A Survey of Innovation Practices among SMEs in Bengaluru Neighbourhood

A Survey of Innovation Practices among SMEs in
Bengaluru Neighbourhood
S. Shyam Prasad
Sudindra VR
Business has two – and only two – functions: marketing and innovation (Drucker). To this day, these two functions not only hold sway over the business but their importance continues to grow. It is more so in view of globalization which has altered the market conditions by shortening life cycles of products. Rightly then the tenth annual global survey by The Boston Consulting Group shows that 79% of respondents ranked innovation as either the top-most priority or a top-three priority at their company.
The shift in the demographics giving rise to vast diversity amongst the customers and the increased volatility of the market is making business models quickly obsolete. In the face of new and emerging or ‘disruptive’ technologies it makes innovation more critical (Christensen, 1997). Companies, particularly SMEs can hope to survive and achieve growth by innovating.  This may sound paradoxical – since plenty of resources will be needed for R&D and innovations. The argument is that any amount of resources spent on promotion by SMEs will surely be dwarfed by the bigger organisations. However, innovation is the only thing that cannot be conceived in spite of possessing plenty of resources.
Innovation, besides being imperative for the survival of the firms, also “strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives” (Schumpeter, 1942). Similar sentiments have been expressed as “…under capitalism, innovative activity…becomes mandatory, a life-and-death matter for the firm and innovation has replaced price as the name of the game in a number of important industries” (Baumol, 2002).
There are more than 36 million SME units in India which provide employment to over 80 million people (SME_Chamber_of_India). This sector contributes about 8% to GDP and has great potential for growth. In spite of great opportunity for growth, they suffer from technological obsolescence, supply chain inefficiencies among others. To overcome these problems and stay in the business that is increasingly seeing competition from big enterprises, SMEs need to innovate. In this scenario this study examined the innovative practices being followed by SMEs that are situated in and around Bengaluru. The micro enterprises were excluded from this study.
The Micro, Small and Medium Enterprises Development (MSMED) Act was passed in 2006 to facilitate the development and competitiveness of these enterprises. It defines (Table 1) medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, micro, small and medium.
Table 1 Definitions of Micro, Small and Medium Enterprises
Manufacturing Enterprises – Investment in Plant & Machinery
Description
INR
USD($)
Micro Enterprises
Up to Rs. 25 Lakh
Up to $ 62,500
Small Enterprises
Above Rs. 25 Lakh & up to Rs. 5 Crore
Above $ 62,500 & up to $ 1.25 million
Medium Enterprises
Above Rs. 5 Crore & up to Rs. 10 Crore
Above $ 1.25 million & up to $ 2.5 million
Service Enterprises – Investment in Equipments
Description
INR
USD($)
Micro Enterprises
Up to Rs. 10 Lakh
Up to $ 25,000
Small Enterprises
Above Rs. 10 Lakh & up to Rs. 2 Crore
Above $ 25,000 & up to $ 0.5 million
Medium Enterprises
Above Rs. 2 Crore & up to Rs. 5 Crore
Above $ 0.5 million & up to $ 1.5 million
Table 2 provides the characteristics of MSMEs in Karnataka.
Table 2 Characteristics of MSMEs in Karnataka[1]
Enterprises(in lakhs)
Employment(in lakhs)
Market Value of Fixed Assets(in lakhs)
12.49
30.48
27161.11
(Excluded activities under wholesale/retail trade, legal, education & social services, hotel & restaurants, transports and storage & warehousing (except cold storage).
The contribution of small firms to innovation-led growth and job creation[2]has attracted the attention of the policy makers and the governments. By virtue of their contributions in terms of employment generation, export promotion, etc., they are considered as one of the ‘driving forces’ of modern economies. However, SMEs seem to be at a disadvantage in their scale of economies and research and development activities – both necessary for sustaining in the present era. A number of researches to study R&D activities to firm size have shown that large firms undertake considerably more R&D and this prompted some experts to infer that SMEs will not survive as globalization increased (OECD, 2000).
Innovation is a broad term. It virtually encompasses any new development in the firm. For the purpose of this study, an innovation is the one that is new or significantly different from previously used or marketed by the firm. Many  studies  have examined  the  success  factors  of  innovation  in  SMEs –  looking  at  the  characteristics  of products,  firms,  markets  and  innovation  processes (Jeroen P.J. de Jong, 2005). Following the cue, this study looked at innovations taking place in product, process, organisational method and marketing methods of the company.
Data was collected directly by the researcher by visiting the organisations in person. Many of the respondents who were contacted declined to share the information. Information was collected only from those who obliged to part of this research. Data was collected in 2016 from May 11th to June 23rd.  A total of 211 SMEs were contacted for getting a sample of 35, the least number required for the study. Furthermore, to have quality data, the researcher collected the information in person. Consequently all the responses were complete and good for consideration.
Innovative firms were identified based on the type of innovations in four categories such as product, process, organizational methods and marketing practices. All the firms (100%) that were contacted reported to have made some form of innovation. Most of the firms (92%) have reported to have made changes to their offerings (product or service) and large number of firms (80%) have also made some changes in their process of manufacturing. Innovations in organizational methods accounted for 64% and marketing process 33%. 
As much as 80% of the companies sampled, reported to have made some innovations in their process of manufacture. However, the type of process innovation seems to be equally divided between a) new or significantly improved methods of manufacturing or producing goods or services, b) new or significantly improved logistics and c) new or significantly improved supporting activities.
64% of the firms have made some improvements to their organizational structure in the last 3 years, the period of the study. New/Improved Manufacturing practices accounted for 52%, new/improved logistics 40% and  new/improved support activities 32%.
Innovations in marketing accounted for 76%.  These firms, being small, understandably were least in their spending towards promotion – only 28% and were more concerned with the price and the pricing strategy – 52%. They also kept on updating their product packaging and design as often as 40% and 36% firms also made some changes in their distribution strategies.
The current study found that innovation was present in all the firms in some form or the other. The ever-changing technology and a constant demand for modification or a new product particularly in Bengaluru being the IT hub, justified this observation. Also, for 80% of the innovative firms, innovations were only new to the firm which is more than the state average of about 60% (GOI, 2014)
Special Economic Zones (SEZs) provide a good opportunity for the SMEs to increase their competitiveness and bring within their grasp those aspects that are missing with them presently such as access to international markets, finance, technology, management skills and specialized knowledge. SMEs should build strong linkages with SEZs. A substantial body of research, including some undertaken by World Commission on Environment and Development (WCED), has provided some pragmatic recommendations. SMEs, to survive in the present era, should adopt a new approach:  to innovate continuously and collaboratewidely.
(This article would be incomplete without acknowledging the contribution of Prof. Sudindra VR in the writing of this article. I thank him.)
REFERENCES
Baumol, W. J. (2002). Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism. Princeton University Press.
Christensen, M. C. ( 1997). The Innovator’s Dilemma. . Harvard Business School Press.
Drucker, P. F. (n.d.). Goodreads. Retrieved 06 13, 2016, from https://www.goodreads.com/author/quotes/12008.Peter_F_Drucker
GOI. (2014). Indian National Innovation Survey.New Delhi: CSIR-National Institute ofScience, Technology And Development Studies (NISTADS).
Jeroen P.J. de Jong, O. M. (2005). The Fruit Flies of Innovations: A Taxonomy of Innovative Small Firms. Dynamics of Industry and Innovation:Organizations, Networks and Systems. Copenhagen, Denmark.
OECD. (2000). Enhancing the Competitiveness of SMEs Through Innovation. OECD.
Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. New York: Harper & Row.
SME_Chamber_of_India. (n.d.). SME Chamber of India’s web site. Retrieved 06 20, 2016, from Small and Medium Business Development Chamber of India: http://www.smechamberofindia.com/about_msmes.aspx



[1] Annual Report 2014-15, Government of India, Ministry of Micro, Small and Medium Enterprises.
[2] During the last five years, SMEs were responsible for more than 80% of the jobs created (European SME coordination unit, CEC).
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