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:

1. Continuous technological developments
2. Shorter product life-cycles
3. Increasingly demanding consumers
4. 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.

Further reading

• 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

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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The word entrepreneur has become one of the most commonly used terms in the modern business vocabulary as the British economy has undergone a major period of restructuring  following the launch of the enterprise culture in the early 1980s.

Despite these developments there still appears to be considerable doubt as to what the word actually means and what characteristics distinguish successful entrepreneurs from the more conventional and possibly less successful business figures. In the UK an entrepreneur is differentiated from an owner-manager of a small business (a lifestyler) on the basis of their ideas being highly innovative, the fact that they adopt a strategic approach to the running of their businesses and they are driven by motives of high growth. In the USA the definition is more generalised insofar as an entrepreneur is anyone who establishes a start up business  irrespective of whether it is based on a innovative idea or not.

Entrepreneur Duncan Bannatyne.
[image © copyright BBC]

Another important question is whether there is a typical person who becomes a successful entrepreneur, an archetype on which we can base our judgements about someone’s aptitude for entrepreneurship? Can anyone become an entrepreneur or does it require a certain type of person to make it really work? If it does require certain attributes are they innate or can we acquire them – in other words are successful entrepreneurs born or made?

The influence of the business founder or nascent entrepreneur  on a small business is crucial, particularly in the early days when enterprises are inseparable from their founders. They are conceived by them and survive (or not) because of their personal commitment and dedication. In later stages of growth, a management team may emerge which makes the enterprise more autonomous and capable of surviving without the founder.

Since this impact is so vital to small business survival it is important to identify and encourage the personality types who are most likely to succeed and to discourage those who are not. A number of traits or personality characteristics have been put forward such as the `Big Five` personality dimensions which include: the need for achievement, the need for autonomy (or independence), an internal locus of control (or self-determination), a risk-taking propensity and self-efficacy (or self-belief). Since these entrepreneurial traits are formed during childhood  and cannot be developed later there is and strong implication that entrepreneurs are born not made.

A further characteristic of the entrepreneur is their ability to innovate. According to the late Peter Drucker, entrepreneurship and innovation are tasks that can be and should be organised in a purposeful way and are part of any manager’s job whether he or she works in a small or large enterprise. The entrepreneurial manager is constantly looking for innovations through an organised and continuous search for new ideas. Drucker presented entrepreneurs not as people who are born with certain character traits but as managers who know where to look for innovation and how to develop it into useful products or services once they have identified the strategic space or market gap. Drucker therefore believed that these competencies could be learned and developed and involved a continuous purposeful search for new ideas and their practical application.

There are also other personality traits associated with entrepreneurs which include: a proactive approach, self-motivation, a tolerance of uncertainty and ambiguity, opportunistic behaviour, creativity, vision, impatience, energy and charisma.

It is therefore hardly surprising that successful entrepreneurs appear to be superficially so diverse. This may also have something to do with the socio-economic characteristics of their environment in terms of both the national and market conditions in which they operate and compete. These will also vary greatly from country-to-country and from sector-to-sector.

Finally, if Peter Drucker was right then perhaps the enterprise initiatives that have been launched across the UK have a high probability of success or is it more complicated than that?

Further reading

• Organisations Evolving by H Aldrich, published by Sage
• `The Entrepreneurial Personality; Past, Present and Future` by E Chell, in Occupational Psychologist number 38
• Innovation and Entrepreneurship by P Drucker, published by Heinemann.
• The Achieving Society by D McClelland, published by Van Nostrand
• `The Dark Side of Entrepreneurship` by M Kets de Vries, in Harvard Business Review November-December 1985  

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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A study by the European Commission (0.6MB PDF) in 2002 identified 4 key drivers of entrepreneurship and small firm development in Europe. These were:

• Continuous technological developments
• Shorter product life-cycles
• Increasingly demanding consumers
• Global competition

Research in 2006 by the Institute of Chartered Accountants of England and Wales (ICAEW) (based on a survey of 1,000 companies) revealed that 60% of companies with 49 or fewer staff bought goods or services from abroad or had customers or operations there.

“Increasingly, small businesses do not start off trading locally as they did in the past,” said Clive Lewis, ICAEW head of enterprise. “If you have a website you can think globally from the beginning”.

[from Small companies look beyond local to go global in the Financial Times, Thursday October 12, 2006, page 4]

The drivers of this trend according to the ICAEW have been globalisation together with the spiralling cost associated with red tape. Increased staffing costs were also becoming a problem for UK SMEs and was a primary reason for the outsourcing of back office jobs to the low cost economies in Eastern Europe and Asia . This is a trend that is likely to double over the next five years.

It is not just in the area of back office support services that SMEs (Small and medium enterprises) and small business start-ups are seeking overseas resources. If a business’ core product or service is information-based then virtual structures, using the Internet as a conduit, may have spawned new form of mini-multinational. For example, GNI is a biotechnology start-up that carries out research in Cambridge UK, data analysis in Japan, clinical trials in China and sells its outputs in the USA to large pharmaceutical companies.

“We take the best of what is available in each country and put them together,” says Mr Savoie GNI’s founder

[from March of the mini-multinational in the Financial Times onThursday May 4, 2006, page 12]

Video conferencing is used to link up personnel and the organisation is able to exploit national differences, cost and expertise to operate as a mini-multinational. Carol Cherkis, Vice President of GNI says that GNI is not a virtual company but a real company “It’s just that we are not all in the same place” [from March of the mini-multinational in the Financial Times on Thursday May 4, 2006, page 12].

Another example of a virtual mini-multinational is Lingo 24 which is a translation company  employing 40 staff in China, New Zealand and Romania with a turnover of £1.5 million and profits of £120,00 (as in 2004). The company’s headquarters are a two bedroom house in Deptford where clients ranging from BP, Honda, Ikea Orange and Travelex are served. Instead of having to physically travel to expensive offices employees can simply log on to a Lingo 24’s central database to obtain all the necessary information relating to translation projects. Homeworking and using international staff reduces overhead costs by 30% and permits a 24/7 service to be offered. Lingo 24 communicate on a daily basis using Skype and e-mail whilst the company intranet is used to monitor quality and provide an editorial oversight.

Richard Portes, an expert on globalisation at London Business School, said: “Small businesses are now operating on a global scale. They could not have done [this] 15 years ago.” Professor Portes added: “The advantage small businesses have is that they are not burdened with long lines of command, where important pieces of information come from operations in one country [back to the centre] then travel up and down chains of command”.

[from Small companies look beyond local to go global in the Financial Times, Thursday October 12, 2006, page 4]

So has the Internet spawned a new form of organisational structure and a new source of competitive advantage for agile and responsive entrepreneurial companies? Are the “big boys” shaking in their boots and would it be premature to start throwing out the textbooks on downsizing, delayering and business process re-engineering…….. or is this just a passing fad?

About the author

Nigel Walton is an associate lecturer for the Open University and the University of Worcester, specialising in strategy, entrepreneurship and international marketing. He previously worked as a management consultant, primarily advising medium-sized companies with growth problems.

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