Small businesses are the pioneers of innovation. In fact innovative strategies for small businesses is essential as they create the most jobs, account for an increasing share of patents, and introduce new disruptions to established firms.

However, in order to succeed and make money, a small business has to be smart. To begin with, a small business cannot be all things to all people. It is important to know where to compete and how to compete in order to succeed, if you are a small business. There are two dimensions that will help characterize the opportunities.

One important dimension to consider is the scale of research & development required to develop technologies depending on your industry. Some industries feature substantial economies of scale, such as petrochemical refining, semi-conductor manufacturing, pharmaceutical development and mass market retailing. Other industries, however, do not exhibit these economic requirements, such as the toy industry, the medical device industry and the fashion industry.

A second dimension that needs consideration is the size of the market opportunity. Markets typically evolve through a life cycle – starting very small, progressing rapidly during the growth phase, plateauing in the mature phase and declining in the end-of-life phase. Combining these two dimensions yields the 2×2 matrix shown below.

Different Innovation Strategies for Small Businesses

Innovation strategies for small businesses need different skills to succeed in different quadrants of the matrix. Niche businesses need to differentiate themselves, but do not need to worry about upscaling their business or investing heavily in technical skills. Strategies for small business must involve greater investments in technology. Breakout businesses must race to stay ahead of rivals, while dominant businesses are the domain of large companies, where small businesses do best by partnering or supplying to the large firms.

Three Keys to Success
  • Know where to play
  • Don’t try to compete in multiple areas. Focus on your natural spot in the matrix.
  • Know how to play

Right size your investments in people, skills and technology. Too much investment can be as damaging as too little. Don’t invest beyond what the market will support. Pay attention to your key staff, since they embody the knowledge your company needs to succeed.

Don’t fear the large businesses. While large companies have more resources to work with, they also have many more meetings, bureaucracy and in-fighting to deal with. Small businesses move faster, learn quicker and respond better to customers.Innovation strategy is not for the big companies alone. Many innovations begin at the periphery of an industry, and and it is the small businesses that start off these new innovations.

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