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.

Surviving an Economic Downturn

The author of this article is unknown; it was sourced from an online repository called 'Small Business Notes'. Given today's economic climate, and the prevalence I have seen recently of small business owners tending to "bury their heads in the sand" and blame their woes on the economy, I thought this article was an excellent opportunity to provide an alternative thought process. In tough times the best thing a small business (or any business for that matter) can do is to go back to the basics. If you actively run your business every day, think thru the issues so you can make smart decisions, and utilize the ideas in the following article, you should be well on your way to insuring that your business survives today's economic challenges and is set up to thrive when things turn back around.

The belief that small businesses fare poorly in economic slowdowns is a common misconception that is not generally true. Solidly run small businesses actually hold their own during downturns. While we all like to believe our businesses fit the definition of "solidly run", let's take a look at what are some commonly cited best practices for all businesses to be following during a time of economic downturn.

Revisit Your Business Plan
The number one recommendation, across the board, is to re-examine your business plan. Your business plan should be the working base for your company. Have you strayed from it in any way? Does it need revision in light of new information? Should you be considering whole new directions that are not included in it? Sit down and read it from the perspective of someone about to invest in your business - and make any revisions that seem appropriate. You may even identify additional information you need to know in order to make decisions about the future of the company.

Seek Supporters and Advisors
If ever there is a time to network, this is it. Many companies set up advisory boards that include a wide spectrum of professional expertise that they can draw on for advice. Such board members often are attorneys, certified public accountants, civic club leaders, owners or managers of businesses similar to yours or whom you do business with, and retired executives. The latest jargon for these types of boards is "Power Circles." An apt name because the members should be power connections for you - knowledgeable about the environment in which you do business and able to connect you with the information you need to make good decisions. The purpose of the board is to offer you objectivity. They should be people you can be truthful with and who will keep your disclosures confidential. Most groups like this discuss specific business problems you have, using the meeting to brainstorm possible solutions.

If you don't belong to civic and professional organizations, do it. Here are groups of people facing similar challenges to you. Their joint expertise and resources can be a powerful support mechanism when times are tough.

Make Customer Satisfaction Your Priority
Your customers are your lifeblood in any economic climate. In a downturn they are what keep you in business. Treat them very well. Spend time listening to your clients to hear what they like and do not like about the services you offer. Change those things that you can. Take time to be innovative in meeting your customer needs. Perhaps taking the time to computerize customer information would allow you to more easily access their particular preferences and respond quickly to their needs. Perhaps taking time to call special clients to discuss how you can serve them better would be productive. Maybe an extra telephone line would speed the service time. Do whatever you need to do to keep your current customers loyal and to position yourself to win new customers.

Expand Relationships with Existing Clients/ Sign More Long-term Deals
Given that your customers are satisfied, they should want to do more business with you. Find out if there are ways you can expand what you do for them, perhaps by offering more products or services or fulfilling other needs that they have. Long-term deals add to your security. So, if you have happy customers, offer a discount to those who are willing to sign a long-term contract or who are willing to pay cash up front for a contracted set of services. Cash up front is particularly attractive because it makes you look good on paper and can allow you to lock in favorable financing from financial institutions.

Advertise/Sell
In a downturn one of the first places many businesses cut expenses is in advertising - a real mistake. As part of the philosophy of expanding your base and recruiting more customers, you need to advertise and sell more than ever. People are looking for better ways to do business. If you have established strong customer satisfaction, this is the time to get the message out.

Seek New Business Opportunities (Diversify)
A downturn sounds like a terrible time to diversify, doesn't it? But there are opportunities out there to be taken. And given that you have done your homework in establishing yourself on a solid financial base, this is an opportune time to broaden your base. Diversification gives you more stability because a down market in one product may be compensated for by another product. The tricky part is, of course, finding complementary products that face differing market challenges. You don't want to stretch your expertise by producing totally different products, yet you do want to target different types of markets so that softness in one may not be mirrored in the other. A simple example of a way to seek new opportunities is to establish an internet business for a retail store. You have provided a new way to service your regular customers and expanded the audience you reach.

Form Alliances
Alliances with your vendors or with closely aligned types of products is always a good way to strengthen your customer base. With the right alliance you are reaching a broader spectrum of possible customers and you have more to offer each potential customer.

Diversify Your Customer Base
It may be possible that you have been selling to a limited sub-group within the community and you can expand the appeal of your product to a wider audience. For instance, you may be primarily selling to a specific age, ethnic, or gender group and with different advertising or a slight modification in the product; you can reach a broader spectrum of the population. Simple things like instructions in another language or wording advertising slightly differently can have a major impact in who your business attracts.

Find Ways to Save Time and Money
Collections are a great place to start in tightening your belt. Not only do you need to be providing incentives to your customers to pay on time or even early, but you need an efficient collection system that gives you advance warning of problems as they develop. Similarly, you need to be paying your bills on time and taking advantage of every possible discount that you can.

Look at fixed and variable costs. What among the variable costs can you cut back on or put off for later? What among the fixed costs can you find a better deal on or negotiate more favorable terms for? And, pay attention to your banking relationships.

Keep in touch with your banker, apprising them of any company developments. If you face a tight situation, having your banker knowledgeable about the positives of you and your business will make them much more amenable to helping you through difficult times.

Watch for Signs and Act on Them
Look for changes in psychology and behavior in your clientele. They may be spending less or putting projects on hold. They may not be paying their bills as quickly. If you are in touch with your customers, you will be aware of differences in buying habits. Contact them before they contact you about what the problems are. Can you help them in some way? You can gain a long-time relationship with a customer by approaching them pro-actively with the view of being there to help them through their own hard times.

Mobilize Your People to Save Jobs
Economic downturns are scary times for employees. Many firms cut personnel and add to the workload of the remaining employees. Involve them in cost cutting. Let them know they are important to you and that you are committed to keeping them. If they know that they are perceived as an active part of the solution, they can identify sources of savings that never occurred to you.

Find rewards that are not costly yet acknowledge their efforts. As hokey as it sounds, one successful businessman placed post-it notes on the restroom mirrors every evening noting positives that had been reported about various individuals during that day. It became a delightful, early morning ritual for the employees to discover each morning what the CEO had noted from the day before.

Whether or not the economy is in a recession, any of these methods can strengthen your organization - and your bottom line. This is what makes a "solidly run" business. It means returning to the roots of your business and making certain that everyone is healthy. All of these principles are worth revisiting at least annually, in good or bad times.

The Small Business State of Your State

For those of you interested in working with other small businesses in some capacity, or needing small business knowledge to help with the development of a business and/or marketing plan, some very useful information has recently been issued by the U.S. Small Business Administration. The data is provided in a national and state-by-state format. A brief overview of the report is shown below. Click on the "compiled data" link and it will take you to a PDF document which provides you with that state-by-state information. Additionally, the links at the bottom of the article will take you to additional small business resources that may be helpful to you.

The Small Business Administration's Office of Advocacy has compiled data for each U.S. state and territory, giving an excellent snapshot of each region's small business activity (in 2006, the most recent year for which data is available).

For example, California had 718,220 small businesses in 2006 and created 87.6 percent of the state's net new jobs from 2004 to 2005. (The SBA defines small businesses as employing fewer than 500 people.)

The health care and social assistance industry was Louisiana's largest small business employer in 2006, while the construction industry was Virginia and Maryland's biggest small business employer that year.

The report pulls together information on each region's number of firms, demographics of business ownership, small business income, banking, business turnover, industry composition and employment gains and losses by business size.

It's worth a visit to check out that status of small business in your state.

By Sharon McLoone, The Washington Post January 27, 2009; 8:00 AM ET Data Points
Small Business Resources