SME innovation

The View From Taft
By Raymond B. Habaradas

Posted on November 24, 2011

Small and medium enterprises (SMEs), according to innovation scholars, are not necessarily less innovative than large firms. They just innovate in different ways. Both large and small innovating firms develop and combine human and technological competencies to provide goods and services that are meant to satisfy customers better than what their competitors offer. While large fast-food chains like Jollibee and McDonald’s constantly come up with new product ideas, a smaller player like Binalot, which has a more limited product range, introduced the novel idea of using banana leaves to wrap the food it serves.

The difference lies in their organizational structures, and their technological capabilities and resources. Smaller firms have certain relative strengths such as ease of communication, speed of decision making, and a higher degree of employee commitment and receptiveness to novelty. This is the reason why they often do not need the formal strategies used by larger firms to ensure communication and coordination among different units within the company. However, smaller firms usually have a specialized range of technological competencies, and undertake less systematic market research or technology monitoring. Lack of resources also limits their investments on research and development.

Government agencies mandated to promote the innovative capacities of SMEs must recognize that small firms are at varying stages of technological development. This means that they need different types of support. Our neighboring countries Malaysia and Thailand have known this for quite sometime.

In Malaysia, the Small and Medium Industry Development Corporation (SMIDEC) believes that the technological level of firms advances over time, and that they have different basic requirements or concerns at different phases of their development.

At the start-up stage, SMEs typically have low technology levels and are largely concerned with developing its workforce, securing an adequate supply of raw materials, and gaining market knowledge. When they reach the growth stage, they become more concerned about getting tax benefits, securing certifications, getting technical assistance, automating their processes, and developing their markets.

At the expansion stage, firms naturally want to raise their production capacity and expand their market reach. Aside from enhancing their technological and management capabilities, they must also expand their distribution channels, outsource certain processes, and develop their brands. These require a large amount of money. Thus they need access to loans or venture capital.

At the maturity stage, firms have achieved a high technological level. At this point, they seek to strengthen their design capability, to promote their brand name, to further upgrade their technological capabilities, and to invest abroad.

In Thailand, policymakers have also become more cognizant of the unique requirements of SMEs. They have benefitted from the work of Thai researchers Patarapong Intarakumnerd and Thanaphol Virasa, who came up with a development staircase of a firm’s technological capability.

Firms that are on Stair 1 lack resources and don’t have the desire to monitor and assimilate external technology. They are content with utilizing the tangible technology base (e.g., plant and equipment, routine operations, and basic maintenance of facilities), and rely heavily on the suggestions of technology suppliers. Firms that are on Stair 2 can adapt applications of existing technology and could search for market opportunities. They manage the tangible technology base well, and invest in the appropriate plant and equipment. They are also able to access external knowledge (e.g., technical know-how, techniques, and information sources).

Firms that are on Stair 3 have the ability to make incremental improvements on the technology itself as well as on its applications. They understand the fit between the firm’s capabilities and market needs. They have design and engineering capabilities, are able to manage producer-user relations. Those on Stair 4 actively perform R&D, which result into significant product variants and innovations. They could manage both tangible and intangible resources (e.g., R&D facilities, codified intellectual capital, and tacit knowledge), and can access business partners with needed complementary assets and capabilities.

The central idea is that firms have different technological capabilities, and therefore, require different types of support. Thus, firms that don’t perceive the need to upgrade their technological capability (Stair 1) will not be receptive to product development assistance or to grants for design and engineering as compared to firms that fall under Stairs 3 and 4. Other types of intervention would be more relevant to them.

Unleashing the innovation potentials of local SMEs is critical if we want to address the problems of poverty and unemployment in our country. It doesn’t hurt to learn from the experiences of our more successful neighbors.

Raymund B. Habaradas is an assistant professor at the Management and Organization Department of De La Salle University. He teaches Organization Theory, Organizatonal Behavior, and Management Research. He welcomes comments and questions at rbhabaradas@yahoo.com.

The views expressed above are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.