Journal of Entrepreneurship 2009 Wang 65 93

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http://joe.sagepub.com/content/18/1/65The online version of this article can be found at:

DOI: 10.1177/097135570801800104

2009 18: 65Journal of EntrepreneurshipYong Wang and Pat Costello

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

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The Journal of Entrepreneurship, 18, 1 (2009): 6593SAGE Publications Los Angeles/London/New Delhi/Singapore/Washington DCDOI: 10.1177/097135570801800104

An Investigation into Innovationsin SMEs: Evidence from the

West Midlands, UK1

YONG WANG AND PAT COSTELLO

This article focuses on innovation in small businesses. Specifically, the objectives of the

paper are twofold: a) to explore the impact of individual features, business resources,

organisational culture, structure and market dynamism onfirm-level innovation;b) to develop insights into innovation in small and medium enterprises (SMEs). Theresearch procedure follows Yins (1994) case method approach. Two Informationand 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 sufficiency offinancial and human resources. Furthermore, an organisational

culture supporting new product development and an innovation-conducive structure/

mechanism influences the innovation outcomes. Evidence also reveals thatfirm-

level innovation will be influenced 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 forbusinesses. Under the conditions of increasingly intensified globalisation,fast changing technological landscape and continuous market and customer

demands for new products/services, both academics and practitioners agreethat 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 understandwhat policy initiatives and infrastructure may trigger innovation, whatorganisational culture is conducive to innovation and what resourcesneed to be invested to instigate innovation. The past two decades have

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66 /Yong Wang and Pat Costello

The Journal of Entrepreneurship, 18, 1 (2009): 6593

witnessed innovation research gathering momentum and the total quantityand quality of research undertaken in the innovation domain have beenascending (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 playingan active role in developed economies as well as emerging economies.Academics, practitioners and policy makers are not able to portray an un-ambiguous picture of how innovation is catalysed, initiated, developedand sustained in the small business realm.

The purpose of this was to primarily explore innovation in SMEs.Specifically, we intended to understand the impact of market dynamism,organisational resources, business structure, culture and entrepreneurscharacteristics on firm-level innovation. The paper commences with a

brief review of the literature, focusing on innovation in small-sized firmsand the influence of individual, organisational and environmental factorson innovation. By building upon earlier literature, a theoretical frameworkabout innovation and its internal and external determinants are proposed.Empirical data from two small Information and Communication Tech-nology (ICT) companies in the West Midlands are presented. Through

comparing and contrasting empirical evidence, this explorative papershows that business innovation is dependent on the availability and suf-ficiency of both financial and human resources. Furthermore, results dem-onstrate that an organisational culture supporting new product developmentand an innovation-conducive structure/mechanism will influence the in-novation outcomes. Evidence also suggests that firm-level innovation will

be influenced internally by entrepreneurs experiences and externally bymarket dynamism. Implications based on the findings arefinally elaboratedand future directions of research are highlighted.

Theoretical Background

The realm of innovation is broad and the boundary of this territory hasonly been vaguely defined (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 structureor administrative system, or a new plan or programme pertaining to



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An Investigation into Innovations in SMEs/ 67


organisational members (p. 556). From this, he further defines innovationas adoption of an internally generated or purchased device, system,

policy, programme, process, product, or service that is new to the adoptingorganisation (p. 556). This wide-ranging definition is exceedingly in-clusive and incorporates different types of innovations in relation to

business operations.Extant research shows that organisational innovation is influenced 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 thefoci of these studies and identified that most research on innovation atthe individual level focused on psychology, at the organisational levelon management and at the environmental level on economics. At the in-dividual level, top managers especially those of smaller sized firms are

believed to be influential on innovation (Damanpour & Schneider, 2006).These companies are often orchestrated by single dominant personnel withcentralised authority (Poza et al., 1997; Schein, 1983; Sharma, 2004). S/heusually establishes a paternalistic system; challenges to this authority are

virtually unheard of (Sharma, 2004). Thus, the centralfi

gures personalcharacteristics will to a great extent influence organisational climate foror against innovation (Damanpour & Schneider, 2006; West & Anderson,1996). At the organisational level, innovation is often perceived as a stra-tegic choice or a firm-level behaviour which is an outcome of businesscharacteristics (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 innovationmay 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 oninnovation. Irrespective of individual, organisational or environmentalorigin of the impetus for change, innovation is often a means that firmsresort to create or sustain competitive advantages. In the following sec-tion, key factors reflected in the literature are reviewed, respectively atindividual, organisational and environmental levels, aiming to develop atheoretical 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 influence business strategiesand operations (Damanpour & Schneider, 2006; Elenkov et al., 2005).They may direct the firm in a way to reflect their personal values and

beliefs. For instance, in a qualitative study of Spanish family firms, Garcia-Alvarez et al. (2002) observed that those founders who prioritise familyover business encourage their successors to join the firm at a youngage and constrain business growth. On the other hand, founders whovalue business over family encourage the young generation to acquireformal education and experience outside the business before they jointhe firm. In the innovation literature, top managers personal features,such as managerial tenure and industrial experience, are recognised to beassociated 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 in-formation may become increasingly narrow and restricted, and theinformation is more finely filtered and distilled (p. 82). The emaciatedinformation channel may isolate the business and eventually put off thefirm from innovation. In a similar vein, Hambrick and Mason (1984) andHuber et al. (1993) argued that long-tenured business runners are morelikely to accept the firm as it is. They feel comfortable with their socialnetworks, business processes and products/services, and are reluctant toadopt new approaches to orchestrate the firm.

Experience

Different from tenure in position, senior managers industry experiencesmay contribute to innovation (Damanpour & Schneider, 2006; Reece &Costello, 2005). Ample industrial experience may offer managers oppor-tunities to recognise the value of innovation and inspire enthusiasm. Inaddition, experience may render managers knowledge on how to embarkon 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, evaluatethe pros and cons associated, justify the rationale of innovation and thenoutline comprehensive plans. Thus, the innovation-related risk will belowered and the financial loss, if unfortunately occurring thereafter, will

be less substantial.In the literature, researchers also posit other top managers demo-

graphic, psychological and behavioural characteristics as determinants oforganisational innovation. For example, senior executives age (Damanpour& Schneider, 2006; Huber et al., 1993), gender (Sonfield et al., 2001;Stelter, 2002), education (Hausman, 2005; Lee et al., 2005), willingnessto manage conflicts (Hausman, 2005) and ability in sharing control (Scott& Bruce, 1994; Timmons & Spinelli, 2004) have all been examined fortheir influential impact on organisational innovation climate. Nevertheless,the findings are often non-consistent and not convincing.

Organisational Antecedents of Firm-Level Innovation

In the competitive markets, SMEs often have to develop an innovation mind-set that allows them to exploit opportunities, create competitive advantages

and consolidate market share (Shane & Venkataraman, 2000). However,a firms innovation practice is not only determined by its willingness orintention, but subject to a number of organisational attributes as well(Damanpour & Schneider, 2006). Previous studies about innovation de-terminants 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 impacton innovation, compared with parameters at other levels.

Business Resource

The resource-based view (RBV) holds that firms are bundles of resources;resources are heterogeneously distributed across different firms inindustries, and that resources are imperfectly mobile which makesthis heterogeneity persist over time (Barney, 1991; Wernerfelt, 1984).

Nystrom et al. (2002) observed that organisations with more resourcesare 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 difficultiesin gaining access to financial resources. The dearth offinance is specificallyconspicuous where small firms lackfinancial records, asset security andequity base to command externalfinance support. Under this circumstance,small firms have to rely on their limited internal capital, such as personalequity (Peterson & Shulman, 1987), family loan and trade credit (Berger &Udell, 1998; Romano et al., 2000). Constrained by this financial anaemia,SMEs often have to tone down their voices or even put innovation asidetotally. Even if they obtain accesses to finance, many small businesses are

still incapable of innovating due to the poor stock of human resources andinadequate industrial and social knowledge (Thornhill, 2006). Kogut andZander (1992) describe knowledge as the critical resource that separates afirm from other competitors. In a similar vein, King and Zeithaml (2003)indicate that copious knowledge is able to facilitate a firm to take actionsin innovation. But bear in mind that knowledge is carried by its entity,

people. In other words, it is people with special calibre that innovate andmake businesses differentiated. In the real world, small firms often lose totheir large counterparts in the fierce competition in recruiting and retaining

high calibre technicians and talented personnel.

Business Structure

Burns and Stalker (1961) argue that business structure can be predomin-antly classified into two categories, mechanistic and organic. Businesseswith a mechanistic structure are often featured by a hierarchy of authority.For each functional position at different hierarchical layers, responsibilitiesare clearly defined and relationships between positions clarified. Staff mem-

bers working in this structure only need to comply with rules and regulations,whereas practices departing from the norm or against regulations are notencouraged. Under this circumstance, innovative venturing is not easy toinitiate. However, organic firms are often featured by a flat administrativestructure where staff members have flexibility to share responsibilities andduties. Rules and regulations are more flexible and roles and relationshipsless formally defined. Under this condition, innovative activities are morelikely to be observed. Miller (1988) indicates that many theorists sharethe 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 andbeliefs within a firm (Gudmundson et al., 2003, p. 3). Chandler et al.(2000), in a study of 429 SMEs, found that both supervisory guidance andreward system support were beneficial to the creation of an innovativeculture. Through clarifying business visions and setting up strategic ob-

jectives, senior executives can pass a clear message to staff membersand promote an innovation-oriented culture within the firm. They mayencourage 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 arepositive, recognition and reward will be made. According to Tushman andNadler (1986) to encourage innovation, organisations must base rewardson actual performance and make innovation an important dimension ofindividual and group performance (p. 85). Immersed in this culture, seniorexecutives may further resort to their networks to explore social, technicaland intellectual resources required by innovations and resolve conflicts

between organisational units to ease the innovation process.

Environmental Antecedents of Firm-Level Innovation

As a response to increasingly intensified globalisation accelerated tech-nological updating and continuously increasing demands for new productsor services, opportunities constantly arise in the market, stimulatingfirmsinvolved to respond. Innovation scholars confirm that the stimulus offirm-level innovation can come from external environment (Damanpour& Schneider, 2006; Thornhill, 2006). In fact, the few and only consistentfindings about stimuli in the innovation literature are associated with

business environment.

Market Dynamism

Dynamism refers to the degree of uncertainty and turbulence in a mar-ket or an industry (Thornhill, 2006; Dess & Beard, 1984). In a marketwith low dynamics, market or industry changes do occur, but alongroughly 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 industrialcompetitors) identifiable (Eisenhardt & Martin, 2000). Businesses in-volved are more likely to rely on existing knowledge and expertise tomanoeuvre. Therefore, the demand from the external environment forinnovation is often not positioned at a high level. Under this circumstance,new technology, new business structure and new pattern of operations dooccur, 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 andshifting (Eisenhardt & Martin, 2000). Businesses engaged therefore cannotsimply 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 absorbnew knowledge promptly. Ultimately they may achieve a fit in the newenvironment and generate new products/services suitable for the market.

Industry

The type of industry businesses engage with is related to the innovationintensity (Freel, 2005). Academics observe that if businesses are involvedin a high-tech industry, they are more likely to update their product/service

profile on a regular basis to cope with the market change. On the otherhand,firms engaging with a low-tech industry are not facing the innovation

pressure as high as their counterparts in the high-tech domains. They mayrely on a type of product/service, develop expertise and sustain their com-

petitive advantages over a relatively long term (Freel, 2005). In sum, pre-vious studies have examined the impact of organisational variables on

innovation as well as individual and environmental characteristics oninnovation. Based on the review of the innovation literature, key factorsat the three levels are extracted and depicted in Figure 1. This forms theconceptual framework, guiding the current exploratory research, whichaims to add to the literature.

Method

The research procedure follows Yins (1994) qualitative case study ap-

proach, the merit of which primarily lies in the potential to yield insights



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into business practices. Two ICT companies, winners of many innovationawards in the West Midlands, were approached to cooperate in the study.The emphasis of the research was to obtain detailed qualitative informa-tion on issues affecting innovation. Semi-structured interviews were per-formed with senior executives in the two companies, each lasting about1.52 hours. Interviewees were briefed on the purpose of the study and thetwo interviews covered the same interest areas. Apart from the interviews,secondary sources of information such as published articles, reports andwebsites were utilised. Whenever possible, data were triangulated toestablish validity. Through these, an attempt was made to elicit the criticalissues related to the firm-level innovation.

Findings

An Overview of ICT Companies in the West Midlands

The West Midlands as a whole suffers from low investment in researchand development (R&D) (Costello et al. 2007). Love et al. (2006) arguedthat low R&D can negatively influence business performance. In fact,compared with other regions, large firms in the West Midlands perform

acceptably, even with a low R&D input. Nevertheless, small firms

FIGURE 1

The Conceptual Model of Innovation Determinants

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performance is relatively poor (Love et al., 2006). Many researchers haveechoed the findings (Costello et al., 2007; Leitch, 2006) that innovationand R&D are absolutely essential for an SME or an industry to surviveand maintain competitive advantage.

The ICT Cluster Directory Survey is carried out each year in the WestMidlands, measuring various factors surrounding ICT companies. In 2007it revealed that the region has over 3,000 firms in the ICT sector. Softwarecompanies are the largest activity sub-group, which accounts for about 42

per cent of all cluster companies. The survey also indicates that

The majority offirms commit to innovation, with 43 per cent ofcompanies directly involved in R&D. Indeed 65 per cent offirmslaunched at least one new product/service within the six months

prior to the 2007 survey. This high percentage, on the one hand,shows that firms in the cluster engage with innovation. On theother 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 turnoverin R&D. Software development companies were recognised as themost R&D oriented, with 39 per cent investing over 20 per cent oftheir turnover in innovation.

The statistics cited above reveal that most of the regional ICT companiestake real actions in innovation. Their devoted effort has led to many posi-tive outcomes, reflected by improved business performance, optimised

business processes, enhanced business efficiency, expedited technology

updating and increased employment requirement from the market. Yet,the survey also shows that small ICTfirms in the West Midlands encounter

barriers which may hinder their innovative venturing. These challengesinclude shortage of funds, lack of appropriate skills and incapability ofcapturing market needs (Sharpe, 2004).

In the following, the innovation practices of the two ICT companiesare illustrated, from which commonalities and idiosyncratic features dem-onstrated by the firms can be identified. These can be utilised to unveilthe secrets of how the two firms 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 manu-facturing company established in the 1960s. In 1996, having experienced aseries of acquisition, merger and management buy-out, the IT departmentof this leading company eventually transformed to Company A. Since itsfoundation, Company A has dedicated itself primarily to simulation, whichis a generic approach of modelling and forecasting business management

practices and outcomes. In its twelve years colourful history, Company Ahas always been pioneering in simulation and has led the way in deliveringoperational applications with specific industries and public sector prac-tice built in. At present, it has subsidiaries and partners in Europe, theAmericas and the Far East, as well as a worldwide customer-base ofmore than 3500 companies.

Company A is an innovation-oriented enterprise, whose innovation pacesynchronises with the market evolution. At the initial stage, it focused on

programming software to serve the manufacturing sector, in particularthe automotive manufacturing sector. However, due to the complexity ofits simulation products, the firm realised the need to offer consultation to

their customers. In 2000, a consulting division was armed, with its initialservice targeting at the manufacturing sector. Before long, not contented

by the sluggish manufacturing industry, Company A extrapolated itsconsultancy service to the service sector because many organisations inthe service field shared the same concern over production efficiency asmanufacturing firms. Banks, police forces, manufacturing companies,oil companies, airlines and enterprises in defence and aerospace, and soon, soon became Company As customers. In fact, opening the new mar-kets greatly broadened Company As competing landscape and created

a massive space for it to survive and prosper. While enthusiastically ex-panding the service coverage, Company A further generated a technology-light version of software. With a timely grant subsidised by AWM(Advantage West Midlands), in 20052006 Company A innovated itsnew generation product, the java-based simulation tool, which has beenswiftly 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 solutiondevelopments. In 2005, it became clear that the business needed to makeadjustments to respond to the market more actively. In September 2005,the executive board suggested that DJ should take over as the CEO anddirect the firm. Therefore in term of tenure in position, DJ has been CEOfor three years.

Though only embarking onto the governing platform recently, DJ hasabundant industrial experiences. Before joining Company A, he had beenin European and US software companies for nearly thirty years. He had arobust technical background and then moved into consulting and businessmanagement positions during his employment with an American companywhere he established the mid range systems division as Managing Director,and through acquisition, worked in senior roles of a French companyin Paris, and latterly IBM Europe. All these experiences in the industry

proffered DJ profound knowledge and expertise in the industry and enabledhim to push forward innovative initiatives. Under his stewardship, manystrategic innovative transitions occurred. For instance, the launchingof the new consulting service division in 2000, the extrapolation of theservice 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 helpingthe executive board make decisions on the incubation and developmentof innovation. Guided by the business growth roadmap, the firm oftenincubates a number of ideas at each development period. The innovation

team is therefore selective and galvanises the firm to consider innovatingrelevant, achievable and high value added products/services. For the ini-tiative stocks, the team normally implements wide-ranging justificationresearch, taking into account factors such as market demand, originalityof the initiative and resources required. The team will then scrutinisethe firms development capability, availability offinancial and humanresources, delivery capability as well as the plan of how the businesscould support initiatives going forward. On average, every year the firminvests about 20 per cent of the total turnover in innovation (that is, fi-

nancial resources), which is conducive to the development of innovative



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products and services. This investment often covers the costs of marketjustification, product/service development and unforeseen risks. Nystromet al. (2002) argue that organisations with more resources are more likelyto invest in innovation. This argument can find some empirical supportfrom the current study.

Company A had a hierarchical structure at its birth. With the timeelapsing, it realised that the managerial hierarchy and bureaucratic cul-ture stifled innovation because of the poor communication and internalcompetition for limited resources. They believed that an agile and flexiblestructure would be more appropriate and hence started to remove themiddle layer management from the hierarchy. This is consistent withMiller (1988) and Lawrence and Lorschs (1967) argument that organic anddecentralised organisational structure is suitable for innovation. Currently,Company A has about sixty employees, led by a small executive board.The management structure is flat.

Due to the organisational structure change, the previous culture this isthe way it has to be done was replaced by a more interactive and partici-

pative ethos how do we get it done. Sleeves rolled up and makingit happen turned out to be the new managerial behaviour code. Within

the firm, innovative initiatives are supported and staff members are en-couraged to initiate and develop new products and procedures. In fact,the management system, because of the structure change, became moreinnovation-oriented, informative and faster to respond to external andinternal changes. Company A has monthly bulletins, quarterly companymeetings and newsletters, and so on, disclosing both good news and badnews, especially those on innovation. In the literature, Chandler et al.(2000) indicate that the top management support is beneficial to the cre-ation of an innovation. This conclusion has solid underpinning in the

current study. Furthermore, employees are embraced by the inclusive cul-ture, Company A One Culture, which means one team. For each majorinnovative attempt, there is a highly committed development team workingon it. Team members enjoy when progress in innovation is made and newachievements attained; they take actions when matters go astray. Immersedin this innovative, open and transparent working environment, staff mem-

bers develop a strong sense of affiliation 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 developingsimulation products continuously arise in the market. Under this condition,according to Miller and Friesen (1982), the company needs to innovateno matter whether it is willing or not. To achieve in-depth insights ofthe market fluctuation and turbulence, Company A scans the market ona regular basis. Sometimes it resorts to external consulting companiessuch as Gartner and Forester to help them analyse the market and predictthe future trend of simulation. Alternatively, it makes use of customerforums as a platform to collect information and interact with clients. Theinformation collected is then referred to when the company outlinessoftware technology roadmaps and product/service development plansover a relatively long term or when the firm reviews these schemes on anannual basis to incorporate market changes.

The boundary of the battlefield Company A is involved in is blurry,whereas the competitors the firm confronts are changing constantly. Alongthe consulting direction, the firm competes with large corporate firms andchain consulting firms. Current competitors include LogicaCMG andIBM. For the simulation market, Company A encounters competitionfrom the dominant software vendors, such as Promodel and Arena. In

the java-embedded simulation tool market, the biggest competitor is DoIt Yourself. In other words, the client companies may design their ownsimulation 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 arange of innovative logistics management systems and products, suchas Warehouse Management System (WMS), Transport ManagementSystem (TMS), Pen2PC, PenPOD, Visualeyes and CandiTV and hencehas been recognised with a number of regional and national awards andcommendations. Recently the sales revenue of the firm broke throughthe 1 million barrier. The business is on its way transforming into a

prestigious solutions and services provider to the logistics and servicemanagement market.



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Individual-Level of Influence on Innovation Company B was foundedby entrepreneur KG, who was based in the West Midlands. He was educatedin local universities and achieved an MA degree. Prior to the businessformation, he worked for a Canada-based Public Limited Company (PLC)which had offices in the UK and Australia. But the headquarters in NorthAmerica and the division in Australia were not successful. In late 2003,it became clear that the entire business stagnated and the profits made inthe UK branch were drifting away to subsidise the other two places. Aftercareful exploration and strategic planning, KG finally decided to acquirethe UK division and Company B came into being.

KG has a sound technical background and achieved ample experiencesby working as a Project Manager in the local council and as a director inthe Canadian firm. He has knowledge about what direction of innovationshould be followed and where to find customers. More importantly, healways encourages staff members to develop new products and he himself

plays an active role in the process. This is in line with Damanpour andSchneider (2006), Kimberly and Evanisko (1981) and Hambrick andMason (1984) that industrially experienced and short-tenured businessrunners are more likely to innovate. Apart from rich industrial experiences,

KG has developed a proven track record of helping leading blue-chipcustomers to choose appropriate technological tools to improve efficienciesand customer services. Indeed, it is KGs experiences and sensitivity tothe market that helped the business overcome many hurdles in its life.For instance, shortly after its inception, Company B encountered thechallenge that the two largest clients that the company was working withwere both subject to acquisitions. The acquisitions and the restructuringof staff members within those firms obliged Company B to experiencea serious downturn for a period of 11.5 years. As a response to this de-

cline, KG showed staff members where to find new customers as well asventured to enhance the companys capability in new product development.Fortunately, after a short term hit, Company B found that those twoex-clients were acquired again by logistics firms that were interestedin products and services provided by Company B. Relationships weretherefore reconstructed. In addition, the firm also commenced to benefitfrom the marketing strategy recommended by KG. During the shortterm recession period, the firm has managed to secure about a dozen keycustomers plus thirty to forty fringe customers, effectively moving away



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from the over-reliance on a few customers. Alongside these positive marketshifts, the investment in developing new products galvanised by KG alsostarted 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 thefirm were in warehousing and transportation management systems. WMSis a warehouse management solution, offering greater control and accuracyof inventory to customers. TMS, on the other hand, is integrated in the

chosen WMS and can improve the efficiency and accuracy of movinggoods from the shipping dock to their onward destination. Pen2PC, anotherhi-tech product recently innovated by the company, combines a digital

pen and a mobile phone. Using Anoto digital technology, it is able torecognise handwriting and read barcodes. It can also transmit images andhandwritten text and convert them into computer readable text. PenPOD,similar to Pen2PC in technology, allows delivery companies to print theirown delivery notes as usual, but replacing normal pen and paper withsuperior digital alternatives.

In 2007, the increasing concern over security of lone workers in thesociety further kindled Company Bs innovative spark, Visualeyes. Thedevice, disguised as an identity badge holder, is designed to be used by loneworkers involved in vulnerable situations. When the staff are threatened,abused or attacked, they can press the button at the back of the device totrigger 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 whichthe 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 thefi

rms observationthat recently there had been exponentially increasing usage of mobilephones. Hence the idea emerged, attempting to use mobile phones asremotes to interact with TV screens available in public places. Thenewly innovated CandiTV system finally satisfies this desire by enabling

people out-of-home to navigate the services available on the public facingscreens by using a mobile handset. On the other hand, retailers, advertisers,manufacturers and service providers are able to contact customers throughthe mobile numbers recorded by CandiTV. Due to the originality of thetechnology, 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 firm 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 pro-ducts all the time. This is the strength of the business in the respect thatit makes the business less dependent on any particular product and con-sequently low risk. Each year, more than 30 per cent of the sales revenues aswell as significant human resources were invested in R&D and new productdevelopment. This fact supports the finding emerging from Thornhill(2006) and Kogut and Zander (1992) that financial and human capitalinput are critical to innovation. Given the fact that the firm was only estab-lished in 2004 and a large number of new products were innovated in thefour-year period, the company has made remarkable achievements alongthe innovation trajectory.

Company B has a product-centred structure. Staff members aremainly structured according to the product development directions, suchas warehouse management division, digital pen division, lone workerdivision, CandiTV division, and so on. This structure is conducive to com-munication, where team members sharing the common language and

the understanding of products and the relevant markets are able to com-municate effectively. This organisational configuration again is consistentwith 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 managementand financial management. The general and technology directors areregarded as the brain of the organisation, who are steering the businessinnovation and assuring that technically the business remains ahead ofthe competition.

The firm is immersed in an innovation atmosphere. The companyalways makes its innovation vision clear to its staff and invites them tohelp the firm achieve the strategic objectives outlined. On the other hand,the firm is keen to understand desires and motivations of employees toensure 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 recognitionsoftware and a two-day intensive training package for its digital pendevelopment staff. Some staff members are sponsored by the firm to

register their master degree programmes with universities to enhance



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their innovation capability and capacity. In essence, the company is keento promote and sustain an innovation culture to maximise opportunitiesfor its staff and also the company itself.

Environmental-Level of Influence on Innovation The market Com-pany B positions itself in is highly dynamic. Facing relentless competitionin the market, modern businesses often have to innovate to maintain theirstatus. More importantly, they need to have more than one influencing

product/service in order to achieve or retain flexibility to manoeuvre.Company B is not exceptional to this end, which offers evidence toEisenhardt and Martin (2000) and Miller and Friesen (1982). Indeed thefirm demonstrates superior competitive capacity by having six products,each of them situated at different stages of the product life cycle. WMSand TMS are positioned in a saturated market. There is little space forfurther innovation. Notwithstanding this fact, the firm perceives WMSand TMS as cash cows that constitute the business foundation. Altogetherthe two systems contribute about 40 per cent to the overall sales revenue.The competition strategy that Company B adopts for these two systemsis primarily related to speed and costs. If a call is received, the firm can

install a customised and cost-competitive system for customers withintwo or three days, well ahead of their larger competitors two to threemonths duration.

The digital pen technology has seen increasing acceptance in themarket in the past few years. From the companys perspective, Pen2PCand PenPOD are classic rising stars, full of potential. For these promising

products, the firm relies on the differentiation strategy in that the businessnot only tenders a magical pen to customers, but collaborates with them tointegrate the pen technology into their working infrastructure to maximise

the potential. Similar to Pen2PC and PenPOD, Visualeyes is a risingstar. Nevertheless, in the marketplace a number of enterprises are sellingalmost exactly the same hardware device. The strategy used by the firmis by designing innovative software that enables customers to have a fullvisibility of what occurs in the field, whereas the solutions provided bycompetitors are often incomparable.

Amongst the hi-tech products Company B hitherto has launched,CandiTV undoubtedly is the youngest and most innovative. The firm isconfident 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 first mover and there are no direct competitors in themarket. The closest competing technology or alternative technology isBluetooth, which is an infrared-based package. At present, the marketfor CandiTV is still premature to predict and to a great extent, the mar-ket share of CandiTV is dependent on the outcomes of the campaignagainst the infrared and text-based services.

The market Company B engages with has a high level of uncertainty.Thefirm has a strategic development plan over a long term horizon. None-theless, to capture market fluctuation and turbulence, the firm scans themarket on a regular basis and the results of scanning are utilised to informstrategic planning and make appropriate adjustments. In the scrutinisingexercise, strategies and performance of existing competitors, behaviourand motivation of new competitors and barriers against new productsmarket entry are all included, which may help the firm in decisionmaking.KG stated that we are a relatively small organisation competing withlarge international corporations. We can never afford to stand still. Weconstantly have to be looking at the competitors, new technologies andways of differentiating ourselves. This statement ideally aligns with theconclusions from Miller and Friesen (1982) and Freel (2005).

Discussion

To recapitulate, innovation has been broadly studied in many different fieldsand at different levels of analysis. This article (a) examines factors thatmay influence innovation at individual, organisational and environmentallevels; (b) scrutinises the influence of these factors on innovation. It addsto existing innovation studies (Damanpour & Schneider, 2006; Van deVen 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,Orga

nisationalandEnvironmentalCharacteristicsoftheTwoInnovationChampions

IndividualCharacteristicsofCEOs

Organisa

tionalCharacteristics

EnvironmentalCharacteristics

Tenurein

Position

Industrial

Experience

Resources

Investedin

Innovation

Bu

siness

Structure

BusinessCulture

Market

Dynamism

IndustryType

CompanyA

3yrs

Abundant

About20%o

f

annualturnover

Fl

at,organic,

an

dflexible

Innovation-

oriented,

participative,

andinteractive

Dynamic

market

Simulationindustry

(high-techfield,

uncertainenvironment)

CompanyB

4yrs

Abundant

About30%o

f

annualturnover

Pr

oduct-centred,

or

ganic,and

fle

xible

Innovation-

oriented,

participative,

supportive

Dynamic

market

Datamanagement

industry(high-tech

field,uncertain

environment)



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beyond his robust technical background, has achieved managerial ex-periences through working as senior executive of European and USsoftware companies. Similarly, KG (Managing Director of Company B)has acquired his experiences and expertise through working in a Canadiansoftware company and the local council. Both of them are energetic,entrepreneurial and willing to take calculated risks to innovate. For ex-ample, in 2004 DJ drove Company A to diversify its simulation servicesfrom traditional manufacturing sector to wide-ranging service sectors. KG,on the other hand, since 2006 started to lead the firms exporting initiativesunder the guidance of the UK Trade & Investments Passport scheme, al-though the business did not have any internationalisation experiences in thehistory. The evidence achieved through case studies confirms the findingsof Damanpour and Schneider (2006), Kimberly and Evanisko (1981)and Finkelstein and Hambrick (1996) that experienced and short-tenuredtop managers are more likely to be involved in innovation. Experiencedexecutives, before implementing innovation, may execute detailed mar-ket research, evaluate businesses strengths and weaknesses and make

judgements whether the innovation to be implemented is appropriate forbusinesses. In the innovation process, experienced executives may also

enable resources allocation, address conflicts arising between differentworking units and motivate staff members involved to maintain enthusiasmand passion.

Organisational-Level of Influence on Innovation

Both companies have invested significant resources in innovation. WithinCompany A there is a team responsible for innovation activities andinitiatives and the firm on average spends about 20 per cent of its sales

revenue to support R&D. Parallel to the emphasis on R&D, Company Aalso pays much attention to market scanning. Through collecting marketinformation collection, the firm can always sense the market pulse andmake decisions accordingly. This is the reason why the firm can developa set of popular simulation products/services exceptionally accepted bythe market. The fact that the firm has a world-wide customer-base of morethan 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 firm

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 managementproducts, well ahead of other competitors in the industry. Indeed, new pro-ducts developed through innovation are valuable, rare, inimitable andnon-substitutable resources (Barney, 1991) and have enabled the twocompanies to achieve competitive advantage and further enhanced theirmarket position and the profitability level.

Companies A and B have commonality in terms of business structure,both in a flat and organic pattern. Company A had a hierarchical structureat the early stage, due to its size. Nevertheless, the operational practicesthereafter proved that the mechanistic and hierarchical arrangement couldnot satisfy the businesss innovation requirement. Specifically, the qualityof communication was poor. Through restructuring, both accuracy andspeed of communication in Company A improved. The top managementalso 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 groupedtogether. One major advantage of this arrangement is the communicationeffectiveness. In this structure, innovation can be more promptly initi-ated 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 com-

prehensive and specialised. Judgements made therefore are more accuratein reflecting market development and fluctuation. Damanpour andSchneider (2006) and Miller (1988) indicate that organic, flexible anddecentralised 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 infl

uence innovation by creating a climate favourable to-wards innovation. Mumford (2000) suggests that senior executivesfavourable attitude to innovation can build up staff members confidenceand provide support to employees for proposing new ideas. Damanpour(1991) further argues that participatory work environment facilitatesinnovation by increasing organisational members awareness, commit-ment, and involvement (p. 558). Company As culture emphasises on

participation and both senior executives and junior members are par-ticipative in innovation. Sleeves rolled up and making it happen are the

organisational behaviour code. Infl

uenced by this culture, thefi

rm often



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has an overflow of innovation initiatives and needs to form an innovationteam tofilter them through. Company B has a similar innovation-conduciveculture. Under the governance of three innovation-oriented directors, thefirm has a strong intention to innovate. Within a relatively short period,the company has developed a competitive mix of six products. This pro-duct landscape offers the firm leading edges. Nonetheless, the wide

product range has also caused the concern that the firm is somewhatover-stretched.

Environmental-Level of Influence on Innovation

Miller and Friesen (1982) identify that the external market with a highlevel of uncertainty is likely to compel firms 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 existingexpertise to operate (Eisenhardt & Martin, 2000). Companies A and B

both are involved in dynamic markets. In the simulation industry, thereexists great variability. New products and services continuously emerge

and Company A constantly faces challenges raised by competitors, suchas IBM, LogicaCMG, Promodel, Arena and a number of smaller sizedICT companies. Innovation therefore seems to become a strategy that thefirm can rely on for its survival or prosperity. Indeed, the years 2000and 20042006 have seen significant innovation outcomes. In the datamanagement industry, Company B encounters similar pressure. In eachof the product domains Company B focuses on, such as. warehouse man-agement system, digital pen, visualeyes, and so on, there exist fierce com-

petitors. This drives the firm 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 ICTbusinesses master their innovation practices. Readers may cast a glanceat how a small company can survive and succeed in an increasingly com-

petitive market through innovative venturing and also recognise whatimpact 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-economicclimates conducive to innovation.

Strengthening Entrepreneurs Capability

and Capacity in Innovation Management

Aninnovation management gap often exists in small firms, which is a re-flection of problems including failure to realise the benefits of innovation,lack of resilience to innovation ideas, poor assembly and analysis of infor-mation in relation to innovation, lack of capability to manage innovation,inability to allocate sufficient financial or human resources to execute in-novation, and so on. Sharpe (2004) shows that 28 per cent of the surveyedmanagers find difficulty in managing the innovation process. In the currentstudy, results indicate that one of the key success factors of the two firmsis that both have an experienced top executive, who is open-minded anddemonstrates superior innovation management capability and capacity.Therefore we suggest that government and those agencies aiming to sup-

port SMEs development should consider delivering mentoring andadvisory services to innovation-oriented firms. Training and education

should be organised and delivered to improve and enhance entrepreneurscompetence in managing innovation.

Facilitating Financial Support for Innovation

Innovation can be a risk-taking journey. To subsidise development of newinitiatives where outcomes are unpredictable is problematic, specificallyfor small sized firms where financial resources are limited. The ICTDirectory Survey reports that 58 per cent of West Midlands ICT SMEs

believe finance and the risk and costs of launching new products are majorbarriers to innovation. The current study aligns with the finding arisingfrom the survey, indicating that sufficient financial investment is thefoundation of innovation success. Hence we suggest that the governmentshould consider sketching finance supporting schemes, with the aim tooffset financial risks that small firms experience during their crucial de-velopment stages. The schemes may have a financial supporting rangeof 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 ad-ministration can be designed and delivered by governments and agencies.Programmes should be tailored to meet aspirations of small businessmanagers and address strategic problems that may be encountered intheir innovative venturing. The current study shows that organisationalculture and structure have impacts on innovation outcomes. Thus educa-tional programmes can be outlined to help entrepreneurs tune organisa-tional climate and alter business structure to fit for innovative venturing.In addition, networking between innovation-oriented firms should beencouraged. Dialogues betweenfirms from different industrial backgroundsand cultures may facilitate entrepreneurs in deepening their understandingof innovation, sharing experiences and lessons and designing more suitablemechanisms to serve the needs of growth inspired small firms.

Establishing the Enterprise Innovation Bureau

Small business innovation bureaus could be established focusing on

supporting SMEs innovation. Such official departments can on the onehand provide general guidance to SMEs on market fluctuation and thetrend of industry development. On the other hand, they can offerspecific support to firms, especially those that are young, by establishingincubators. Firms located in the incubators may enjoy finance and taxationsupport, whereas they may further save their operation costs by sharingadministrative facilities. In addition, the innovation bureaus can facilitatenetwork construction between universities and businesses to promoteknowledge transfer and commercialisation of academic research.

Conclusions

Research on small business innovation remains immature, although the interestin the domain has continuously increased recently. Motivated by the beliefthat the empirical qualitative approach to innovation may result in advancedunderstanding and improved knowledge, this study examines innovationand 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 domainand highlights a number of factors that may influence innovation outcomes.Future studies could be further implemented along a quantitative directionto validate the findings arising from the current study and other qualitativestudies. Indeed, more work is warranted before one can hope to developdomain-specific 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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