Contribution of Stakeholder Groups on Innovation Project Success in Small and Micro Firms

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Contribution of Stakeholder Groups on Innovation Project Success

in Small and Micro Firms

By

Ingi Elmelund Petersen

University of Groningen

Faculty of Business and Economics

MSc Business Administration

Strategy & Innovation

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Abstract

This thesis maps out the origins of ideas which result in innovation project success in small and micro companies by testing the contribution made by source groups as a whole as well as the inputs which are available within each source group. The source groups consist of entrepreneurs, employees, competitors, customers and suppliers and their contributions are categorized as either significant or non-significant, depending on the outcome of a Chi-Square analysis. The source groups and their respective variables are individually proven by academics to influence innovation project success. Whereas there is potential for suppliers and employees to contribute to innovation project success in small and micro firms, the contribution is hypothesized to be non-significant. On the contrary, entrepreneurs,

competitors and customers are considered to significantly contribute to innovation project success, due to academic research within the field of innovation. Furthermore, the author tests the contribution made by certain inputs available to source ideas from the specific source groups, according to previous academic findings such as the 80/20 model, financial rewards and competitor imitation. These concepts are tested, by investigating innovations from thirty-three small and micro companies in the Faroe Islands, spanning over multiple industries. The results show that there is no significant contribution made by any of the five source groups, which contradicts previous theories and the framework presented in this thesis. The repercussions could indicate that several theories within the sources of

innovation have a different effect on small and micro companies, compared to larger firms. Finally, the data size was insufficient to determine whether the variables within each source group contributed significantly or non-significantly.

Keywords: Stakeholders, small and micro companies, innovation project success,

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Executive Summary

To achieve continuous innovation project success is considered as one of the pivotal battles for small and micro firms in order to survive and grow in today’s marketplace, which is marked by ever-increasing competitiveness and continuous change. This thesis shows how thirty-three small and micro businesses use activities and inputs to source ideas from source (stakeholder) groups in order to pursue innovation project success. Whereas there are numerous inputs available to companies, ranging from financial rewards to imitating competitors, not all of them result in the success of an innovation project. Thus, in order to achieve maximum success rates in innovation projects, one must know which source groups provide the best chances of success. It has been proven that companies effectively can source their innovations from customers, suppliers, employees, entrepreneurs and

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Foreword

Ever since the idea for this thesis started to form, I have been overwhelmed by the support and good-will shown by various people from near and far. First of all, I would like to thank my good friend Mr. Jógvan Sigvald Lydersen Jacobsen, whom I owe my academic career to, since I would not have embarked on my academic journey throughout England and the Netherlands without his support. His companionship and advice has been invaluable to me over the past many years. I would also like to thank my wife and family for the emotional and financial support which they have given me over the last twelve months. Additionally, if my father hadn’t allowed me to borrow the family car for the two weeks when the

interviews took place, the data collection would have been less thorough. Additionally, I would like to thank Mr. Jóan Pauli Poulsen for his tutoring in regards to the Chi-Square analysis and supervision of the results. Furthermore, I would also like to thank the

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This paper is focussed on mapping out the origin of ideas, which result in innovation project success in micro and small enterprises. Considering that the new millennium was marked as the age of innovation, after having the previous decades marked by efficiency, quality and flexibility (70’s, 80’s and 90’s respectively), it seems peculiar that so far academics have failed to produce a general consensus about the origin of innovation project success in small and micro companies (Conway & Steward, 2009). Whereas Trott (2008) highlights the lone entrepreneur as the pivotal player in innovation, Smith et.al (2008) argue that proper innovation management along with high R&D investments are the crucial components in terms of increasing and sustaining a competitive advantage. Additionally, Tushman and O’Reilly (1996) emphasize the importance of companies engaging in explorative and exploitative activities simultaneously, in other words being ambidextrous. A drawback of these proposed solutions, which are particularly relevant in these times of recession, is the conjoined economic cost and subsequent risk undertaken by the respective firm. Within this context, technological innovations can in particular exhaust a company for excessive

amounts of resources.

What is particularly interesting about this phenomenon is how these prescriptions variously apply to and affect companies which differ in size and financial availability. Given that an amount of larger entities have the financial slack to afford R&D departments and

experimentations, smaller companies in general do not have much financial elbow room, leaving little or no room for fruitless paths. Therefore, it is questionable whether micro and small companies have the resources to remain or even become ambidextrous in the first place. Given that explorative activities bring higher uncertainty compared to exploitative activities, it would seem more plausible and realistic for micro and small companies to leave the exploration activities to the larger organisations and focus solely on exploiting the current potential and eventually imitate the innovations produced by their larger competitors.

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innovations can for instance be triggered by customers either through lead user research (Thomke and Nimgade in Burgelman et.al 2009) or general market trends and demand (Trott, 2008). Additionally, academics have also proven linkages between innovations and entrepreneurs (Carter and Evans-Jones, 2006), competitor imitation (Semadeni and

Anderson, 2010 and Gemser and Wijnberg, 2001), employees (Trott, 2008 and Longenecker et.al 2003) and suppliers (Chesbrough, 2006).

Companies cannot sustain themselves on exploitative and imitative tactics alone, since this reliance over time gets increasingly vulnerable to creative destruction and competence destroying innovations, prescribed by Schumpeter (1985) and Burgelman et.al (2008) respectively. Thus, micro and small companies are constantly forced to innovate under different circumstances than their larger equivalents. Whereas the larger entities can rely on full time R&D staff or whole departments to systematically deliver new product and process innovations, courtesy of extensive research and ample resources, smaller companies have to rely on alternative mechanisms.

Several authors such as Gassman and von Zedtwitz (2003) also highlight the importance of R&D departments in order to provide ambidextrous capabilities and to encourage

innovation. However such theories are only applicable in companies with ample resources, thus eliminating the vast majority of small and micro companies in the process. The same applies to theories which aim at utilizing cross-sectional brainstorming sessions in order to provide multiple thinking patterns to enhance creative thinking and problem solving. Whereas these sessions are backed by the work of (Nonaka and Takeuchi, 1995), smaller companies have a lesser amount of employees to draw upon.

But smaller is sometimes better when considering the game of innovation. It has been argued by Trott (2008) as well as Verhees and Meulenberg (2004) that smaller organisations are more flexible in terms of implementing innovations and diverting organisational

strategies when needed, compared to their larger competitors. Smaller firms are less prone to bureaucracy due to the fact that the decision making usually lies with the individual owner or a small number of people. Furthermore, Acs and Audretsch (in Vossen 1998) found that small firms generate 2.4 times more innovations per employee than their larger

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Therefore, academics argue that a firm’s ability to innovate is influenced by the size of the organisation, which provides certain restrictions as well as certain benefits. But whereas larger organisations devise their radical innovations from exploratory R&D departments and incremental innovations from the exploitative equivalents, there is a gap in the literature in terms of where initial ideas for innovations developed in micro and small businesses

originate from. Whereas entrepreneurial organisations can draw upon the founder to provide initial innovations, it is yet unclear how and if smaller organisations systematically develop new innovations on their own, as a result of imitation or through certain source groups.

Van der Heide (2010) conducted a study in which six participating restaurants revealed the origin to their innovations. The paper concluded that consumers and staff were responsible for the majority of innovations while remaining stakeholders contributed with minor but radical innovations. However, given that the study only consisted of six small businesses within a single and local industry, the jury is still out on whether the statistics hold up. Additionally, the author generalises the remaining sources whereby leaving the reader wanting more information and segmentation.

Therefore, the aim of this research is focussed on discovering where the initial innovation is generated, to uncovering the tools of how they are achieved and discover whether the contribution of each source group is significant to small and micro firm project

innovativeness. Additionally, the thesis will test the relationship between the amounts of generated innovations in firms with a set of variables that are attributed to the source groups.

1.1 Problem Definition

The previous section implies that the premises of idea generation in small and micro organisations seem to differ significantly from their larger equivalents. Furthermore, the radicalness of the proposed innovations is more likely to achieve funding for

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necessary to experiment the validity and realistic potential of their innovations, the goal of this thesis is as following:

Discover which sources of input result in innovation project success in micro and small companies.

Thus, the following main research question is as followed:

Which sources of input make a significant contribution to innovation project success in micro and small companies?

1.2 Thesis Outline

The structure of this paper is intended to guide the reader through a literature review which encompasses relevant issues and theories, before presenting and interpreting the results from a qualitative research perspective, with the addition of statistics in order validate the qualitative results, all with the aim of answering the research question. The literature review in chapter two will in depth discuss the notion of innovation, in addition to the relevant typologies. Furthermore, the chapter will also include how an array of sources can influence to the success of innovation projects in small and micro firms, before presenting a

conceptual framework deriving from the review. Chapter three encompasses the research methodology, which takes the reader through the research design, data collection method and the following analysis method. Chapter four provides the reader with results derived from the qualitative and quantitative analysis. Finally, chapter five will conclude this paper with a brief summary, in addition to discussing any resulting theoretical implications as well as providing guidelines for future research.

1.3 Methodology

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Chapter 2. Theoretical Reflection

This chapter will start of by comparing, contrasting and defining the term innovation in order to provide the reader with a solid fundament on which the research is built upon. The section will also provide the reader with an understanding of the term innovation and how it will be used in the context of this thesis. Section 2.2 and its subchapters will encompass the sources and variables which can result in the success of innovation projects in small and micro firms. The chapter will conclude with a conceptual framework, derived from the literature review.

2.1 Innovation

It is generally argued by academics that the term innovation consists of a wide combination of terms, such as invention, discovery, development, change and improvement (Trott 2008).However it is simultaneously still believed that creative thinking and the individual organisation’s capability of putting existing ideas into new combinations, lie at the heart of the organisation’s ability to innovate (Janszen 2000, Amabile, 1998). Academic literature therefore argues that it is not necessary to invent in order to innovate, but rather to perform an action to enhance the competitiveness of an organisation (Conway & Steward, 2009 and Trott, 2008). Garcia &Calatone (2001) and Schumpeter (in Freeman &Soete, 1997), claimed that the difference between an invention and innovation is that an innovation is diffused into the marketplace. Thus, the commercialization of a product is the formal separation between an invention and an innovation. Additionally, there is a consensus among academics that an innovation must contain a certain degree of novelty, whether it is new to the world, industry or the company itself. Therefore, for the remainder of this paper, the author will argue that the term innovation covers: The combination and re-combination of something novel and commercially viable in the relative marked whether it is a product, service, process or activity.

The increased focus on innovation has resulted in various usages of the word

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refers to a combination of five operational dimensions: Strategy, Linkages, Process,

Organisation and Learning. However, Trott’s (2008) usage of the word refers to the iterative ability to innovate i.e. the organisation’s continuous commercialisation of innovations. Thus, for the remainder of this thesis, innovativeness will refer to the amount of innovations that are generated by the individual organisation.

Furthermore, a term previously used in this thesis which might have puzzled the reader is innovation project. In this regard, the term encompasses the process from the point that an innovative idea is introduced to firm to the point where that idea is successfully

commercialised in the relevant market and thus crosses the threshold from idea to innovation. Thus, an innovation project not only spans across a certain process but also requires the novelty and commercialisation which defines the parameters of a traditional innovation.

2.2 Source Influences on Innovation Projects

When addressing several authors’ views on influential sources on innovation, Preston and Sapienza (1990) argued that the business version of the term is generally thought to

encompass four groups: Employees, customers, competitors and suppliers. Furthermore, Da Camara (2004) claims the existence of internal and external sources, whereby supporting the view that employees and management can be a part of an organisations source of innovation. However, as we shall see in the following sections, the appropriate sources in regards to innovation in small and micro firms go beyond the four groups mentioned by Preston and Sapienza. Authors have proved that innovation can be achieved through entrepreneurs (Carter and Evans-Jones, 2006), consumers (Trott, 2008 and Thomke and Nimgade in Burgelman et.al 2009), competitor imitations (Semadeni and Anderson, 2010 and Gemser and Wijnberg, 2001), employees (Trott, 2008,Longenecker et.al 2003 and Carter and Evans-Jones, 2006)and suppliers (Chesbrough, 2006). Thus, the source groups focussed on in this thesis are as followed: Entrepreneurs, consumers, competitors,

employees, and suppliers. Belderbos et.al (2004) also confirmed linkages between among others innovation and customer-, competitor-, and supplier co-operations, without

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execution of these co-operations in addition the academically proven correlations with innovation and the five source groups, it becomes evident to discover how these groups are able to influence innovation project success in organisations and more importantly how firms can source innovative ideas from the respective groups. These issues will be addressed in the following sections.

2.2.1 Entrepreneurs

The first stakeholder, which has a documented effect on innovation project success is the entrepreneur. Ever since J.B.Say introduced the word “entrepreneur” back in around 1800 (Oates, 2000), various definitions have emerged all over the globe, which at one point led to total confusion about the meaning of the term (Drucker, 2007). Some authors have defined entrepreneurs by their individual characteristics (Longenecker, 2003), while others have defined them by their outputs (Schumpeter, cited in Casson, 2003, p.223). The image of the entrepreneur has similarly been perceived differently by the public over the past 30 years, from being labelled “...deviant individuals on the margins of society” (Carter & Jones-Evans, 2006, p.1) to a point where the public admires their skills and wealth and where the media praises them as innovating champions (Forbat, 2007). Firstly, academic literature does not provide a general consensus to the definition of an entrepreneur. Instead, the definitions vary from society to society. Among academics in the U.S., an entrepreneur is usually

defined as a person who sets up his own, new and small business (Drucker, 2007). However, Drucker (2007) claims that it’s not enough to just start your own business. He argues that opening a Mexican restaurant in an American suburb similar to every other Mexican restaurant in that area is far from entrepreneurial. Instead he joins other authors in saying that an entrepreneur has to create new satisfaction, new consumer demand, new markets, new products/services or new production methods in order to be a true entrepreneur (Drucker, 2007 & Schumpeter in Casson, 2003, p.223). Schumpeter (in Casson, 2003, p.223) goes on to claim that the task of an entrepreneur is creative destruction, basically

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particular have been highly successful ventures, but none of them are doing anything which hasn’t been done before, with Easy Jet following Southwest Airlines’ low-cost business model from the early 1970’s. This definition, where there is an emphasis on identifying and exploiting a gap in the market is in line with the equivalent of innovation where the

definition is focussed on combining new and existing knowledge with the intention of commercialising the idea.

Thus it can be argued that in order to become an entrepreneur in the first place, a person will have to commercialise an idea which makes it an innovation. In other words,

entrepreneurs and innovation go hand in hand. It can also be argued that all small and micro businesses are more or less founded by entrepreneurs. Thus, whereas entrepreneurs might sell their business when they grow larger and become more interesting for investors, smaller businesses will most likely still have the entrepreneur at its realm.

In order to clarify how an entrepreneur can contribute to idea generation and subsequent innovation project success in firms, it is necessary to analyse the issue surrounding the entrepreneur’s cognition, especially the notion of opportunity recognition. A long line of academics, including the likes of Carter and Jones-Evans (2006), Trott (2008) and Conway & Stewart (2009) highlight the ability to detect a business opportunity as one of the most critical functions of an entrepreneur. This ability is according to Carter and Jones-Evans the result of a mix of traits, which the entrepreneur possesses. Most notably, an entrepreneurial trait such as the need for achievement pushes an entrepreneur to spot opportunities.

Furthermore, entrepreneurs possess an internal locus of control, meaning that they

perceive their faith to lie in their own hands. Along with determination and risk taking, these entrepreneurial traits are argued to be pivotal in order to systematically identify new

commercial opportunities. An entrepreneur such as Mark Zuckerberg, founder of Facebook is a prime example of these traits. However, serial entrepreneurs such as Virgin Group’s Sir Richard Branson is an example of a creative and highly risk taking entrepreneur who is consistently pushing boundaries, for instance with the development of the sub-orbital spaceflight company Virgin Galactic.

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into an innovation. Whereas creativity, which leads to opportunity recognition can spark the initial idea, it is the risk taking trait which can enable the entrepreneur to develop the

product and launching it into the market. As will be argued in section 2.2.2, employees can be encouraged to show entrepreneurial traits when the notion of risk is removed from their shoulders.

Additionally, when addressing entrepreneurial cognition it is imperative to include the notion of entrepreneurial perseverance. Echoing the theoretical findings of Oates (2000) and Forbat (2007) it is argued that the ability to stick with a prospective innovation and see it through either failure or success is a significant part of the traditional entrepreneurial cognition and can in some cases be picked out as the pivot of the entrepreneurs success rate.

Therefore, it is no surprise that entrepreneurs are seen as a pivotal source of innovation, because their occupation depends on it. The ability to consistently manufacture business ideas which can be successfully commercialised is a part of the entrepreneurial DNA, along with intrinsic motivation and the risk taking that enables entrepreneurs to identify and exploit ideas and thus become a source of continuous innovation.

We have established that entrepreneurs develop business ideas due to their superior cognition, with regards to opportunity spotting, risk taking and determination. This makes the entrepreneurs more likely to develop innovations than “ordinary” businesspeople. Additionally, since entrepreneurs are present in most small and micro businesses it will be estimated that the three entrepreneurial inputs (opportunity recognition, risk taking and perseverance) will have a significant influence on the ideas generated in small and micro firms.

2.2.2 Employees

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companies1 because of sheer luck, but among other things due to strong organisational processes including those, where the aim is to encourage and facilitate innovation. Google, for instance allow their employees to spend one of their five weekly workdays to develop their own projects, which among other innovations have resulted in the Gmail

communication system2. Along the same lines, Steve Jobs argued that Apple’s innovations have seen the daylight thanks to a product-oriented culture, where the emphasis is on improving existing technologies and product offerings (Bloomberg, 2004). Thus it becomes evident that there are certain organisational tools that management can utilize in order to encourage innovative behaviour from their employees. In other words, there are ways in which an organisation can motivate and enable its employees to engage in entrepreneurial activities. Google’s method of allowing employees free time to pursue and develop

individual projects follows theoretical evidence from Amabile et.al (2006), whose research showed that autonomy and freedom positively affect employee creativity. The method also encourages employees to develop new projects, because they will not lose any salaries nor will they have to work overtime. This is significant because the authors also proved a negative correlation between workload pressure and creativity. Therefore, allowing employees time to pursue individual projects within normal working hours and without losing any salaries is considered a tool for facilitating innovative behaviour.

But this tool is not sufficient nor is it always profitable for organisations. Damanpour (1991) as well as Jansen et.al (2006) proved that having ample resources for experimentation was positively correlated to both explorative and exploitative activities. This means that

organisations who provide and inform their staff that their pet projects will receive resources for development, will ultimately encourage staff to experiment. Thus, financial resources not only play a part in increasing creativity in employees, but also in fostering innovative behaviour by providing assurance of development of pet projects. However, the required financial slack for experimentation is unlikely to exist in small firms, where

especially micro firms rely on financial bootstrapping.

Employees can also be motivated through reward systems, such as additionally paid vacations, financial bonuses or promotions. Google implements a wide range of both

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financial and non-financial bonuses where, depending on the individual idea, employees are rewarded with bonuses ranging from massage coupons to stock grants (Brown, 2006). With regards to small and micro businesses, it would be feasible to facilitate such a reward if the resulting innovation equals to increased revenues.

Jansen et.al also conducted an empirical study, in which there was a strong correlation between autonomy and entrepreneurial behaviour. In other words the study showed that employees which are given autonomy over their own projects in terms of development and resources also developed higher amounts of successful innovations compared to

employees, whose projects had to go through rigid Stage-Gate models (Cooper, 2008), which restricts employee autonomy. Thus decentralisation, the notion of descending the autonomy of projects down from the executive level, has a positive effect when the aim is to encourage employees to develop innovations. This is somewhat in line with the

theoretical suggestions by Kamoche and Pina e Cunha (2001), who compared organisations who have proven track records of continuous innovation to jazz orchestras. In their views, jazz improvisation where all group members stay within a certain beat are free to explore on their own without the interference from superiors. This notion can be transferred to

businesses when decentralizing autonomy down to employees, on the condition that pet projects must be in line with current and future business strategies.

As touched upon in the previous section, entrepreneurs are not that different from regular employees, but with the biggest separation being the amount of risk that the individuals take upon themselves. Whereas creativity and opportunity recognition can be thought, the notion of risk taking is somewhat embedded in a person’s DNA (Trott, 2008). Thus, if firms eliminate the risk taking aspect for instance through ensuring available resources for experimentation, then entrepreneurial employees can in essence contribute with similar amounts of innovations as regular entrepreneurs. But as previously argued, whereas some companies are able to provide some resources for experimentation, it is highly doubtful whether small and micro companies can provide these resources and thus eliminate the risk taking aspect from the equation.

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this term is acclaimed to be critical in an organisation’s innovative capabilities, due to importance of external awareness and rapid changes in today’s competitive and rapidly changing environments (Lichtenthaler, 2009). The notion of absorptive capacity thus encompasses the ability to understand and exchange information from external stakeholders, including competitors and customers. Thus, continuously increasing the absorptive capacity is invaluable to firms in highly competitive industries, when considering innovation and gaining competitive advantages.

Absorptive capacity doesn’t exclusively benefit first movers who enter the market through radical innovations, but also followers who have to respond to newly emerged market disruptions, according to Khoja and Maranville (2010). The authors argue that absorptive capacity is developed mainly through human capital i.e. the skills, knowledge and

capabilities of the employees of the organisation. Therefore, absorptive capacity not only encompasses the organisation as a whole, but also the individual who contributes to the overall competitiveness.

Going back to the origin of the notion, Cohen and Levinthal propose that absorptive capacity to a large degree depends on prior related knowledge, consistent R&D investment in

addition to a diversified and specialised workforce. The authors highlight the importance of consistent R&D investments to accumulate and nurture knowledge creation within the firm. It becomes evident that these predicaments are more applicable in larger firms, as optimal absorptive capacity requires a large and diversified workforce in addition to financial slack to fund R&D activities and investments. Therefore it would be reasonable to argue that smaller companies cannot possess the same absorptive capacity as their larger equivalents. The resulting managerial implications could be that small companies only concentrate on becoming first movers or late followers, as absorptive capacity is progressively important for gaining in on first movers.

Thus, there are some theoretical claims and organisational tools which suggest that

employees in small and micro businesses are capable of contributing with innovative ideas, but employees in larger firms can become bigger contributors if the organisation provides the autonomy, financial slack and cultural support. Furthermore, the presence of

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innovative behaviour to be excluded from their assignments. From the literature review on employee contribution to firm and innovation project success it can be established that the four factors which are expected to contribute to most of the successes in this category are the 80/20 method (also referred to as the Google method), fixed rewards, proportional rewards and firm culture. However, these inputs are not expected to make a significant contribution to innovation project success.

2.2.3 Consumers

The notion of consumers as contributors to innovation is not new, with the notion tracing back to the work of Lundvall (1985) and Von Hippel (1988). The authors argued that consumers possess valuable knowledge about the products that they purchase. This knowledge could contain information about the benefits and drawbacks regarding the purchased good in addition to the equivalents of competing products. An example could be taken from the new touch-screen phone segment, where consumers are likely to compare a number of products before purchase. By doing so, consumers will be aware of which

features that appeal to them and which don’t. Companies can therefore be provided with invaluable information which they can use as a source of innovation and learning.

Companies that strategically position themselves as followers due to risk aversion can draw upon almost any group of consumers to provide the organisation with product benefits and drawbacks, but innovative first movers need to seek out lead users in order to attain better predictions as to the direction of future products. Thomke and Nimgade (in Burgelman et.al 2009) describe lead users as having needs that develop months and even years ahead of the general bulk of consumers, whereby they can possess invaluable ideas and

recommendations that can help organisations in predicting future needs.

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where the late pioneer Henry Ford once said: “If I had asked people what they wanted, they would have said faster horses.3”

Although small and micro companies are not likely to possess the resources to properly source lead users for ideas resulting in innovations, it can be argued that these firms have an advantage over their larger competitors when sourcing ideas from “regular” customers. Verhees and Meulenberg (2004) noted that smaller companies are more flexible in terms of adapting to market needs and can for instance adjust their product portfolio based on only a few customer remarks or structured reviews. In comparison, customer remarks have to go through a more bureaucratic process in larger companies and thus customer feedback only become noticeable and relevant when there is a substantial consumer consensus regarding altered needs and wants. In other words, the academic consensus suggests that a consumer has more influence on a small/micro company as opposed to a large company. Furthermore, niche markets or consumers with untraditional needs are more appealing to small

companies due to the economic benefits that a niche market provides. In theory, a small niche market would receive less attention from large companies who are more likely to pursue mainstream markets (Trott, 2008).

Thus it becomes evident that smaller companies are faster to adjust to altering market needs and that these altered needs can be provided be smaller amounts of consumers compared to the amount of consumers needed by larger firms to alter products and strategies. The way that companies can source ideas from their consumers are separated into active and passive feedback activities. Active feedback activities encompass the

previously mentioned lead user activity in addition to consumer panels and traditional focus groups while passive feedback contains unsolicited customer feedback in which the firm has made no active attempt in gathering the feedback. Overall it is expected that active

feedback inputs and passive feedback will significantly contribute to innovation project success in small and micro firms.

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2.2.4 Competitors (Imitation)

Companies can also become more innovative through their competitors. This is mostly achieved through learning and imitating from their competitors’ products and processes (Schnaars, 1994 and Glass, 2010). In fact, some authors and business people alike seem to underestimate the importance and the possibilities that imitation brings with it (Shenkar, 2010). In an article published in the Harvard Business Review online edition, Oded Shenkar argues that imitation can play an important role in a firm’s innovativeness. Specifically, the author discusses how imitation is more than just mindless repetition. The truth is that imitation is “an intelligent search for cause and effect” (Shenkar, 2010 pp.1.). Additionally, the author highlights the fact that imitation can be more important for a firm’s growth than innovation. In this matter it is important to touch upon the theory behind innovators (e.g. first movers) and imitators (e.g. followers).

The notion of first mover advantages dictates that firms which proactively enter a new product or market space may enjoy a temporal competitive advantage over follower firms (Semadeni and Anderson, 2010). But equally important is the fact that progressive reports suggest that as much as 98% of the value that is generated by an innovation is captured by followers instead of the first movers. Take for instance the first graphical web browser Mosaic, which was overtaken by the follower Netscape Navigator which in turn was overtaken by Microsoft’s Internet Explorer. The point is that being a follower will not necessarily deter a company from being innovative. Instead it is about keeping up with the market and not drifting away from the first movers because of reluctance to imitate. By drifting away from the market leader, companies risk alienating their existing customers and driving them into the hands of their competitors. Therefore, there is the possibility that the first mover has hit upon the “next big thing” and, by not imitating the innovation, the competitor firm may miss a significant market opportunity.(Semadeni and Anderson, 2010). Even though Apple’s IPad series often is considered to be the lone runner in the tablet segment, there are still more than ten competitors that are trying to exploit the market which Apple largely has created on their own4. Conservative wisdom would suggest that imitating products are found in the lower segments of the market, e.g. cheap look-a-likes of

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the innovator and wanders on the boarder of copyright infringement (Semadeni and Anderson, 2010). However, some of the IPad’s competitors are highly respected and successful firms such as Hewlett Packard, Motorola, Samsung and Dell. This transition from eyeing imitation as a negative activity is a thing in the past according to the authors. Another benefit for followers (imitators) is that imitation can enable companies to improve the technology and the product which the first mover has introduced. Glass (2010) showed in his study that several Asian countries started to copy Japan’s activities in imitation overseas technologies and as a result, these countries have since started to innovate on their own. This also raises a point of definition, because according to the set definitions previously mentioned in this thesis an imitation can be an innovation if the two aren’t in the same market. This can be exemplified when a product launched in Japan is duplicated in a European market where the Japanese version isn’t introduced or intended for. Similarly national imitation can also occur, when a technology or product is imitated, but for other usages than the original. Thus, when considering imitation it can be argued that national and foreign imitation activities have altering purposes.

But what does this mean for the smaller firms’ innovativeness? Essentially, smaller

companies which suffer from having less resources can benefit from the free riding aspect, which comes with the following position. The position allows the smaller companies to save funds due to less R&D and less training for its employees (Schnaars, 1994). Furthermore, the smaller companies can also benefit from the less uncertainty regarding the product’s

technology and market, due to the success of the initial innovator. However, one important aspect regards to the size of the industry, more specifically how many competitors are competing for the same customers. Schumpeter (1942) argued that monopolistic firms were more innovative than non-monopolistic firms, but more recently authors such as Carter and Jones-Evans (2006) countered that theory by arguing that fierce competition between several firms will result in higher amounts of innovations. Additionally, it has been argued that firms in monopolistic positions have a less incentive to innovate due to the fact that consumers are unable to switch between sellers. An example can be found in the

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These theoretical findings in this section suggest that companies in general accept imitation as a competitive tool in order to keep up with market leaders and customer expectations. Furthermore, small companies can achieve a free riding role which makes a better fit with the smaller companies’ resource and competences. Therefore, foreign and national

imitation will combined be expected to significantly contribute to innovation project success in small and micro firms.

2.2.5. Suppliers

Recently, the likes of Van Beers &Zand (2008) along with Henke & Zhang (2010) have focussed on the link between suppliers and innovation projects and in particular how companies can engage into co-operations with their supplier and affecting the firm’s innovativeness.

In their paper, Van Beers and Zand showed that companies who engaged in R&D

co-operations with suppliers either experienced increased innovation productivity or increased performance of the firm’s current innovations. These co-operations follow the recently emerged trend in which the buyer-supplier co-operations are intended to reduce production costs by identifying and implementing process innovations.

Furthermore, it is also argued that vertical co-operations can provide market information and opportunities which would otherwise be unobtainable (Carter and Jones-Evans, 2006), whereby benefiting the participating enterprises. Firm innovation also holds an incentive for the supplier as increased revenues for the buyer results in increased revenues for the supplier as well. Thus, one passive firm method of sourcing innovation projects is from suppliers who actively engage the firm with ideas (supplier push).

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systems or commencing support and scouting channels such as BMW’s Virtual Innovation Agency5 and General Motor’s TechWorld conferences6.

However, Henke and Zhang (2010) touched upon the notion that suppliers will be reluctant towards the idea of co-operations when efforts and/or benefits are unequally distributed. When considering small and micro companies, it is worth considering that suppliers might be reluctant in engaging co-operations with small buyers as they have fewer available resources to contribute with. Furthermore, according to Porter’s Five Forces framework, smaller companies do not have the same bargaining power as larger firms, which might mean that suppliers do not feel pressured into co-operations as could be the case if the supplier is co-dependent on a large buyer. Thus, the academic literature does not support any significant linkages between innovation project success and suppliers.

2.3 Conceptual Model

The literature review has produced five groups of expectations, which from a theoretical perspective suggest the impact each individual source group will have on small and micro firm innovation. The first expectation surrounds the entrepreneurial impact and following the theoretical argumentation it is suggested that entrepreneurs will make a significant contribution to the innovation projects, which the participating firms in this study have developed. The second expectation will test the employees contribution, with the

theoretical prediction being that no significant contribution will be made, mostly due to the lack of resources to support innovation management in addition to the presence of

entrepreneurs in the firm. The third expectation is that consumers will have a significant influence on innovation project success due to the flexibility and adaptability of the firms. Expectation number four touches upon imitation of national and foreign competitors and discovered theoretical backing in terms of suspected significance on innovation project success. This is mainly due to fact that imitating a product is less uncertain with regards to customer adaptation in addition to the savings in R&D. The final expectation encompassed suppliers and although this source group is in possession of tools which can affect

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Chapter 3. Research Methodology

The aim of this chapter is to provide a description of the research design and the

justification of the chosen research method. The research design has been chosen in order to provide a solid bridge between the research questions in chapter one and the research data, which will be elaborated on in chapter three. Chapter two will be rounded off with descriptions of the data collection and the subsequent data analysis.

3.1 Research Design

According to Bryman and Bell (2003), a research design consists of a framework of which the aim is the collection and subsequent analysis of data. With the research questions and hypotheses in mind, the author decided on a multiple case study. The emphasis of a case study tends to be upon an intensive examination of the setting and in most cases the research consists of one case, although not exclusively. Bryman and Bell also argue that exponents of the case study design favour qualitative methods, such as unstructured interviews. However, a downside of qualitative data is that it is difficult to generalise, thus the conducted study is a multiple case study, so that the results from the semi-structured interviews can detect any overarching patterns and thus provide some degree of validity. Furthermore, Yin (1989) provides two supporting arguments which argue in favour of a multiple case study. First of all, Yin argues that using multiple case studies as opposed to a singular case study, provides more compelling and robust evidences, while the author also claims that case studies in general are especially suitable when the researcher is

investigating “why” or “how” questions. When considering the fact that some of the sub-questions in the problem definition in this thesis start with how, it becomes evident that the most suitable research design is a case study. Finally, Bryman and Bell also claim that the main purpose of a multiple case study is that it improves theory building. In their own words, the authors proclaim that: “By comparing two or more cases, the researcher is in a

better position to establish the circumstances in which a theory will or will not hold” (2003,

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3.2 Data Collection

In order to understand the influence on innovation projects, by relevant sources of input in small and micro businesses, a preliminary research has been conducted. The literature within the realms of innovation, small and micro business management, entrepreneurship and additional source group influence has been obtained through academic textbooks and academic articles. The articles were extrapolated through the reading lists of the Business Administration in strategy and innovation course at the University of Groningen in the Netherlands in addition to the reading list of the Business Enterprise course at the Manchester Metropolitan University in Manchester, England. Additionally, the Business Source Premier database provided access to the large majority of the related articles. The conducted literature review resulted in the conceptual framework, illustrated in section 2.3. When considering the main research question, it becomes evident that a qualitative data collection method is more appropriate than a quantitative one due to the formulation of the question. Qualitative data provides the researcher with a more in-depth examination of the topic (Bryman and Bell, 2003) which is suitable for this research given the nature of the topic. As mentioned in section 3.1, a qualitative and multiple case study usually contains a few cases. However, given the amount of groups and inputs which may have an influence on innovation project success in small and micro firms, it seemed more suitable to interview a larger amount of companies in order to combine the evidence collected from the qualitative interviews with a supportive quantitative element. Thus, the quantitative data was intended to provide comparable statistics which could support or discard any resulting observations from the qualitative evidence.

According to the European Commision (2003), a firm is classified as micro when there are less than ten employees, a turnover of less than €2 million and a total balance sheet value of less than €2 million. Subsequently, the classification of a small firm is ten to forty-nine employees, a turnover of less than €10 million and a total balance sheet of less than €2 million. The Faroese business portal BusinessLine7 was used as an initial screening method in order to discover firms which were suitable from two perspectives. First of all, the business portal provided the author with the financials and staff counts of all Faroese

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companies, whereby allowing firms that fulfilled the European Commission’s definitions of small and micro firms. Second, the student in question then picked out forty-two firms based on public knowledge of recently developed innovations. Initial contacts were made to all forty-two in early March 2011 where information about the project and required

participation was given as well as thirty-seven interviews were scheduled, giving an accepting participant rate of eighty-eight percent. By mid-March participating firms were sent a confirmation email stating the time and place of the respective interview.

Data was then collected from thirty-seven small and micro firms in the Faroe Islands during the twelve day period between Monday, April 4th of 2011 and Friday, April 15th of 2011. The Faroe Islands (semi-independent nation under the Danish monarchy, situated in the North Atlantic Ocean halfway between Norway and Iceland) were chosen due to the close proximity of all participating companies. This ensured that all of them were subject to roughly the same regulation and under similar circumstances. Interviews were as previously mentioned scheduled about a month in advance, in order to provide the company

representatives with ample time to prepare any research, figures and possible questions, given that only innovations which were conceived within the last five years would be eligible for this research.

The interviews were undertaken by the author in question in addition to at least two representatives from the participating company in order correct or collaborate any

information obtained in addition to minimizing the chance of managerial bias towards given information. The presence of the author also benefitted the understanding of the

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information to this study, the interviews lasted from between an hour and up to two-and-a-half hours.

3.3 Data Analysis

The methodology for analysing the data in this research consists of comparing and

compiling both qualitative and quantitative data extracted from the thirty-three approved semi-structured interviews and highlighting any consistencies and deviations from the conceptual model in section 2.3. First of all, each claimed innovation was cross-examined with internet searches and academic definitions in order to commercially authenticate and academically validate the innovations.

Appendix 1 contains the standard questionnaire, which was used in order to determine the sources and inputs responsible for each successful and non-successful innovation projects. The results from the standard questionnaire and subsequent qualitative research were compiled and used to construct a series of Chi Square analysis. The Chi Square analysis is used in this research due to the versatility of the method and because it is generally regarded as being among the most useful statistical techniques of analysing data (Aczel, 1996). Essentially, the Chi-Square can be used to analyse the impact of numerous variables on a target and detect whether or not the contribution of those variables are significantly different. For instance in the case of the entrepreneurial impact of innovation project success, if the analysis showed a significant difference then it would indicate that one of the three variables is contributing more significantly that the others. On the contrary, the results could also show no significant difference, thus indicating that the variables are contributing equally. In order to ensure that the analyses were properly and correctly conducted and calculated an external college teacher, specialised in mathematical statistics supervised and validated the process and the subsequent results.

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Chapter 4. Results and Analysis

The previous chapter described the research methodology used to test the validity of the conceptual model, presented in section 2.3. This chapter will present and subsequently analyse the resulting outcomes and whether or not the conceptual model holds. The chapter follows the same sequence as the literature review, with the exception of the conceptual model being presented first as a whole followed by the six sourcing groups. Each results section will consist of a quantitative element in form of the Chi-Square analysis results for the particular section and the subsequent inputs in addition to a more substantial qualitative review in which overarching themes are brought to light. The chapter will

conclude with a discussion based upon the findings and whether or not they have any implications for management and/or academia.

4.1 Conceptual Model

The theoretical findings from the literature review suggested that entrepreneurs,

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Although that the results were disappointing when considering that the goal was to prove the validity of the conceptual model, it is however interesting to address the variation of the observed values, because the result is so close to the threshold of significance.

Suppliers was the only source group in which initiatives resulted in more failures than successes, thus all but proving that if the results were on the other side of the significance threshold then suppliers would most likely not significantly contribute to small and micro firm innovation project success. On the other side, if there would have been a Chi square result outside of the expected area then it would most likely have occurred due to

competitors which jointly contribute with the highest amount of successful innovations in the test.

4.2 Entrepreneurs

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In correlation with several academics mentioned in the relevant section of the conducted literature review, most firm representatives (of which several were owners/entrepreneurs) claimed that the opportunity recognition skill was significantly important for their respective company’s innovation project success. In fact, most of the entrepreneurs themselves argued that they were solely responsible for new product developments. All except two of the entrepreneurs in the study argued that the firms responsibility of innovating laid on them. As one entrepreneur put it: “....I see it as my job to innovate because I believe that I poses

certain abilities which most of my employees don’t. If I didn’t contribute, then in my opinion nothing new would ever come out of this firm.” Thus, most of the entrepreneurs believed

that their capability of recognising business opportunities were crucial for their firms project innovativeness.

In particular, several of the well-established entrepreneurs praised the ability to recognize potential opportunities within their industry. These entrepreneurs formed a consensus in which they argued that the opportunity recognition ability was a crucial part of their entrepreneurial cognition and was developed during their upbringing and in particular during early adolescence. As a “Faroese Entrepreneur of the Year” winner explained: “I have

always been fascinated by the start-up phenomenon in addition to the personal and monetary rewards that can be achieved. Therefore, I have always been obsessed by

improving existing concepts or developing new ones from scratch ”. Another entrepreneur,

one who developed one of the most profitable innovations in the Faroe Islands during the past five years explained how critical thinking helped him to conceptualize the solution: “I

used to run a small fishing vessel in which we used several devices for navigational purposes. However, they could not perform the task which I thought was essential for our purpose and I thought to myself that surely there has to be a better way. In the end I got so annoyed that I started to play with different ideas for potential solutions and ultimately embarked onto the entrepreneurial path and voila here I am”.

Indeed, the ability to continually identify and exploit opportunities was the entrepreneurs’ most recurring answer when asked how they were able to contribute to project

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35 numerous functions and firms and identified needs, which we could address. Among others, we tagged along fire fighters, festival planners and even graveyard attendants in order to identify needs which we then worked on back at the office. As the local businesses were unsure of how our services could benefit them, our survival depended on our ability to go out and identify our customers’ needs for them”.

Another entrepreneurial trait highlighted in the literature review was the notion of risk taking, which several academics argued as one of the carrying pillars of entrepreneurship. The interviews provided mixed results regarding this issue, due to the fact that some of the entrepreneurial ventures were developed almost without any risk attached. Some

entrepreneurs turned out to fit the classic cognitive prescription of a risk taker. An

entrepreneur who managed to start up his own firm and become the market leader within four years replied when asked about his attitude towards the risk associated with his innovation project success rate: “I invested in processes which were unconventional for the

industry, because I wanted to attract my competitors’ customers. It was risky and required substantial funds, but I believe that if you only offer what your competitors offer then they will beat you through their experience and their reputation. In my mind the classic phrase (if you don’t buy a ticket, you won’t win the raffle) still holds true”. Interestingly though, it

turned out that some of the entrepreneurs approached potential customers with concepts rather than with fully developed products and acquired selling contracts before investing into the projects. Thus, when addressing the risk notion aspect it is important to conclude that around half of the innovation projects developed by entrepreneurs were developed without any significant risk attached, according to the traditional sense of the word. Thus, this discovery casts some clouds over the traditional consensus that entrepreneurs by default have to be risk takers.

The final input which was continuously emphasised by the participating entrepreneurs when discussing their path to success was perseverance and determination. These traits were also touched upon in the literature review and follow the academic theories regarding

entrepreneurial success criteria. A serial entrepreneur explained how important it was for him to keep himself motivated when products were in the developing stages: “If I can

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36 earnings in the first three to five years after setting up your business, but if you believe in your idea, then for goodness sake push on. That’s the only way to become a true

entrepreneur if you ask me. Without perseverance you are simply setting yourself up for failure”.

The literature review of entrepreneurs’ contribution on small and micro firm project

innovativeness coincides for the most part with the results from the research. The evidence shows that the entrepreneurial inputs have no significant influence, but the way in which entrepreneurs contribute to small and micro firm project innovativeness provide interesting yet controversial results. The entrepreneurs are viewed as crucial in terms of continuously developing innovation projects and in most cases they view themselves as the sole

contributors of their respective firms. The research showed that opportunity recognition skills dominated the results, with the majority of participating entrepreneurs highlighting the ability as the most crucial aspect of their respective company’s innovativeness. Whereas some entrepreneurs took a random approach to the phenomenon e.g. not consciously pursuing it, others took a structured and iterative approach in order to spot opportunities on a continuous basis. Perseverance and determination was highlighted by several

entrepreneurs as a crucial element of their ability to innovate, but interestingly risk-taking was not always needed in contrast to the classic understanding of the entrepreneurial mind-set. Therefore, entrepreneurial inputs do not significantly contribute to small and micro firm project innovativeness.

4.3 Employees

In section 2.2.2, the author expected that employee inputs would not make a significant contribution to innovation project success in small and micro firms. The research supports that expectation due to the fact that there is no evidence which shows a significant

difference among the proposed inputs as is shown in table number two. Having said that, it is imperative to keep in mind that five of the eight expected observations failed to meet the suggested threshold of five, thus one must be cautious in drawing conclusions. It is

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significant difference which if passed would suggest that the contribution of the inputs are significantly different.

Turning to the qualitative analysis, the literature review touched upon organisational processes in which innovation was encouraged and facilitated. Whereas the likes of Apple and Google heavily relied on the processes, it was hypothesized that small and micro firm would be unable to influence their employees in the same way due to the scarce resources, which more often than not control the organisational processes. This turned out to be only partially true. Two of the thirty-three participating firms actually utilized the

before-mentioned eighty-twenty rule (employees are allowed to pursue their own projects during 20% of their working hours), however these did not achieve their purpose. The managing director of one of the companies which deployed the “80-20” input explained their situation: “We saw that Google had achieved great results through this method but

somehow our employees could not develop any successful innovations”. Thus, the “80-20”

input has presently not resulted in any innovation project success in the two particular firms.

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38 money had. Our employees seemed to view the scheme as a breath of fresh air and they started to do market research in order to come up with new ideas, which was rare in the old days”. Even though there was no significant difference in the employee inputs, it is worth

noticing that all four companies who deployed fixed rewards were rewarded with innovation project success.

Eleven other companies experienced a spike in project innovativeness after setting up a reward system, in which the employees were given a provisional cut of the revenue, which resulted from their particular innovations. One owner explained: “We provided a provisional

reward system, which gave instant results. Our employees now know that if they come up with new product ideas that turn out to be successful, then they can achieve significant bonuses. This seems to be a real motivator for them. Some of my employees even stayed at work until midnight during the first week of the reward system”. Whereas eleven companies

experienced innovation project success due to the provisional reward systems, there were still three companies which did not achieve any success when deploying the same system. Several firms highlighted a reliance on their employees to be intrinsically motivated in regards to innovation. Thus, instead of offering financial rewards some firms try to influence their employees through firm culture. However, this input resulted in many innovation projects but only eight out of sixteen were successful. A managing director whose company did achieve success elaborates: “I would argue that we are in the high-end of our industry.

We offer higher salaries, sublime working conditions and go about with a real sense of professionalism. People always want to work for us and therefore we demand that our employees pull their own weight in terms of expanding product lines and new product development. We don’t formally expect X amounts of ideas but people now that they are expected to chip in...and they do chip in as a result”. Other companies focussed their firm

culture on friendly competition. A couple of firms used an iterative system in which consumer complaints were distributed to all employees, from which it turned out to become an unofficial challenge among employees to solve the problems.

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and innovation. The reason for this might be size-related. Smaller companies with low amounts of employees might not afford to offer their employees the same salaries and benefits that their larger competitors might, thus when the chance to supplement the basic salary with a bonus presents itself, employees in small firms might become more motivated than the employees in larger companies.

4.4 Consumers

The conceptual model expected that consumer inputs would have a significant contribution on innovation project success in small and micro firms. The results regarding consumers in particular show a significant difference in input contribution as shown in table number three. Therefore, expectation number three is heavily supported, but cannot be completely confirmed due to fact that one of the expected observations is below five.

The argument of consumers having a bigger chance of being heard in smaller companies as opposed to bigger ones seem to hold as twenty-nine of the thirty-seven firms cited the importance of attending to every customers needs and wants. One interesting discovery from the interviews when the emphasise switched to the consumers was that companies in either “old” industries or brand new industries received high amounts of unsolicited (or passive) idea suggestions from their consumers. One owner/manager dedicated his two latest innovations to his core customers: “After the launch and initial market penetration of

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40 in which most of our consumers are elderly women who probably know more about this industry than we do to be honest”. Another firm experiencing several successful innovation

projects through consumer feedback operated in the new mobile application industry. The newness of the market is appealing to small companies who wish to grow and thus need to be tightly connected to the customers as the managing director explained: “We know that in

such a new industry there will be a lot of small companies trying to get a slice of the potential earnings. Therefore we have to act quickly when customers suggest an idea in order to reap the benefits before a foreign competitor does”. Although the research cannot

prove that smaller companies are more closely connected with their customers than larger companies, it can be claimed that several of the small and micro companies in this research use their customers inputs in order to be successful in innovation projects. Indeed,

unsolicited feedback is expected to make a significant contribution to innovation project success. Whether this is an organisational input is dubious, but should nonetheless be seen as an effective way to achieve success in innovation projects. This issue will be elaborated on in the section, managerial implications.

An additionally interesting discovery regarding the respective source group is that some of the contributing consumers were businesses. These firms’ incentives are that if their suppliers can offer more efficient products, then their own products might become more efficient as a result. An electric component manufacturer elaborated when asked about their award-winning electrical sub-sea device: “One of our customers is a large firm

operating in aquaculture. They had an idea for a product, which they wanted us to fully develop and distribute, because it was useful when combined with their main product line. They could not produce it themselves because it was out of their expertise and industry”. It is

therefore important to take notice of the fact that some consumers are businesses which also have an interest in their suppliers being innovative. Thus, future research could aim to separate between regular people and then organisations and assess their impact on firm innovativeness.

The research also showed that none of the participating firms engaged in lead-user

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consumers helped shape the offering from the firms. One owner claimed that reaching out to the customers and basically asking for advice brought an innovation along with it: “We

actually encourage our customers to approach us with their suggestions, whatever they may be because we are renowned for being alternative. People know that we wish to develop organically and according to the people’s choice. That’s why I’m not surprised to see how all but one of our innovations stem from our active feedback system“. This point is encouraging

for other firms because it suggests that some consumers need to be engaged by the firm in order to be successful in innovation projects.

4.5 Competitors (Imitation)

With regards to competitors, it was expected that competitor inputs (or imitation of

competitive products) would have a significant contribution to innovation project success in small and micro firm. The results from the Chi-Square test show no significant contribution whereby rejecting the expectation. Again it is important to take notice to one of the expected observations which failed to meet the criteria of being a minimum of five.

Contribution of Stakeholder Groups on Innovation Project Success in Small and Micro Firms