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Innovation types and performance in growing UK SMEs

Adegoke Oke
Arizona State University, Phoenix, Arizona, USA

Innovation types and performance

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Gerard Burke
Craneld School of Management, Craneld, UK, and

Andrew Myers
AJM Associates, Stoke Bruerne, UK
Abstract
Purpose The objective of this study is to explore the types of innovation that are predominant in UK SMEs, whether they are predominantly radical or incremental, and to investigate the impact of these innovations on performance. Design/methodology/approach A web-based survey instrument was used to administer survey questionnaires to a sample of UK SMEs in manufacturing, engineering, electronics, information technology and telecommunications industries. The response rate was 13.8 percent. Relevant statistical analytical techniques including regression for analysis was then used. Findings It is found that the SMEs tend to focus more on incremental than radical innovations and that this focus is related to growth in sales turnover. Practical implications It is not such a bad idea for SMEs, particularly those operating in high technological industries, to focus on incremental innovations as these are actually related positively to sales turnover growth. Originality/value An investigation of the types of innovation that SMEs pursue is pioneering in the eld as previous studies of this type have been based on large rms. The contention that the raison detre of SMEs is to develop radical innovations is not supported empirically, at least for the sample of SMEs. In addition, it is found that the age of an SME is not related to its focus on either incremental or radical innovation. These are the contributions of this paper. Keywords Innovation, Performance management, Small to medium-sized enterprises, United Kingdom Paper type Research paper

Introduction The importance of SMEs has been noted in many studies. For example, Birch (1989) demonstrated that two-thirds of the increase in employment in the USA between 1969 and 1976 had been in rms with fewer than 20 workers. Wolff and Pett (2006) argued that SMEs and entrepreneurial rms are a key segment and driver for most national economies. As such, many governments have been attempting to develop programmes to stimulate entrepreneurship. The governments of most developed economies see new and smaller enterprises as the well-spring of economic growth and job and wealth creation. Several Organization for Economic Cooperation and Development (OECD) member nations are discussing scal measures that promote innovation and research and development. Entrepreneurship and innovation have also been closely linked and are high on the policy agenda. The UK Government, in particular, is specically attempting to encourage innovation in SMEs. A simple search of the web site of the UK Governments

International Journal of Operations & Production Management Vol. 27 No. 7, 2007 pp. 735-753 q Emerald Group Publishing Limited 0144-3577 DOI 10.1108/01443570710756974

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Department of Trade and Industry (www.dti.gov.uk) for the word innovation returned 500 entries. Within this government department, there is a specic innovation unit which is currently running a very large initiative called living innovation. In support of this initiative they indicate that:
There is no doubt that competitive pressures on UK businesses are increasing, most signicantly from international, low cost nations. To encourage UK companies to develop new and improved added value products and services, processes and ways of doing business, the Innovation Group at DTI puts resources, help and guidance at their disposal (DTI, 2004).

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In the UK at least, it is clear that policy makers see an important link between innovation and business and economic growth. Innovation activities in SMEs have also been of interest to academics (Motwani et al., 1999; Cosh and Hughes, 2000; Oliver et al., 2000). However, studies about innovation management in SMEs are few compared with similar studies on large rms (Cagliano and Spina, 2002; De Toni and Nassimbeni, 2003; Mosey, 2005). Previous studies have argued that because of their nature, SMEs particularly those operating in manufacturing, electronics, engineering and general high technology industries are able to undertake radical innovation more easily than large rms and that introducing pioneering products is an important entrepreneurial activity and the lifeblood of SMEs (Kanter, 1985; Simon et al., 2002). However, this is not a fact without refute. Some argue that while a small rm in any of these industries may have high research and development intensity (R&D/sales), a larger rm with more slack can actually devote more resources to R&D. The assumption that SMEs focus more on radical innovations than incremental innovations has not been empirically researched. In general, studies on the types of innovation that SMEs pursue have been largely ignored in the literature. Therefore, the objective of this study is to empirically identify the types of innovation that are predominant in UK SMEs, whether these innovations are radical or incremental and to investigate their impact on innovation performance and business performance. The paper is structured as follows. First, we review the literature on innovation in SMEs and dene the research questions and hypotheses. Second, we discuss the research methodology employed to carry out the empirical work. Third, the analysis is presented and discussed. Finally, the managerial implications of the results are discussed and the paper is then concluded with suggestions for future work. Literature review In order to provide a theoretical basis for the study, we review previous studies on SMEs in the operations management literature. We note a dearth of studies on innovation in SMEs. We then extend our review of studies on SMEs to other elds. We nd that generally most innovation studies in SMEs fall within two categories rstly, innovation in SMEs linked with performance and economic growth, and secondly, SMEs and innovation types. We nd that the former stream of literature has attracted more studies. Unlike innovation studies in large rms, there is a dearth of studies relating to the type of innovations that SMEs pursue. We develop our research questions and hypotheses to contribute to this aspect of the literature. SME studies in the operations management literature There has been some focus on SMEs in previous research in the operations management literature (Neely et al., 1994; Yusof and Aspinwall, 2000; Gunasekaran et al., 2000;

Hudson et al., 2001; Petroni and Bevilacqua, 2002; Quayle, 2002; Raymond and St-Pierre, 2005). Innovation, an important aspect of operations management, has, however, received very little attention in the operations management literature in so far as it relates to the context of SMEs. A review of previous research on SMEs in other elds reveals that signicant work has been done on innovations in SMEs. However, many of these studies relate to the effect that innovations in SMEs have on performance and economic growth. We present this review in the next section. As well as a review of innovation types in SMEs. Innovation in SMEs and performance Previous research has investigated the characteristics and entrepreneurial behaviour of owner-managers and how these relate to decisions concerning innovative activities in their organizations (Bird, 1988; Lipparini and Sobrero, 1994; Caird, 1994; Cosh and Hughes, 2000; Kickul and Gundry, 2002). For example, Caird (1994) found that the innovator is highly important in the commercial success of innovative products in SMEs. Lipparini and Sobrero (1994) argue that the entrepreneurs ability to glue external expertise and capabilities in an original and unique way is considered the key factor in pursuing innovative performance. Simon et al. (2002) found that entrepreneurial condence, adaptability, product championing, market emphasis and technological newness contributed to performance across all new product introductions in small computer rms. Wolf and Pett (2006) suggest that internationalization and innovator position have a positive impact on new product improvement in SMEs. Kickul and Gundry (2002) found that the prospector strategy orientation mediated the relationship between proactive personality and three types of innovation: innovative targeting processes, innovative organizational systems, and innovative boundary supports. Previous works have also investigated the importance of SMEs as drivers of economic growth and policy issues in national economies (Birch, 1989; Radosevic, 1990; Bowen and Ricketts, 1992; Sullivan and Kang, 1999; Henderson, 2002; Fisher and Reuber, 2003). Henderson (2002) contends that entrepreneurs create new jobs, increase local incomes and wealth, and connect the community to the larger, global economy. The recognition of the importance of innovation and SMEs has led to the development of the National Systems of Innovation in several countries. Birch has been at the forefront of the research in this body of work (Birch, 1989; Birch and Medoff, 1994). For instance, Birch (1989) coined the term gazelle to refer to SMEs that have a high growth rate. It has been suggested that SMEs (e.g. gazelles) operating high growth businesses are the engines of the economies and provide the majority of new jobs. While much has been researched about high growth SMEs, their roles and importance in the economy, what has been lacking in many of the studies in this stream is the important role that innovation plays in fueling such growth in the SMEs. Further, there is a dearth of studies relating to the understanding of the types of innovation that SMEs pursue and their impact on performance. This is potentially a major contribution to the innovation and operations management literature. SMEs and innovation types What appears to be generally lacking from the innovation and SME literature are studies that explore the types of innovation that SMEs pursue (except for Rizoni, 1991

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who investigated the taxonomy of technological innovation in small rms). In contrast, there have been many studies on the types of innovation that large companies pursue. Notable examples include de Brentanis (2001) study on business to business services, a study by Avlonitis et al. (2001) on innovativeness in the nancial services sector and the PDMA study on new product development practices by Grifn (1997). de Brentani (2001) suggests that the understanding of how to achieve positive product outcomes might be improved by exploring the innovativeness of products that are being developed by rms. Storey and Easingwood (1998) argue that simple augmented service offerings (or incremental service innovations) have the capability to impact a companys protability and sales but do not offer enhanced opportunities. Cooper and Kleinschmidt (1986) argued that both highly innovative and incremental new products in industrial product rms would lead to superior performance. Many of the innovation studies in large rms revealed that management requirements for managing normal and existing activities and developing incremental innovations are different from those required to develop and manage radical innovations. It has been suggested that radical innovations are characterized by uncertainty, knowledge intensity, and boundary crossing. Therefore, in order to develop radical innovations, corporations need to build adjustments into their design, which allow for exibility and the ability to manage the requirements for developing this type of innovation. It has been argued that radical innovations, which tend to generate very high returns, are more predominant in SMEs compared to large rms (Kanter, 1985; Simon et al., 2002). This is because it is easier for SMEs to make such adjustments compared to large organizations (Kanter, 1985). At a general level there have been various classications of innovation types in large rms. Product innovation which may include new product offerings or improvements in existing products appears to be the most common form of innovation. Service innovation has become increasingly important. It can be described as new developments in those activities that are undertaken to deliver the core product and make it more attractive to consumers. Another type, process innovation involves creating or improving methods of production, service or administrative operations (Khazanchi et al., 2007) as well as developments in the processes, systems and reengineering activities undertaken to develop new products. For example, to support the manufacture of new products and improve plant competitiveness, process technologies, operational and organizational practices may be upgraded, modied or replaced with new and advanced processes (Jayanthi and Sinha, 1998). There is also a type of innovation that is often referred to as organization innovation (Abernathy and Utterback, 1978; Trott, 1998). This refers to innovation in management initiatives. Organization innovation is a rm level type of innovation. Previous studies on innovation types and their impact on performance have mainly focused on large rms. Therefore, the research questions for this paper were formulated around this gap identied in the SME literature. We focus on a product/project level type of innovation because comparative studies on large rms have adopted this focus. The three types of innovation considered are product, service and process. Therefore, our rst research question is: RQ1. What types of innovation (products, services or processes) are predominant in SMEs?

Previous studies on innovations and new product development in SMEs have largely focused on product innovations perhaps suggesting that there is a focus on products in terms of innovations in SMEs (Kanter, 1985; De Toni and Nassimbeni, 2003; Mosey, 2005). Further, previous studies have posited that large rms tend to focus more on product than process or service innovations (Grifn, 1997; Gofn and Pfeiffer, 1999; Avlonitis et al., 2001). Our objective was to nd out whether this assertion would hold for SMEs. Thus, the rst hypothesis that was developed from research question one is as follows: H1. SMEs tend to focus more on product innovations than on service and process innovations. To further address the gap in the literature, we were interested in the strategic focus of each type of innovation. Mosey (2005) classied innovations in products as either incremental innovations or new-to-market product innovations. We nd this classication to be broadly suitable for classifying the innovation focus of SMEs. We labeled Moseys new-to-market innovations as radical innovations. Therefore, SMEs focus in terms of which innovation to pursue can be said to be either radical (new to the world or completely new) or incremental (minor to major improvements in existing offering). Our second research question was developed from the above: RQ2. For each type of innovation (product, process, service) what is the focus in relation to the pursuit of radical versus incremental innovations? Except for the recent work by Mosey (2005) the extant literature on innovation in SMEs has largely ignored a classication such as this. It has been suggested that SMEs tend to focus on radical innovations (Kanter, 1985; Simon et al., 2002). It has also been suggested that the raison detre of SMEs is to develop radical innovations which could make them more competitive in a market that is dominated by large rms and attractive for takeover by large rms. The intention is not to compare SMEs innovative focus with large rms innovative focus in this paper. However, we draw on the above argument to formulate our second hypothesis: H2. SMEs tend to focus more on radical innovations (for products, services or processes) than on incremental innovations. In the literature review, we highlighted that previous studies on innovation types and their impact on performance have mainly focused on large rms. But policy makers see an important link between innovation and business performance in SMEs that could potentially lead to economic growth (Birch, 1989; Henderson, 2002). However, there is not much empirical evidence to support this assertion. We formulated our third research question to investigate this: RQ3. What is the relationship between SMEs innovation focus (radical or incremental) and innovation performance on one hand and business performance on the other hand? Kanter (1985) suggested that radical innovations in SMEs tend to generate high returns. Simon et al. (2002) suggest that radical or pioneering products are the lifeblood of SMEs. Thus, the above question is translated to hypotheses three and four below:

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H3. SMEs innovation focus (radical or incremental) will have a positive relationship with innovation performance. H4. SMEs innovation focus (radical or incremental) will have a positive relationship with their business performance.

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We have distinguished between innovation performance and business performance based on the premise that a good innovation performance does not necessarily translate into a good business performance. Previous studies have used different measures to assess the innovation performance of rms. Generally, outcome level measures of innovation have been based on nancial and non-nancial metrics (Avlonitis et al., 2001; Cooper and Kleinschmidt, 1995, respectively). While they may predict innovation performance more accurately than perceptual measures, objective non-nancial measures such as number of patents tend to be innovation specic (i.e. not all innovations can be patented). Also, patents do not necessarily translate into successful innovations. In this paper, we adopt perceptual non-nancial measures to measure innovation performance, based on rst-mover or pioneering advantages, as used in previous studies to measure innovation performance (Cooper et al., 1994; Grifn, 1997; Song et al., 1999). Business performance is measured by nancial metrics (Avlonitis et al., 2001). Methodology A quantitative empirical research approach was chosen to investigate the research questions. This is necessary to be able to statistically test some of the hypotheses, and be consistent with previous research for comparison. The design of the questionnaire used for this study was based on questionnaire items used in previous studies (Grifn, 1997; Gofn and Pfeiffer, 1999; Avlonitis et al., 2001; Oke, 2002, 2004). Specically, the questionnaire investigated the following: (1) Innovation types and innovative focus: three types of innovation were identied (product, process and service). For each type, respondents were asked to state the actual number of radical (described as introduction of a completely new product/process/service) and incremental (described as minor or major improvements to existing products/process/service) innovations that their businesses have introduced in the previous two years. (2) Innovation performance. Respondents were asked to indicate the degree to which they agree or disagree (on a seven-point scale) with statements that seek to measure their innovation performance compared to competitors. For example, our business tends to: . be better at time-to-market for new ideas; . be one of the rst to market with innovative new products and services; . be perceived by our customers to be more innovative; and . have more new products/services in our portfolio at any one time, etc. (3) Business performance. The most common measure of business performance as it relates to innovation in the literature is the amount of sales (or sales turnover) generated from innovations or new products (Grifn, 1997). Business measures such as return on assets, return on equity and the like have been largely ignored because of the difculty in linking such measures with innovation activities.

Therefore, we adopted two quantitative measures of business performance namely sales turnover and net prot before tax. Respondents were asked for the following information for each of the last three years: . sales turnover; . net prot before tax; Choice of survey method An on-line survey tool (www.zoomerang.com) was selected as the method for administering the survey. The on-line survey tool had been used in a number of previous surveys with similar samples (Burke, 2002). The previous experience of using the online survey tool also indicated that responses would be received more quickly than with traditional methods. Also, there was a very limited budget for the study and using the online survey tool was cheaper since no printing or mailing costs were incurred. The response rate was 13.8 percent (Table I). Sampling The sample to which the survey was administered was a selection from a database of existing contacts. The database consisted of individuals in businesses which had either participated in, or enquired about, the Business Growth and Development Program (BGP) run at a leading business school in the UK (www.som.craneld.ac.uk/som/ enterprise/credo). BGP is a agship business and personal development program aimed specically at owner managers and managing directors of businesses with turnovers between about 1 million and 25 million who are seeking to grow their businesses. BGP has been running for over 15 years and has about 650 past participants. In addition, the database holds details of another 1,350 individuals who had enquired about the program in the past. The database is comprised of businesses in several sectors including predominantly manufacturing, engineering, information technology, telecommunication, electronics and other services (Table I). Because of the use of the online survey tool, only those individuals for whom we already had an e-mail address could be sampled. This resulted in a net database size of 784. This sample is representative of the BGP database as we nd no signicant differences between the two in terms of cross-sectoral distribution ( p . 0.05). However, it should be pointed out that this sample is not necessarily exactly representative of the total UK SME population, in that there is a very large number of small business owners (for example, sole traders, freelancers, so-called
Percentage Percentage of in Percentage database Sample of sample Respondents respondents 36.0 29.5 24.0 10.5 100 266 258 156 104 784 33.9 32.9 19.9 13.3 100 38 28 23 19 108 35.2 25.9 21.3 17.6 100

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Sectors Manufacturing/Engineering IT/Telecommunications Electronics Others Total

BGP database 720 590 480 210 2000

Note: Others: include professional services, retail/wholesale, transport/distribution, construction/ civil engineering, pharmaceuticals/chemicals

Table I. Breakdown of sample

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lifestyle businesses) who have no intention to grow. On the other hand, given the commitment in time and money required to participate in BGP, which specically deals with growth, an individual who has participated in the program, or enquired about it, is likely to be not only ambitious to grow but strongly committed to growth. If there is a link between innovation and business growth, then one might infer that this sample is likely to be more interested in innovation, and more innovative, than the average across the total population of UK SMEs. Nevertheless, Birchs (1989) study showed that the vast majority of job creation happens in a small proportion of high growth SMEs rms which he called gazelles. He then drew the implication that government and private sector small rm initiatives would have the most benecial effect on economic development and job/wealth creation by targeting these gazelles. While it is unlikely that the sample for this survey is exclusively made up of gazelle rms, we would accept that our sample is likely to be made up of rms which are more ambitious and committed to growth than the average. For the same reason as Birch gives, we would argue that these are precisely the rms which policy makers and small rm advisors should be interested in understanding and supporting. Since, our survey was carried out online, all of the participating sample were e-mail users. Once again, it could be argued that the use of e-mail would indicate a more innovative rm. Pilot testing From the total sample, 12 individuals were selected and invited to take the survey as a pilot. They were asked for feedback on the questions, the online survey tool and the time required for completion. Detailed feedback was received from six respondents. The questionnaire was revised and the survey was launched in the early part of 2005. The feedback and the actions taken are summarized in Table II. Measurements A number of measures were created to test our hypotheses: . innovation type and innovation focus; . innovation performance; and . business performance. Innovation types and innovation focus Although the terms radical and incremental innovation were not used within the survey, items were created to measure them objectively. Respondents were asked to estimate how many improved and adapted products, services and processes (incremental innovations) they had introduced within the last two years. Thus, incremental for product innovations was measured in terms of how many: . minor improvements or adaptations to existing products; and . major improvements or adaptations to existing products. Likewise, radical product innovations were measured in terms of: . introduction of a new product to an existing market; and . introduction of a new product to a new market. Service and process innovations were measured in a similar way.

Issue Ease of use Time to complete

Comment All respondents reported that the online tool and survey were very easy to use Minimum 10 minutes, maximum 20 minutes, mean 15 minutes. All deemed this to be acceptable Some confusion over the different types of innovation (ie. Product, service, process). Respondent completed the survey correctly but felt guidance was not sufciently clear The question aimed at identifying the industry sector to which the responding business belonged was answered in terms of the industries into which the responding business sells its products/services Too many similar questions The question How many people work in the business? did not allow for the answer 5. The question What is the highest level of formal education that you have successfully completed? did not allow for professional qualications

Number reporting

Action taken None

Innovation types and performance

6 None 6 Improved clarity of guidance on these questions by being far more specic about which sections individuals should complete in different circumstances 1 Changed the question text to be far more specic

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Clarity of questions

Clarity of questions

Clarity of questions Ability to answer questions Ability to answer questions

3 1

None. Questions of a similar nature required in order to validate reliability of responses Changed answer options to allow for an answer of 5 Inserted an additional answer option for professional qualications

Table II. Results of pilot test

Three continuous measures for product (PROD), service (SERV) and process (PROC) innovation were then generated by taking the number of incremental innovations away from the number of radical innovations within each rm. The higher the resulting negative score, the rms innovative focus is more likely to be incremental, and conversely, the higher the resulting positive score, the more likely that the rms innovative focus will be radical. In order to carry out analysis that involves the focus on innovation, a new aggregate variable INNTYPE (comprising the difference between the total number of incremental and radical innovations) was then created with values of 0 predominantly non radical (incremental) and 1 predominantly radical. Again, a negative score from the data (scored as 0) implies the SMEs innovative focus is predominantly on incremental innovations, and a positive score (scored as 1) implies the SMEs innovative focus is predominantly on radical innovations.

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Innovation performance In the survey, innovation performance relative to the competition was measured using a series of ten self-reporting items (shown in Table III) based on previous research using a seven point scale, ranging from 1 strongly disagree to 7 strongly agree (Grifn, 1997; Avlonitis et al., 2001). Business performance Respondents were asked to provide objective, factual information about the sales turnover and net prot before tax generated for their rm for each of the 2002, 2003 and 2004 nancial years. We took into account the effect of the ination rate and determined the net business performance gures for the years. In order to ascertain how well each business had performed over the three year period, the 2002 net gure was subtracted from the 2004 net gure. As a consequence two business performance measures were generated to measure sales turnover growth (TURNG) and net prot growth before tax (NETPG) over this three year period. Analysis and results In total, 108 SMEs completed the survey on-line during an eight week period the length of time the survey ran for. The sectoral distribution of the responding rms is similar to that of the sample and, as an extension, to the BGP database. It can, therefore, be argued that the dataset is representative of the population that was invited to take part in the survey and that the results are generalizable to the database population that is being looked at. Fifty rms responded in the rst four weeks and, following a reminder, a further 58 rms responded in weeks ve to eight. Overall, this represents a response rate of approximately 13.8 percent. Analysis has been undertaken for where data is available and a clear response has been given by the respondent. Analysis is therefore based on valid data. In order to ascertain the representativeness of the data and to test for non-response bias, analysis was undertaken of the 50 rms responding in the rst time period. This dataset was then compared with the remaining 58 rms that completed in the second time period (Armstrong and Overton, 1977). This latter group would have been
Innovation performance Have more new products/services in our portfolio at any one time Be at the leading edge of innovation Be perceived by ourselves as more innovative Be one of the rst to market with innovative new products and services Be better at time-to-market for new ideas Be better at understanding our customers needs Be better at developing products/services to meet customers needs Be perceived by our customers to be more innovative Be more effective at taking existing ideas and making them into something better Be better placed to meet future challenges Component 1 Component 2 0.795 0.795 0.767 0.678 0.561 0.508 0.883 0.878 0.636 0.635 0.590

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0.580

Table III. Rotated component matrix

Notes: N 108; extraction method: principal component analysis; rotation method: varimax with Kaiser normalization; rotation converged in three iterations; Kaiser-Meyer-Olkin measure (KMO) of sampling adequacy 0.841

classied as non-respondents if the cut-off date had been at the end of the rst time period. Analysis shows that there was no signicant difference between the two sets of data on the key variables utilized in this article. Generalizability to the population of the database that is being looked at is thus further ensured. The respondents are very senior, with over two-thirds (73.1 percent) indicating that they are either a managing director or a chairman. In terms of the businesses themselves, rms responding are generally quite mature. 64.8 percent have been established for over 10 years. Of the rms that responded, 81.6 percent have up to 50 full-time equivalents working in the business. Performance outcomes A principal component factor analysis was undertaken on the ten innovation performance items. Using a varimax rotation method, two components emerged (using a strict cut-off point of 0.5). No item had a loading of less than 0.3. Two scales were generated, taking out the items that appeared on both factors (see items in Table III, highlighted in italics). This left us with two scales each with four items. The results of this analysis indicating the factors, the items and their loadings are shown in Table III. The two factor dimensions that emerged, accounted for 67.1 percent of the total variance. The rst component comprises measures that focus on innovation outcomes compared to the competition, and can be described as innovation outcome (INNOUT). The second component comprises measures that focus on capability for innovation development, and can be described as innovation capability (INNCAP). A reliability analysis of the two factor components was undertaken and strong Cronbachs alpha coefcients of 0.83 and 0.85 emerged for component 1 and component 2, respectively. The Kaiser-Meyer-Olkin measure (KMO) of sampling adequacy was 0.841, thus giving a high degree of validity to the ndings. As a consequence, two innovation performance measures were created (INNOUT and INNCAP) by summing up the individual scores and dividing by the number of items within each component. Overall, there is a positive outcome on both of the innovation performance measures (Table IV). The closer the score is to seven, the greater the perception of high innovation performance. Over two-thirds of rms (70.2 percent) taking part in the survey show positive sales turnover growth, and over half of the rms show positive net prot growth (59.6 percent) over the three year period (Table V). Data have been reported for 94 cases, as information was available for both measures for these respondents. In 14 cases, the respondent had either not given answers to both measures, or gave an answer to just one measure. These respondents have therefore been excluded from this analysis. Hypothesis 1 In order to test the rst hypothesis that rms focus on product rather than on service and process innovations, mean scores were compared using a paired
Innovation performance measures INNOUT INNCAP Mean 4.81 5.33 Standard deviation 1.25 1.09

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Notes: N 108; scales range from 1 strongly disagree to 7 strongly agree

Table IV. Innovation performance

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Business performance measures Sales turnover growth 2002-2004 (TURNG) Negative No change Positive Total Net prot growth 2002-2004 (NETPG) Loss Breakeven Prot Total

N 22 6 66 94 28 10 56 94

Percent 23.4 6.4 70.2 100.0 29.8 10.6 59.6 100.0

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Table V. Business performance

Notes: N 94; data reported that is available for both measures

sample students t-test. The reason this test was used, rather than an ANOVA-test is because each respondent has a score for the number of product, service and process innovations and each category is not unique. Thus, comparisons are between product and service; product and process; and service and process. Table VI shows the mean number of innovations (radical and incremental) introduced within SMEs in the last nancial year. The mean number ranges from 6.0 process innovations to 15.8 product innovations. In total three rms reported an exceptionally high number of product, service or process innovations within the last nancial year compared to other rms. As these rms, or outliers, were distorting the mean scores, they were excluded from this particular stage of the analysis. Table VII shows the results of the paired comparison t-tests. The results show that, on average, there was a signicantly higher product than service focus ( p , 0.05); a signicantly higher product than process focus ( p , 0.001); and also a signicantly higher service than process focus ( p , 0.01). The hypothesis that SMEs focus more on product innovations than service and/or process innovations can, therefore, be accepted.

Type of improved / new innovation Table VI. Mean number of innovations (radical and incremental) in the last year Product (n 90) Service (n 87) Process (n 87)

Mean 15.8 9.9 6.0

Standard deviation 25.1 14.5 6.0

Range 119 90 31

Notes: NB: three outliers were excluded from the analysis, one from product, one from service and one from process

t-values Product Service Process

Product 2.242 * (n 84) 3.816 * * * (n 84)

Service -2.858 * * (n 85)

Process

Table VII. Paired comparison t-tests

Notes: Signicant at *0.05 level; * *0.01 level; * * *0.001 level

Hypothesis 2 Table VIII summarizes the results of the paired sample t-tests for H2. The results show that SMEs tend to focus signicantly more on incremental than radical innovations on average. Product, service or process innovations that are incremental score signicantly higher than radical innovations in product ( p , 0.05), service ( p , 0.001) or process ( p , 0.01). Thus, H2 can be rejected. In other words, the tendency is towards incremental rather than radical innovation. Hypothesis 3 Table IX shows the innovation performance of SMEs by their innovation focus and t-test results. There are no signicant differences between a focus on radical or incremental innovations for product, service and process innovations. Although SMEs who focus predominantly more on incremental innovations score higher on average on INNCAP performance than SMEs who focus predominantly more on radical innovations, the difference is not signicant. In addition, a regression analysis was carried out. The two measures of innovation performance (INNOUT and INNCAP) were used as dependent variables and were regressed in turn over the innovative focus variable (INNTYPE) (Table X). R 2 values are low, which suggests that other variables, not used in this analysis, are likely to have an inuence. Table X shows that an innovation focus (that is, a choice between radical and incremental innovation) is not signicantly related to the two measures of innovation performance relating to innovation outcomes and capability (INNOUT and INNCAP). We can, therefore, reject the hypothesis that the innovation focus of SMEs is signicantly related to innovation performance. In other words, the performance of SMEs in terms of their innovation outcomes and the capability to develop innovations

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Number of innovations Product (n 74) Service (n 78) Process (n 80)

Mean incremental 17.9 12.1 6.5

Mean radical 6.9 2.6 1.8

t-value and sig. 2.399 * 4.076 * * * 3.496 * * Table VIII. Radical vs incremental innovations (innovative focus)

Notes: Signicant at *0.05 level; * *0.01 level; * * *0.001 level-based on valid data

Mean radical Product (PROD) INNOUT INNCAP Service (SERV) INNOUT INNCAP Process (PROC) INNOUT INNCAP 4.79 4.86 4.88 5.33 5.18 5.09

Mean incremental 4.75 5.40 4.82 5.41 4.83 5.43

t-value 0.118 21.827 0.084 20.169 0.699 20.996

Signicance (2-tailed) Table IX. Innovation performance by innovative focus

Notes: Not signicant at 0.05 level; scales range from 1 strongly disagree to 7 strongly agree

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does not appear to be signicantly related to whether the rm focuses on radical or incremental innovation. Hypothesis 4 Table XI shows the results of paired sample t-tests when business performance measures (turnover and prot growth) were compared to innovative focus. In the majority of cases turnover growth is positive over the three year period, and is highest on average (604,406) where service innovations are reported as incremental. The highest net prot growth on average (51,185) was reported where process innovations were identied as radical. There is only one signicant difference ( p , 0.01) between radical and incremental, and that is for service innovation and sales turnover growth incremental innovators score signicantly higher in growth of sales turnover on average than radical innovators. In addition, a regression analysis was carried out. The two measures of business performance (TURNG and NETPG) were used as dependent variables and were regressed in turn over the innovative focus variable (INNTYPE) (Table XII). Again, R-squared values are low, which suggests that other variables, not used in this analysis, are likely to have an inuence. A focus on either radical or incremental innovation is found to be signicantly related ( p , 0.05) to sales turnover growth (TURNG). The indications are that incremental innovation is more likely to have an inuence than radical innovation (due to negative b coefcient). In other words, the pursuit of incremental innovation in SMEs is related to their sales turnover growth. On the other hand the innovative focus is found to have no signicant relationship with
R 2 value Dependent INNOUT Independent Innovative focus Dependent INNCAP Independent Innovative focus Note: N 94

748

b coefcient

Signicance

Table X. Regression analysis of innovation outcomes, innovation capability and innovative focus

0.003 0.011

0.050 20.104

0.633 0.322

Mean radical () Product (PROD) TURNG 356,831 NETPG 9,378 Service (SERV) TURNG 343.167 NETPG 33,934 Process (PROC) TURNG 443,403 NETPG 51,186

Mean incremental () 456,179 20,629 604,406 27,151 516,024 22,562

t-value 2 0.183 2 0.260 2 3.310 0.203 2 0.234 0.746

Signicance (two-tailed)
**

Table XI. Business performance by innovative focus

Notes: Not signicant at 0.05 level; * *signicant at 0.01 level

net prot growth. Therefore, we can partly accept the hypothesis that a focus on incremental or radical innovation will have a signicant relationship with business performance. This is an interesting nding as it highlights not only the importance of innovations in general but also in particular incremental types of innovation to the bottom line of SMEs. Analysis by rm characteristics It could be argued that the results of this study may have been inuenced by the characteristics of the SME, such as the age of the rm. It has been suggested that the development of radical innovations is one of the main drivers for bringing SMEs into existence. We would thus expect relatively newer SMEs to focus more on radical innovations than the older rms. Therefore, we carried out further analysis using the x 2 test to explore whether the innovative focus (radical or incremental) of innovations varies (Table XIII) with the ages of the responding rms (that is, how long the SMEs have been in business). Interestingly, we nd no signicant differences (x 2 value 3.799, p . 0.05). In other words, whether the SMEs in our sample choose to focus on incremental or radical innovations is not signicantly related to the length of time that the rm has been in business. Discussion and conclusion This research shows that for this group of ambitious to grow UK SMEs, there is a greater focus on incremental innovation (that is, improvements to products, services and/or processes often in response to customer needs) than on radical innovation (that is, new products, services and/or processes and/or new markets). This is an important contribution of the study; it corresponds with an earlier study (Enterprise report, 1994) which showed that 88 percent of the fastest growing and most protable small rms
R 2 value Dependent sales turnover growth 2000-2002 (TURNG) Independent Innovative focus 0.042 Dependent net prot growth 2000-2002 (NETPG) Independent Innovative focus 0.034 Note: N 94

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b coefcient

Signicance

20.205 20.185

0.05 0.087

Table XII. Regression analysis of sales turnover growth (TURNG), net prot growth (NETPG) and innovative focus

Age of the rm Less than 3 years 3-5 years 6-10 years 11-20 years Over 20 Note: N 94

Incremental (percent) 16.7 12.8 7.7 24.4 38.5

Radical (percent) 6.3 12.5 12.5 43.8 25.0

Table XIII. Length of time the rm has been in business by innovative focus

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achieved growth by selling more of their existing products/services to their existing market. The result also corresponds to previous studies on innovation types in large rms (for example, Grifn, 1997; Storey and Easingwood, 1998). This focus on the existing core market (often popularized as sticking to the knitting) demands a profound understanding of the needs of customers in that market and the ability to be able to improve products/services in response to those needs, in other words, incremental innovation. The interesting thing is that the focus on this type of innovation is actually related to an increase in sales turnover growth. This may be a challenging message for those entrepreneurs who are constantly seeking the next new product idea and the next new market. It is also a useful message to large rms seeking SMEs for takeover based on the latters apparent focus on radical innovations. The result showing that there is a link between innovation and sales turnover growth in SMEs is an important contribution and has important implications (within the constraints of the study sample size). It conrms the importance of innovation and provides support for the encouragement of innovation in SMEs. Policy and government initiatives directed at SMEs tend to encourage the development of radical innovations (for example, grants for R&D) and entering new geographic markets (for example, the various programmes to encourage export). It will be recalled that within the constraints of our sample size, we nd that our sample of ambitious to grow UK SMEs favour incremental over radical innovation. Thus, perhaps policy initiatives could also be made to encourage SMEs to focus on incremental innovations based on concentration, focus, deep understanding and rapid response to a core existing market. We nd that the age of SMEs is not related to a focus on either radical or incremental innovation. This is another interesting nding because intuitively, it could be argued that newly established SMEs are more likely to focus on radical innovations than older SMEs. This is based on the premise that SMEs are established to exploit something new or radical innovations (Simon et al., 2002). There are some limitations to this study. An example is the relatively small sample size, especially when a cross-sectoral distribution of responding SMEs is considered. Also, like many studies on SMEs it could be argued that this research is highly contextual, focusing on a group of SMEs that we have labeled ambitious to grow SMEs in particular sectors. Therefore, policy recommendations as stated above must be viewed in the light of these limitations. Further studies are required to validate the ndings of this study with a larger sample and in different contexts to reach rmer conclusions. Also, the issue of how SMEs actually undertake the process of developing new products and services or manage innovation activity needs to be empirically investigated. It will be interesting to identify high performing SMEs and explore how they differ from low performing SMEs in the way they undertake or manage innovation activities.
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