Monday, August 20, 2007

Service Innovation for SMEs

India is full of small & medium sized enterprises (SMEs). Today many of these firms are facing competition from global players or large companies. Typically these SMEs are run by the founders - who came up with a product or a service and they started the business. Over a period of time, the founders got fully engaged in running the business and they lost the focus on innovation. When a new competition emerges, founders of these SMEs are at loss - they do not have the time to innovate new products and all their waking hours are spent fighting against new competition, globalization and commoditization.

I have seen several enterprising persons who tried to innovate constantly - but in the end they were overcome by the forces of global economy. This story of SMEs is repeated all over the world - US, Europe, Asia, India et al.

Recently, I was asked by a owner of one such SME - " Given the fact that my business will be small - and can never grow to global scales, How can I innovate and be successful?" He makes and sells coffee powder in Bangalore. His line of business is now being threatened by giants such as Cafe Coffee Day, Barista, UniLever, Tata Tea & new competition such as Starbucks, Cafe Nero’s, McDonalds, etc. are around the corner.

Innovation Dilemma

The problem faced by the SME in Bangalore is vary familiar. The challenge must therefore be answered with innovation.

Given the risks of innovation and the amount of resources needed to sustain it, developing a new product line of gourmet coffee would be futile. Deep inside I knew the problem he was facing - he was caught in the middle of bloody Red Ocean & invariably he will be crushed if he stays put for long. I knew he needs to develop a Blue Ocean strategy. Discover a market place where he does not face competition at all.

Historically, These SMEs became successful through products. It is therefore natural for the founders to experiment with new product development. New product development is exciting - but it takes lots of work and the chances of success are slim. Given the level of Intellectual Property awareness among these SMEs, its doubtful that they would fully protect their innovation - thus becoming liable for cheaper imitation products. The best solution, therefore is to opt for service innovation. Innovating on developing innovative service or delivery to provide existing products to existing customers is definitely better.

Services today contribute to a large chunk of our economy. In developed countries, services account for more than 70% of the GDP. Given the vastness of the service domain, the scope of opportunity in services is equally vast. With ingenuity one can create immense competitive advantage. Innovations in business models, product delivery channels and customer experience can offer tremendous competitive advantages over global giants.

There are proven methods to lower the risks of innovation. For more details see: Minimizing Risks in Innovation

The coffee example

The coffee manufacturer in Bangalore - who sells commodity product decided to opt for the service innovation route - while keeping product improvements to be on par with the global giants. To begin with, he started offering custom coffee blends - where customers can get the kind of roast and the kind of blend they need. The coffee would be blended & roasted as per customer specification. This required quite some changes in the business models.

He also developed whole new range of coffee blends - spice blend, organic coffee, Brazilian Blend etc. These products could then be sold at a very high premium - at a price higher than that charged by Cafe Coffee Day or Tata Tea or Unilever. The choice of various blends of coffee and the ability to deliver these blends in small quantity - as low as 50gms for a premium price ensures higher profitability while avoiding direct competition from the global giants.

The second innovation he did was to enhance the customer experience. He tied up with several coffee estates in Kodagu ( about 250 Kms from Bangalore) and created a separate line of coffee estate tours. Customers could go and visit the estates where coffee is being grown. These visits will be arranged over the weekends and the customers have the option of buying coffee during the tour and after that tour in Bangalore. This service is similar to that of wine tasting tours conducted at Napa Valley in California.

This service innovation in form of enhanced customer experience will be unique and other global giants & local competitors will not be able to imitate that.

Both these innovations created an effective Blue Ocean strategy for this SME.

Implication to other SMEs

The opportunities for service innovation now also encompass innovations in business models, delivery channels, and the overall customer experience. Service innovation enables competitive advantage via better market position and greater responsiveness to customer requirements.

In order to maximize the benefits from service innovation:

  1. One has to have a clear understanding that service innovation is not the same as invention.
  2. Define Innovation in a broad context - look at all aspects of the value chain. Looking at all aspects of customer experience gives a wider scope for innovation.
  3. Consider all value adding areas such as: business models, brand names, distribution channels, product delivery, operations and also the entire customer experience.
  4. Look at other products/services that customers use along with your product or service. If possible identify areas where you can add value by forward or backward integration.

Such broad definition provide a vast opportunity for innovation. With this wide view - look for innovations; not just in products, also include services which provide commercial value.

Leadership for Innovation


Innovation always requires strong leadership. Creative ideas may come from all employees. , but to execute these ideas, one needs a strong leadership. Leadership for innovation at SMEs is no different than that in a large organization. In case of SMEs, the founders take up the responsibility for:

  • Giving direction to the innovation efforts
  • Encourage creative ideas from all employees
  • Provide resources, technology and empower individuals to innovate.
  • Encourage & promote cross-functional collaboration within the organization for innovation.
  • Eliciting customer view points - often times leaders must directly engage with the customer to get customer’s opinions or customer’s point of view. Ideally, the leader should be able to identify a few lead customers on which innovative ideas can be tried
  • Encourage innovation through out the organization.
  • Setup policies and procedures to harvest creative/innovative ideas. The policies must be clear to all. The selection criteria for implementing innovative projects must be fair and understood by all.
  • Have a clear cut policy that explains when to discontinue the innovation project. Make everyone understand why a particular project was/is killed.
  • Avoid opacity and vagueness in decision making.
  • Do not setup targets or mandates for innovation - leaders should not command people to be innovative. Instead encourage innovation.
  • Recognize & reward innovation publicly.
  • Talk passionately and candidly about innovation at all company events.

Founders and leaders at SMEs often find that these leadership behaviors that are needed for innovation is tough to develop and sustain. The main reason is that the owners/founders often believe that they "own" the innovation burden and hence they have the monopoly over all new ideas. Often times, the founders have come from a past work culture of ‘Command and Control" and that behavior led to the success of the firm till date. Unfortunately innovation does not flourish in a ‘Command and Control’ environment.

Founders/owners of SMEs often lose sight of customer’s point of view. With the initial success and focus on profitability - the founders often view the business solely from their own perspective. To regain the customer focus and to drive innovation it may be necessary for the leader to indulge in customer anthropology. (See Innovator’s tool box: Customer Anthropology). Ensure that the anthropology study includes the entire customer use cycle: from procurement to retirement.


Closing Thoughts

SMEs often find innovation as a big challenge. Most SMEs cannot cope up with market changes due to lack of successful innovation. Organizations that are successful are the one that fail the fastest. The leaders find it difficult to abandon practices that once made them successful and are unwilling to change. So when market conditions change, the old practices are no longer valid and the organization fails.

The challenges faced by founders of SMEs is similar to that faced in large organizations - only the scales are different. So the solutions are also similar - but SMEs have the size advantage. SMEs are inherently agile and can respond faster with innovation. SMEs suffer from lack of leadership for innovation and that leads to their failure. Most SMEs fail not because they were not agile - but because they did not have the right kind of leadership.

PS: In this article, I have briefly touched upon the leadership required for innovation. I welcome your comments and opinions on the same.

2 comments:

krishna said...

Arun, I came across your article by chance - I do agree with you about fostering innovations for SMEs - do you have a name for this coffee shop that you talk about? I'd love to learn more about other innovations across India.

Personally, I am passionate about innovations from India, particularly ones that are created from necessity. Let me know and I'd love to chat with you some time. I can be reached at krishnashrinivas at gmail.com


Krishna

Hardikbv said...

Hi Arun,

Nice Article.. I am Hardik from Gujarat; QMS Consultant and pursuing my doctoral level research on 'Role of Innovation in the Growth of SMEs..' from NMIMS University, Mumbai.

Wold like to chat with you on the topic. Also interested in pursuing joint research. I can be contacted on hardikbv@yahoo.com

Once again.. Good article..