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An Investigation into Innovations in SMEs : Evidence from the West Midlands, UK

Yong Wang and Pat Costello Journal of Entrepreneurship 2009 18: 65 DOI: 10.1177/097135570801800104 The online version of this article can be found at: http://joe.sagepub.com/content/18/1/65

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An Investigation into Innovations in SMEs: Evidence from the West Midlands, UK1
YONG WANG AND PAT COSTELLO
This article focuses on innovation in small businesses. Specically, the objectives of the paper are twofold: a) to explore the impact of individual features, business resources, organisational culture, structure and market dynamism on rm-level innovation; b) to develop insights into innovation in small and medium enterprises (SMEs). The research procedure follows Yins (1994) case method approach. Two Information and Communication Technology (ICT) companies, winners of various innovation awards in the West Midlands of the UK, participated in the case studies. Evidence from the studies shows that innovation intensity is dependent on the availability and sufciency of nancial and human resources. Furthermore, an organisational culture supporting new product development and an innovation-conducive structure/ mechanism inuences the innovation outcomes. Evidence also reveals that rmlevel innovation will be inuenced internally by senior executives experiences and externally by market dynamism. Yong Wang is a Senior Research Fellow/Senior Lecturer in Entrepreneurship and Information Management at Wolverhampton Business School, University of Wolverhampton, UK and Pat Costello is an ICT Cluster Manager in Advantage West Midlands and a Principal Lecturer at the School of Computing and Information Technology, University of Wolverhampton, UK.

Innovation is often perceived as a source of competitive advantage for businesses. Under the conditions of increasingly intensied globalisation, fast changing technological landscape and continuous market and customer demands for new products/services, both academics and practitioners agree that businesses have to innovate if they are to prosper, or even survive, in the dynamic environment (Damanpour & Schneider, 2006; Howell & Higgins, 1990). Research on innovation has been conducted to understand what policy initiatives and infrastructure may trigger innovation, what organisational culture is conducive to innovation and what resources need to be invested to instigate innovation. The past two decades have
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witnessed innovation research gathering momentum and the total quantity and quality of research undertaken in the innovation domain have been ascending (Freel, 2005; North et al., 2001). Irrespective of this rising trend, there is a paucity of innovation research implemented in the SME arena (Gudmundson et al., 2003; Hausman, 2005), though SMEs are playing an active role in developed economies as well as emerging economies. Academics, practitioners and policy makers are not able to portray an unambiguous picture of how innovation is catalysed, initiated, developed and sustained in the small business realm. The purpose of this was to primarily explore innovation in SMEs. Specically, we intended to understand the impact of market dynamism, organisational resources, business structure, culture and entrepreneurs characteristics on rm-level innovation. The paper commences with a brief review of the literature, focusing on innovation in small-sized rms and the inuence of individual, organisational and environmental factors on innovation. By building upon earlier literature, a theoretical framework about innovation and its internal and external determinants are proposed. Empirical data from two small Information and Communication Technology (ICT) companies in the West Midlands are presented. Through comparing and contrasting empirical evidence, this explorative paper shows that business innovation is dependent on the availability and sufciency of both nancial and human resources. Furthermore, results demonstrate that an organisational culture supporting new product development and an innovation-conducive structure/mechanism will inuence the innovation outcomes. Evidence also suggests that rm-level innovation will be inuenced internally by entrepreneurs experiences and externally by market dynamism. Implications based on the ndings are nally elaborated and future directions of research are highlighted. Theoretical Background The realm of innovation is broad and the boundary of this territory has only been vaguely dened (Damanpour & Schneider, 2006). Damanpour (1991), by referring to the studies of Daft (1982), Damanpour and Evan (1984) and Zaltman et al. (1973), indicate that innovation can be a new product or service, a new production process technology, a new structure or administrative system, or a new plan or programme pertaining to

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organisational members (p. 556). From this, he further denes innovation as adoption of an internally generated or purchased device, system, policy, programme, process, product, or service that is new to the adopting organisation (p. 556). This wide-ranging denition is exceedingly inclusive and incorporates different types of innovations in relation to business operations. Extant research shows that organisational innovation is inuenced by factors at individual, organisational and environmental levels respectively (Chandler et al., 2000; Damanpour, 1991; Damanpour & Schneider, 2006; Thornhill, 2006). Gopalakrishnan and Damanpour (1994) examined the foci of these studies and identied that most research on innovation at the individual level focused on psychology, at the organisational level on management and at the environmental level on economics. At the individual level, top managers especially those of smaller sized rms are believed to be inuential on innovation (Damanpour & Schneider, 2006). These companies are often orchestrated by single dominant personnel with centralised authority (Poza et al., 1997; Schein, 1983; Sharma, 2004). S/he usually establishes a paternalistic system; challenges to this authority are virtually unheard of (Sharma, 2004). Thus, the central gures personal characteristics will to a great extent inuence organisational climate for or against innovation (Damanpour & Schneider, 2006; West & Anderson, 1996). At the organisational level, innovation is often perceived as a strategic choice or a rm-level behaviour which is an outcome of business characteristics (Thornhill, 2006), such as business structure (Burns & Stalker, 1960), business resources (Barney, 1991), organisational culture (Chandler et al., 2000), and so on. Finally, researchers claim that innovation may occur due to external environmental stimuli (Tornatsky & Fleischer, 1990). Market dynamism (Thornhill, 2006), business sector (Freel, 2005) as well as other cultural, societal, political or geographical conditions (Damanpour & Schneider, 2006; Wejnert, 2002) may have an impact on innovation. Irrespective of individual, organisational or environmental origin of the impetus for change, innovation is often a means that rms resort to create or sustain competitive advantages. In the following section, key factors reected in the literature are reviewed, respectively at individual, organisational and environmental levels, aiming to develop a theoretical framework to guide the current study.

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Individual Antecedents of Firm-Level Innovation Organisational and strategic leadership research posits that top managers, because of their centralised positions, often inuence business strategies and operations (Damanpour & Schneider, 2006; Elenkov et al., 2005). They may direct the rm in a way to reect their personal values and beliefs. For instance, in a qualitative study of Spanish family rms, GarciaAlvarez et al. (2002) observed that those founders who prioritise family over business encourage their successors to join the rm at a young age and constrain business growth. On the other hand, founders who value business over family encourage the young generation to acquire formal education and experience outside the business before they join the rm. In the innovation literature, top managers personal features, such as managerial tenure and industrial experience, are recognised to be associated with innovation (Damanpour & Schneider, 2006). Tenure in Position Finkelstein and Hambrick (1996) observed that if senior executives stay on their positions over a long term, the sources they rely on to collect information may become increasingly narrow and restricted, and the information is more nely ltered and distilled (p. 82). The emaciated information channel may isolate the business and eventually put off the rm from innovation. In a similar vein, Hambrick and Mason (1984) and Huber et al. (1993) argued that long-tenured business runners are more likely to accept the rm as it is. They feel comfortable with their social networks, business processes and products/services, and are reluctant to adopt new approaches to orchestrate the rm. Experience Different from tenure in position, senior managers industry experiences may contribute to innovation (Damanpour & Schneider, 2006; Reece & Costello, 2005). Ample industrial experience may offer managers opportunities to recognise the value of innovation and inspire enthusiasm. In addition, experience may render managers knowledge on how to embark on innovative venturing and tackle business politics to achieve desired innovation outcomes (Kimberly & Evanisko, 1981). Before innovation,
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experienced directors are apt to execute detailed market research, evaluate the pros and cons associated, justify the rationale of innovation and then outline comprehensive plans. Thus, the innovation-related risk will be lowered and the nancial loss, if unfortunately occurring thereafter, will be less substantial. In the literature, researchers also posit other top managers demographic, psychological and behavioural characteristics as determinants of organisational innovation. For example, senior executives age (Damanpour & Schneider, 2006; Huber et al., 1993), gender (Soneld et al., 2001; Stelter, 2002), education (Hausman, 2005; Lee et al., 2005), willingness to manage conicts (Hausman, 2005) and ability in sharing control (Scott & Bruce, 1994; Timmons & Spinelli, 2004) have all been examined for their inuential impact on organisational innovation climate. Nevertheless, the ndings are often non-consistent and not convincing. Organisational Antecedents of Firm-Level Innovation In the competitive markets, SMEs often have to develop an innovation mindset that allows them to exploit opportunities, create competitive advantages and consolidate market share (Shane & Venkataraman, 2000). However, a rms innovation practice is not only determined by its willingness or intention, but subject to a number of organisational attributes as well (Damanpour & Schneider, 2006). Previous studies about innovation determinants primarily focus on those at organisational level (Wolfe, 1994), such as business resources (Barney, 1991), business structure (Burns & Stalker, 1961), organisational culture (Chandler et al., 2000), and so on, although these variables do not necessarily have more profound impact on innovation, compared with parameters at other levels. Business Resource The resource-based view (RBV) holds that rms are bundles of resources; resources are heterogeneously distributed across different firms in industries, and that resources are imperfectly mobile which makes this heterogeneity persist over time (Barney, 1991; Wernerfelt, 1984). Nystrom et al. (2002) observed that organisations with more resources are more likely to invest in innovation because they can afford to take innovation-related risks and absorb the loss caused by failures. Due to
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capital market imperfections, small businesses often encounter difculties in gaining access to nancial resources. The dearth of nance is specically conspicuous where small rms lack nancial records, asset security and equity base to command external nance support. Under this circumstance, small rms have to rely on their limited internal capital, such as personal equity (Peterson & Shulman, 1987), family loan and trade credit (Berger & Udell, 1998; Romano et al., 2000). Constrained by this nancial anaemia, SMEs often have to tone down their voices or even put innovation aside totally. Even if they obtain accesses to nance, many small businesses are still incapable of innovating due to the poor stock of human resources and inadequate industrial and social knowledge (Thornhill, 2006). Kogut and Zander (1992) describe knowledge as the critical resource that separates a rm from other competitors. In a similar vein, King and Zeithaml (2003) indicate that copious knowledge is able to facilitate a rm to take actions in innovation. But bear in mind that knowledge is carried by its entity, people. In other words, it is people with special calibre that innovate and make businesses differentiated. In the real world, small rms often lose to their large counterparts in the erce competition in recruiting and retaining high calibre technicians and talented personnel. Business Structure Burns and Stalker (1961) argue that business structure can be predominantly classied into two categories, mechanistic and organic. Businesses with a mechanistic structure are often featured by a hierarchy of authority. For each functional position at different hierarchical layers, responsibilities are clearly dened and relationships between positions claried. Staff members working in this structure only need to comply with rules and regulations, whereas practices departing from the norm or against regulations are not encouraged. Under this circumstance, innovative venturing is not easy to initiate. However, organic rms are often featured by a at administrative structure where staff members have exibility to share responsibilities and duties. Rules and regulations are more exible and roles and relationships less formally dened. Under this condition, innovative activities are more likely to be observed. Miller (1988) indicates that many theorists share the belief that innovation requires organic, decentralised and intensively integrated structures (Lawrence & Lorsch, 1967).
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Business Culture Organisational culture is featured by a set of shared values, norms and beliefs within a rm (Gudmundson et al., 2003, p. 3). Chandler et al. (2000), in a study of 429 SMEs, found that both supervisory guidance and reward system support were benecial to the creation of an innovative culture. Through clarifying business visions and setting up strategic objectives, senior executives can pass a clear message to staff members and promote an innovation-oriented culture within the rm. They may encourage new practices which depart from the norm (Mumford, 2000) and allocate resources to implement new initiatives. The appraisal of staff performance may be connected to innovation and if the outcomes are positive, recognition and reward will be made. According to Tushman and Nadler (1986) to encourage innovation, organisations must base rewards on actual performance and make innovation an important dimension of individual and group performance (p. 85). Immersed in this culture, senior executives may further resort to their networks to explore social, technical and intellectual resources required by innovations and resolve conicts between organisational units to ease the innovation process. Environmental Antecedents of Firm-Level Innovation As a response to increasingly intensied globalisation accelerated technological updating and continuously increasing demands for new products or services, opportunities constantly arise in the market, stimulating rms involved to respond. Innovation scholars conrm that the stimulus of rm-level innovation can come from external environment (Damanpour & Schneider, 2006; Thornhill, 2006). In fact, the few and only consistent ndings about stimuli in the innovation literature are associated with business environment. Market Dynamism Dynamism refers to the degree of uncertainty and turbulence in a market or an industry (Thornhill, 2006; Dess & Beard, 1984). In a market with low dynamics, market or industry changes do occur, but along roughly predictable directions, in foreseeable approaches and not at a frequent pace. In this market, the industry structures are relatively stable,
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market boundary reasonably clear and key players (such as industrial competitors) identiable (Eisenhardt & Martin, 2000). Businesses involved are more likely to rely on existing knowledge and expertise to manoeuvre. Therefore, the demand from the external environment for innovation is often not positioned at a high level. Under this circumstance, new technology, new business structure and new pattern of operations do occur, but only occasionally. Yet, in a dynamic market, market and industry changes occur frequently, rapidly and randomly. In this market, the industry structures are blurry, market boundaries fuzzy and key industrial players ambiguous and shifting (Eisenhardt & Martin, 2000). Businesses engaged therefore cannot simply depend on their existing knowledge base and expertises to survive, but innovate to safeguard their market position (Miller & Friesen, 1982). They need to commit themselves to experiential learning to absorb new knowledge promptly. Ultimately they may achieve a t in the new environment and generate new products/services suitable for the market. Industry The type of industry businesses engage with is related to the innovation intensity (Freel, 2005). Academics observe that if businesses are involved in a high-tech industry, they are more likely to update their product/service prole on a regular basis to cope with the market change. On the other hand, rms engaging with a low-tech industry are not facing the innovation pressure as high as their counterparts in the high-tech domains. They may rely on a type of product/service, develop expertise and sustain their competitive advantages over a relatively long term (Freel, 2005). In sum, previous studies have examined the impact of organisational variables on innovation as well as individual and environmental characteristics on innovation. Based on the review of the innovation literature, key factors at the three levels are extracted and depicted in Figure 1. This forms the conceptual framework, guiding the current exploratory research, which aims to add to the literature. Method The research procedure follows Yins (1994) qualitative case study approach, the merit of which primarily lies in the potential to yield insights
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FIGURE 1 The Conceptual Model of Innovation Determinants

into business practices. Two ICT companies, winners of many innovation awards in the West Midlands, were approached to cooperate in the study. The emphasis of the research was to obtain detailed qualitative information on issues affecting innovation. Semi-structured interviews were performed with senior executives in the two companies, each lasting about 1.52 hours. Interviewees were briefed on the purpose of the study and the two interviews covered the same interest areas. Apart from the interviews, secondary sources of information such as published articles, reports and websites were utilised. Whenever possible, data were triangulated to establish validity. Through these, an attempt was made to elicit the critical issues related to the rm-level innovation. Findings An Overview of ICT Companies in the West Midlands The West Midlands as a whole suffers from low investment in research and development (R&D) (Costello et al. 2007). Love et al. (2006) argued that low R&D can negatively inuence business performance. In fact, compared with other regions, large rms in the West Midlands perform acceptably, even with a low R&D input. Nevertheless, small rms
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performance is relatively poor (Love et al., 2006). Many researchers have echoed the ndings (Costello et al., 2007; Leitch, 2006) that innovation and R&D are absolutely essential for an SME or an industry to survive and maintain competitive advantage. The ICT Cluster Directory Survey is carried out each year in the West Midlands, measuring various factors surrounding ICT companies. In 2007 it revealed that the region has over 3,000 rms in the ICT sector. Software companies are the largest activity sub-group, which accounts for about 42 per cent of all cluster companies. The survey also indicates that The majority of rms commit to innovation, with 43 per cent of companies directly involved in R&D. Indeed 65 per cent of rms launched at least one new product/service within the six months prior to the 2007 survey. This high percentage, on the one hand, shows that rms in the cluster engage with innovation. On the other hand, it implies the dynamics of the industry and market pressure. The 2004 ICT Cluster Directory Survey measured investment in innovation and Sharpe (2004) reports that at that time a third of ICT cluster companies invested at least 10 per cent of their sales turnover in R&D. Software development companies were recognised as the most R&D oriented, with 39 per cent investing over 20 per cent of their turnover in innovation. The statistics cited above reveal that most of the regional ICT companies take real actions in innovation. Their devoted effort has led to many positive outcomes, reected by improved business performance, optimised business processes, enhanced business efciency, expedited technology updating and increased employment requirement from the market. Yet, the survey also shows that small ICT rms in the West Midlands encounter barriers which may hinder their innovative venturing. These challenges include shortage of funds, lack of appropriate skills and incapability of capturing market needs (Sharpe, 2004). In the following, the innovation practices of the two ICT companies are illustrated, from which commonalities and idiosyncratic features demonstrated by the rms can be identied. These can be utilised to unveil the secrets of how the two rms approached their innovation champion crowns.
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Company A The origin of Company A can be traced back to a leading British car manufacturing company established in the 1960s. In 1996, having experienced a series of acquisition, merger and management buy-out, the IT department of this leading company eventually transformed to Company A. Since its foundation, Company A has dedicated itself primarily to simulation, which is a generic approach of modelling and forecasting business management practices and outcomes. In its twelve years colourful history, Company A has always been pioneering in simulation and has led the way in delivering operational applications with specic industries and public sector practice built in. At present, it has subsidiaries and partners in Europe, the Americas and the Far East, as well as a worldwide customer-base of more than 3500 companies. Company A is an innovation-oriented enterprise, whose innovation pace synchronises with the market evolution. At the initial stage, it focused on programming software to serve the manufacturing sector, in particular the automotive manufacturing sector. However, due to the complexity of its simulation products, the rm realised the need to offer consultation to their customers. In 2000, a consulting division was armed, with its initial service targeting at the manufacturing sector. Before long, not contented by the sluggish manufacturing industry, Company A extrapolated its consultancy service to the service sector because many organisations in the service eld shared the same concern over production efciency as manufacturing rms. Banks, police forces, manufacturing companies, oil companies, airlines and enterprises in defence and aerospace, and so on, soon became Company As customers. In fact, opening the new markets greatly broadened Company As competing landscape and created a massive space for it to survive and prosper. While enthusiastically expanding the service coverage, Company A further generated a technologylight version of software. With a timely grant subsidised by AWM (Advantage West Midlands), in 20052006 Company A innovated its new generation product, the java-based simulation tool, which has been swiftly recommended by many leading Independent Software Vendors (ISVs) because of its uniqueness. Individual-Level of Influence on Innovation The incumbent CEO, DJ, joined the company in 1997 as the Marketing Director, mainly responsible
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for the strategic development of the business and all product and solution developments. In 2005, it became clear that the business needed to make adjustments to respond to the market more actively. In September 2005, the executive board suggested that DJ should take over as the CEO and direct the rm. Therefore in term of tenure in position, DJ has been CEO for three years. Though only embarking onto the governing platform recently, DJ has abundant industrial experiences. Before joining Company A, he had been in European and US software companies for nearly thirty years. He had a robust technical background and then moved into consulting and business management positions during his employment with an American company where he established the mid range systems division as Managing Director, and through acquisition, worked in senior roles of a French company in Paris, and latterly IBM Europe. All these experiences in the industry proffered DJ profound knowledge and expertise in the industry and enabled him to push forward innovative initiatives. Under his stewardship, many strategic innovative transitions occurred. For instance, the launching of the new consulting service division in 2000, the extrapolation of the service from the manufacturing sector to new services sectors in 2004, and the development of the java-based simulation tool in 20052006. This evidence offers support to the conclusions of Kimberly and Evanisko (1981) and Damanpour and Schneider (2006). Organisational-Level of Influence on Innovation Within Company A, there is an innovation team (that is, human resources) committed to helping the executive board make decisions on the incubation and development of innovation. Guided by the business growth roadmap, the rm often incubates a number of ideas at each development period. The innovation team is therefore selective and galvanises the rm to consider innovating relevant, achievable and high value added products/services. For the initiative stocks, the team normally implements wide-ranging justication research, taking into account factors such as market demand, originality of the initiative and resources required. The team will then scrutinise the rms development capability, availability of nancial and human resources, delivery capability as well as the plan of how the business could support initiatives going forward. On average, every year the rm invests about 20 per cent of the total turnover in innovation (that is, nancial resources), which is conducive to the development of innovative
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products and services. This investment often covers the costs of market justication, product/service development and unforeseen risks. Nystrom et al. (2002) argue that organisations with more resources are more likely to invest in innovation. This argument can nd some empirical support from the current study. Company A had a hierarchical structure at its birth. With the time elapsing, it realised that the managerial hierarchy and bureaucratic culture stied innovation because of the poor communication and internal competition for limited resources. They believed that an agile and exible structure would be more appropriate and hence started to remove the middle layer management from the hierarchy. This is consistent with Miller (1988) and Lawrence and Lorschs (1967) argument that organic and decentralised organisational structure is suitable for innovation. Currently, Company A has about sixty employees, led by a small executive board. The management structure is at. Due to the organisational structure change, the previous culture this is the way it has to be done was replaced by a more interactive and participative ethos how do we get it done. Sleeves rolled up and making it happen turned out to be the new managerial behaviour code. Within the rm, innovative initiatives are supported and staff members are encouraged to initiate and develop new products and procedures. In fact, the management system, because of the structure change, became more innovation-oriented, informative and faster to respond to external and internal changes. Company A has monthly bulletins, quarterly company meetings and newsletters, and so on, disclosing both good news and bad news, especially those on innovation. In the literature, Chandler et al. (2000) indicate that the top management support is benecial to the creation of an innovation. This conclusion has solid underpinning in the current study. Furthermore, employees are embraced by the inclusive culture, Company A One Culture, which means one team. For each major innovative attempt, there is a highly committed development team working on it. Team members enjoy when progress in innovation is made and new achievements attained; they take actions when matters go astray. Immersed in this innovative, open and transparent working environment, staff members develop a strong sense of afliation and are highly motivated. Environmental-Level of Influence on Innovation The simulation market that Company A is dealing with is a high-tech domain with strong
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market dynamism. New products/services or new ways of developing simulation products continuously arise in the market. Under this condition, according to Miller and Friesen (1982), the company needs to innovate no matter whether it is willing or not. To achieve in-depth insights of the market uctuation and turbulence, Company A scans the market on a regular basis. Sometimes it resorts to external consulting companies such as Gartner and Forester to help them analyse the market and predict the future trend of simulation. Alternatively, it makes use of customer forums as a platform to collect information and interact with clients. The information collected is then referred to when the company outlines software technology roadmaps and product/service development plans over a relatively long term or when the rm reviews these schemes on an annual basis to incorporate market changes. The boundary of the battleeld Company A is involved in is blurry, whereas the competitors the rm confronts are changing constantly. Along the consulting direction, the rm competes with large corporate rms and chain consulting rms. Current competitors include LogicaCMG and IBM. For the simulation market, Company A encounters competition from the dominant software vendors, such as Promodel and Arena. In the java-embedded simulation tool market, the biggest competitor is Do It Yourself. In other words, the client companies may design their own simulation tools bespoke to their business processes. Company B Company B started its business journey from 2004. Since its formation, Company B has been dedicating itself to the fundamentals of innovation, high value and high performance. This commitment functions substantially. In its short but swiftly growing history, the company has launched a range of innovative logistics management systems and products, such as Warehouse Management System (WMS), Transport Management System (TMS), Pen2PC, PenPOD, Visualeyes and CandiTV and hence has been recognised with a number of regional and national awards and commendations. Recently the sales revenue of the rm broke through the 1 million barrier. The business is on its way transforming into a prestigious solutions and services provider to the logistics and service management market.

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Individual-Level of Influence on Innovation Company B was founded by entrepreneur KG, who was based in the West Midlands. He was educated in local universities and achieved an MA degree. Prior to the business formation, he worked for a Canada-based Public Limited Company (PLC) which had ofces in the UK and Australia. But the headquarters in North America and the division in Australia were not successful. In late 2003, it became clear that the entire business stagnated and the prots made in the UK branch were drifting away to subsidise the other two places. After careful exploration and strategic planning, KG nally decided to acquire the UK division and Company B came into being. KG has a sound technical background and achieved ample experiences by working as a Project Manager in the local council and as a director in the Canadian rm. He has knowledge about what direction of innovation should be followed and where to nd customers. More importantly, he always encourages staff members to develop new products and he himself plays an active role in the process. This is in line with Damanpour and Schneider (2006), Kimberly and Evanisko (1981) and Hambrick and Mason (1984) that industrially experienced and short-tenured business runners are more likely to innovate. Apart from rich industrial experiences, KG has developed a proven track record of helping leading blue-chip customers to choose appropriate technological tools to improve efciencies and customer services. Indeed, it is KGs experiences and sensitivity to the market that helped the business overcome many hurdles in its life. For instance, shortly after its inception, Company B encountered the challenge that the two largest clients that the company was working with were both subject to acquisitions. The acquisitions and the restructuring of staff members within those rms obliged Company B to experience a serious downturn for a period of 11.5 years. As a response to this decline, KG showed staff members where to nd new customers as well as ventured to enhance the companys capability in new product development. Fortunately, after a short term hit, Company B found that those two ex-clients were acquired again by logistics rms that were interested in products and services provided by Company B. Relationships were therefore reconstructed. In addition, the rm also commenced to benet from the marketing strategy recommended by KG. During the short term recession period, the rm has managed to secure about a dozen key customers plus thirty to forty fringe customers, effectively moving away

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from the over-reliance on a few customers. Alongside these positive market shifts, the investment in developing new products galvanised by KG also started to pay off. An ideal product mix including six high technology products gradually arose with remarkable growth potential. Organisational-Level of Influence on Innovation Since its foundation, Company B has committed itself heavily to innovation. The origins of the rm were in warehousing and transportation management systems. WMS is a warehouse management solution, offering greater control and accuracy of inventory to customers. TMS, on the other hand, is integrated in the chosen WMS and can improve the efciency and accuracy of moving goods from the shipping dock to their onward destination. Pen2PC, another hi-tech product recently innovated by the company, combines a digital pen and a mobile phone. Using Anoto digital technology, it is able to recognise handwriting and read barcodes. It can also transmit images and handwritten text and convert them into computer readable text. PenPOD, similar to Pen2PC in technology, allows delivery companies to print their own delivery notes as usual, but replacing normal pen and paper with superior digital alternatives. In 2007, the increasing concern over security of lone workers in the society further kindled Company Bs innovative spark, Visualeyes. The device, disguised as an identity badge holder, is designed to be used by lone workers involved in vulnerable situations. When the staff are threatened, abused or attacked, they can press the button at the back of the device to trigger an alert back to the remote monitoring centre. On the other hand, users can activate an alert to the centre when they enter a premise, in which the device must be reset periodically to prevent hazardous situations. In early 2008 the companys latest innovation, the CandiTV system, had its debut. The new product was triggered by the rms observation that recently there had been exponentially increasing usage of mobile phones. Hence the idea emerged, attempting to use mobile phones as remotes to interact with TV screens available in public places. The newly innovated CandiTV system nally satises this desire by enabling people out-of-home to navigate the services available on the public facing screens by using a mobile handset. On the other hand, retailers, advertisers, manufacturers and service providers are able to contact customers through the mobile numbers recorded by CandiTV. Due to the originality of the technology, the company is applying for world-wide patents.

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On the companys priority list, innovation has always been on the top. Indeed, the rm is excited by new technologies, and new products are positively perceived as being able to offer the business leading edges. KG, the managing director, commented that we are developing new products all the time. This is the strength of the business in the respect that it makes the business less dependent on any particular product and consequently low risk. Each year, more than 30 per cent of the sales revenues as well as signicant human resources were invested in R&D and new product development. This fact supports the nding emerging from Thornhill (2006) and Kogut and Zander (1992) that nancial and human capital input are critical to innovation. Given the fact that the rm was only established in 2004 and a large number of new products were innovated in the four-year period, the company has made remarkable achievements along the innovation trajectory. Company B has a product-centred structure. Staff members are mainly structured according to the product development directions, such as warehouse management division, digital pen division, lone worker division, CandiTV division, and so on. This structure is conducive to communication, where team members sharing the common language and the understanding of products and the relevant markets are able to communicate effectively. This organisational conguration again is consistent with the suggestion of Miller (1988) and Lawrence and Lorsch (1967). Currently, the company has about 20 employees led by three directors, respectively responsible for general management, technology management and nancial management. The general and technology directors are regarded as the brain of the organisation, who are steering the business innovation and assuring that technically the business remains ahead of the competition. The rm is immersed in an innovation atmosphere. The company always makes its innovation vision clear to its staff and invites them to help the rm achieve the strategic objectives outlined. On the other hand, the rm is keen to understand desires and motivations of employees to ensure that they can progress the careers in a way that they yearn for. For instance, the company actively commits itself to training provision. Recently it invested about 25,000 Euros on handwriting recognition software and a two-day intensive training package for its digital pen development staff. Some staff members are sponsored by the rm to register their master degree programmes with universities to enhance
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their innovation capability and capacity. In essence, the company is keen to promote and sustain an innovation culture to maximise opportunities for its staff and also the company itself. Environmental-Level of Influence on Innovation The market Company B positions itself in is highly dynamic. Facing relentless competition in the market, modern businesses often have to innovate to maintain their status. More importantly, they need to have more than one inuencing product/service in order to achieve or retain exibility to manoeuvre. Company B is not exceptional to this end, which offers evidence to Eisenhardt and Martin (2000) and Miller and Friesen (1982). Indeed the rm demonstrates superior competitive capacity by having six products, each of them situated at different stages of the product life cycle. WMS and TMS are positioned in a saturated market. There is little space for further innovation. Notwithstanding this fact, the rm perceives WMS and TMS as cash cows that constitute the business foundation. Altogether the two systems contribute about 40 per cent to the overall sales revenue. The competition strategy that Company B adopts for these two systems is primarily related to speed and costs. If a call is received, the rm can install a customised and cost-competitive system for customers within two or three days, well ahead of their larger competitors two to three months duration. The digital pen technology has seen increasing acceptance in the market in the past few years. From the companys perspective, Pen2PC and PenPOD are classic rising stars, full of potential. For these promising products, the rm relies on the differentiation strategy in that the business not only tenders a magical pen to customers, but collaborates with them to integrate the pen technology into their working infrastructure to maximise the potential. Similar to Pen2PC and PenPOD, Visualeyes is a rising star. Nevertheless, in the marketplace a number of enterprises are selling almost exactly the same hardware device. The strategy used by the rm is by designing innovative software that enables customers to have a full visibility of what occurs in the eld, whereas the solutions provided by competitors are often incomparable. Amongst the hi-tech products Company B hitherto has launched, CandiTV undoubtedly is the youngest and most innovative. The rm is condent about the products potential as a result of its understanding of the market and the broad usage of mobile phones in the public. In this arena,
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Company B is the rst mover and there are no direct competitors in the market. The closest competing technology or alternative technology is Bluetooth, which is an infrared-based package. At present, the market for CandiTV is still premature to predict and to a great extent, the market share of CandiTV is dependent on the outcomes of the campaign against the infrared and text-based services. The market Company B engages with has a high level of uncertainty. The rm has a strategic development plan over a long term horizon. Nonetheless, to capture market uctuation and turbulence, the rm scans the market on a regular basis and the results of scanning are utilised to inform strategic planning and make appropriate adjustments. In the scrutinising exercise, strategies and performance of existing competitors, behaviour and motivation of new competitors and barriers against new products market entry are all included, which may help the rm in decisionmaking. KG stated that we are a relatively small organisation competing with large international corporations. We can never afford to stand still. We constantly have to be looking at the competitors, new technologies and ways of differentiating ourselves. This statement ideally aligns with the conclusions from Miller and Friesen (1982) and Freel (2005). Discussion To recapitulate, innovation has been broadly studied in many different elds and at different levels of analysis. This article (a) examines factors that may inuence innovation at individual, organisational and environmental levels; (b) scrutinises the inuence of these factors on innovation. It adds to existing innovation studies (Damanpour & Schneider, 2006; Van de Ven et al., 2000) by providing empirical evidence and contextualising the relationships between various factors and innovation in the SME sector (see Table 1). Cross-Case Comparisons Individual-Level of Influence on Innovation The two ICT companies share many commonalities in innovation practices. Both of them are directed by experienced top executives who have been in the position for a relatively short term. DJ (CEO of Company A),
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TABLE 1 Individual, Organisational and Environmental Characteristics of the Two Innovation Champions Organisational Characteristics Resources Invested in Innovation Business Structure Business Culture Dynamic market About 20% of Flat, organic, annual turnover and exible Environmental Characteristics Market Industry Type Dynamism Simulation industry (high-tech eld, uncertain environment) Dynamic market Data management industry (high-tech eld, uncertain environment)

Individual Characteristics of CEOs

Tenure in Position

Industrial Experience

Company A 3 yrs

Abundant

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Company B 4 yrs

Abundant

Innovationoriented, participative, and interactive About 30% of Product-centred, Innovationannual turnover organic, and oriented, exible participative, supportive

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beyond his robust technical background, has achieved managerial experiences through working as senior executive of European and US software companies. Similarly, KG (Managing Director of Company B) has acquired his experiences and expertise through working in a Canadian software company and the local council. Both of them are energetic, entrepreneurial and willing to take calculated risks to innovate. For example, in 2004 DJ drove Company A to diversify its simulation services from traditional manufacturing sector to wide-ranging service sectors. KG, on the other hand, since 2006 started to lead the rms exporting initiatives under the guidance of the UK Trade & Investments Passport scheme, although the business did not have any internationalisation experiences in the history. The evidence achieved through case studies conrms the ndings of Damanpour and Schneider (2006), Kimberly and Evanisko (1981) and Finkelstein and Hambrick (1996) that experienced and short-tenured top managers are more likely to be involved in innovation. Experienced executives, before implementing innovation, may execute detailed market research, evaluate businesses strengths and weaknesses and make judgements whether the innovation to be implemented is appropriate for businesses. In the innovation process, experienced executives may also enable resources allocation, address conicts arising between different working units and motivate staff members involved to maintain enthusiasm and passion. Organisational-Level of Influence on Innovation Both companies have invested signicant resources in innovation. Within Company A there is a team responsible for innovation activities and initiatives and the rm on average spends about 20 per cent of its sales revenue to support R&D. Parallel to the emphasis on R&D, Company A also pays much attention to market scanning. Through collecting market information collection, the rm can always sense the market pulse and make decisions accordingly. This is the reason why the rm can develop a set of popular simulation products/services exceptionally accepted by the market. The fact that the rm has a world-wide customer-base of more than 3,500 companies is further evidence of business success. Company B, in a similar vein, is enthusiastic about new products development. Guided by the organisational philosophy we cannot stand still, the rm invests 30 per cent of the sales turnover into innovation. In a four-year
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period, Company B successfully launched six major data management products, well ahead of other competitors in the industry. Indeed, new products developed through innovation are valuable, rare, inimitable and non-substitutable resources (Barney, 1991) and have enabled the two companies to achieve competitive advantage and further enhanced their market position and the protability level. Companies A and B have commonality in terms of business structure, both in a at and organic pattern. Company A had a hierarchical structure at the early stage, due to its size. Nevertheless, the operational practices thereafter proved that the mechanistic and hierarchical arrangement could not satisfy the businesss innovation requirement. Specically, the quality of communication was poor. Through restructuring, both accuracy and speed of communication in Company A improved. The top management also became more interactive and committed in innovation. Company B, in variation from Company A, structures the business based on products. Staff members who have the similar interests and expertise are grouped together. One major advantage of this arrangement is the communication effectiveness. In this structure, innovation can be more promptly initiated and implemented to respond to market changes. In addition, since the product-based groups focus on certain products for a relatively long term, the experiences and expertise developed through practices are more comprehensive and specialised. Judgements made therefore are more accurate in reflecting market development and fluctuation. Damanpour and Schneider (2006) and Miller (1988) indicate that organic, exible and decentralised structure is conducive to innovation. The conclusion has pragmatic support from the two companies. Damanpour (1991) and Dewar and Dutton (1986) indicate that senior executives may inuence innovation by creating a climate favourable towards innovation. Mumford (2000) suggests that senior executives favourable attitude to innovation can build up staff members condence and provide support to employees for proposing new ideas. Damanpour (1991) further argues that participatory work environment facilitates innovation by increasing organisational members awareness, commitment, and involvement (p. 558). Company As culture emphasises on participation and both senior executives and junior members are participative in innovation. Sleeves rolled up and making it happen are the organisational behaviour code. Inuenced by this culture, the rm often
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has an overow of innovation initiatives and needs to form an innovation team to lter them through. Company B has a similar innovation-conducive culture. Under the governance of three innovation-oriented directors, the rm has a strong intention to innovate. Within a relatively short period, the company has developed a competitive mix of six products. This product landscape offers the rm leading edges. Nonetheless, the wide product range has also caused the concern that the rm is somewhat over-stretched. Environmental-Level of Influence on Innovation Miller and Friesen (1982) identify that the external market with a high level of uncertainty is likely to compel rms to introduce new products, services, or processes to safeguard their market position. On the other hand, in a relatively stable market, businesses are more likely to rely on existing expertise to operate (Eisenhardt & Martin, 2000). Companies A and B both are involved in dynamic markets. In the simulation industry, there exists great variability. New products and services continuously emerge and Company A constantly faces challenges raised by competitors, such as IBM, LogicaCMG, Promodel, Arena and a number of smaller sized ICT companies. Innovation therefore seems to become a strategy that the rm can rely on for its survival or prosperity. Indeed, the years 2000 and 20042006 have seen signicant innovation outcomes. In the data management industry, Company B encounters similar pressure. In each of the product domains Company B focuses on, such as. warehouse management system, digital pen, visualeyes, and so on, there exist erce competitors. This drives the rm to innovate on a regular basis and differentiate. Visualeyes and CandiTV are representatives of recent innovations. Implications for Policy Makers The above described case studies have demonstrated how small ICT businesses master their innovation practices. Readers may cast a glance at how a small company can survive and succeed in an increasingly competitive market through innovative venturing and also recognise what impact various factors can have on innovation. In light of the empirical evidence, we further discuss the implications as follows, aiming to
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perpetuate the development of both macro-economic and micro-economic climates conducive to innovation. Strengthening Entrepreneurs Capability and Capacity in Innovation Management An innovation management gap often exists in small rms, which is a reection of problems including failure to realise the benets of innovation, lack of resilience to innovation ideas, poor assembly and analysis of information in relation to innovation, lack of capability to manage innovation, inability to allocate sufcient nancial or human resources to execute innovation, and so on. Sharpe (2004) shows that 28 per cent of the surveyed managers nd difculty in managing the innovation process. In the current study, results indicate that one of the key success factors of the two rms is that both have an experienced top executive, who is open-minded and demonstrates superior innovation management capability and capacity. Therefore we suggest that government and those agencies aiming to support SMEs development should consider delivering mentoring and advisory services to innovation-oriented rms. Training and education should be organised and delivered to improve and enhance entrepreneurs competence in managing innovation. Facilitating Financial Support for Innovation Innovation can be a risk-taking journey. To subsidise development of new initiatives where outcomes are unpredictable is problematic, specically for small sized rms where nancial resources are limited. The ICT Directory Survey reports that 58 per cent of West Midlands ICT SMEs believe nance and the risk and costs of launching new products are major barriers to innovation. The current study aligns with the nding arising from the survey, indicating that sufcient nancial investment is the foundation of innovation success. Hence we suggest that the government should consider sketching nance supporting schemes, with the aim to offset nancial risks that small rms experience during their crucial development stages. The schemes may have a nancial supporting range of 20,00050,000 (Sharpe, 2004), available for SMEs to bid through public processes.

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Constructing Innovation-Conducive Culture and Infrastructure Educational programmes on innovation and entrepreneurial business administration can be designed and delivered by governments and agencies. Programmes should be tailored to meet aspirations of small business managers and address strategic problems that may be encountered in their innovative venturing. The current study shows that organisational culture and structure have impacts on innovation outcomes. Thus educational programmes can be outlined to help entrepreneurs tune organisational climate and alter business structure to t for innovative venturing. In addition, networking between innovation-oriented rms should be encouraged. Dialogues between rms from different industrial backgrounds and cultures may facilitate entrepreneurs in deepening their understanding of innovation, sharing experiences and lessons and designing more suitable mechanisms to serve the needs of growth inspired small rms. Establishing the Enterprise Innovation Bureau Small business innovation bureaus could be established focusing on supporting SMEs innovation. Such ofcial departments can on the one hand provide general guidance to SMEs on market uctuation and the trend of industry development. On the other hand, they can offer specic support to rms, especially those that are young, by establishing incubators. Firms located in the incubators may enjoy nance and taxation support, whereas they may further save their operation costs by sharing administrative facilities. In addition, the innovation bureaus can facilitate network construction between universities and businesses to promote knowledge transfer and commercialisation of academic research. Conclusions Research on small business innovation remains immature, although the interest in the domain has continuously increased recently. Motivated by the belief that the empirical qualitative approach to innovation may result in advanced understanding and improved knowledge, this study examines innovation and the complexity of innovation management through two case studies. The research, although not suitable for widespread generalisation due to its

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intrinsic nature, does shed light on innovation in the small business domain and highlights a number of factors that may inuence innovation outcomes. Future studies could be further implemented along a quantitative direction to validate the ndings arising from the current study and other qualitative studies. Indeed, more work is warranted before one can hope to develop domain-specic theories pertaining to the small business innovation. Note
1. The authors sincerely thank the ICT Cluster, Advantage West Midlands (AWM) for its generosity in sponsoring this research project.

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