How SMEs are able to identify innovation opportunities and prepare for the future
Small and Medium-Sized companies (SMEs) – like large companies – are facing rapidly changing environments, innovation pressure and short product life cycles. Only few companies can ensure long-term competitive advantages as company structures often do not correspond to the requirements of a dynamic business world.
For SMEs, trying to follow similar innovation strategies as large companies is neither promising nor sensible. Instead, spectacular successes from the start-up world that have changed whole industries have shown that new ways to growth can be successful.
As a result, leading large companies use innovation sourcing strategies that span beyond company borders and that tap into the start-up world at a low risk. Especially venturing, or more precisely corporate incubation programs, have been surging. In addition to widely recognized successes of start-ups and emerging threats for MNEs, this is driven by the understanding that innovations in general – and particularly those that are likely to cannibalize existing businesses – require a special treatment outside of common corporate processes. Through corporate incubation programs firms can
- keep track of change and tap into knowledge created through start-ups
- identify and monitor potential partners and future employees
- benefit from the positive image that start-ups often carry
- support and accelerate identified partners with own resources
- benefit from financial success at low risk by investing early
In the recent past there has been a substantial rise in venturing programs for early stage start-ups. In Berlin, for example, Deutsche Telekom, Axel Springer, Telefónica, Microsoft, Bayer, and Lufthansa – to mention just a few – have started own programs to support and collaborate with start-ups. These programs are dominated by large companies.
SMEs have not been active in the start-up community so far even though corporate incubation seems to offer interesting opportunities for them. Literature even emphasizes that SMEs having an open innovation culture are able to remain innovative in the long-term, to outcompete competitors and thus realize above-average growth rates.
So, what are the reasons for their absence in this field and what are the barriers that keep them from getting engaged?
In general, most SMEs do not develop incubation programs as it is difficult for them to compete with corporate incubators of large companies as they lack financial, human and time resources. As a consequence of these restrictions SMEs
- are not able to provide ample services covering all aspects of company building
- often do not have a broad network of experts or mentors but rather a very specified and narrow one
- often focus on daily businesses and short term business development rather than strategic development of new business fields
- usually do not have comparable brand awareness and publicity as MNEs
Nonetheless, we think that corporate incubation can work for SMEs and is an attractive prospect for many of them as it allows to respond quickly to market transformations and helps to discover disruptive advances that occur outside the company.
What are critical factors for SMEs when trying to get engaged?
Here are some thoughts on how to build up a successful corporate SME incubation program:
1. Define USP. SMEs need to create a ‘new market’ for their incubation program and refrain from competing with large companies in this field. Key is to focus on what they are good at, what they are known for, and how this can be leveraged for creating value for the start-ups. Defining a USP is the key factor for a successful program. For example, a company might want to focus on a specific production technology or channels that they use and open them up. In any case the offered services need to be defined clearly so that benefits and also limitations are obvious for start-ups.
2. Utilize flat hierarchies and specialization. Offering intangible goods such as access to expert knowledge, specialized networks and senior management increase attractiveness for relevant start-ups. Interviews have shown that the advantages of SME incubation programs are seen in flat hierarchies and short communication channels. For example, coaching through CEOs and co-founders that have often undergone similar phases that the start-ups are experiencing at the very moment they are in the program are of tremendous help – both thematically for the offered service or products but also personally for the founders who might struggle with their new role as leader.
3. Use the network. Instead of trying to master such a program single handedly, SMEs need to integrate external resources into their offering. Benefits are multifold. Partners will see the leader of the program as future-oriented and pioneer, they may add additional perks to a program, or might help in the execution of specific program parts. Multipliers help in creating awareness, adding to the build-up of credibility as an actor in the start-up community.
4. Engage in the community. A good and often different marketing and communication approach is required to reach the targeted audience. Promoting a corporate incubator is an ongoing process and should be prepared and implemented thoroughly. Often this requires moving away from traditional formats and methods. However, it also opens up chances for existing employees to see the company with different eyes and try new methods in a low-risk environment.
5. Onboard employees. Key to success in working with outside parties is onboarding existing employees. Also, as SMEs typically shy away or simply do not have the resources for investing heavily into a large dedicated team for venturing activities, they need to engage employees. These employees need to be prepared and trained to understand that the start-ups are not seen as better, just different, but an essential part of future growth. Preparing employees for different working styles, methods, and behaviour is extremely important for ensuring beneficial integration of new these partners and avoiding the Not-Invented-Here syndrome. In this context, it is important to create incentives for employees to be part of the program and emphasize management support for this.
6. Internalize insights. Start-ups often pilot new methods, formats, technologies and business models. SMEs should try to adopt these insights for own products if improvements may be achieved. At least it will fuel creativity and challenge existing structures within the company. At best, new business fields result from novel combinations of technologies and skills.
All in all, we found that keeping up with the speed of innovation or changes in the business world does not depend on rich assets anymore. It is rather about the ability of organizations to manage a complexity of large networks of value creation partners.