empowering sme innovation - building internal strengths and external partnerships

Profiting from innovation: internal and external dimensions

Professor Stephen Roper Enterprise Research Centre and Warwick Business School

Stephen.roper@wbs.ac.uk

Professor Nola Hewitt-DundasSchool of Management, Queen’s University Belfast

NM.Hewitt@qub.ac.uk

The Enterprise Research Centre• The new Enterprise Research Centre (ERC) is the largest research initiative on SMEs

in the UK for 25 years - £3m over the first 3 years. Awarded after national competition.

• Warwick Business School leads the research consortium which brings together some of the UK’s best SME researchers from five leading business schools (including Aston, Imperial and Strathclyde)

• The ERC is funded by the Economic and Social Research Council, the UK government Department for Business, Innovation and Skills, the British Bankers’ Association and the Technology Strategy Board

• ERC research focuses on six themes:– Entrepreneurial Ambition and Growth– Entrepreneurial Leadership, Capabilities and Growth – Diversity and SMEs in the Emerging Economy – Finance and Growth – Innovation, Exporting and Growth– Firm Dynamics, Job Creation and Productivity Growth

Starting points …

• William Baumol, writing in 2002, comments that:– ‘… firms cannot afford to leave innovation to chance. Rather,

managements are forced by market pressures to support innovation activity systematically… The result is a ferocious arms race among firms in the most rapidly evolving sectors of the economy, with innovation as the prime weapon.’ (Baumol 2002, p. ix)

• And the evidence suggests that innovation matters – contributing positively to growth, profitability and productivity …

Innovation defined…

• Innovation is … – ‘the successful exploitation of new ideas, which can mean new to a

company, organisation industry or sector. It applies to products, services, business processes and models, marketing and enabling technologies’.

– Innovation Nation White Paper, 2008, p. 15.

• Innovation is …– ‘The design, invention, development and/or implementation of new or

altered products, services, processes, systems, organisational structures or business models for the purpose of creating new value for customers and financial returns for the firm’

– US Advisory Committee on Measuring Innovation, 2008

Innovation and business growth (%, 3 years)(Source: Roper et al, 2009)

• ‘ … on average, innovating firms were growing more than four times as fast as

• non-innovating firms’ (p. 21).

Internal dimensions

Innovation defined

Measuring innovation (outputs)

• ‘Measurement is one of the most significant factors in successful innovation. Ironically, in many organisations, it is one of the least attended to’. Davila et al.(2006, p. 178)

• A killer measure (or two!)

– The percentage of sales coming from products newly introduced in the last three years (Narrow)

– The percentage of sales coming from products newly introduced or improved over the last three years (Wide)

Measuring innovation

• Q1: Do you currently measure innovation in your firm? What metrics do you use?

• Q2: What do the ‘narrow’ and ‘wide’ measures of innovation look like for your firm?

• Q3: Are these the ‘right’ values? How would you like them to change?

Innovation outputs – Irish manufacturing firms: 1991-2008

Making innovation happen – the internal dimension

Introducing the innovation value chain

Hansen and Birkinshaw (2007) see the IVC as: ‘a sequential, three-phase process’

Link 1: Accessing knowledge : getting the knowledge needed to undertake innovation

Link 2: Building innovation: transforming this knowledge into new innovations - products, services, processes or business models

Link 3: Commercialisation: exploiting these innovations to generate sales, added value and growth

If all links are strong this will enable effective translation of knowledge into added value

Any link in the chain is weak this will undermine the whole effort and so can act as a management diagnostic

IVC in services

Implementing the IVC (After Hansen and Birkinshaw, 2007)

• Accessing Knowledge– Do people in our company create good ideas on their

own?– Do we create good ideas by working across the

company? – Do we source enough good ideas from outside the

firm?

• Are you ‘ideas rich’ or ‘ideas poor’?

Implementing the IVC (After Hansen and Birkinshaw, 2007)

• Knowledge transformation – Are we good at screening and filtering new ideas?– How good are we at investing in new products or

services?– How well do we manage and organise the development

of ideas into new marketable products or services?

– Are you ‘transformation rich’ or ‘transformation poor’?

Implementing the IVC (After Hansen and Birkinshaw, 2007)

• Knowledge exploitation – Are we good at taking new product/services to market?– Are we prepared to invest in marketing/advertising to support

new products?– How effectively do we partner with other organisations to

maximise our sales and marketing opportunities?– How effectively do we feed back signals from the market into

our innovation process?

• Are you ‘exploitation rich’ or ‘exploitation poor’?

Making innovation happen

• Q1: How effective is the IVC in your business?

• Q2: Which links in the IVC are weak/strong?

• Q3: Why? What can you do about it?

Open Innovation Creating value cheaper, better and faster

Professor Nola Hewitt-DundasQueen’s University Belfast

Contact nm.hewitt@qub.ac.uk

Assumption – Location of innovation is within the firm.

Reality – Vast potential for innovation (and innovation activity) lies outside the firm

What is it?Generating

Transforming

Exploiting

Traditional Innovators – few if any partners and follow a closed innovation model

Hunters – primarily engaged in inbound open innovation

Ambidextrous firms – seek knowledge outside the firm and seek to exploit their own knowledge with partners

32%

42%

26%

• Q: Would you describe innovation in your business as being:

Traditional closed?Hunter?Ambidextrous?

Why?

Changing Attitudes

1. Not all the smart people work for you2. External ideas can help create value, but it takes internal R&D to

claim a portion of that value for you3. It is better to build a better business model than to get to market

first.4. You don’t have to originate the research in order to profit from it.5. If you make the best use of internal and external ideas, you will

win.6. Not only should you profit from others’ use of your intellectual

property, you should also buy others’ IP whenever it advances your own business model

Source: Chesbrough, H. (2003) The Era of Open Innovation, MIT Sloan Management Review, Spring 2003, pp. 35-41

Does it make sense?0

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0 1 2 3 4 5 6 7 8Breadth of linkages (0-8)

Small Medium and large

Strong evidence of benefits

Stronger for small firms

Limit of Benefit may be reached earlier for small firms

Openness is not confined to specific sectors

Source Vahter, P., Love, J.H., & Roper, S. (2012) Openness and innovation performance: are small firms different? Working Paper, Centre for SMEs, Warwick Business School.

Implementing OI

Idea Led

Partner Led

Idea LedSource: NESTA (2010) Open Innovation

DISCOVER

Starts with an innovation brief detailing the specific unmet needIs a competitive innovation marketplace amongst customers, suppliers or usersInnovation process is mediated by a Trusted AgentInnovations are extractedTend to be internal routes to market e.g. licence deals

1. Clear Thinking

2. Open Competition

3. The Airlock

4. The pitches

Partner LedSource: NESTA (2010) Open Innovation

JAM

Starts with finding collaborative partners often to explore a broad opportunityIs a cooperative process, with customers, suppliers, users, universities etc.Process may be facilitatedInnovations are built through an iterative processTend to be external routes to market

1. Picking the right partner

2. Open Briefing 3. Facilitation 4. Business

planning

Use of external partners in firm’s innovation activities

Source: UK Innovation Survey (2009)

• Q: For your business, Which model is more relevant for you in conducting OI – DISCOVER or JAM?

Idea Led Partner led

What are the barriers?

Hard Barriers Soft Barriers

Intellectual Property Inertia

Complexity Culture and tradition

Interdependence Mind-sets

Source: NESTA (2010) Open Innovation: From marginal to mainstream, NESTA London

• Q: What barriers to you envisage?

Overcoming these barriers

• Strategy – be clear about what you are aiming for (or who you are working with)

Ideas for Innovation website – wanted “ideas for new products, packaging, marketing, and production technologies that will help us meet the needs of our consumers and customers better, faster and more completely.”3 – 6 months response period with no explanation for decision!

Overcoming these barriers

• Use being small to your benefit – be flexible!– Determine responsibility – Who? – Bring employees with you - How is it rewarded? – Invest in the effort – People or ideas– Power and control does not work! Develop Trust– Be open to potential ideas– Minimize risk (you can’t eliminate it)– Measure efforts

Source: NESTA (2010) Open Innovation: From marginal to mainstream, NESTA London

• Q: How might you overcome your barriers?