Are smaller companies more innovative than larger ones?

In last month’s article we looked at why larger companies were more innovative than smaller ones, whereas in this article we’ll argue that it is in fact smaller companies who take the lead when it comes to innovation. Austrian Economist Joseph Schumpeter first argued that smaller companies were more innovative, although he left this world believing that it was indeed larger companies who had the edge when it came to being more innovative. However, much has changed since then, and today’s ‘technology age’, has, in many ways, created more of a level playing field for smaller startup companies.

Advantages of Smaller Companies

Quick To Respond

One of the strongest arguments in favour of small companies being more innovative is that they have the ability to act quickly and decisively, particularly in terms of executing on new ideas. A flatter organisational structure means there are rarely layers of management and departments that must approve an idea or project before it is signed off. By comparison, larger companies usually have several layers of management that an idea must ‘ascend’ through before it is finally signed off. This can have a couple of very serious consequences: Firstly, the initial idea may have had so many revisions that it is almost unrecognisable once it is approved. Secondly, even if the idea remains unchanged but takes several months to be approved, this has cost the company vital time. Fast execution often means smaller companies can quickly create a minimum viable product and get introduce their innovation to the marketplace.

Less Risk-Averse

The quest for innovation through research and development is an inherently risky process. There can be significant consequences to a business if an R&D project ‘fails’ at any stage, consequences which can often have a very serious impact on the finances of a company. However, this is something that small companies are well aware of, and unlike large companies, they often have less to lose and a more entrepreneurial, risk-taking culture meaning they are more likely to really push the envelope when it comes to innovation. It could be argued that most of the innovation we see from larger companies is based around making small improvements to existing products (Latest models of Apple’s iPhone being the perfect example of this), whereas more innovative breakthroughs, such as that recently released by Plastc, often come from smaller companies.

People & Culture

Following on from the prior point, smaller companies, particularly those on the startup scene, are far more likely to attract highly entrepreneurial people who are driven by something more than picking up their monthly paycheck, meaning the resulting company culture is conducive to innovation. By comparison, apart from a handful of very obvious examples, there are very few large companies who are known for having an entrepreneurial and innovative culture. With the flood of venture capital into the tech startup scene over the past fifteen years or so, a large number of very talented people, including many ex-bankers from the City of London, are now willing to work very hard in startups, knowing that the right product or service could make them very wealthy.

There is clearly a very strong argument for both large and small companies here, larger companies seem to have the upper hand when it comes to less groundbreaking innovations but larger R&D projects, whereas smaller companies have the upper hand when it comes to executing quickly and producing something more groundbreaking.