The role of innovation in creating and destroying the competitive advantage of modern firms cannot be over-estimated. A report by the European Union in 2002 identified four key drivers of entrepreneurship and small firm development which highlighted the importance of innovation. These included:
- Continuous technological developments
- Shorter product life-cycles
- Increasingly demanding consumers
- Global competition
Small and medium-sized enterprises (SMEs) have always been considered to be more adept at innovation compared to larger bureaucratic enterprises owing to their flat structures, absence of functional barriers and the lack of bureaucratic procedures which facilitate the sharing of ideas, information and knowledge.
Innovation is even more important to small start-up firms that need to offer unique benefits in terms of their products and services so as to attract customers who would otherwise buy from their competitors.
Although SMEs may have an advantage over their larger rivals in terms of their ability to nurture innovation-friendly environments, they cannot emulate the large investment budgets of their bigger rivals when it comes to in-house idea-generation and research and development. However, recent developments in the field of ’open-source`, or user-centred, innovation has made it possible for SMEs to compete more aggressively with their larger rivals – sometimes leading to substitute products.
Instead of new product ideas being developed within the research laboratories of organisations (the in-house approach) new products and services are now being sourced from existing customers and clients of organisations. For example, practitioners of extreme sports, from windsurfing to ice climbing, play a significant role in the development of equipment which is subsequently mass-produced by manufacturers. Surgical equipment companies are often led towards new products by surgeons (i.e. keyhole surgery) whilst the Linux operating system was developed by members of the open-source software community. Finally, the toolkits approach has been used by companies including Flavors and Fragrances which supplies customers with the tools to design their own food flavours. Product development is left to users who are in the best position to know exactly what they want.
As customer expectations are increasing it is logical to use their input when designing and shaping new products and services. Not only are such inputs invariably free but they are a natural source of incremental innovation and therefore differentiation.
Since one of the strengths of being an SME is the closeness of the entrepreneur to the customer, an `open source` / user-generated approach is an ideal way of overcoming the obstacles of high R&D budgets and at the same time creating a differentiated unique selling proposition (USP). Knowledge is now so widely distributed via the Internet and travels so fast that great ideas can come from customers over a wide geographic area which is not confined purely to large organisations.
Moreover, as it becomes increasingly difficult to protect new ideas for any length of time, lead–time advantage and speed to market become key areas of competitive advantage. The agility and fast responsiveness of small entrepreneurial firms therefore places them in a very strong position when it comes to exploiting the advantages of pro-active consumers or prosumers.
3M, the industrial products group, has had programmes in place since 1996 to harness ideas generated by lead-users. Working out where great ideas come from is one of the big mysteries of modern management. Corporate research laboratories and in-house product development groups are only part of the answer. Breakthrough products and processes can come from start-ups, competitors, university campuses and rank-and-file employees. So open source innovation is another route to innovation that doesn’t cost the earth as the likes of MySpace, Facebook, YouTube and Wikipedia will testify.
- Open Innovation by Henry William Chesbrough, published byHarvard Business School Press
- Experimentation Matters: Unlocking the Potential of New Technologies for Innovation byStefan Thomke, published by Harvard Business School Press
- The Third Wave by Alvin Toffler, published byBantam
- Democratizing Innovation by Eric von Hippel, published by MIT Press