Innovation Lessons from Small Business

As I've attended networking events and various meetings in the last 6 months, one theme has been consistent among most of the small business owners I've met, the majority are frustrated by the downturn in today's economy and the effect it's having on their businesses. However, the reasons for this frustration appear to be many and varied. Some blame the economy for a lack of customers/sales, others blame the economy for a lack of credit which is affecting their ability to maintain short-term operating capital, and others insist that this Summer's exorbitant gasoline prices put them so far behind in other expenses that they can barely stay afloat. None of this frustration, nor these comments, have been unexpected.

What have been unexpected are those businesses I've met that have seen this economy as an opportunity. These businesses have chosen to look at this situation as a "glass half full" and seek new ways to take advantage of the situation to grow their business. For example: the small independent technical college who decided to expand their training offerings when the layoffs started to happen – and guess what, the supply of extra funds from the government for training programs for laid-off workers has continued to expand, resulting in increased enrollment – and the need for even more training classes. Another example is the small technology company that has re-prioritized its' research and development schedule (and budget) to meet the increased demand for green technology.

These companies did not have large amounts of capital to make these changes; in fact, they barely operated on a shoestring. What they did have was a small company that was able to review their circumstances and their marketplace, and in a short period make a decision to re-align their resources in a way that would provide better opportunities for their firms. This is called Innovation, and if utilized often enough by small business within the next few months, it could be the one thing that saves America from experiencing another Depression.

In keeping with this theme, below please find an article recently run by Forbes.com that gives a broader perspective on Innovation and the ways it can provide small businesses with an advantage – even in this economy. Once you've read the article, I challenge you to meet with your team to find ways that your company can take advantage of today's economy with a "glass half full" mentality, thereby positioning yourself to be in a very positive situation when the economy stabilizes.

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Small Business owners are highly innovative but don't realize it. The reason: They need to better understand their customers.

Many people have come to think wrongly of innovation as a separate activity, walled off from their regular course of business, something they have to pursue intentionally. We saw this firsthand recently while participating in a workshop on small-business innovation. One small-business owner disavowed the notion that anything his business did could be classified as innovative, saying, "We're not creating the iPod."

Our recent experience showed that many small-business owners are highly innovative but not aware of it. The notion that you have to be creating an iPod to be innovative reveals that people are very confused about what innovation is.

In fact, iPod wasn't Apple's sole reason for success in the digital music space. This innovation went well beyond the technology. Apple understood that some customers wanted to buy MP3s, not steal them. Thus the combination of iTunes with the slick iPod device proved a winning business model that upended digital music.

Understanding your customers is required for successful innovation. Small-business owners, with their intimate knowledge of their customers, actually are incredibly well-positioned to innovate. One example is a story told at the workshop by a man we'll call "John" who owns a pool-service business.

John started out in the traditional way, servicing equipment and maintaining pools for residential, commercial and government customers. The pools that were controlled by the municipalities and some of the very large commercial installations were required to maintain strict water quality standards. These customers invested heavily in monitoring technology that ensured the water quality was up to local standards. The rest of John's pool customers were certainly interested in maintaining pool quality but viewed monitoring technology as far too expensive for them to reasonably deploy.

At a local trade show some time later, John was taken by new technology that would provide remote monitoring services at a much lower cost than the systems deployed in the large pool installations. Recognizing this enabling technology, John developed an entirely new business model for his customers. He purchased a limited number of the devices and then offered monitoring to a group of small to mid-sized pool owners as a service. Overnight, this entrepreneur evolved his business model from a fee-for-service model to a leasing business.

However, John did not consider this change to his business model to be highly innovative for his field. When asked about the innovation, John explained he felt the decision to expand into leasing equipment was an easy one. He didn't need a business plan to evaluate this innovation. He pointed out that, in fact, he hasn't had a plan for a number of years. He started out with a business plan but stopped updating it years ago. He said, "I know in my mind by how much I want to grow and what I need to accomplish each month at achieve my target."

What John didn't realize is that he does in fact have all the elements of a business plan. Instead of the annual, stagnant planning process that characterizes many large businesses, John and other small-business owners have clear metrics, a clear direction and the ability to change course immediately if they need to.

There are lessons here for small-business owners. Small companies should realize that their close customer connection provides a great springboard for innovation. The small businesses we talked to were incredibly market-connected. To them, a customer problem is an opportunity to sell that customer another solution. They are responsive, iterative and flexible.

Further, small-business owners might think they don't have the resources to innovate. In fact, constraints are a friend to innovation, not a foe. More promising innovations have been killed by too much time and money, and too many people, than have been killed by lack of any of these.

Big companies can also learn from the way small companies approach innovation:

* Connect with your customers in order to truly understand them; pay particular attention to framing the conversation around the problems the customer has rather than the problems you think your current product or services could solve for that customer.

* Be iterative in regards to strategy and planning, in order to maintain flexibility and be most responsive to outside change.

* Be open to experimentation with new business models.

* Be wary of the curse of too much capital and resist the temptation to throw resources at innovation efforts.

Above all, businesses of all sizes need to remember that innovation is not limited to products, services, technology or creative thinking. Creating a new iPod isn't always the goal--rather, focus on understanding why the customer can't adequately solve important problems and develop an innovative business model that does the job in a new, novel fashion.

The last six months have certainly taught us that all businesses need to be open to change. If there was ever a time to start thinking like a small, nimble business, 2009 is it.

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Written by Andrew Waldeck, a partner with Innosight and Renee Hopkins Callahan, editor of Strategy & Innovation. This article was excerpted from a recent online issue of Strategy & Innovation by Innosight, a consulting firm co-founded by Clayton Christensen and Mark Johnson specializing in innovation and disruptive strategy.