Driving innovation in SMEs through Entrepreneurial Orientation  

SME Publications/ SME XPO 2024

By Dr Ezra Carlson, below, strategic adviser, entrepreneur and KAI Practitioner  

The government’s innovation strategy is to turn the UK into a global innovation hub by 2035. It has been shown that long-term growth through innovation in technologies, production processes, supply chains, and business models can determine the ability of a country to raise its economic growth and productivity.     

The government’s plans follow a 2021 UK Innovation Survey which revealed that pre-pandemic innovation planning among SMEs was in decline. However, the same study also revealed, perhaps in response to the increased focus at a national level, that 55% of those businesses surveyed have ramped up their innovation planning activity over the last two years.    

While it is a promising sign that innovation is becoming a higher priority amongst SMEs, and the government, understanding the entrepreneurial orientation of your company could help you better understand and respond to internal and external strategic challenges facing your business, whether that’s on growing opportunities, better planning for long-term continuity, future mitigation, or in reaction to other market and industry factors your organisation could be facing.   

What is entrepreneurial orientation?  

Entrepreneurial orientation encompasses a better understanding of the strategic view of a company, considering its risk appetite, and understanding its decision-making processes, management style, and organisational culture and behaviours. Understanding an organisation’s entrepreneurial orientation can therefore play a vital role in establishing business continuity, growth, and future success.   

What is meant by innovation?  

Within entrepreneurial orientation, the concept of innovation is broad and dynamic, encompassing the introduction of new ideas, transformation, risk-taking, customer-centricity, proactive thinking, a culture of creativity, and learning from failures. Thus, entrepreneurial orientation can be viewed as a driving force (within organisations) for change that promotes a dynamic and forward-looking organisational mindset. These changes range from incremental to revolutionary and frequency.  

The opportunity  

The UK economy is driven primarily by SMEs. There are approximately 5.6 million of them, which make up 99.2% of all UK businesses, with a combined annual turnover of £2.3 trillion (52% of the private sector). SMEs employ around 16.3 million people (or 60% of the total employed population). Of these businesses that have 49 or fewer employees, they employ around 12.9 million people and contribute £1.6 trillion in turnover. In short, UK SMEs in the private sector provide the backbone of the UK economy.   

According to recent statistics, the top challenges UK SMEs face in embracing innovation are financial constraints, lack of skills or expertise, risk aversion, and access to funding. Secondly, businesses are facing challenges around outdated technology infrastructure, regulatory compliance, supply chain distributions and competition. Addressing these requires a combination of short-term (exploiting) and long-term (exploring) interventions, actions, and innovation continuously.   

Exploiting opportunities is focused on addressing immediate challenges (e.g., maximising short-term profits, or seeking quick returns) sometimes at the expense of long-term planning, stability, or sustainability. Exploring opportunities is an approach focused on looking towards the future beyond immediate results and short-term gains that considers the broader, often more complex, and enduring aspects of success. Entrepreneurial orientation involves a combination of both exploration and exploitation activities. Therefore, building this ambidextrous capability to simultaneously exploit and explore is key.   

The role of entrepreneurial orientation  

Firms are described as having an entrepreneurial orientation when they support and manifest entrepreneurial behaviour with sufficient regularity. This behaviour should become a defining organisational attribute or characteristic that results in a high frequency and intensity of innovation output (e.g., creating, changing, or improving businesses, products, services, processes, markets, etc.). It provides a strategic approach to innovation. These entrepreneurially oriented firms support and exhibit a sustained pattern over time that is generally characterised by innovation, proactiveness, risk-taking, competitive aggressiveness and autonomy through processes and behaviours that are embedded into the DNA of the company occur at three levels:   

  • Management style: that captures the goals, beliefs, decisions, and communications which demonstrate organisational commitment to new value creation
  • Organisational configuration: by creating complementary processes, routines, structural choices, and cultural climates that foster entrepreneurial behaviours
  • Organisational entrepreneurial behaviours: that manifest in terms of externally directed new entries (products, services, ventures, etc.) targeted at the exploitation of those explored opportunities for new value creation in the market 

There are several tools to evaluate entrepreneurial orientation as a firm-level capability. EO Audit provides a way to measure and benchmark entrepreneurial orientation and its five dimensions (autonomy, innovativeness, risk-taking, proactiveness, and competitive aggressiveness). This can be used to develop a snapshot of your current state and a strategy for change. When used alongside qualitative assessments of your organisational configuration and behaviours, can provide powerful insights to surface key constraints.  

However, people lie at the heart of driving entrepreneurial orientation. According to adaption-innovation theory, we all have a preferred style for developing new solutions, which creates change, ranging from incremental to revolutionary. Some people are more comfortable with change that involves breaking the mould, taking great risks, and challenging the system (i.e., revolutionary). While others prefer to make efficient improvements to the system, take fewer calculated risks, and lead with more group conformity (i.e., incremental). There is no right or wrong, better or worse style for leading change. Instead, you need both for developing your entrepreneurial orientation for exploiting while exploring. The Kirton Adaption-Innovation Inventory (KAI) provides a powerful psychometric tool used to measure an individual’s problem-solving style that connects a dimension of our personality to how we engage with change.  

Combined, these tools can help ensure companies are investing in the right resources depending on their innovation needs.   

In today’s marketplace innovation amongst SMEs is essential for short-term business continuity and long-term growth. The ability to better understand your entrepreneurial orientation could be the key to understanding where change is needed and how to enhance an organisation’s ability to innovate, develop, and drive success.  

SME Publications/ SME XPO 2024