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Small businesses are the vanguard of innovation. They create the most jobs, account for an increasing share of patents, and introduce new disruptions to established firms. But they cannot be all things to all people. To succeed, they must know where to compete and how to compete.
To help characterize opportunities, one important dimension to consider is the scale of research and development required to develop technologies in an industry. Some industries feature quite substantial economies of scale, such as petrochemical refining, semiconductor 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 to be considered is the size of the market opportunity. Markets typically evolve through a life cycle, starting very small, progressing rapidly in a growth phase, plateauing in a mature phase, and then declining in the end-of-life phase.
Combining these two dimensions yields the 2-by-2 matrix shown below.
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 scaling up their business or investing heavily in technical skills. Specialist businesses must make 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 the large firms.
To innovate successfully, here are three keys to success:
1. Know where to play. Don’t try to compete in multiple areas. Focus on your natural spot in the matrix.
2. 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. And pay attention to your key staff, since they embody the knowledge your company needs to succeed.
3. Don’t fear the large businesses. While large companies have more resources to work with, they also have many more meetings, bureaucracy, and infighting to deal with. Small businesses move faster, learn quicker, and respond better to customers. Many innovations begin at the periphery of an industry, and small businesses are often in the vanguard of these new innovations.
Center for Open Innovation, Haas School of Business
University of California, Berkeley
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