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Innovation model in SMEs

How do we apply an innovation model in small and medium-sized companies (SMEs).

Since I published “A model for innovation management” on this website, I have received many questions regarding difficulties in applying the model in small companies.

I also had similar observations when I published the first version, now revised, and updated, of the same topic. It seems that, with the effects of the pandemic on the economy, SMEs are more affected and the need to innovate has become more evident and even urgent.

That is why I dedicate this article to innovation in SMEs and we will also make a small foray into knowing, as an example, the Mittelstand.

To begin with, I have somehow been forced to think that parts of the model, or the implementation of the model that was shown, might be expendable in a small company. And the truth is that I would not dare to do without any. My experiences show that the activities to be carried out are essentially the same, although in a different way and with much less resources. The basic differentials are resources, time, and dedication.

Definitions:

We will consider small and medium-sized enterprises (SMEs) to be independent, non-affiliated enterprises, employing between 10 and 250 employees. This number varies by country. These limits are of the European Union. Other countries set the limit at 200 or less, while the United States considers SMEs to include companies with up to 500 employees.

Of these, those with less than 50 employees, with a turnover between € 2 and 10 million, and medium-sized ones between 50 and 250 employees and a turnover of up to € 50 million are considered really small. [1]  Microcompanies would be those with less than 10 employees and less than € 2 million in turnover.

(1) Source: OECD SME and Entrepreneurship Outlook and data from EU Eurostat.

However, some of these companies, while still being SMEs by number of employees or organization, achieve much higher business figures. As is the case of the “unicorns” that are start-ups that are sold with a value above $ 1,000 million or some German companies called Mittelstand that reach turnover of € 3,000 million.

Here we will not go into the case of companies without any employee, in which only the owner works as self-employment, or owners and partners. These are usually around 50% companies, according to countries, of the total 98-99% that SMEs represent.

Nor do we consider here micro-companies, whose analysis may be closer or similar to start-ups.

Innovation budgets

We know that the budget dedicated to innovation in large companies varies globally, in a very general way, between 2.5 and 5% of their business volume. (Minimum 1.5%). The ones that exceed 10%, and some widely)

Based on the fact that in SMEs, innovation is really a necessity and an urgency, it should be the same or more. Which would mark an innovation budget between:

  • Medium-sized companies: Between € 300,000 and € 2.5 million. (Turnover between € 10 and € 50 million and% between 3 and 5%)
  • Small companies: Between € 80,000 and € 500,000. (Turnover between € 2 and € 10 million and% between 3 and 5%)

Accordingly, in a small company between 1 and 3 people should be working directly on innovation. In the case of medium-sized companies, between 3 and 8.

However, this way of calculating people involved in innovation can be very misleading, because the main thing is to first structure the process, the projects and the tasks and responsibilities of each of them and then assess the necessary resources. We are talking about a number of projects slightly higher than the number of people.

But the top priority includes establishing that innovation is going to affect everyone’s work, to a greater or lesser extent, since everyone is going to be part of cross-functional teams and a part of their dedication should be in innovation.

The future

Innovation is the process that prepares us for the future.

Giving up an innovation process or practicing it only sporadically means giving up the future, or leaving it to chance or the appearance of some “great” idea

Everything that today gives us benefits can and will change, and in a short time. We call it accelerated change.

Customers and their expectations and needs will change; the competition, current or new; regulations, planned or unpredictable; changes in society, environment, finances, etc.

The future is always uncertain, and my thinking is that we can do two things:

  • Try to know the trends and common threads that can announce the changes. It is not about making detailed forecasts of the future, but rather thinking about different possible scenarios that may arise, trying to assess their probability and our ability to anticipate or respond to them.
  • Be prepared and react to changes once enough signs are produced, quickly and agilely.

We verify that innovating requires acting continuously, and acting in a way:

  • Agile (not only fast)
  • Minimizing risk. (There is always risk, you have to live with it, know it and focus on it)

Differences: Large company and SMEs

If SMEs are faced with carrying out more or less the same activities as large companies, what are the differences in an innovation model, to be effective in SMEs, with respect to large companies?

Let’s look at the differences between large companies and SMEs, and from this see what we can do to carry out these activities in the most favourable way to the characteristics of SMEs. Also, try to see what the strengths of SMEs are compared to large companies:

 Large companySME’s
Structured organization+++
People and teams educated and trained++++
Relations in extended supply chain++
Accesso to financial capital+++
Investment capacity+++
Processes structured++
Presence international++
Quick actuations++
Quick taken decisions++
Sector knowledge+++
Technologic knowledge++++
Application of new technologies+++
Human Resources+++
Possibilities of alliances+++++
External Collaborations+++
Government aid and support++++
Economic and market Intelligence+++
Capacity to react quickly to change++++
Change management++
Capacity in R&D+++
Patents and intellectual property (IP)++
Knowledge & intangibles management+
Adaptation to regulations+++
Capacity environmental management+++
Vision/compromise local/global++++
Capacity RSC++++
C. Creativity and design+++++
Products/services of value added+++
Creation of brands & branding++++
Source: Own elaboration from data of Statista, Eurostat & GII (Global Innovation Index).

Some conclusions for SMEs

From the table above, we can extract some characteristics that SMEs could take advantage of and certain guidelines when creating or improving our innovation process.

Types of innovation based on the product or business life cycle
  1. Capacity for creativity and design. There is a certain advantage of small businesses in this regard, and it will be necessary to take advantage of it. Focusing the process in these areas.
  2. Agility. To understand what is happening in the external environment, the trends or drivers of change and quickly learn how to get ahead.
  3. Ability to adapt to change and decision making. It is fostered with agility. Take advantage of this strength in the types of innovation that interest us. In the life cycle of the activity and the life cycle of our products or services, we distinguish different types of Innovation. Basically, SMEs are better prepared for incremental innovation and renewing or reinventing a business model. See diagram of the types of innovation based on the life cycle of products or business.
  4. There are strengths in SMEs in local and regional knowledge and relationships. Without leaving these it is advisable to acquire and consider a global vision. This is a recognized weakness for SMEs in general. Even if we have a local business, or very regionally focused, we should strive to see the global set of our segment or area. One part is not enough. It is more than proven that the competition can come to us tomorrow from the antipodes.
  5. Leadership. Leadership is always necessary, unless we start from the beginning, with a highly insightful and innovative team. In SMEs close to the initial startup stage, or in the family business, there is clearly the printing press of an entrepreneur or a small group of partners. They should lead innovation and dedicate themselves to it more than day to day. More is more time and dedication. This type of leadership can be positive for innovation, but it depends on the leading person or team. If it is negative, it will be necessary to find a compromise between innovation and the foundational nature of leadership in the company. Professionalizing the management can be an alternative.
  6. A clear and continuous analysis of the business model and how it is changing. This can include:
    1. How do we get benefits, how we build experiences for the customer, how we create products and deliver them to the customer / end user. And especially how we differentiate ourselves, what makes us different. This is our model. And surely you will have to think about how to change it somewhere or as a whole when there are external signs of change, and even create a new one. The entire world changes, then …
    2. What new technologies are there or are they coming in the next 3-5 years? And how will they affect us, or how are we going to be able to take advantage of them?
    3. How current clients are going to change, or what new clients are we going to focus on.
  7. The risk exists. Then we need an effort and method to understand it … and manage it. It is not possible to wait or stop new projects and initiatives to be surer. Reducing risk has its techniques and the recommended ones are not passive.
  8. Commitment, enrolling everyone. Also enrolling external elements, clients, suppliers, alliances, research institutes, elements of the extended supply chain, etc., everything that can be used. SME associations, collaborations and alliances for specific projects are highly recommended. The “ecosystem” must be harnessed or created. Innovation and the innovation process is going to be a part of everyone’s dedication.
  9. Get to the medium size… as soon as possible! We will see as an example a short description of the Mittelstand in Germany.

With all this, each SME should be able to create their own innovation model … a tailored suit.

How do we build it?:

Innovation model and process

This is the process in a circular and iterative way:

We look first at the 4 framework factors, 2 internal and 2 externals, that permanently surround the innovation process.

  • Culture and organization
  • Vision and strategy
  • Local and global environment
  • Economic and social environment.

In the centre, the 4 phases or threads framed by the previous ones are described:

  1. Clients and external exploration. Trying to collect as much information as possible from the outside environment. Always in accordance with those who interest us, according to our vision and strategy, and allowed by our culture and organization. It is done by one of the four support processes, represented by four red trapezoids at the base. Specifically, the intelligence management of the company that captures the maximum information that is relevant to us from the environment, processes it and uses it to help us draw conclusions and decisions. The more we can understand and fix as knowledge, the better.
  2. Generate ideas, select and validate, to turn them into projects. We use a variety of filters, such as business attractiveness, vision, and strategy fit, synergies, contribution to growth, potential margins, competitive improvement, geography, technological availability, business impact, ability to adapt, production capacity, etc. With this we make decisions and turn ideas into projects. We create or improve our innovation portfolio. And we do it through two of the basic support processes: strategic product management and technology management.
  3. Plan and manage projects. We rely on basic and up-to-date knowledge of project management. Managed by multifunctional teams, with reviews by phases with stages and gates (stage & gate) and we use appropriate methods, techniques, and tools. The projects will be more or less complex and more or less long, with more or less resources, etc. But they will always be reviewable and removable, before consuming more resources, if at any stage it is decided that they will not meet the planned objectives. To do this, we follow the fourth support process, portfolio management or innovation flow that can cover earlier and later phases.
  4. Capture the first benefits. It is important in each project, to make a confirmation, as soon as possible, that the expected benefits can be obtained on a small scale, through prototypes, geographical or segment limits, etc. The process is cyclical and iterative and we continually feed it.

The operation of the process is based on nine key elements:

We see it in the image.

Above in blue, the key element: Decision-making, who carries it out, how and when. On the right are the elements common to all projects and programs, which are basically the support processes that have already been indicated. On the left, the elements that are specific to each project, depending on its complexity, duration, strategic interest, risk, etc.

With this, in practice, we complete the innovation process that will require more or less resources and complexity depending on the number of projects in the portfolio, their assessment in terms of impact on the business, and their specific needs for investment, work and other resources.

But returnig to the starting point, all this seems more typical of a large company. In an SME, with few resources, who is going to do it?

All in one

This would be the recommendation. Unifying the processes of the present and the future, that is, involve all the people of the company and some external support in the innovation. It is the answer that I have observed the most that leads to success. All to one, that is, focused on the same purpose, to innovate. This means being very efficient in day-to-day processes, eliminating overtasks caused by delays, bottlenecks, uncertainties, errors, etc.

Experience confirms, in almost all cases, that the activities to be carried out, adapted to the resources, are better executed with multifunctional teams, with the same people who take care of the operative processes of the company in their day-to-day activities. In other words, sharing everyone’s time between the operational processes and the innovation process. It will be necessary to find a relationship, in each case, to establish the relationship of dedication times.

There will not be, as in (some) large companies, people dedicated only to innovation process and others only to operational processes, marketing, sales, production, distribution, logistics etc. Everyone will need to distribute his time to dedicate to both processes. And working in mixed teams, in the innovation effort.

This has both advantages and disadvantages.

AdvantagesInconveniences
No department “silos”It’s easy to prioritize the short term when there are incidents.
Everyone sees the short-term and long-term goalsIt requires effort in some people more oriented to a specific activity only.
Cross-functional teams enrich management.Requires effective communication
Projects flow faster and are not duplicated or wasted resources.The objectives of the teams must be very clear.
There is usually less conflict between department and managers points of view 

We are to remember that we are talking about companies between 10 and 50 employees, (small) and between 50 and 250, (medium). How to implement more than 6 working teams, from the innovation team or steering committee until project teams as well as the support processes?

One way is to merge 2 or 3 teams into one and share dedications accordingly. The most used is to share people in various teams, and the dedication is multiplied. Regarding project teams, the same team can be responsible for some similar projects, classifying them according to their duration and impact on resources.

The German Mittelstand.

“Germany is seen as the focus of great innovations in many fields. The innovation potential of a country plays an essential role in its survival as a global player. For example, Germany ranks first, compared to the rest of Europe, with 67,898 patent registrations “

“Germany spends around 3.1% of its gross domestic product (GDP) on research and development, a considerable figure compared to other European countries”.[2]

Although there are many large, internationally known companies, more than 98% of German companies belong to the group of SMEs.

They are dedicated to many sectors, from small and innovative software producers, through companies with a global activity in the field of industrial engineering, to traditional companies dedicated to handicrafts, etc. From a statistical point of view, all companies with less than 250 employees are considered small or medium-sized, but some larger companies are also considered “Mittelstand”, which are integrated into the category because they are managed as medium-sized companies. This means that the owner or owners largely make decisions relevant to corporate policy and ultimately assume risk and responsibility, even though in many cases the management is professionalized.

The vast majority of companies try to ensure their long-term existence and attach great importance to stable relationships with employees, customers, suppliers and other companies through collaborations and alliances. Many medium-sized companies also act in their regions as promoters of education, culture and sports.

In accordance with the German tradition of technology and science, many SMEs operate with a technological dynamic. The main selling point of its products and services is usually not price, but quality and a high degree of specialization and innovation. A large number of these companies are European or world market leaders in their sector.

Within the more or less small structure of these companies, they create a lot of jobs in areas such as research and development, technology, engineering, production, sales and the workers are immersed and fully participate in the innovation procedures.

The German Mittelstand sector has proven itself as a successful model. It is based on a family business model, evolved over decades and which today constitutes a key sector and a powerful engine of the country’s economy.

For the German IFM (Mittelstand Research Institute), these companies can have more than 500 employees and turnover volumes of more than € 50 million, up to 1,000 million. By this definition, the Mittelstand sector is reduced to some 21,000 companies, approximately 2% of the total in Germany, but employing 34.5% of all workers, contributing 31% of GDP and more than 68% of exports.

An average company in this group would have 450 employees and an annual turnover of € 108 million.

This is the German paradox: A country that is seen from the outside as having large internationally known companies is actually the country of small and medium-sized companies, mostly family-owned, which are at the same time the source of its great global potential.

The “hidden champions”

The term “hidden champions” was coined by Hermann Simon, a professor at Harvard Business School, in the late 1980s, and became known in the book “Hidden Champions. Lessons from 500 of the world’s best unknown companies”, published in 1996.

The German professor and consultant called “hidden champions” companies that are leaders in their sector in the global market (number one, two or three in the ranking) or in their local market (number one); they have a business volume of less than 1 billion euros, and they tend to have little notoriety.

The German economy benefits from approximately 1,500 of these “hidden champions” that make up much of the Mittelstand.

Since they are often in hiding, developing their production in areas far from big cities, it is easy to underestimate their success.

As employers they are often highly appreciated, as they develop their line of business. long-term employment and offer safe and well-paying jobs.

Mittelstand Sector Features

  • Generally, they are family businesses or of family origin, but with professional direction or management (sometimes by their own owners, who are qualified for it). They focus on creating personalized, lasting, and sustainable relationships both with their staff and with customers and suppliers.
  • A great specialization. They are companies that take advantage of niche market segments and, generally with intermediate products, business to business (B2B), with low visibility for the general public, but fundamental for the operation of consumer products. For example: machines or machine parts, components for more complex consumer goods such as commercial kitchen ovens, metal components for furniture or machinery, etc.
  • Innovation. They are aware of the importance of investing in R&D as it allows them to advance and transform their production processes, positioning themselves as leaders in their segment. Germany is the European leader in patent registration.
  • Incremental innovation. As mentioned, incremental innovation is best suited to SMEs and Mittelstand companies are fit for it. They have been described as “improvers” rather than “transformative”, in the sense that their innovative activities seek to improve either production systems or products that already exist and / or are well known, adapting them to specific sectors, rather than being based on introduction of radical innovations or the creation of new paradigms.
  • Long-term oriented. The long-term vision of these medium-sized companies is one of their most characteristic features, basing on this aspect the quality of the product and the after-sales service they offer, as well as their relationships with suppliers, customers, and employees. Also, long-term focus on investments, product research, development and innovation etc. Instead of seeking short-term maximization of the profitability of their owners or investors, they seek growth and permanence.
  • Financing. Mittelstand companies are generally savers, capitalizing their own profits to generate their own capital for investments. Not very fond of borrowing excessively, when they require financing, they prefer to resort to institutions that also invest in the long term.
  • International vocation. Due to their high specialization in niche segments, they seek the minimum necessary volumes and economies of scale in the global market and in exports. For this reason, in their specialty they sometimes border on a monopoly.
  • But… they maintain strong ties at the local level. This avoids direct confrontation with large international companies and allows the creation of strong ties with communities (for example: technical schools, universities, research centers. Local or Land Administration, etc.). Employment in Mittelstand companies generally begins with apprenticeships that eventually lead to secure, highly skilled and productive jobs. Contributing financially to local institutions (schools, etc.) is seen by companies as a long-term investment, as it helps create community ties that lead to workforces interested in the prosperity of the company.
  • More medium than small. The size of the SME does matter. The larger the company, the more diversified the sources of financing are and it is more common for them to be exporters. In addition, the larger the company, the longer the company usually has, which means more established production capacity and market penetration. They seek to reach a suitable size as soon as possible and more thinking about exports and their presence in the global market.

Therefore, unlike the Anglo-Saxon model focused on maximizing profitability for shareholders (short-term objective), the Mittelstand are family structures or coming from family origin, with long-term plans, strong investment in staff training, high sense of social responsibility and strong settlement in their communities.


[1] Source: OECD SME and Entrepreneurship Outlook and data from EU Eurostat.

[2] Make it in Germany. Federal Government


Author

Francesc Guell is the owner of this site. He was CEO and director of international companies in specialty chemicals and pharmaceuticals. The last 12 years was associated with international consulting groups, providing advice and support to businesses on topics such as innovation and agile innovation processes, operational excellence, knowledge management, change management, strategy and integrated business management. Currently creates and presents courses and workshops on these topics. He graduated as a chemical engineer, postgraduate from ESADE Business School in Business Administration and Master in Knowledge Management. He participated in numerous programs, seminars and ESADE, IESE, EADA, APD and MCE (Management Centre Europe). He is author of articles, presentations and courses on innovation in strategic management, integrated business models, knowledge management, performance measurement, change management and excellence in business processes. See more in: Professional Profile

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