Small businesses are a growing driver of U.S. economic growth. They employ about half of private sector workers, create 60 to 80 percent of new private sector jobs, and generate more than $6 trillion in annual revenue.
Despite their importance, relatively little is known about how small businesses innovate—the majority of research focuses on large corporations or small, high-growth technology firms. To better understand small business innovation, Intuit, Emergent Research and the Institute for the Future organized a project to identify, analyze and forecast forces affecting small business innovation. This is an abridged summary of the first research brief in the series.
“Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.” —Peter Drucker, Innovation and Entrepreneurship
Today’s turbulent world magnifies the increasing importance of small business innovation. The intensity of economic and technological change means few businesses can succeed without continually incorporating new methods. Innovation, once optional for small businesses, is now mandatory.
In the next decade, small businesses will embrace innovation even more broadly than they do today. They will take advantage of new technologies to improve their products and services, and their agility will let them create new business models to seize opportunities, improve their competitive position and provide more value to their customers.
In the short term, innovation will help small businesses through the current recession. Small businesses react quickly to changing economic conditions, and their owners have a can-do attitude, creating opportunity out of adversity. Despite the tough times, the majority of small business owners remain upbeat about their long-term prospects. Intuit’s Small Business United survey, conducted in December 2008, found that nearly nine out of 10 small business owners see opportunities for their business despite the stagnant economy.
Small Businesses are Natural Innovators
Chuck Siegel, of Charles Chocolates, created new cooling trays that tripled production using existing manufacturing facilities. The idea enabled him to fill new orders for chocolates from a major retailer.
Cristy Clarke, the creator of the popular game TableTopics, was thinking of interesting conversation starters on her way to a party. She turned this idea into a successful game company.
Ask either of these business owners to describe their innovation, and they might seem perplexed. More than likely, they would tell you they had an idea, saw a way to do it better, recognized an opportunity or solved a problem. But in fact, each is an innovator.
Many small business owners innovate on a continuous basis to survive and thrive. But rather than calling it innovation, they use words such as “tweak,” “adjust,” “improve” and “change.” They talk about improvising and finding new ways to do things.
Small businesses are active and natural innovators. Just because they don’t see themselves in that light doesn’t diminish this fact, or the importance of small business innovation to the U.S. economy.
Drivers of Small Business Innovation
The word innovation invokes a picture of resource-rich laboratory settings. But for small businesses, the market is the lab. Small business owners, managers and employees are the innovation specialists. And resources are scarce. Despite the constraints—or perhaps because of them—small business innovation thrives. The drivers of small business innovation fall into three broad categories:
- Necessity. Small businesses operate in competitive and changing markets. Pressures to meet payroll, reduce costs and respond to customer complaints are continuous. Competition is always a threat and resources are limited. Success often hinges on making constant changes and improvements in the business.
- Opportunity. Entrepreneurs are opportunistic by nature and small businesses are constantly looking for new ways to make money, save time, improve their processes and create more customer value.
- Ingenuity. Many small businesses spring from the desire for something that doesn’t exist. Gatorade was created to rehydrate football players. eBay began as a way to make money by selling garage clutter. Both met needs that had much broader implications.
Small businesses innovate both reactively and proactively. They innovate reactively in response to customer, market and competitive pressures. But they are also proactive innovators, scanning for and acting on new business opportunities. Interestingly, small businesses blend the two processes by reacting to a need but often creating something bigger and better—or altogether different—than what is needed to oil a squeaky wheel in the marketplace.
Innovation is in Small Business DNA
Because of their size, agility and deep customer understanding, small businesses have inherent innovation advantages over large corporations. Small business innovation enablers include:
- Personal passion. Entrepreneurs often start small businesses based on their passions. Often wearing many hats, their personal stake and enthusiasm for their ideas makes them willing to try new approaches to make their business more successful.
- Customer connection. Because of their close customer relationships and deep market understanding, small businesses can anticipate needs, identify new opportunities and fix problems quickly.
- Agility and adaptation. Small businesses can quickly and easily adapt their business practices, change course or even pursue entirely new directions. Innovation takes fewer resources and is easier to implement than for larger corporations.
- Experimentation and improvisation. When pursuing new opportunities, many small business owners aren’t afraid to experiment and improvise, accepting failure as part of the path to success.
- Resource limitations. Small businesses are adept at doing more with less, and these constraints lend to innovative mindsets. With small staffs and few dollars, small businesses are forced to focus on high-impact or low-cost innovation efforts, or both.
- Information sharing and collaboration. Small businesses traditionally rely on strong social networks—trade associations, the Rotary Club, chambers of commerce and extended friends and family—to share information and inspire innovative thinking.
Small Business Innovation Amplifiers
Multiple factors affect small business innovation in many ways.
- Technology. It is leveling the playing field. Today’s entrepreneurs are using technology that, just a few years ago, was the exclusive property of large enterprises. As it becomes cheaper, more powerful and more accessible, the costs of starting and operating a business decrease, while opportunities for small business innovation increase.
- Business Culture. While many small business owners are natural innovators, there is a wide range in their interest and ability to do so. How they embrace and manage change determines their willingness, or lack thereof, to innovate. Leaders can adjust the organization’s goals, style, pace and behaviors to either increase the pace of innovation or impede it. Most innovative companies have a culture that values risk-taking and a willingness to try new ideas. The leaders at successful, innovative small businesses encourage and reward behavior that increases innovation.
- Knowledge. The ability to innovate successfully also hinges on having the right information about customers and markets, and the methods and skills to act on that information. Today’s online communities and social media tools like blogs, wikis and Twitter, greatly expand networking opportunities and provide a diverse pool of knowledge. It’s easy to tap into best practices from a range of industries and geographies.
- Capital. Small businesses often rely on credit to maintain cash flows, support inventory levels, and purchase buildings and equipment. Without access to credit, many small businesses cannot pursue new opportunities or invest in new ideas, methods or markets. Credit greases the skids of small business innovation.
- Regulatory Environment. Innovation-friendly, transparent regulation can encourage new business formation. Tax policy can stimulate and reward research, development and commercialization of new technologies, products and methods. Conversely, complex rules and regulations make compliance difficult and innovation risky. Regulations can hinder companies of any size, but reporting requirements are often much more burdensome for small businesses.
Entrepreneurs have the ability to innovate their way into new markets and new opportunities by rethinking their business and reworking how they approach the marketplace. By creatively applying their resources to address a need, an opportunity, or a desire to make something better, small business owners bring about change. Their goal: to grow their business, improve their lifestyle or enhance their community.
Innovation can occur in all aspects of business. We see it in how they interact with customers, produce goods, structure their organization, and manage their employees. These solutions can be as broad as the major redesign of a production system, or as focused as ongoing refinements that strengthen relationships with customers or suppliers.
Both levels of innovation add value to a small business. They enable companies to provide higher quality, increased customer value or improved goods and services. Innovation can also increase profitability and allow small businesses to accomplish more with less effort, time and expense.
Innovation will be mandatory for small businesses over the next decade as they survive and thrive by seizing new opportunities, improving their competitive position, and providing more customer value. Small businesses are up to the challenge. They are natural and continuous innovators.
Most small business innovation focuses on the commercialization of new ideas and processes and not patentable, scientific research. Thus, the impact of small business innovation is often overlooked. Yet despite being silent innovators, small business success hinges on innovation and is an important driver of economic growth. iBi
Emergent Research is a research and consulting firm that analyzes the forces impacting small businesses and their role in the global economy.