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Why does a SME need business model innovation?
Why does a SME need business model innovation?

I have been thinking about how SMEs need business model innovation.

There is a lot to consider as a SME. Many SMEs are just 1 or a handful of people. How do they innovate?

With increasing competition, how do they start to consider implementing something that might change, and disrupt, everything about their way of working? Even larger organisations struggle to innovate, so it must be harder for SMEs. Currently, I don’t know the answer, but it is something I am trying to work out!

What is business model innovation?

Academics have looked at the strategic process of changing a business model. Some suggest it is:

“… designing a new, or modifying the firm’s extant activity system – a process which we refer to as business model innovation …” (Amit & Zott 2010, p. 2)

This is a good starting definition for me because in my own research I am considering processes and activity systems: I am asking how understanding of activities can form a framework for implementation of innovation in SMEs.

“Business-model innovation is the discovery of a fundamentally different business model in an existing business.” (Markides 2006, p. 20)

I personally am very interested in this second definition becasue Markides’ research is focussed on disruptive innovation.

What does disruptive business model innovation look like?

Disruption happens in many ways. One such way is through business model innovation. But, how do small organisations innovate to improve their performance and ability to compete? Academics, like Amit & Zott (2012), reckon any industry can benefit from business model innovation, even established ones. In fact, whether they are SMEs or larger organisations, understanding the process of innovating with a business model is a really important.

Some organisations are better at continuous disruption. They find new ways of challenging how they operate. Netflix is an example; since day one they have had  a culture of business model innovation. Their values are:

  1. Values are what we Value
  2. High performance
  3. Freedom and responsibility
  4. Context, not control
  5. Highly Aligned, Loosely Coupled
  6. Pay Top of Market
  7. Promotion and Development

And because of this culture they try to recruit, promote and drive development of nine behaviours and skills. One is the ability to innovate. To achieve this constant disruption they need people who can:

  1. Reconsider problems and find solutions
  2. Challenge assumptions and suggest better approaches
  3. Generate new ideas
  4. Minimise complexity and encourage simplification.

This is definitely not the case in many SMEs. Many are simply not in the right place, perhaps they are even struggling. How can they be encouraged in such times to innovate with new ways of doing business?

Why would business model innovation be difficult for a SME?

SMEs “hierarchy of motivational drivers” to innovate.
SMEs “hierarchy of motivational drivers” to innovate.

I had a brief conversation with a colleague about the nature SMEs. This triangle represents a “hierarchy of motivational drivers” to innovate

Hypothetically, SME by nature will probably fit into three areas where they are  (from bottom to top):

  • Trying to survive – need to be actively looking for contracts and revenue streams.
  • Stable – have sources of income and enough traction to be safe in their market; at this stage to remain competitive they need to innovate to avoid slipping back into survival mode or to enable them to pass towards a developmental phase.
  • Developmental – have reached a stage with traction and revenue. But, they may not feel the need to remain innovative and actually start slipping back towards stability.

How can a SME be encouraged to innovate? Some academics talk about the idea of the “absorptive capacity” of business, including SMEs, to innovate.

But, actually, business model innovation in SMEs is essential to economic success

SMEs are really important and the government Plan for Growth pledges to keep low “ the SME rate of R&D tax credit, subject to state aid approval” because of this. But, what is a SME anyway? Well, there is a definition and it is pretty clear in fact:

The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

So why is it so hard for a SME to innovate? Well, the figures above do not represent the average SME at all. In 2011 for example there were 5.2 million UK SMEs making up over  99% of all UK business. But, at the same time there were 5.0 million smaller micro-businesses, with 0-9 employees, and this accounted for 96% of all UK businesses. In many of these businesses we may only be talking about 1 or 2 people. But, when:

“ … existing research on Business Model Innovation (BMI) challenges focus almost exclusively on intra–firm factors such as capabilities, cognition and leadership.” Berglund and Sandström (2013, p. 275)

What are the challenges of being a SME right now?

As you can tell, I am really interested in understanding how businesses innovate. Are you an SME? How do you innovate? Do you struggle to be innovative? I would like to hear about your experiences, and maybe even start a few conversations. Drop me a line, or leave a comment – it would be good to hear some stories.

 

 

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