Innovation in Large versus Small Firms

In 1940s, Austrian economist Joseph Schumpeter argued that large firms would be more effective innovators and he point out that better able to obtain financing for R&D projects and better able to spread costs of R&D over large volume. Large size firms may also enable for greater economies of scale and learning effect and taking on large scale or risky projects. However, large firms might also be disadvantaged at innovation because;

  1. R&D efficiency might decrease due to loss of managerial control
  2. Large firms have more bureaucratic inertia
  3. More strategic commitments tie firm to current technologies

Small firms often considered more flexible and entrepreneurial. Many big firms have found ways of “feeling small” because break overall firm into several sub-units and can utilize different culture and controls in different units. A large firm gains experience in choosing and developing innovation projects, it may learn to make better selections of projects that fit the firm’s capabilities and have a higher likelihood of success. Large firms are also in a better position to take on large or risky innovation projects than smaller firms. Large firms will tend to outperform small firms at innovation.

Most of the larger businesses are always the handling of large project to develop new products. They are better position to finance projects R&D from there large volume of sales in the long term and that they also innovation in companies manage to have a better management structure, good development process and projects prioritization process that small businesses.

That is why the large enterprises are better suited for “incremental innovations” that make changes to the existing technology through small improvements to the creation of a new improvement of quality performance, but not radically different system. For an example incremental innovation is the introduction of the Boeing 777, a new aircraft different from previous models which introduced a new set of technology and capacity. These types of innovations will take a lot of time and more funds and time. In the light of the Honda manufacture hybrid vehicle is a “product innovation” which is a production of research in the long term and development process. Given that the large enterprises may face competition and the scale of the market is great that they can develop customer-oriented productive products and surpass the small businesses.

The next a notes the large enterprises are “competence destroy” innovations which is more run or obsolete the existing technology of the existing skills. The large companies have the capacity to absorb new technologies and develop the technology which is not available in the farms using their past experience and new skills. For an example quartz more execute the market of mechanical watches. The other is the ‘architectural innovation”. This involves change the overall design of the system means only the well established the large enterprises can do this from that they have more resources and other R&D facilities.

Given the facts above in industries that have great development scales and more research and the funding opportunities are small businesses to discharge the innovations incremental, competence destroy, architecture and as in product innovations.

Small businesses are better to organize and its organizational structure is very streamline having some layers of the management and also these managers are multi-functional which increase the flexibility of processing the drafts even large firms expand considerably the new products and their risk taken factor is very high the smaller enterprises shows the rate of success rate in the new development.

The facts may be taken to force that argument are they are small in size, creativity is high and new ideas, develop products less administrative to concentrate correct market, and also since they have small funds that they will spend more carefully selected for success projects only.

Radical innovations take considerable time may be years of progress of the idea of tangible product and there is a risk factor also involved. For an example introduction of wireless technologies and technology 3G are rare of radical innovations that had a lot of time to develop and the risk was due uncertainty of customer acceptance of these products.

The other achievement example is the apples innovative models and technology, the products such as the iPod and Apple the touch screen iPhone 3G which makes great success in the GSM and cellular telephone area. The facts above will be suggest that the “radical innovations” are the most appropriate for small businesses.

The innovation can be a “competence strengthens” to an enterprise if its build their existing knowledge. Small businesses always work with universities for their activities of R&D and they have knowledge and the flexibility with new ideas to improve their products in the next level, more effectively as the large enterprises.

Small businesses are better in the “process innovations”. They are the process innovations to customize the applications of their firms to increase the effectiveness better than large enterprises because of the organizational levels layered and the flexible structure.

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