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What are the challenges and potential pitfalls for SME-led innovation? by Gary Walpole, Director ION

Written by / Monday 11th December 2017

The majority of active enterprises in Wales are SMEs and they account for 99.3% of all enterprises (National Statistics, 2013). In a recent UK innovation survey (BIS, March 2016) businesses were asked to rank constraining factors on their innovation activities.  SMEs (Enterprises with 10-250 employees) - made up 80% of the overall sample of 15,091 UK enterprises surveyed.  Only 53% of firms in the UK are regarded as ‘innovation active’ (BIS, March 2016), the innovation inactive or ‘long-tail’ of firms that are not engaged in innovation are contributing to UK productivity lags. However, only 25% of UK firms (BIS, March 2016) use technological innovation, with a concerning 8% of firms only being engaged in both product and process innovation.  Innovators employ more highly qualified staff and innovators are three times more likely to employ science or engineering qualified people.  Wales as a region lags other regions of the UK in terms of ‘innovation active’ and ‘technological innovation’ firms. The Well-Being for Future Generations Act (2015) has identified ‘the percentage of businesses that are innovation active’ as a national prosperity indicator.  There appears an obvious need to support innovation active firms in Wales to engage in technological innovation, often used as a R&D proxy, and encourage innovation inactive firms to engage with supply chain partnerships to develop their innovation capacity. 


The main constraining innovation factors for SMEs in the ‘broader innovators’ category were reported as: cost factors; knowledge factors; market factors; and other factors. In particular cost factors included ‘direct innovation cost too high’ and ‘excessive perceived economic risks’. Knowledge factors included ‘lack of qualified personnel’, ‘lack of information on markets’ and ‘lack of information on technology’. Market factors related included ‘market dominated by established businesses’ and ‘uncertain demand for innovative goods or services’.


The barriers to innovation, outlined above, are a particular challenge to SMEs as they lack the human and capital resources of larger businesses. In evidence of this, a recent ESRC report suggested ‘small firms have weaker internal knowledge resources than larger firms, and they may have more to gain from external university knowledge – but with limited resources they may find it difficult to go beyond local universities’ (ESRC, 2017). It appears that UK policy makers and large firms might need to look at how SMEs can be supported to develop innovation capabilities if the UK is to enhance its productivity levels. However the process of developing innovation capabilities is not straight forward.  The knowledge transfer process is an established challenge for policy makers and stake holders, for example the Department of Trade and Industry established a large initiative called ‘living innovation’ to ‘encourage UK companies to develop new and improved added value products and services’ (DTI, 2004) and yet the UKs relative innovation position has not improved greatly in the last decade. The knowledge transfer challenge was articulated by Pfeffer & Sutton (1999)  as the ‘Knowing Doing Gap’ where they articulated how businesses find the ‘gap’ between understanding that they need to be more innovative, as promoted by policy makers, and actually developing and implementing practices that drive their innovation.  One suggested solution is to increase the capabilities of management within organisations as s European wide research report, by the Centre for Economic Performance (2015) advised “In summary, management does indeed appear to be important in accounting for the large differences in cross-country Total Factor Productivity (TFP) as well as within-country differences.”An increasing body of evidence suggests that the heterogeneity of innovation management practices across firms is a major contributor to different productivity levels, within and across regions.


·       How can big organisations support SME-led innovation?


Large organisations can simultaneously develop their productivity levels and that of their supply chain by working with the SMEs, in their supply chain, to help them develop innovation capabilities. Some large manufacturers, like Toyota, have engaged with their supply chains to enhance their innovation capabilities over the last decade.  A recent UK initiative, Be the Business, part funded by UK Government, is encouraging large business to engage with the UK productivity challenge and support initiatives to develop innovation capabilities of SMEs. The Chair of Be the Business, Sir Charlie Mayfield, advised:

“We aim to support businesses in three principal ways. By inspiring leaders with actionable insight that helps businesses to set goals and measure progress. By providing modern tools that enable businesses to work out how good they are compared to others they choose. By encouraging sharing of best practice within communities of businesses across the UK as a catalyst to enable people to find out what’s worked best for others seeking the same improvement.” Sir Charlie Mayfield, Chairman, John Lewis Partnership

Be the Business has recently launched the Productivity through People programme that is encouraging large business to work with SMEs in their supply chain to help them develop. Swansea University and Cardiff Metropolitan University have also recently been awarded funding by the Welsh Government SMARTExpertise programme to develop a contemporary approach for innovative collaboration with Welsh-based SMEs and large firms in order to form ‘innovation learning networks’ that aim to develop the innovation capabilities of the firms involved and the region . Funding from Smart Expertise will enable the development of an innovative collaborative supply chain model, which will propose a ‘blueprint’ for guiding future SMEs in Wales on how to work collaboratively with local HEIs to share risk, knowledge, and grow the future of industrial research and development. This will drive the industrial partners up the Technology Readiness Levels (TRLs) and enhance their ability to engage in R&D, leading to innovative new products and services. This industrial research project aims to address the aforementioned barriers to innovation by:

  • Reducing the ‘cost factors’ barriers by enhancing innovation management knowledge (firm and supply chain levels) and sharing of costs across supply the chain. Therefore, removing the costs of having to buy-in expertise for each firm and reducing the opportunity cost of engaging unnecessary staff in the process.

  • Enhancing innovation management knowledge to reduce the ‘knowledge factors’ barriers. The lack of knowledge often deters firms from engaging in R&D as they do not understand what to do.

  • Developing innovation skills (tools and techniques) aligned to innovation management to reduce existing knowledge barriers and develop confidence in ability to ‘lead innovation’.

  • Reducing the ‘Cost risks’ of entry to new markets, through the alignment of core-competencies and shared learning as part of a new supply-chain cluster, costs of market entry are therefore reduced as shared across all firms. This has the potential to also move companies up the supply-chain system (e.g. up the Technology Readiness Levels)

  • Mitigating ‘Market Factors’ by co-developing RD&I across supply chains and clusters which gives the new product developers greater confidence in the success of the R&D to provide ROI to their respective firms.


There are, no doubt, initiatives in other parts of the UK that are supporting SMEs to develop their innovation capabilities.  The importance of developing innovation capabilities cannot be underestimated according to Sir Charlie Mayfield:

Productivity is vital. Yet the UK’s productivity trajectory is flat – so now it’s time for action. By building a dynamic movement involving thousands of businesses we could add as much as £130bn in Gross Value Added (GVA) to the UK economy each year.


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