A national event themed ‘Managing Innovation in SMEs – Practical Tools and the Role of Universities and Private Sector’ organised by Deutsche Gesellschaftfür Internationale Zusammenarbeit (GIZ) under the patronage of the University Grants Commission (UGC) was held recently at the BMICH. This workshop was part of the University Business Linkage (UBL) Program initiative, which aims to foster better relationship between universities and SMEs. Following is the extract of the keynote speech delivered by Prof. Dr. Utz Dornbergerof Leipzig University, Germany:

Innovation is a difficult game as we can understand. Statistics on innovation projects and enterprises show high failure rates. It depends on what type of innovation projects we are talking about; for example, when we are talking about radical innovation projects developing very new type of technologies, the failure rates goes up to 90%. That means only one of 10 projects is successful. 

Developing a product or service which has success in the market can be called as innovation and not only invention. Incremental innovation, which means developing of an existing product to the next level with new characteristics and new features, is something we do a lot in Germany. We develop a car every year but with a higher level, with more characteristics, more performance and so on and even then we have a failure rate of 50%. 

Innovation management, managing the innovation projects, is the management activity in companies which has the highest failure rate. We don’t have the same failure rate in marketing, human resources and production management. We have it only in innovation management and that tell us that what our challenge is, which from a SME perspective we have to find a way how they can spend their limited resources on successful projects. At the end of the day we are able to develop a product or new service, which has success in the market. How can we avoid spending our limited resources on unsuccessful projects?

Challenges in innovation management

Why do we have failure rates? What are the challenges in innovation management? There are four factors. First factor which is also the base for innovation is creativity. We need a lot of creative people developing new ideas for products and services. But that is only the base that helps us to get inventions. But to bring it to the market, we need the other three factors which are really important.

First one is time to market. In a company, the time we need to develop a product and bring it to the market is crucial because competitors can always be faster than us. We have to consider how much time we need. Very often a company cannot wait for the cooperation of universities to finish their research. We have to bring a product at a certain timeframe to the market because it is crucial.

The second factor we see is price to market. Today more innovative new products can be sold at a much higher price than the traditional product. Other companies from other parts of the world are also developing new products and offering this in the market. So we invest money in our innovation projects and return for investment, what we have to get at the end of the day, is finally having an impact on the price of the product we have on the market. When this is too high, when the customer is not willing to pay this amount of money for the product, then we have failure.

The third management aspect which also plays an important role is customer integration. Today we see more and more companies involve customers in their innovation activities. They want to learn from customers, they want to get insights from customers and they want to get ideas from customers to develop new products and services. We need new ideas and we need creative people developing these new ideas in our businesses and we need to think about how we create an innovation culture which promotes this innovative thinking inside our staff and have incentive/rewards systems in place to give the right motivation. 

Product lifecycles

That is just the base. Based on these ideas we have to consider the next aspect which is time to market. This can be explained using product lifecycle. They come to the market, they sell it more and more and then product gets mature, someday it gets old and it disappears from the market. In the beginning we have to invest in developing the new product and we hope selling this product in the market that we can get all the money back, our return for investment. Hopefully this is big enough so that the company can further develop their competitive position in the market.

The challenge is product lifecycles get shorter and shorter. For example in the IT industry the average lifecycle in the ’70s was 11 years. Twenty years later it was already five years. Today it may be two years. As we all know when we talk about cell phones or other type of electronics companies have to produce two new versions of their products into the market every year.

Our problem is our product lifecycles get shorter and as a company I have to understand this. I have to understand my product lifecycles in the sector I am working and I have to bring the next version at the right time to the market because if I come too late, my existing product already goes into the declining stage; I get less turnover, and the new product is not ready. So at the end of the day the whole company makes less turnover. So this timing is a very important issue and it becomes more complicated because we have increasingly less time to develop the next product versions.

That means today as a company I have to work on my product which I will bring in one year into the market but also I have to start on my innovation project to develop a product which I will bring into the market in two years or three years. When the products get more complex, development time also gets longer. So there might be a situation where you will take two years to develop a product but we can sell it for only one year. This is of course a big challenge for SMEs in many perspectives on how to manage it in best possible way.

Strategic decision

Another sector which is related to time to market is the strategic decision. A company always has to think ‘what is my strategic orientation?’ and whether I want to be a leader in my particular sector or a follower. A leader has advantages; for example, first in the market with new products, can set certain type of standards in the market, can approach first customers, etc. Follower also has advantages; for example, a company which chooses to be a follower can copy from the leaders, can bring a product similar to the competitors in the market, maybe at a lower price, with certain modifications. This can be also a successful strategy. But what is important for a company is to decide whether to be a leader or a follower in the market.

So time is the first important factor. When a company comes late into the market, and the projects takes too long, meanwhile the competitors will be faster and the company will lose market share. That finally is one of the most important causes for failures in the innovation projects. Second factor; price for markets. A company whether it’s just starting or not, always has to think about budget, how much money I can spend. In my experience, normally in an innovation project, it is always more expensive than you thought at the beginning.

I will take an example from Germany. Not everything in Germany is perfect. It was at a time when roof of the Olympics Stadium in Munich was built. This was innovation at that time because it was the first ever time a roof was made out of ‘plastic-glass’. Real costs were 860% higher than planned costs. However in this particular instance, the German Government provided financial support. But consider this happens to a company. In a lot of cases it can simply lead to bankruptcy. They will never be able to get back all the money that they invested in developing the new product by selling it in the market.

So this is a very important issue to consider that how we plan our budget for the innovation projects and how we control our budgets because problems can always happen in innovation projects. It can be technical problems, which we might not see at the beginning. But they appear and we have to manage it, we have to add more resources and we have to deal with this and control it. Sometimes it’s even better to stop an innovation project because when it gets too expensive, it makes no sense to further waste money which we will never get back by selling the product in the market.

 

Financing innovation projects

This also tells us something more important about financing innovation projects. It shows why especially SMEs need public support in financing innovation projects. When you look around world, Europe, Asia for example in lot of cases you see very strong financial instruments including grants providing up to 50% from the government side to support innovation projects in companies. This is in order to manage this problem. Because it is very risky from a company perspective, from SME perspective to take limited resources or add more resources when the project is not working well and finally when product comes to the market, you will not be able to get your money back. This is the reason why lot of companies says no to innovation saying ‘it’s too risky for us, it is better to invest money in marketing then at least we can predict what would be the potential success of this investment’.

In innovation it is much more complicated and we never know if we will really be able to develop a new product/service with characteristics which we plan. So this aspect of funding of innovation project and at the end of the day coming up with a product with a competitive price in the market that still allows us to get a return for investment is important second challenge. 

Customer integration

The last challenge is customer integration. Most of the big companies believe that customers we have, we must use them. They are source of creative ideas, they can tell us what they need, what they will buy in future, so we should understand their needs, take their ideas in order to plan and develop our new products. For this we should use tools like communities and the internet to collect these ideas.

I personally think SMEs should also explore these new ways. SMEs also have customers and they can also use IT tools to collect these information to encourage their customers to get involved in innovation activities. We are not talking about consumers. We are talking a lot about business to business relationships. 

Managing the process

From a management perspective, we have to manage the process; at the right time, with the right costs, so that we are able to deliver the final product and launch it successfully in the market. It needs to be structured in stages. You have early stages where you analyse customer requirements, opportunities from technology side and develop ideas.

Then come the first gate; a decision stage where you have to decide whether you want to go forward or not. Do we have the right idea or not. Then when we decide to go forward and develop the concept, we make the project plan, budget planning and then comes the second gate; should we go forward or not. If we have a feasible project developed, it should be implemented in the new product development stage.

Why do all this? Why do we need to have these gates? It has to do with the fact that in innovation management, we should always control what we are doing and when we are not going in the right way, it is better to stop or better to go back and find a different way which allows to a successful product or service. So we need to check what we are doing. It reflects a German and Japanese way of thinking. When we have complex issues, and innovation management is a complex process, let’s structure it. Let’s make it in steps. Step by step, check the first step, do we get the right results? That is a way of dealing with complexity and getting higher success rates in our innovation projects.

Innovation today 

Innovation today is not only to develop new products, to improve existing products or to get new characteristics to a product, to get higher product performance. That’s what we do a lot when we think of innovation. Really innovative companies also consider how they can be innovative in the configuration of the business and organising. They also consider how they can be innovative in customer experience. How you integrate customers in your activities, how you use new channels to interact with customers and doing so become more innovative in launching and distributing new products.

In a typical situation we see a company put a lot of effort in innovation activities, developing a new product. But real innovative companies do not only emphasise on innovating products characteristics; they also emphasise a lot on innovation in configuration of the business. At the end of the day, they use around four different types of innovation in order to create a very innovative company. 

The message here is technology alone which helps us to create wonderful products doesn’t makes a company an innovative company but also the business configuration. For example, the company Skype developed a product using information technology to communicate. Other companies also have similar technologies but what made Skype successful? When you want to attract a lot of customers to our service, we have to develop a new way of generating revenue. Skype offered their basic service free as well as a premium service and idea behind this was when Skype gets lots of customers using the basic service, some of them will use the premium service. Not everyone will use the premium service but most of them will. The idea is to combine technological development with the right profit model to be successful in the market.

Based on popular business model canvass, when you describe your business model, think how you can innovate either by improvising your product through process innovation or structural innovation, or how you can find a creative and innovative way of creating new relationships and new channels to deliver your products.

When you think of big Chinese companies like Lenovo, you can say their products are not innovative and they just copy, but they are able to produce these products in a very efficient production system which allows them to offer this product at a very competitive price in the market. That is not only because they have low labour costs but because they have very efficient production systems. They are strong in how they organise their production in a way to produce their products in a standardised way that makes it very efficient. That’s one way of being innovative in the market. We could see that they are quite successful in this approach in the last 20 years. When we take our business models of SMEs, we have lot of opportunities to innovate.

We are using four different approaches to move from active business model to a more innovative business model. These can be approaches from understand customer needs, can be approaches coming from the creative side, it can also be an approach of using management tools to analyse competitors so that you don’t have to reinvent the wheel or it can be from a very systematic problem solving perspective. Similarly we have few more management tools which we can use in order to run innovation projects in a more successful way.

University-business linkages

From a SME perspective, one of the challenges of innovation management topic is where to learn, where to get this knowledge on management tools. Even from a university perspective, sometimes it is a challenge how to teach these topics to students because in most of our business schools we have management, financial management, marketing, human resource management but how much we have in innovation management is question to ask. In Sri Lanka you can also check how many publications have been written in local languages dealing with innovation management.

When it comes to innovation management in SMEs, you have to consider organisational aspects and how you organise innovation activities. Most innovative European SMEs have an innovation strategy where they look at the plan of developing new products and services in future, who will be responsible driving innovation in the company, etc. But in many SMEs, you don’t have an innovation department or even a research and development department. SMEs at best will have departments like marketing and financial management. 

This raises the question, who drives innovation in SMEs? Who has the responsibility? How can SMEs ensure the innovation process is managed in the right way? For this SMEs have to rely on external networks and this is where university-business linkages come into play. This will support SMEs to find resources you don’t have but need to in order to manage innovation in their company. 

What can universities do to support SMEs? In addition to the role of universities in contributing with new knowledge on technology, technology transfer in natural science field, etc., universities also have a responsibility in management perspective. Faculties of Economics and Management should consider collaborating more with private sector in areas like knowledge transfer related to managing innovation projects in companies. This can be done in different ways like trainings and activities we offer to companies; it can be consultations, etc.

At Leipzig University we have a training course which we call ‘Certified Innovation Managers’. At the moment we are running it here for the first time in Sri Lanka together with the Ceylon Chamber of Commerce. In SMEs we need someone who is able to manage the innovation process. This person will be taught on how to organise the innovation process, what type of management tools can be used, etc. The objective of this course would be to transfer this knowledge to SMEs.

Students, especially in the Management faculties, can run student projects but not with an intention to develop new technology but to support innovation in SMEs by using different types of innovation; for example, use an existing technology and provide an innovation on how SMEs can communicate with existing customers or how a SME is able to make a production process more efficient.

We encourage our students to take real problems of SMEs and find solutions using different types of innovation and present to SMEs and help them to implement these measures. Innovation is not only a game of scientists but even students of Faculties of Economics and Management can contribute to innovation in SMEs. 

From a university perspective we should invite the SMEs to take part in workshops where we develop, together with SMEs, their knowledge on how to better manage challenges in innovation and also to contribute our know-how and knowledge perspective in developing innovation plans for SMEs. Today innovative companies are not only innovative in their products but they are also innovative in how they produce their products and how they market their products. 

Innovation today is a game not only focused on developing technological solutions alone but also focused on how to innovate all business processes in a company.  

UBL initiative in Sri Lanka

In 2015 GIZ launched a comprehensive UBL initiative under the patronage of University Grants Commission in order to consolidate the above initiatives and gear the process towards the establishment of a coherent UBL policy framework. The initiative is championed by German academic consultants who will bring in international expertise from the area of university-business linkages as well as innovation management.

Activities within the UBL initiative address challenges both at the grassroots and at the policy levels. At the former it brings new methods and process management tools to five universities (University of Jaffna, Eastern University, South Eastern University, University of Uva Wellassa and University of Moratuwa who will join as a steering partner). Moreover it also facilitates the hands-on cooperation between SMEs and universities.

Meanwhile Ceylon Chamber of Commerce and GIZ SME Development Program together with the University of Leipzig together conducted a training program to train ‘Innovation Managers,’ The 10-day course was aimed at promoting an innovation culture among the Sri Lankan businesses.

This is the first time a comprehensive training program on innovation management was conducted in Sri Lanka. The objective of the course is to make the participants familiar with the application of the different concepts and tools of innovation management in their organisations. The course is designed for managers of the private sector firms, business consultants, and also entrepreneurs.

A fundamental principle of this training course was the exchange between the objective and subjective approaches of the instruction process. The objective approach was related to the teaching based on units of knowledge; for instance, creativity techniques, strategic innovation management, etc. Regarding methodology, classical class room setting and case-studies discussions was used. This procedure allowed fluent interaction between students and course facilitators. 

On the other hand, the subjective approach was related to the individual learning efforts of the participants. This offers the participants “space to make their own decisions”, as well as the required flexibility to develop their capabilities and competences, with a special emphasise on the application of innovation management tools in a real project setting. Therefore the final result of the training was a well-developed plan for innovation in a selected product/service.