Innovation in big firms and medium sized firms. Approaches, differences and examples

Structure

1. The importance of innovation in business life
1.1 The role of innovation as a driver for success
1.2 Digital disruption and the reaction and innovation of the old economies

2. Innovation Management approaches in big and medium sized firms
2.1 Strategic approaches for big sized companies
2.2 Strategic Approaches for medium and small sized companies

3. Best practice business examples
3.1 Employee Idea Management at Siemens as a big firm representor
3.2 Idea Management at SIGA as a medium firm representor

4. Conclusion and forecast in Innovation Management

Bibliography

1. The importance of innovation in business life

1.1 The role of innovation as a driver for success

To understand the meaning of innovation, it is important to determine different innovative dimensions. Innovation is often stated as a “driver for success” or the “fuel” that powers our economy and leads it to prosperity, especially in Germany with its traditional organizations and their role in society. It is not only important for the economy, but they can also be a source of political and social ingredients. Innovations will play the key role for the challenges that face our global society in the 21th century. Global problems as the rise of population and mass urbanization, the global garbage problem, or climate change can only be solved by brave innovators. Those challenges can not only be seen as problems, but companies around the world can develop innovative products to accelerate their business success. [see Vahs and Brehm 2015, pp. 1-17]. The central question, regarding big firms is: How can so huge networks and highly branched systems manage the different kind of innovations? Is it really necessary for surviving?

One of the problems that many large organizations face is how to innovate successfully within the confines of a massive, bureaucratic operational structure. Nowhere is this more apparent than in the area of research and development, where small, entrepreneurial firms routinely do end runs on large companies will multi-million dollar research budgets. It is really interesting to know how flexible and adaptive big firms can be in this situation of change and how medium firms challenge different kinds of disruptions and innovations. [see Baumgartner 2013]

In the following we will try to find an appropriate attempt to explain the differences regarding innovation in big and medium sized firms and their approaches. In theory, large companies with big research budgets and the resources to hire top scientists and the best skilled employees should have a remarkably huge advantage when it comes to innovation. In practice, however, smaller firms with comparatively tiny budgets often manage to out-innovate the bigger, established competitors. [see Baumgartner 2013]. In this seminar paper, the main thesis is that long-term growth in profits depends significantly on firms' investment in innovation activities. The following chart proves the fact that all companies, which generate high profits, spend a high percentage of their budget for research and development. A good example for this is Amazon, the largest spender on research and development in 2017 and a company which is only 24-years old. It even passed Volkswagen, biggest car manufacturer worldwide with 81 years of history, in an industry which has originally the highest research budgets. Amazon does not report concrete spendings, but it is estimated that the online retailer spent about 17.4 billion USD in 2017 for R&D. This company is on the top, because its founder, Jeff Bezos used all the profit Amazon has made over the years, to reinvest it consistently into new innovative business fields [see Manager-Magazin 2017].

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[see Fox 2018]

1.2 Digital disruption and the reaction and innovation of the old economies

The digital disruption is the influence that technology has on the industry. As a Forbes survey sais, more than one third of global CEOs think that they feel directly attacked by competition from digital and data-using players in their markets. Every second manager thinks that there is a high or potentially high risk for his or her enterprise. [see Forbes Insights Team 2018]. Personal data will become the most important key resource of the future. The disruptors attack the “old” companies on different channels and dimensions. So it is very difficult for the established corporations to find ways against little, fast-growing startups. Companies, who are able to get, hold and analyze the data will have bigger market advantages than those who don´t [see Forbes 2018]. Customer data can be used to allow a very high level of marketing knowledge, product development or sales forecasting. For instance, marketing budgets can be adjusted wisely and used for those potential buyers who likely will buy products instead of wasting it into marketing campaigns nobody understands. Internal process analyzing generates data that allows the user to optimize key parameters such as productivity and quality management or improve manufacturing, controlling and logistic processes, e.g. the load-factor. With algorithms and artificial intelligence, tech companies are in order to get to know their customers better and better every day. With this information, they are able to offer a bride customer experience based on personal data statistics [see Forbes 2018].

When PayPal was founded in 1998 by Peter Thiel and Elon Musk, the founders were frustrated about the very difficult and time-consuming process of bank transactions. They dreamed of software which is able to send money to friends or to sellers via e-mail address, the preferred and modern way of communication back then. Musk and Thiel saw a problem that probably most of the people were confronted with - a business case for a mass market was born. The big banks in the US have not taken PayPal seriously - a big mistake. While PayPal established and invested in new technologies to provide fast and secure online payments, the traditional banks held on because they earned high provisions with every standard payment. Also German bank institutes eyeballed PayPal but ignored its growing influence on the bank transaction market. As a last consequence, they tried to conquer PayPal’s business model with their project named “Paydirekt” - with rare success due to the lack of innovations. The “Sparkasse” simply copied PayPal`s concept instead of radically innovate an even better solution than the American tech-star. This example describes the ignorance of some big players who neglect new disruptors and rest on the old days’ payoffs [see Atzler, Drost und Osman 2018].

Another example is the quickly changing tourism industry. The digitalization brings many advantages especially for emerging or developing countries which access to a save infrastructure. Digital technologies have the potential to give small tourism businesses in emerging destinations direct access to a global market with the possibility to reach many different target groups.

Airbnb has become a huge and remarkably successful alternative regarding traditional hotels in the tourism sector. It is even the biggest competitor of securely established hotel chains. Founded in 2007, the platform offers private accommodations for people who want to have a deep-diving insight of their travel destinations and it tries to create a sense of belonging to locals instead of only being a tourist.

But what are the concrete innovation strategies of Airbnb? First of all, Airbnb has a huge database of places to stay everywhere in the world based on private renting of accommodations. This generates a high flexibility and a wide range of possibilities for customers. Another important fact is the price. The accommodation platform manages to adapt to the local hotel prices but in average they are almost 35 percent cheaper and so it becomes considerably more favorable especially for young people. While most of the traditional hotels have missed this competition, Airbnb has reached a relative market share of ten percent in the touristic accommodation sector so far. The reaction of the two giants Marriott and Starwood was the merger of their two companies. This can be seen as a last-ditch attempt to generate synergy effects, but it doesn´t attack Airbnb in their business model [see Capital 2016].

2. Innovation Management approaches in big and medium sized firms

2.1 Strategic approaches for big sized companies

If you compare the Fortune-500-companies of 1955 with the index today, you will only find ten percent of those companies listed still today – over 90 percent have disappeared. This underlines how important innovations for big companies are. If a corporation isn´t innovative for a longer time, the company most likely becomes a customer for insolvency administrators. While business models in former times were effectively protected by patents, which saved the company trade protection for many years, today, especially the digitalization and the internet don't allow those possibilities anymore. Studies and researches have shown that most of the innovative ideas in big corporations fail due to the fact that restrictions and rigid organizations prevail there [see Weiß and Sauberschwarz 2018, pp.6-12]. By contrast, startups are often quickened by highly motivated employees who don´t care that much about working times because they “burn” for their project or company. Furthermore, startups can work in a very agile and fast way because strong hierarchies and structures are missing. For a lot of enterprises, those new, disruptive highly customer-orientated services or products become a danger for their traditional business model. As a consequence, most enterprises try to imitate startup mentalities and copy startup working styles into their business [see Weiß and Sauberschwarz 2018, p.9]. Unfortunately, those working styles can´t unfold in established organizations due to fixed and rigid structures and different stakeholders’ interests. Some big companies missed the chance to use innovative technologies in an early stage because they weren't profitable or to complicate to integrate in current structures. At the same time, corporations invest a lot of money to improve their existing products from the competitors’ ones. As a result, products get more complex and expensive and not attractive anymore for some customers while startups use this gaps to win them. Because innovation is inherently risky, it is more important to “manage the risk” than to “eliminate” it, as a study of McKinsey reveals [see Marston, de Jong and Roth 2015]. Therefore, big companies should focus more on the “where” to invest then on the “if”. Companies should start with more projects than they will finalize with success, but this gives the opportunity to kill those projects which deliver the lowest benefit and cover the top performers. RELX group, one of the biggest publishing companies worldwide, yearly runs about 15-20 innovations per customer segment from where only one or two are finally chosen. Another strategic way to improve innovations is to detect opportunities apart from the core business. This diversification enables the business to cover new markets with innovative products the customers really need [see Marston, de Jong and Roth 2015]. Amazon leads this to perfection when they make suppliers to their customers: Amazon offered them a solid web database system where they can easily manage and store their customer data and so improve their business. Today, Amazon Web Services (AWS) has grown to the by far biggest provider of Infrastructure-as-a-service which is responsible for 10% of Amazons’ sales while it is one of the most profitable parts in the Amazon portfolio [Statista 2018].

Another great way to extend innovation activities is to build up networks. Even the most innovative companies can never be that productive, if they don´t collaborate with partners. A partner is able to see the own challenges from a different point of view – and can help to give external hints. In such a relationship, both partners should benefit from it, e.g. with the flow of talents or knowledge. After a while, when confidence and a good workflow are established on both sides, the collaboration could become a joint-venture. This strategic alliance gains market knowledge and can evolve new geographical markets.

An approach for an internal organizational innovation strategy is to establish a mission and vision. This could be a philosophy in general or any type of concrete goals, e.g. financial indicators. The vision should be easy to understand and actively pushed by the managing board to all employees, so they can identify fully with it. Employees get motivated by this and understand the importance and dimensions of their decisions in business life. So they can come up with new and innovative ideas in an environment where their opinion is appreciated [see Marston, de Jong and Roth 2015].

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