal processes to be able to maintain their innovation activities and their competitive position. These are companies that emerge from times of crisis even stronger. They look for best practices and how to adopt them within their own organisations. They are self-confident enough to ask for advice from outside. Here the external innovation support provider need to develop a profound understanding of the company’s level of ambition and the competitive pressure the client is in.

Implications for innovation support providers

Rendering innovation management support services to SMEs has to build on the profound knowledge of the client’s level of ambition and their ability to translate this successfully into action. Additionally and as important are the insights into the competitive pressure and dynamics of the markets the client is serving. The support service provider will gain a good understanding of the company’s level of ambition once he/she supports the client in completing the IMP³rove Assessment improve-innovation.eu. The discussion on the various dimensions of innovation management and on the innovation results achieved by the company reveals whether the company is capable to innovate but not very ambitious or whether it is ambitious but not very successful in their innovation projects.

If the company is ambitious but not very successful it does not make sense to support this company in applying for funding of the next radical innovation project. Here it seems that at first the root causes for the failure need to be identified and eliminated. These root causes emerge in the IMP³rove benchmarking reports where the company is compared to those that have achieved significant growth and to the average in the benchmarking class. If the company is successful but not very ambitious the support provider should help the company to overcome their reluctance in taking risks that the company still can control. Do not impose radical innovation projects to companies with a culture determined by incremental innovation objectives. Experience shows that in many cases the innovation management capabilities are not developed – yet – for the more risky innovation projects. This starts with the challenge that budgets might not become available if the SME’s management is not open to such risk. And even if budgets were made available then the systematic project management and risk mitigation capabilities during the development phase might be lacking and leading to failure. Or the marketing and sales team has difficulties in successfully introducing and selling the radical innovation that requires more efforts in developing the marketing and sales approach and in convincing the sales representatives in promoting the radically innovative offering. Usually radical innovation also requires changes in processes or products of consumers or customers. All this again re-confirms the risk-averseness of the management.

Implications for innovation support programs

A low level of ambition of SMEs regarding radical innovation needs to be taken into account by innovation support programs and innovation policies. Generally speaking more ambitious innovation projects require higher budgets/funding than incremental innovation projects. There is a temptation for SMEs to apply for funding of radical innovation projects although they have not developed the capabilities to manage such demanding innovation project. There are examples where projects failed not because the idea or the timing were poor but because the organisation was not prepared and skilled to successfully develop and launch such a radical innovation product, service, process or business model. On the other hand, SMEs who are used to successfully commercialize radical innovation results complain about the lengthy procedures to get access to public funds. In these cases the approval could be accelerated if the company provides the proof that they have the innovation management capabilities in place. Ideally this proof presents a comprehensive and validated picture that allows a comparison between different companies, across different industry sectors and different size and age classes of the SMEs. Here, policy makers can build on the IMP³rove benchmarking reports and link the access to funding of radical innovation projects to the SME’s proven ability of managing such projects successfully.

By Eva Diedrichs

Photo: Truck light trails in tunnel from shutterstock.com

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*The IMP³rove Benchmarking has been developed within the European Commission’s initiative IMP³rove – better support in innovation management. The services developed within this initiative will be provided in the future by the IMP³rove – European Innovation Management Academy (non for profit). It shall support regions to integrate the IMP³rove tools in new programs to enhance innovation management capacity of SMEs. To that end the IMP³rove – European Innovation Management Academy is supported by the European Commission, Directorate General Enterprise and Industry.