Innovation Ecosystem for SMEs

In this first article on the Innovation Ecosystem for SMEs, Dr. Hamsa Thota defines innovation and introduces its basics to actors involved in the product innovation ecosystem. He also highlights relevant SME success factors and risks in the Ecosystem.

Innovation Definition

Innovation is the process of converting ideas into useful products and services. It also includes innovation in processes, and organizational and marketing methods in internal business practices of an enterprise or the market place. The process used to develop ideas into new products and services is called the new product development (NPD) process. The NPD process consists of three phases. Research or discovery phase, development phase and commercialization or launch phase. You can learn more about the NPD process and other popular definitions of innovation in my book, Key Concepts in Innovation published by Palgrave-MacMillan in 2011.

Open Innovation vs. Closed Innovation

In the past NPD was seen as a linear process in which internal research and development (R&D) developed new products, and the enterprise launched them. This is the closed innovation approach. Many in-house R&D departments overemphasized the secret nature of their research in the closed innovation approach. In 2003 Henry Chesbrough argued that closed innovation is not very effective. He argued that in closed innovation many projects stay in the R&D departments because enterprise managers look at short-term profits and do not invest in ideas to support long-term growth. So, many R&D projects languished in the prototype stage for lack of funding for development. More innovative internal R&D projects suffered the ‘‘valley of death.’’ Chesbrough proposed that companies should open their R&D departments and collaborate with external partners.

In 2006 I wrote in the Product Development and Management Association (PDMA) Visions magazine that internal and external sourcing of ideas, co-development with partners, and co-invention with customers is a trend driving global innovation. Also innovative enterprises were profiting from their unused intellectual property (IP)-technology by seeking others to use them, including competition. This is Chesbrough’s “open innovation” approach. In open innovation external linkages enable knowledge interactions. Knowledge interactions take place among three actors: academia, enterprise R&Ds, and markets. They form the basis of product innovation. Enterprise R&Ds can begin collaboration with clients (including customers and end users), suppliers and competitors in the discovery phase of the NPD process. Enterprise R&Ds can also collaborate with other organizations, such as the research labs, universities, and public research organizations. External collaborations in the discovery phase enable enterprise R&Ds to detect promising future avenues for growth, to identify current market opportunities, and to successfully integrate newly acquired technologies into existing platforms and product pipelines. So open innovation is complementary to enterprise’s internal R&D and not a substitute. However, enterprises practicing open innovation are susceptible to information leakage and knowledge losses, to dangers of imitation, copying, and to illegal reverse engineering. These risks are mitigated if an enterprise operates in an ecosystem with laws protecting their intellectual property.

Definition of Innovation Ecosystem

Innovation ecosystem molds economic relationships formed between organizations or partners whose functional goal is to enable technology development and innovation. In Key Concepts in Innovation, I described innovation ecosystem as “ enabling collaborative innovation, in which organizations with complementary resources combine them to provide a coherent, customer-facing solution.” The solution can be a new product, feature, process or service. The collaborative solution creates value that no one organization can produce on its own. In a thriving ecosystem, increased profits generated from collaborative solutions exceed initial R&D investments.

Building and strengthening interdependent links among ecosystem actors is very important to create and sustain product innovation. The iPhone’s success is dependent on Apple’s carefully cultivated ecosystem of network partners including the content producers, and a highly customer-driven vertical supply-chain combined with Apple’s abilities to create delightful customer experiences to drive adoption of innovative iPhone in the marketplace. The iPhone achieved 10% market share less than one year after launch and continues to be a popular seller today. Other examples of technology-based ecosystems include consumer electronics, high-tech, automobiles, and machinery.

SME Innovation Ecosystem

SMEs can be categorized into innovating enterprises or operating enterprises. Operating SMEs focus solely on managing everyday business activities and generating incremental improvements to existing products and processes (i.e., incremental innovations) while innovating SMEs invest in both incremental projects as well as foster the generation and deployment of more innovative technologies, and breakthrough products and services. Innovating SMEs also innovate in how they deliver their products, features and services to end-users. They understand innovation as an ecosystem. In the ecosystem perspective, innovation occurs in interactions between cooperating and/or competing enterprises, public-private partnerships, and in the universities, science and technology parks, and industrial laboratories. Institutions that make up the SME ecosystem include universities, national research institutes and laboratories, colleges of engineering, business schools, business firms, venture capitalists (VC), industry-university research institutes, federal or industry supported Centers of Excellence, and state and/or local economic development and business assistance organizations, funding agencies, and regulatory and policy making bodies.

Innovation is a fundamental source of wealth generation. SMEs that acquire technology and/or market information from their ecosystem and utilize it to develop innovative products and services create their own future. However, acquiring marketing information from market surveys, concept tests, focus groups, and competitive market data is a challenge for many SMEs because of scarcity of resources or low market research capabilities. Market research and market planning at the front end of new product development is positively associated with project success factors such as breakeven timing and cumulative sales over time.

Ecosystem Risks for SMEs

Along with new opportunities, the innovation ecosystem also gives rise to new risks, one of which is that an enterprise’s success depends on the fulfillment of commitments of others, such as collaborating partners who are part of the ecosystem.

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Dr. Hamsa Thota is the President of  Innovation Business Development, Inc. (INSME Member), an innovation performance consulting and training company in the USA. Dr. Thota has 25 years of senior R&D management experience in the US food industry and holds 10 US patents. He is co-author of Key Concepts in Innovation, a fundamental reference book on innovation. He was a visiting professor at the Management School of the Zhejiang University and an Honorary Professor at the Geely Automotive Engineering Institute in China. He is a past president of the Product Development and Management Association.