After collecting and studying innovation data from over 1,000 companies in 62 countries, I’m often asked whether Small and Midsize Enterprises (SME) are more innovative and entrepreneurial than larger corporations. In times when the market dynamics, technology development, and diffusion are faster than ever, it is a natural question. So let´s dig into some key findings and see what we can learn.
All companies have a conscious or unconscious strategy, leadership, culture, capabilities, and competencies they use to improve and innovate business internally (e.g. processes) and externally (e.g. value proposition). According to Steve Coley (2009) the innovation work can be divided into three parallel Horizons, each one representing an S-Curve. The first Horizon 1 (H1) is about incremental innovation in today’s business, extending the existing S-Curve of the company. Horizon 2 (H2) is about expanding and building new business (the next S-Curve) through innovations. Horizon 3 (H3) is an explorative approach to future S-Curves, to be commercialized in H2, ending up in H1. Another source on the theme, O’Reilly III and Tushman (2004), talks about being able working ambidextrously with incremental and radical innovation at the same time.
The insight of dividing innovation work into different Horizons in order to manage it effectively is, in my experience, often well known at C-level. At the same time, large H1 projects are prioritized to the extent that they are causing internal traffic jams among projects sharing resources. This results in projects that are too numerous, too big, and often less value-creating. Instead, companies can utilize common resources more optimally, improving and caring for today’s profit (H1), developing tomorrow’s profit and market shares (H2) and learning for the future (H3).
Besides killing zombie projects in H1 that otherwise would not die, it is about using and developing the leadership, culture, capabilities, and competences most efficiently. The key lies in understanding how to organize and transform into an organization that’s able to work short-, mid- and long -term, maximizing the utilization of all resources from tangibles to intangibles.
Before we compare and contrast SMEs and large corporations—and what they might learn from each other—we’ll start with some key findings in the studied companies. Correlations in the data studied shown in Table A state that different Horizons call for different strategies, leadership styles, capabilities, competencies, and metrics.
In H1, where most companies put their effort (up to 99% according to many studies), incremental so called spiral staircase leadership (Table A) works. This is when leaders work step-by-step towards well-defined goals calculating ROI predicting the future.
In H2, the strategy is not to understand and respond to the market, but instead to understand needs and use technology in new ways. Platform and design thinking, prototyping, ideation, project selection, and speed are imperative capabilities. The leadership in H2 is more entrepreneurial, challenging the business model (Cauldron style, Table A), seed-funding external projects then buying them back (Pacman style, Table A), as well as acting as the gardener on a fertile field (trying out what’s working and removing what isn’t). H2 projects are measurable by working with small experiments and prototyping, building the base for cash flow assumptions.
H3 is the explorative style: needs are investigated on a deeper level and new technology used to disrupt. It’s essential here to sharpen the future possibilities with external knowledge sharing, open innovation, and co-creation. H3 projects cannot be measured by traditional methods such as ROI: it is more about exploring.
Source: Penker (2016) and the Eighth Global Peter Drucker Forum. Based on the work of Ralph-Christian Ohr and Kevin McFarthing. 1 Based on Jaruzelski & Dehoff (2010). 2 Based on Loewe, Williamson, Chapman & Wood (2001).
In my studies I divided the companies into two groups: SMEs and larger companies. The SMEs, unlike the larger companies, are clearly stating that they are prioritizing innovation. SMEs perceive a clearer vision, ideation, and exploration: setting the scene for H2/H3. Larger corporations perceive their strength in reading the market (H1) and selecting the right innovation projects (H2). It’s noteworthy that SMEs perceive several concomitant leadership styles (up to three) while larger corporations tend to be more uniform. Larger corporations tend to have all types of innovation strategies, which is not the case with SMEs. This illuminates why many SMEs can adapt easily to an innovation Horizon model but are strategically struggling (inflexible). Larger corporations easily change and set strategy (are flexible) but struggle with the leadership when trying to work with innovation Horizons. It seems that SMEs and larger corporations can learn from each other.
Finally, some findings are key regardless of company size. Companies stating that they apply radical innovation also apply incremental innovation, but not the other way around. It seems that radical innovators are more mature in innovation management, systematically dividing into several innovation Horizons. They are able to maintain and nurture appropriate multi-leadership and multi-strategies for optimal resource usage and value creation.
This quote from Peter Drucker summarizes it all: “Innovation is the specific instrument of entrepreneurship…the act that endows resources with a new capacity to create wealth.”
Republished from Drucker Forum 2016.