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Innovation in a small business context: Factors that contribute to successful innovation in small firms


Innovation is essential in the modern day business environment in the quest to satisfy the needs and expectations of customers thereby driving their preference. Continual change and evolution in the business environment among several other factors exert unrelenting pressure on business firms to develop and implement strategies to adapt and sustain their competitiveness. This is especially true for small businesses given their low capacity and predominant lack of expendable resources to facilitate experimentation and innovative shifts.

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Factors that contribute to successful innovation in small firms are identified and explored. These include their flexibility and adaptability in response to changing market demand and evolving needs; lean organizational structures enhancing flexibility and speed in decision-making and performance of tasks; efficiency and effectiveness in the use of meager resources, given their lack of expendable resources; their potential for focus on particular areas of corporate strategy enhanced by their simple and lean corporate/organizational structure and smaller scale which enables easier switching to new developments; and, the particular traits of individual participants in the workforce which are unhindered by bureaucracy and hierarchy, among others. Compared to larger corporations or firms, small businesses through the exploitation of these factors are able to better adapt to the fast paced innovation and technological cycles with successful innovations being their fundamental source of competitive advantage.


Innovation refers to the process of translating an idea or invention into a good or service, creating value and further satisfying the needs and expectations of customers and thereby driving preference. It is also defined as the development of new values through solutions that meet inarticulate needs, new requirements, or adds value in new ways thereby meeting customer or market need (Bala, 2005; Tushman and O’Reilly, 1997). Innovation differs from improvement, which implies doing the same things in better ways, with innovation implying doing something different. Innovation can be in many forms and may include changes in products, processes, marketing, business models among others and is divided into two general classes: evolutionary innovation, which refers to the continuous, dynamic and evolutionary change brought about by incremental advances in technology and processes; and, revolutionary or discontinuous innovation, which are often disruptive and new (Baldwin, 1995; Utterback, 1994).

Continual change and evolution in the business environment among several other factors exert unrelenting pressure on business firms and organizations to develop and implement strategies to adapt (Tushman and O’Reilly, 1997; Carpenter and Sanders, 2007). This is especially so for small business given their low capacity and lack of significant expendable resources that can be used to facilitate innovative experiments and endeavours. Such pressure is enhanced by the increased pace of technological development and the breath-taking speed of advent of new solutions which have significantly shortened innovation cycles (Carpenter and Sanders, 2007; Reisman, 2004). Strategy is essential in enhancing competitiveness and positioning in the hostile business environment and therefore, strategic management is a forte of innovation strategy.

This paper discusses innovation in a small business context with particular regard to factors that contribute to successful innovation in small firms.

Overview of innovation in small business

Small business is variedly defined around the world with common characteristics shared being private ownership, fewer numbers of employees and financial measures such as asset value, balance sheets, or sales, which are relatively low compared to the large corporations. Small businesses are also characterized by their reduced capacity for dominance in their particular fields of operation, often challenged by bigger players (Storey, 2000). Despite these challenges relating to their capacity however, small businesses often have the advantage of adaptability and flexibility, as well as pragmatism in response to emerging need over the bigger players and competitors with enhanced capacity (Yusuf, 1995; Bridge, et al., 2003). This is a window through which strategies towards their success and survival in the hostile market should be focused.

Innovation in the new world economy is an essential source of competitive advantage for small firms and is consistently identified as a key characteristic associated with success, a crucial determinant (Hitt and Ireland., 2000). However, in Schumpeterian tradition, large firms are often perceived as better endowed and having superior ability to innovate (Reisman, 2004). This is partly based on the basic observation that they have more long-range plans, a very structured process and formal mechanisms that encompass comprehensive research and development (R&D) mechanisms taking up significant investments aimed at the generation of innovative products and processes. By default then, small businesses are perceived to be less innovative based in part on the observation that considering total R&D expenditures, they account for a small percentage (Storey, 2000).

However, small firms/businesses are probably no different than their larger counterparts and rivals in the need to adapt to the increasing importance that needs to be placed on technological capability. This is required in their adaptation to the increased pace of technological development and the breath-taking speed of advent of new solutions which have significantly shortened innovation cycles characteristic of the modern capitalist economy. Thus, innovation is also crucial to the success and viability of small businesses as it is to larger entities (Tushman and O’Reilly, 1997; Bala, 2005).

There are several factors that contribute to successful innovations in small firms which are discussed hereafter.

Factors that contribute to successful innovation in small firms

A company or product in its economic life undergoes shifts and fluctuations characteristic to the capitalist economic system. The Marxian view, upon which the capitalist economic system is based, views profit as the major engine driving the market economy. However, through the business cycle which entails shifts between periods of relative rapid economic growth, periods of relative stagnation, and eventually, periods of decline, profitability (business capital) in the capitalist economic system has a tendency to fall creating crises (Reisman, 2004; Hirsch, et al., 2008). This outlines the dynamism in the market which makes it necessary for firms to seek appropriate strategies to adapt.

Schumpeter, who subscribes to this Marxian view, argues that competition among participants in a market leads to the desire to improve technologies, processes and other advantages so as to increase profit margins and overall growth. This is the foundation upon which his idea of creative destruction is founded (Reisman, 2004). Creative destruction refers to the replacement of old innovations by the new driven by the rampant copying of new innovations upon entry into a market. This drives down profit margins and thereby creates incentives to seek out new innovations, the essential idea behind the capitalist economic system (Carpenter and Sanders, 2007; Hirsch, et al., 2008).

Failure to innovate hinders the firm’s differentiation, a significant edge that enhances competitiveness in its market making it prone to the ever present challenge of creative destruction. It also hinders the capacity of the business to garner requisite revenues and profit, as well as to attract capital investment, which form the backbone of successful businesses without which sustenance of business success and growth is impeded (Hirsch, et al., 2008; Carpenter and Sanders, 2007). This is especially significant for small business ventures with their low capacity and capitalization/resource base, hindering their ability to outcompete and/or challenge the major established players in the market.

Among the factors that contribute to successful innovation, with particular regard to small firms include: their flexibility and adaptability; lean organizational structure; efficiency and effectiveness in their use of their meagre resources; their potential for focus on particular areas of corporate strategy; and, the traits of particular individuals within the workforce among others.

Flexibility and adaptability

Notably, small firms are oftentimes better placed than large firms with regard to quick efficient response to the changing patterns of market demand, as well as to take advantage far more easily of opportunities that are opened by innovative developments in operational and production processes. This factor is enabled by their comparatively higher flexibility and adaptability, giving small firms the capacity and better placement in the development and implementation of new ideas (Yusuf, 1995; Storey, 2000). With age, maturity and specialization of resources, characteristic of large, established firms, it is often the case that firms become increasingly complacent and unresponsive, particularly if their products or services dominate the market. Also hindering flexibility and adaptability of large firms is the characteristic scale of asset investments required for their high production, as well as the long-range planning associated with massive R&D investments (Olson, et al., 2005; Bridge, et al., 2003). This results in high switching costs with the result being larger entities holding on to technologies in spite of the finite life cycle of products and technologies given the modern day pace of innovation cycles (Carpenter and Sanders, 2007).

Small firms have better capacities in mutating their core competencies over time in tandem with market and economic life cycles and thus are able to sustain attractive returns. These firms in this quick mutation and response to demand through innovation are better able to serve niche markets and special production that may not have sufficient requirement for large scale production (Storey, 2000). In this way, small firms are often successful in their innovations, in their enhanced ability to pursue distinctive competences and/or innovations.

Organizational structure

Given the lean and significantly horizontal hierarchical structure characteristic of organizations with fewer employees, small firms are consequently closer to customers enhancing their ability to adapt their products and to respond to changing customer demand. It is therefore easier for them to find the differences that matter to customers, a factor which offers them significant distinctive competences (Yusuf, 1995; Unger, et al, 2011). This simple administrative structure also enables quick decision-making and flexible operations enabled by the shorter hierarchy and lack of bureaucracy unlike those found in larger entities which is often a notable impediment (Olson, et al., 2005; Bridge, et al., 2003).

With the low levels of formalization and centralization in lean, simple organizational structures, innovation within the firm is better promoted. Centralization relates to the focus on authority in decision-making referring to minimal involvement by participants in an organization while formalization refers to the extent to which the activities of an organization are closely controlled by sets of rules and procedures (Unger, et al, 2011; Hitt and Ireland, 2000). Such structural elements of larger organization structure hinder the ability of firms to respond quickly to external market conditions and also hinder most innovative pursuits. It is noted that a vast majority of innovations resulted from informal group processes far higher than in more formal work rules which therefore gives greater weight to success of innovations in small firms (Unger, et al, 2011).

Influence of resource availability (e.g. Munificence)

Munificence refers to the availability of scarce resources in a firm’s environment. The availability of adequate resources significantly impacts innovation which often requires substantial expenditure of time and money. With reduced capacity and resource availability, innovation by small firms is constrained, with larger entities standing out with their massive expenditures on research and development (R&D) (Yusuf, 1995; Olson, et al., 2005). It is however noted that while small businesses account for smaller proportions of important innovations than their share of output, they also account for an even smaller share of official R&D expenditures meaning that they are relatively more efficient than their larger counterparts in their innovative production. The low risk and receptivity of small firms are essential features that facilitate their innovation successes far better than the long-range planning, more formalised structures and huge investments in R&D in larger entities (Bridge, et al., 2003; Baldwin, 1995).

Corporate strategy

The ability of small firms to produce high quality and appropriate output for special niche markets makes them successful niche players often existing with the larger firms in a dual economy that is often not characterized by significant competition between them (Olson, et al., 2005; Bala, 2005). Their scale and quick response to demand, given their flexibility and adaptability, enables their success. This feature often enables small firms to avoid disturbances such as the currents shaping the world economy (due to globalization), which significantly impacts the larger entities (Storey, 2000; Bridge, et al., 2003).

In a comparison of small and large businesses operating in hostile competitive environments, characterized by intense rivalry among firms for diminishing opportunities, it is noted that small firms tend to adopt innovations with greater frequency leading to the differentiation of product or services and therefore competitive advantage. This is crucial to the success of small firms unlike the economies of scale that larger entities can exploit. Larger firms, on the other hand, tend to act in more defensive ways, conserving their organizational resources rather than adopting a more proactive, innovative orientation (Bridge, et al., 2003; Bala, 2005).

Due to resource constraints and reduced capacity, small business owners and managers might be better advised to examine the external competitive conditions and resource availability prior to developing a strategic focus, with far less risky behaviour and experimentation. Hence, their strategic focus has the advantage of better alignment and more focused on potentially successful strategies (Carpenter and Sanders, 2007). Firms with proactive and more market-oriented strategies were more likely to be innovative and to introduce new, commercially successful products which were customer oriented (Utterback, 1994). This corporate strategy capability and attribute of small firms significantly contributes to their success in innovation.

Individual traits of participants in the business

The background and role of entrepreneurs on whom the enterprise depends entirely are crucial for innovations of small firms. Innovative activity in small enterprises is often directly related to the training and education of managers and employees, which is a greater influence in smaller firms more than in large corporations or entities with a higher number of employees and participants (Unger, et al, 2011). The proportion of technical workforce in the total force matters for a firm’s innovative capability. It is often likely that small firms and enterprises have technically qualified people with innovative attitudes (Unger, et al, 2011; Hitt and Ireland, 2000). Also beneficial to the success of innovations in small firms, its pursuits tend to be much less formalized and based more on the inspiration and preferences of owners and managers (Hirsch, et al., 2008).

Individual traits such as creativity, the emergence of new ideas, and innovation, the application of these ideas, are necessary conditions for entrepreneurship and are special means through which firms realize success. This is better illustrated by Kirton’s Adaptation – Innovation theory in which he maintains that individuals are systematically different from each other in decision-making, problem-solving and creative style. Differences in individual creative style are influenced by group conformity, efficiency, and originality. It follows therefore that a low standing on originality but a high standing on efficiency and group conformity (characteristic of bureaucracy and hierarchy in large firms) makes a person an adaptor. On the contrary, a high standing on originality but low on the two other aspects (often characteristic of small flexible and adaptable firms) makes a person an innovator (Unger, et al, 2011; Olson, et al., 2005). The individual traits of participants in a small business context, given the flexibility and adaptability of small firms as well as its favourable corporate strategy is a significant contributor to the success of innovation of small firms.


Innovation is essential in the modern day business environment in the quest to satisfy the needs and expectations of customers thereby driving their preference. Strategy is essential in enhancing competitiveness and the positioning of a business in the hostile, complex and dynamic business environment. A number of factors contribute to successful innovation in small firms including their flexibility, adaptability and responsiveness enhanced by their lean and simple organizational structure, focused corporate strategy, and the individual traits of participants.

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Innovation in a small business context: Factors that contribute to successful innovation in small firms. (2019, Feb 11). Retrieved February 18, 2019, from https://phdessay.com/innovation-in-a-small-business-context-factors-that-contribute-to-successful-innovation-in-small-firms/