New business isn’t all about startups and includes existing businesses large and small. I previously covered large businesses in innovation for Enterprise. Here, I take a look at innovation for SMEs. Unlike new companies, SMEs usually have existing revenue-generating business so innovation is as much about improving existing things as it is about creating new products and services.
This post looks into what defines SMEs, explores their relative importance and shows SMEs can benefit greatly from innovation. It explains how ‘best practice’ advice suitable for Enterprise isn’t always appropriate for SMEs. I provide some thoughts on how SME innovation differs from Enterprise innovation and pointers where to get help and funding.
Small in Size, But Ubiquitous
There’s ambiguity as to what actually defines a company as being a SME. A typical measure is it’s a company employing less than about 500 people. This is also the size at which it isn’t usually financially viable to seek the help of the top consultancies so SMEs have to find other sources of advice.
Even though SMEs are small, they account for the vast majority of the economy. For example, in Europe, the 24.5 million SMEs account for 99.8% of Europe’s economy. It’s similar in the USA with over 6,064,000 businesses with only 0.32% qualifying as large businesses in the last census. In my home country, the UK, 98.6% of manufacturers are SMEs.
SMEs Benefit Most
While most ‘best practice’ advice is more suitable for large companies, it’s usually the smaller companies that can benefit most. The 2019 Vodafone IoT Barometer found that IoT has the potential to have a greater affect on SMEs than larger companies.
57% of SMEs with less than 250 employees reported achieving significant benefits versus 49% for businesses with over 1000 employees. Vodafone believes that the smallest of changes can have a major impact on a small business. SMEs can achieve greater benefits from economies of scale, mass customisation and personalisation.
Vodafone isn’t the only organisation identifying the larger benefit for SMEs. The World Economic Forum has a recent white paper from Davos on Accelerating the Impact of Industrial IoT in Small and Medium Sized Enterprises: A Protocol for Action (pdf).
The paper identifies the need to lower the barriers and encourage adoption of technology by SMEs. The Eurostat data shows that companies with over 250 employees in the EU are six times more likely to benefit from analysis of data collected from smart devices or sensors.
The paper concludes SMEs need to gain more profitability, seek larger addressable markets and ultimately provide expanded tax revenue for governments as well as improved social outcomes for the general public.
The main barriers are short-termism, lack of funding and shortage of spare time for innovation. SMEs need to organise better so as to be more flexible. They can and should be more flexible than large Enterprises that have lots more inertia. At the other end of the scale, unlike new companies, SMEs tend to be financially stable. SMEs are actually the best placed to take on new technology.
Whether innovation is to improve internal processes or external to realise new markets, it’s important that technologies are sized appropriately to reduce complexity, risk and cost.
Enterprise hardware and software isn’t always best for SMEs. SMEs can consider shortcuts such as re-purposing consumer hardware and taking a more do-it-yourself approach. Consumer devices not only have lower costs but tend to be easier to develop for as they have less proprietary lock in. For example, consider rugged versions of consumer hardware, for example rugged or ‘active lifestyle’ laptops and smartphones. The Raspberry Pi, originally designed for learning and hobbyists is now being used in industry. However, take into account factors such as endurance, warranties and obsolescence that you should factor into design decisions.
Along the theme of re-purposing technologies, The University of Cambridge and Nottingham Institute for Manufacturing have an interesting initiative Digital Manufacturing on a Shoestring that considers inexpensive and easy solutions for SMEs.
With software, don’t automatically think you need cloud providers such as Amazon, IBM and Google. Also be wary of software as a service (SAAS) platforms that can lock you into unknown future costs and, particularly for VC funded SAAS, a short lifetime. Consider simple self-build solutions with less vendor platform lock in. Do-it-yourself approaches using free, open source solutions are more suitable for SMEs where scalability is less of an issue than for large Enterprises. Solutions can be more flexible and on site rather than cloud based for more controllable reliability, better security and lower, more deterministic costs.
Measure and Combine Data
SMEs are at an advantage over startups and Enterprise because they a) have existing data and b) that data is accessible rather than silod by over-protective departments. If there’s no data then it can usually be easily created without involving lots of red tape. As mentioned in the post on analytics, data leads to insights that can lead to innovative improvements, new products and services.
Re-assess Your Business Model
While most innovation concentrates on technical implementation, it’s possible and indeed desirable that innovation be driven by high level business needs. Business model generation isn’t a one off event and should be periodically re-assessed. This is especially so for SMEs where a small change in the business model can have outsize positive repercussions. The changes are also more easily implemented than in Enterprises where there’s always too much inertia.
Take at look at your key partners, resources, revenue streams, channels to market and customer segments. Changing these can lead to innovative technical solutions that power new markets.
Communicate With Your Customers
Again, SMEs are in a great position compared to new startups and Enterprise when it comes to communicating with existing clients to discover their needs that are not being fulfilled. Unlike startups, you will probably have lots of customers. Unlike Enterprise, they won’t be locked behind account managers.
Your customers will always be a better source of ideas than you and your employees. Don’t guess, ask.
It’s in governments’ interests to make SMEs more competitive and ultimately bring in more taxes. There’s also an impetus to make business more environmentally friendly. These are often wrapped into what’s called Industry 4.0 or the 4th Industrial revolution.
There are many initiatives to help SMEs become more innovative:
- The future of manufacturing in Europe (FOME) financed by the European Parliament and individual country-based organisations and schemes exist to revive manufacturing using the latest technologies.
- Interreg Europe helps policymakers find solutions. Their recent paper on Industry 4.0 (pdf) explains the enabling technologies, opportunities and challenges and they fit into European Union industrial policies.
- Europe’s Green Action Plan (GAP) is helping SMEs address environmental challenges, turning them into business opportunities by improving resource efficiency, green technology transfer and providing finance for environmental improvements.
- There’s also the European DIGITAL SME Alliance representing 20,000 SMEs with an emphasis on cyber security, ICT standards, intellectual property, future technologies and AI and trade/competition.
- Countries each have their own government initiatives with grants and competition-based funding. For example, here in the United Kingdom we have Innovate UK and Digital Catapult. Some countries also have R&D tax credits for research that offset the cost of adoption and deployment of new technologies.
SMEs represent the majority of economic activity compared to startups and large Enterprise. There’s a huge opportunity for innovation in startups that doesn’t necessarily require expensive and proprietary hardware and software technologies. SMEs are not alone in that governments have many financial and advisory initiatives.