Uncovering Barriers to Complex Incremental Product Innovation in Small and Medium-Sized Financial Services Firms

By Vermeulen, Patrick A. M. | Journal of Small Business Management, October 2005 | Go to article overview

Uncovering Barriers to Complex Incremental Product Innovation in Small and Medium-Sized Financial Services Firms


Vermeulen, Patrick A. M., Journal of Small Business Management


Developing new products is of the highest importance for the survival of firms. This not only refers to really new products, but firms also need to invest in modifying their existing products. Small and medium-sized companies are no exception to this rule. The present study focuses on the innovative activities of small and medium-sized financial service companies and aims to answer how small and medium-sized financial services firms organize their product innovation processes and what the main barriers during these innovative attempts are. Data from 30 financial small and medium-sized enterprises were collected to address these issues. The data showed that the firms in our study experience problems in terms of resources, project-based working, incentives, and information technology, despite the fact that the innovative efforts are aimed at modifying existing services. Although these issues may not be totally unexpected, the results from this study do point at some interesting distinctions with the previous literature. Furthermore, it is suggested that the impact of the barriers may be of lower importance than is often assumed in the innovation literature.

Introduction

Developing new products is of the highest importance for the survival of firms. Small and medium-sized companies are no exception to this rule (Huang, Soutar, and Brown 2002). Traditionally, firms experience many unnecessary problems in their innovative activities (for example, van de Ven 1986), which lengthen the development process. However, the increased turbulence of the environment in which these companies operate has required firms to develop new products more effectively and efficiently. This refers not only to really new products but to modifications of existing products too. These incremental product innovations are not radically different from the existing product portfolio but are often refinements and extensions of existing products of a company and seem to involve primarily exploitation-oriented activities (March 1991). They leverage a firm's existing resources and capabilities and, as such, only require routine procedures and capabilities (Leonard 1998; Nelson and Winter 1982). This study sets out to increase our understanding of incremental product innovation in the financial services sector by closely examining the process of and main barriers to incremental product innovation in financial small and medium-sized enterprises (SMEs).

Although incremental product innovation has been identified as a critically important competitive factor in established industries (Banbury and Mitchell 1995; Utterback 1994), most of the present studies on innovation in SMEs seem (1) to deal with radical innovations (for example, Huang, Soutar, and Brown 2002; Freel 2000; Hadjimanolis 2000; Hoffman et al. 1998; Vossen 1998; Wakasugi and Koyata 1997; Brouwer and Kleinknecht 1996) and stress the need for attracting sufficient funds, creating external linkages, hiring highly skilled employees, taking risk, and using networks. However, the existing literature remains unclear in the case of incremental product modifications where the issues just mentioned might not be of crucial importance. SMEs will probably have sufficient knowledge and resources to their disposal for managing these innovation projects and do not need external parties to participate in these efforts.

Furthermore, most new-product development (NPD) research in SMEs has focused on manufacturing organizations (for example, Huang, Soutar, and Brown 2002; Hadjimanolis and Dickson 2000; Hoffman et al. 1998), leaving a research gap in our understanding of the increasing services sector where product innovation processes remain understudied.

For many banks and insurance companies, most new products are extensions of existing products that build on current competencies (Avlonitis, Papastahopoulou, and Gounaris 2001; De Brentani 2001). This type of innovation mainly has to do with combining existing services, meaning that besides functional departments, multiple-product departments, which are all trying to defend their specific product domain, are involved in the development process. …

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