The impact of open innovation strategies on new product development among SMEs

Companies eager to conduct innovation activities are constantly seeking opportunities to launch new innovations in the marketplace.

This, however, can be a challenging task, especially for Small and Medium sized Enterprises (SMEs) who have to cope with relatively larger proportions of both the risks and the costs associated with innovation and can only spread these out over a limited amount of innovation projects.

Collaboration with external parties or opening up to resources from the business environment might offer a helping hand in selecting strong product ideas and filtering out weak projects. This is the central theme of the research I conducted this year as part of my thesis.

Innovation strategy as a trade-off

Although SMEs provide two-thirds of all jobs on the European labour market, management scientists and economists have only recently started to investigate the specific challenges that SMEs face when they innovate.

So far, most of the research has focused on large, innovative multinational firms. Although these large firms introduce innovations that might have a large impact and radically change the way industries and consumers operate (think of innovation giants such as Apple, 3M or Google) we all recognize that they too started out as small entrepreneurial ventures.

Understanding the impact of (open) innovation strategies on the future development of SMEs might therefore help to generate more success stories.

A second reason that justifies a focus on SMEs is their relatively small scale in terms of available cash and resources, and correlated to that, the higher level of pressure they face to produce commercially successful new products. Put differently, SMEs have more to gain from evidence on factors for success or failure in innovation projects.

Despite the relatively young interest in SMEs and their innovation challenges, significant amounts of raw data are available that can lead to valuable insights.

I ventured out to look for a good dataset that would allow me to investigate innovative SMEs and opted to a dataset of Spanish SMEs containing data from the mid 2000s.

In my research I decided to investigate how particular innovation strategies can influence the chances of innovation project abandonment (i.e. when an idea is found to be non-lucrative or when formal development of a product launch is aborted).

I set out with the proposition that firms face a trade-off when adopting a certain innovation strategy and that this trade-off might be decisive in the choice to either continue a project or stop it. Let me explain this trade-off below.

On the one hand, firms may access more resources such as market or technical knowledge through external interaction with other firms in their business environment, allowing them to make sound decisions on preliminary ideas for new products.

On the other hand, firms will incur higher costs because they might have to coordinate external relationships, manage shared innovation projects, and have to search for viable business partners. Not to mention the costs involved in applying for, or enforcing, intellectual property rights such as patents and trademarks. These costs related to coordination, information and search might severely impair the strength and viability of an innovation project.

I distinguished three types of innovator strategies:

(I)            open innovator strategy, in which firms intensively explore external modes of innovation or collaborate with, amongst others, suppliers, competitors or universities;

(II)          semi-open innovator strategy, this kind of innovator applies only to some external modes of innovation and collaboration in its innovation process;

(III)         the closed innovator strategy, a type of strategy in which basically no external interaction or collaboration is established for the sake of innovation.

Refer to the figure below for a graphical representation of all strategies along two axes: one for costs associated with openness and one for the level of access to resources.

What do innovation strategies mean for innovation projects, and specifically the decision to halt projects?

As noted earlier, an open innovator strategy involves a greater access to information and knowledge resources that might otherwise be distant. This might help an open innovator to select only those ideas that lead to more successful innovations preventing later drop-out projects.

Or, put differently, it provides SMEs with a better framework for decision making that streamlines the innovation process.

On the other hand, SMEs are faced with higher costs in the formal stages of new product development, and coordinating external relationships might be difficult, so that the likelihood of stopping a project at later stages of the innovation process increases.

The logic is exactly the reverse for closed innovators. Semi-open innovators could face both effects depending on how intensively they apply open modes.

Openness as a remedy?

Results from my research among Spanish SMEs show that open approaches towards innovation lead to a lower chance of abandoning innovation projects and activities at early stages of the innovation process and to a higher chance of abandonment in later steps of the innovation process.

My findings indicate, to some extent, that SMEs with an open innovator strategy benefit from external innovation modes and hence reduce the amount of halted projects.

One reason might be that these SMEs have more access to knowledge and information resources and hence make well-informed decisions on which ideas to proceed with in the innovation process.

But, on the other hand, higher costs of coordination, information and searching inherent to the open innovator strategy do increase the risks for projects to be abandoned at later stages.

As open innovators have to deal with many business partners, contracts and shared financing, projects might be delayed and eventually stopped.

Hence, based on the research findings at hand, an open innovator strategy appears to work best in the early steps of the product innovation process.

Given this conclusion it seems strange that only 3,8 percent of the SMEs in my sample declared to be an “open innovator”.

Overall, it looks like the 80-20 rule applies to SMEs in Spain: for every 100 SMEs approximately 20 apply some sort of open tactics to their innovation function and 80 apply a closed approach.

Closed alternatives to the open innovator strategies seem to have only limited impact on the chances of abandonment, indicating that openness is in some way a remedy.

Understanding the risks

All types of organizations can learn from mistakes and previous failures in management strategies. This undoubtedly also applies to innovating firms that take risks while trying to develop new successful products too.

Some might learn more easily and faster through collaboration and by adopting open strategies for their innovation activities, as is the case for SMEs that use external sources of knowledge and information to assess their new product ideas.

But openness has a price and given their relatively small balance sheets, SMEs need to be aware of this aspect at all times, especially in rough economic conditions.

Is it then fair to conclude that openness in the development of new products is a panacea that can prevent innovation failure and abandonment?

Well, not really.

First of all, firms, and especially SMEs, must be aware of the risks inherent to innovation adventures involving external interactions and high levels of collaboration. This is an interesting subject often neglected in studies on open innovation and innovation co-operation.

Secondly, openness only works well in certain business settings and industries. For instance, firms that innovate in a high tech industry such as the space-and aircraft industry, are found to face higher chances of project abandonment. Further research should have a look at other differences among industries and other types of organizations and could deepen out the causes for innovation success and failure.

In the end, it is a pro-active, open attitude to external information, knowledge and business opportunities, that drives entrepreneurship and successful product innovation.

I believe that policymakers and managers in innovation intensive sectors should be encouraged to stimulate this attitude and pave the way for small businesses to collaborate and access external sources of knowledge and information.

By Karel van Eechoud

Karel van Eechoud studied at Maastricht University where he obtained his bachelor degree in Economics and his master degree in International Business with a specialization in strategy and innovation. In 2012 he finished his research into innovation strategy as part of his master thesis.

Note: This article is based on my master thesis “SME innovation strategies and their effect on the likelihood of innovation project and activity abandonment. A formal study among spanish small and medium sized product innovators”. The empirical evidence in this thesis is based on a database of Spanish SMEs provided by the Spanish National Statistics Institute and the Spanish Foundation for Science and Technology. For more elaborate information, limitations and references to any literature or resources, please refer to this thesis (p.70). My special gratitude goes to my supervisor Dr. Marc van Wegberg. Karel van Eechoud

 

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