Question

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Corporate Strategy/ Exploring Strategy:
Read the text and answer the questions below.

Are large firms better innovators than small firms?

The famous Austrian economist Joseph Schumpeter proposed that large firms are proportionately more innovative than small firms. This proposition is a controversial one. If true, it would discourage laboratory scientists and engineers from leaving their large-firm employers to set up their own ventures. It would encourage large firms like Google to keep on buying up small innovative firms and absorbing them into their own corporate strategies. It would make government policy-makers more tolerant of huge, domineering firms like Microsoft who claim that their large scale is important to continued innovation in computer software.

Schumpeters proposition for the advantages of large firms in innovation has several points in its favor:

• Large firms have grater and more diverse resources, helping them to bring together all the various necessary elements for innovation.
• Large firms may have a greater propensity for innovation risk, knowing that they can absorb the costs of innovation failure.
• Large firms have better incentives to innovate, because they are more likely to be able to capitalize on innovation, having all the required complementary assets (distribution channels and so on) to roll it out fast and under their control.

On the other hand, there are good reasons why small firms might be more innovative:

• Small firms are typically more cohesive so that knowledge is more easily shared.
• Small firms are typically more flexible and less bureaucratic, so that they can nnovate faster and more boldly.
• Small firms are more motivated to innovate simply to survive, while large firms can simply defend and exploit their dominance of existing markets.

There has been plenty of research on whether small or large firms are proportionately more innovative. Some researchers have focused on the input side, for example measuring whether large firms are more research intensive in terms of R&D (research and development)-expenditure as a percentage of sales. Other researchers have focused on the output side, for example counting whether large firms have proportionately greater numbers of patents for innovations. There is no final consensus on the overall patterns of innovation. However, recent research findings suggest that in general:

• Large firms are relatively less research intensive in high-technology industries, for example electronics and software.
• Large firms are relatively more innovative in service industries than in manufacturing industries.

It seems that the research so far cannot provide any firm rules about whether large or small firms are better innovators in general. However, research scientists, acquisitive large firms and government policy makers need to consider carefully the specifics of particular industries.

Associated questions to Text 2:

1. What kinds of managerial action might you consider if you were trying to increase the innovativeness of a large firm in a high-technology manufacturing industry?

Answer 1

To increase innovativeness, managers must ensure Agile Framework of Product management which takes unanimous views of teams in new product development ideas and only top 5 ideas are prototyoed and commercialised.

Managers must link compensation to innovation and performance appraisal must ensure metrics like Innovation Index which assesses employees new idea contribution.

Additionallly managers must offer multiple training and development for new products and technologies to foster culture of innovation.