How can an SME out-innovate bigger companies?

Mid-sized companies have neither the Research and Development budget of big corporations, nor the spirited freedom of a startup. Yet in a recent survey of 3,000 executives, an impressive 45% of mid-sized companies stated that they usually drive disruption. This is less surprising than it sounds. SMEs occupy a unique space in the market. Corporate bureaucracy does not curb their ambitions, but they have sufficient resources to make ideas happen.

Three companies from the idyllic Austrian countryside offer valuable insights into how this helps SMEs to harness innovation to outperform their rivals. Zotter constantly challenges the conventions of the chocolate industry; Giesswein gave wool a new home in the world of sneakers; and Zanier is a glove brand that continues to push the boundaries and became the first firms in its industry to go climate neutral.

To leverage their combination of nimbleness and accessible resources, these SME innovators look for resistance as an indicator that an idea is not just average, they embrace experimentation in the real world, and they revisit old ideas when the time is right.

Innovation: can encountering resistance be good?

“We talk about things you should not talk about.” Josef Zotter says, when he explains why one of his recent creations—a chocolate bar containing spermidine (a polyamine compound originally isolated from semen but made out of wheat seedlings today)—fits so well with his innovation philosophy.

After multiple rounds of consumer testing, most companies drift towards the safe middle ground, the boring average. In chocolate that’s raspberry and milk chocolate. The world would miss out on pig’s blood or insects in chocolate if Zotter did the same. The chocolatier, however, is not deterred by opposition. On the contrary, he views resistance as one of the best indicators that an idea is truly fresh. “Whenever I experience resistance, I know that I am on to something. It’s the best way to identify outliers,” he says.

Giesswein’s 2016 foray into sneakers began with a similar sentiment. “Retailers told us to stick to house shoes.” Markus Giesswein recalls. “You don’t know anything about sneakers. Stick to your knitting, they said.” The two brothers running the wool manufacturer, which is known for traditionally designed indoor slippers and jackets, were undeterred. Bypassing the usual distribution route and sceptical retailers, they started to sell their merino wool sneakers online. Today, these sneakers make up 70% of the company’s record $80 million sales.

Innovation by definition introduces something new and unknown. Smart SMEs are not obsessed with de-risking. When they meet resistance, they spot opportunity. Large corporations are less likely to dive into these un-explored niches.

Starting small: how to expand through experimentation

Hypothesis testing is popular in the startup scene. Instead of making a product perfect, they introduce it, collect feedback, and then either relaunch an improved version or kill it all together. Large corporations are reluctant to do so and typically opt for more controlled experimentation. That’s sensible as they need to avoid undermining both their reputation and existing product lines.

Established SMEs are expected to be more like corporates, but those who thrive as innovators are prepared to act more like startups with one crucial distinction: they extend existing capabilities rather than starting from scratch.

The most extreme example is Zotter. Every year the company creates between 60 and 80 new flavours to replace around a third of its existing products. Conventional wisdom would suggest rounds of tasting sessions with consumers before launch. Zotter adopts an altogether different approach. Worried that the craziest ideas would not survive, they are simply put into shops. Retailers are not always keen. “They ask me which products sell best when they place orders, but I am adamant that they choose what tastes best for them personally. We never share bestseller lists!” Zotter explains. “Otherwise pig-blood chocolate would never make it into the shop.” And while around one-third of the bestsellers remain in circulation as cash-cows, even those are occasionally dropped. “If I take out raspberry champagne—which I did—I create space for 10 less popular flavours.”

A 2011 study on opera in the US, by Kyung Kim from Southern Methodist University and Michael Jensen from University of Michigan, showed that unconventional operas were popular with critiques but not with season ticket holders. For the latter, the inclusion of these curveballs was a reminder of the performances they loved. This is exactly what Zotter is offering. Consumers expect to be surprised with unusual flavours. If they don’t like one, they will remember all the others they do love. It’s courageous but sensible, as the company will never outdo Lindt or Cadbury by sticking to middle of the road products. Surprise is its secret weapon.

Markus Zanier, strikes a similar note “We can’t compete on scale, it has to be through constant innovation”. The company is smart of how exactly to experiment. It starts with mini-series which it sends to retail partners. “It’s important for them to feel and touch the product,” Zanier emphasises. “It’s not possible to understand what a product is like just from drawings.” That’s a risk, but a calculated one. It has produced winners such as a heated glove. First introduced to the industry in 1999, it has grown slowly but steadily ever since. Other products such as a carbon protector for the forearm or a GPS tracker in the glove did not work. The point is, you always need to experiment to stay ahead of the game.

Why you should bury ‘bad’ ideas until their time comes

Not all great ideas meet with immediate success. Giesswein tried to start direct to consumer sales via Facebook in 2011. It did not work. Consumers in Germany and Austria were not used to buying products that way, let alone clothes or shoes. But five years later, the company was able to build on its earlier experience. As Markus Giesswein puts it: “Every idea has its time.”

When retailers showed no enthusiasm for merino wool sneakers, Giesswein had to come up with a new distribution channel. The future of the firm’s main production depended on it. The pressure was on. The solution came from unexpected source: crowdfunding. People placed orders worth $80,000 of the new sneakers before the first pair had been produced. For the company, the message was clear. It was time to revive and update their plans for online sales.

Innovative companies have many ideas. Some of them don’t work, but by keeping them in their back-pocket, they are able to revive them when circumstances are more favourable. Zanier for example is constantly tinkering with materials. If the market is not ready, then no problem. “When we notice that the conversation is picking up pace, we can move fast as we did all the development work earlier,” says Zanier. In some cases it also means that the company is prepared to stay with a product for many years, making constant improvements while it slowly, but steadily gains popularity. The heated gloves, inspired by heated seats in cars, was only possible this way.

SMEs have a unique advantage, particularly when they are owner-managed. They can be almost as agile as a startup, without wasting hours to grasp the basics. Deep expertise in their home territory can be leveraged when they set out to disrupt the market. The secret ingredient is just enough cockiness to give them the confidence to ignore the naysayers and pursue their own path to success.

Christian Stadler is Professor of Strategic Management and teaches Strategic Advantage on the Global Online MBA.

Follow Christian Stadler on Twitter @EnduringSuccess.

For more articles on Strategy and Organisational Change, sign up to Core Insights here.

Learn to innovate with AI on the new four-day programme for Executives Business Impacts of Artificial Intelligence.   

This article was republished from Forbes.