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 collaborate
widely.
(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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