The State of Small Business in an Innovation Nation

By Rieva LesonskyBusiness on Main

Recently, small-business owners have come under fire for not being ‘innovative’ enough. We look at what it means to truly innovate in today’s economy.

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When I first started covering entrepreneurs in the 1970s, few people actually knew what an entrepreneur was. But the evolution of American business was under way, creating an environment where entrepreneurs transformed from virtual unknowns in the 1970s into role models and heroes 20 years later.

In order to celebrate this new breed of businessperson, we differentiated between entrepreneurs and small-business owners (since owning a small business wasn’t a new concept). In the ensuing years, with the disappearance of many  mom-and-pop businesses and a change in the way business owners defined themselves (most say, “I own a business,” not “I am an entrepreneur”), this differentiation faded. Until now.

Small-business owner or entrepreneur? Despite the challenging economy of the past few years, I believe entrepreneurs have been busy innovating. But apparently not everyone agrees with me. A 2011 study entitled “What Do Small Businesses Do?” by Erik Hurst and Benjamin Wild Pugsley of the University of Chicago concluded, "Few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base."

Using the study as evidence, a controversial piece on Slate essentially concluded that small businesses aren’t innovative. In fact, the article’s author dubbed small-business owners as "common village professionals" without entrepreneurial aspirations.

Fine, but let’s acknowledge that a portion of America’s 28 million small-business owners have more “entrepreneurial aspirations” (meaning they’re more ambitious, more focused on rapid scaling and growth) than others. Still, does that make the rest of them less innovative?

Judging by the way Hurst and Pugsley define innovation, the answer would be “yes.” Their argument — that most small businesses don't invest in research and development, don't file for trademarks or patents, and generally enter a marketplace already crowded with similar ideas — equates invention with innovation. And that is so wrong.

Innovation vs. invention Don’t believe me? Here’s what authors and renowned innovation experts Peter J. Denning and Robert P. Dunham write in their book, “The Innovator’s Way: Essential Practices for Successful Innovation”: “There is a common, deeply held, and revered belief that inventions are the main cause of innovations. We call this belief the Invention Myth. Those who hold this belief … believe that if they are not cooking up ideas, they cannot innovate.”

The authors point out that the person who first comes up with an idea is not necessarily the one who implements it. “Creating new ideas,” they write, “is fundamentally different from getting people to adopt them.”

As proof, they cite a number of sources: the iconic Peter Drucker, who “believed that new knowledge is the least likely source of innovation”; a study for the National Research Council that concluded “the notion that innovation is initiated by research is wrong most of the time”; and a book about the history of American innovation by Harold Evans, who determined “that the innovators were almost always not the inventors.”

Real-world evidence comes in the form of great innovators like Ray Kroc and Howard Schultz, who disrupted entire industries (fast food and coffee) yet invented nothing.

While this may not agree with the University of Chicago study, it should be noted that business owners aren’t exactly flaunting their innovative credentials either. Why? Steve King, a partner at Emergent Research, says his firm’s research shows that small-business owners “don't consider themselves innovative because they think that's what big companies and tech companies do.”

King says several years ago, while doing a project on innovation, they were surprised that “almost all the research said the vast majority of small businesses didn't innovate” (with the exception of tech startups), even though King’s group saw “examples of innovation all the time” in its work with small businesses.

Emergent teamed up with Intuit to conduct a study interviewing entrepreneurs, their employees and customers. King says, “Almost all said their firms were not innovative. We asked what kind of firms were innovative, and the answers were consistently big firms and tech firms, with Apple and Google mentioned most.”

But King says when describing their companies, instead of saying “innovative” the business owners used words like "tweak," "adjust," "improve" and "change.” And yet, King says, “Almost all were innovative.”

So what is innovation? Perhaps the definition of innovation is the same as Supreme Court Justice Potter Stewart’s definition of pornography: “I know it when I see it.” The business owners in Emergent’s research, while rejecting the label of innovator, reported they “had an idea, saw a way to do it better, recognized an opportunity, found a way to meet their customers’ needs, or creatively solved a problem.”

Innovation is both inventing and reinventing the wheel. It’s the ability to take the ordinary and turn it into something extraordinary. Entrepreneurs and small-business owners innovate every day. They experiment, improvise and implement new ideas. They find new ways to do things. They refine manufacturing processes and open new distribution channels.

King says Emergent’s work “consistently shows no matter how innovative a traditional small business is, the owners rarely consider themselves innovative.”

Emergent’s research resonates. It shows small-business owners to be “active and natural innovators.” You may not think of yourselves that way, but this is one case where perception does not equal reality. Embrace your inner innovator. Take claim to the contributions you make, and (with apologies to singer Helen Reddy) shout, “I am innovator. Hear me roar.”

What do you think?

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