A step toward filling that gap is found in a June 2006 study, "PRODUCT AND SERVICE INNOVATION: FINAL REPORT" (PDF) by David Cheney, Sushanta Mohapatra, P. Shapira, Y. Youtie, E. Lamos, and A. Bhaskarabhatla, SRI International and Georgia Tech Program in Science, Technology and Innovation Policy. This report examines examines innovation in product and service offerings for SMEs, with Georgia in mind. Early in the report we get a reminder about the importance of innovation for economic success:
A survey of Georgia manufacturers conducted in 2005 found that fewer than 10 percent of Georgia manufacturers compete for customers through innovation or new technology compared with more than twice that amount competing through offering low prices. Yet innovative companies are much more profitable and pay on average $10,000 more in average wages (Youtie, et al., 2005).
Later we have several case studies that show how SMEs need to be flexible as they pursue innovation. For example, consider Gage Products a Michigan manufacturer of specialty paints and chemicals. They used to focus on providing paint products for auto makers. But when they developed "Cobra," an environmentally friendly product (no methylene chloride) for cleaning paint circulation systems, it sparked a series of business model innovations.
Cobra was an innovation in the product space. However, the unique nature of this product innovation catalyzed major transformation in the firm’s business model. Prior to the introduction of Cobra, most plants used methylene chloride to clean paint lines. But, for environmental reasons, plants needed to adopt a replacement for this heavily regulated material. Gage introduced Cobra as a non-chlorinated material that started mechanical cleaning of the lines as an industry practice. The product was new to the market, and needed certain technical expertise at the plants. Seizing the opportunity created by stringent environmental regulations and Chrysler’s urgent need to improve the use of solvents, Gage changed its business model from purely selling solvents to providing consulting and technical assistance in implementing new solvents and cleaning systems. Gradually Gage moved up the value chain to provide complete paint system maintenance for plants resulting in cost savings, better paint selection and lower solvent use leading to reduced environmental footprints of their clients.
Apart from onsite consulting on paint maintenance systems, Gage developed a refining process to recycle millions of gallons of purge solvents which would otherwise end up in landfills. Today, Gage collects the purge solvents from clients, purifies in a large distillation system, and returns almost 70 percent of the purge solvent as clean reusable solvent to the plant. The byproduct is used as fuel for making cement. This process innovation in the form of recycling solvents has led to environmentally sustainable new products and applications, reduced cost and improved productivity at automobile plants.
In order to fully embrace these innovations, the firm had to fight resistance from inside and from the clients. Gage employees and plant employees had to be educated to relinquish age-old paint practices and adopt new techniques and products. Gage redefined basis for pricing and profits in contractual agreements. The company also changed the sales incentive system to focus away from volume of solvents sold to emphasize cost savings for the client in the paint shop.
A great example of what can happen when a flexible company thinks beyond improved products and rethinks the business model in terms of new offerings across the entire supply chain. Many times an innovative product can create opportunities for business model innovation as well.
When you've got a hot innovation, view it as the beginning, not the end!