Sunday 26 June 2011

Coaching SMEs to innovate

Commercialisation is the "the conversion of an idea or know-how into a replicable product or service that delivers value to a market".

Nine years ago, when the Australian Institute for Commercialisation (AIC) was first created, we were quickly forced to ask ourselves how we could add value to our own market – those entrepreneurs, researchers, or businesses seeking to commercialise their ideas. It took time to understand the real market needs, and to develop and commercialise our own products and services. In some we failed, but in others we succeeded.

What is the test of success? For us, as a not-for-profit company, success of our own products and services has been measured through various key performance indicators, such as the number of our customers, our customers’ success, and degree of our product uptake. However, if imitation is the sincerest form of flattery, perhaps our success can best be measured by the degree to which other governments and innovation groups are now offering the services that we first pioneered and innovated ourselves. These include our flagship TechFast program, which is a “demand-pull” commercialisation service that helps SMEs to establish collaborative relationships with research organisations or others in an open innovation model, and our TechClinics, which help businesses to enter or even establish new value chains to take products to market in collaboration with others.

SME’s, or small to medium enterprises, are the lifeblood of almost every economy, and usually contribute well over half the total of all business revenues within national gross domestic product (GDP). Most know what they are doing. But a good proportion keep doing the same thing over and over, failing to innovate and eventually losing to competition. The job of our Innovation Coaches is to help find and use outside expertise to help facilitate the innovation process.

Many innovation intermediaries focus on helping to establish and accelerate the growth of start-up companies. However, we believe there are several benefits in working to help existing SMEs to (re)innovate. Firstly, SMEs already have an ability to operate, rather than having to establish capacity from scratch. Secondly, SMEs know their market, and will have established distribution channels, enabling them to focus on innovating the product or service itself, rather than having to establish entirely new capabilities. Thirdly, SMEs can frequently fund themselves organically rather than rely on venture capital, and tunnel through the “valley of death” using internal funds. Finally, SME’s are sticky, and more likely to remain headquartered in their existing region, rather than be forced to relocate – often offshore – because of the whim of a venture capitalist seeking a profitable exit.

However, not all SMEs are equally well adapted to innovation, and it is important to first segment the SME population to ensure that they are best able to benefit from assistance. The graph below shows a general SME population, plotted against some measure of innovation intensity, such as number of R&D staff or spend, or new product development investment. Numerous surveys over the past decade have shown that firms that innovate consistently have higher performance in profitability, market share or revenue than those that don’t, and the graph shows this general trend.

Firms at the low end of the plot typically lack the skills and resources to innovate. Instead, they frequently need improved “zero-level” capabilities, and should focus on achieving efficiencies in their HR, finance, and customer management systems to survive. Manufacturers in this segment can benefit from introduction of “lean” manufacturing techniques and other process improvements – so called “new to the firm” innovation. Frequently however these attempts will be insufficient, and many in this population will fail. In fact, fast failure should even be encouraged to minimise losses to their owners, and prevent the “walking dead” that impose a drag on the overall economy. Other firms in this category should become educated in how to innovate and commercialise their products, perhaps benefitting from entrepreneurial-based courses that improve marketing, operations, and better utilisation and capture of their intellectual property.

Firms at the top end are the stars, the highest R&D spenders. They typically already know how to innovate on their own, and normally won’t require the services of an innovation intermediary.

Firms in the middle however are in the ‘sweet spot’, where the goal should be to transform from rising stars into real stars. However, even in this population, not all firms will benefit from innovation coaching. Only firms with sufficient commitment and absorptive capacity will be able to engage in open innovation or develop new products and services to grow their market share. The absorptive capacity of a firm is a measure of its ability to adopt and adapt intellectual property and know-how for its advantage, and is a function of the skills of its staff, its technological literacy, its ability to undertake research and development of its own, and of course its leadership.

The Innovation Coaching program

The AIC’s Innovation Coaching program was first introduced to help Queensland (Australia) SMEs in 2009. The program works with SMEs in a number of industry sectors, helping company management to “think outside the box” to grow their business or develop new products and services. In addition, the AIC refers companies to other service providers in its wider partner network, where other specialist skills are required. Many of these firms are now enjoying the results of the business model transformation and product innovation experienced through this program; firms such as Placid Pools in Cairns or B&C Plastics in Brisbane.

Generally, we find that open innovation – involving shared risk and shared collaboration to innovate – is a good avenue for rising star SMEs to develop their product or service. However, it can still stagnate. Ultimately, the secret of commercialisation is for a firm to know precisely where its product or service fits in the value chain, and how it adds value.

The value chain, first popularized by Michael Porter in 1985, refers to a network of activities, connected by linkages that are performed by an organization to design, produce, market, deliver and support its products and services. As corporations have become less vertically integrated, adopted open innovation, and embraced globalization, most value chains today cross organizational boundaries and consist of many firms, loosely linked but interdependent on each other.

Value chains are a useful model to describe how a product or service is developed and ultimately utilized. When a value chain lacks transparency, or is fragmented, or perhaps does not yet exist (for instance, in a new emerging industry sector), the commercialisation of new ideas can stall and innovation can be stifled because small firms find themselves unable to offer fully integrated products, or unable to access markets on their own.

For the first time in 2009, the AIC developed its TechClinic process to restore, reorganize, or assemble value chains in existing or emerging industry sectors through a structured, facilitated process. Through the TechClinic process, successful outcomes have been achieved for companies in industries as diverse as energy, mining, tourism, and agriculture.

Value chains have long been overlooked by innovation advocates, who usually focus only on the “firm”, rather than on where and how the firm fits within a more extended value chain. However, all firms need “complementary assets” to achieve successful market penetration. The AIC expects the value chain to feature more prominently in future innovation policy. If innovation is all about “serendipitous connections”, then TechClinics can help to engineer these. 

Conclusion

Innovation is important to any firm wishing to grow. Innovation results in the development of new products and services, enabling it to access new markets and increase revenues. Firms looking to become the innovation stars should look outside their own borders, to more closely collaborate with partners to complement the resources and activities needed to take a product to market. Partners can provide complementary technological capability, or undertake research and development, or simply provide new channels to market segments beyond reach. Collaboration requires absorptive capacity, a preparedness to learn and adapt, and to strategically share with others. Programs like Innovation Coaching can help to facilitate open innovation, while TechClinics can help a firm to assemble or enter the value chains necessary to deliver new solutions to markets that need them.

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