3/2014, In English, Tutkimus ja innovaatiot

Networking as a way for innovation in SME organizations: The case of the Chech Republic

Introduction

Innovations are crucially linked with the business sphere. Without the competitive market environment and appropriate innovation policy, the enterprises are not able to discover and make the best of new business opportunities through innovation (Schumpeter, 1939, Drucker, 2008). Entrepreneurship under non-stable and risky environment, brings to entrepreneurs new dimension of skill development – not only high level of professional skills, but multipart model of basic managerial skills required for decision-making and risk taking in innovative entrepreneurship as whole. Traditional models of innovative behavior cover only few variables like structure of organization, climate, processes and leadership without dynamic points such as behavior of elements (Lehman, 2002, Burke and Litwin, 1992).

The purpose of the paper is to examine how important role play strategy preferences as quality improvement, human resource care and others in the area of openness for cooperation in innovation and find the answer to the following questions theoretically defined (Kimberley, Cook, 2008): (1) Which factors support innovative environment in the organization? (2) Which kind of organizational values must be used to adopt innovations, under risk and support future cooperation? According to the review of literature that was carried out in advance of any primary research being undertaken, nobody has yet tried to combine this area of values to compare. A detailed analysis of the data is still in process but early indications suggest the following results: (1) According this to suggest recommendations which could be used in the future as a metrics for innovative spirit evaluation. (2) Finally, we believe, that SMEs should be more innovative and competitive when they cooperate, so the entrepreneurs, who support external cooperation, reach more longevity in their products. Small businesses offer their new services and products on the local market, inspired by original global product, so they mostly offer cheaper, home-made imitation of some innovation activity (Pichlak, 2008). In many case studies, firms between 10 to 49 employees are proactive in the process of on-going learning and innovative process. They are still under the pressure from the market to offer unique product or service to survive and to be competitive. They exist qualitative and quantitative barriers to support innovative climate within organization based on owner’s personality, financial sources and others competencies which could cause low innovative activity (Ćwik, 2007).

According to Pichlak (2008) and Ćwik (2007), there are in the paper, specific tasks to solve: (1) What behaviour will support innovative and cooperative behavior of small business? (2) Pichlak (2008) specified types of innovation – which of these should we find in the strategic behavior of small businesses? According to this part of questionnaire we set up two main quantitative-based hypotheses to be evaluated in the case of the innovative spirit in the whole sector.

H1: Enterprise, which was in the period 2009–2011 in decline business phase (without any innovation potential or cooperation vision), will mainly evaluate their priorities of business in grades of 5-7 (average and higher rating) as a priority to survive in the market in most areas.

H2: As a final connection to the innovative approach for businesses, if a company invests more than 5%–10% of their turnover toward innovative activities, they will have high priorities in external cooperation for innovation.

Theoretical framework

Entrepreneurs as individual entities in the market, require resources such as labor, information, skills and capital for their businesses. They often use friends or informal contacts to acquire these and to contribute to knowledge generation. During a period of economic crisis, the role of the entrepreneur has changed. Entrepreneurship is based on decision making in an environment full of uncertainty whilst pushing businesses into an innovative but risky strategy application and finally acquiring new knowledge (Nijkamp, 2003). Most of previous studies simply describe the effect of new business formation activity on a performance measure with some control variables; however, some studies have applied an explicit production function framework. That also contains indicators for the contribution of other inputs to growth (Wong et al., 2005, Audretsch et al., 2004, 2006). Monitoring the degree of flexibility can encourage greater creativity and focus on strategic planning and management in small and medium enterprises, which is so often underestimated. Subsequent delay introducing changes could cause major changes in behavior and may influence the ultimate effectiveness of the strategy.

Nowadays we deal with changes, which could be managed, mainly with innovations, which assume creative and untraditional thinking. New ideas and vision formation, acceptation of all ideas, formation of model situations – that all form the basis of change command. Most frequently we are finding the conception – systematic innovation – because innovations play basic role in actual economics and social transformation. Above mentioned ways produce a very flexible and opened organization, where people will accept and adapt to new ideas and change through shared vision. Building a learning organization is a means to become an innovative company. As new outputs, innovations may come from new knowledge as well as from the combination of existing knowledge to create innovations (Henderson and Clark, 1990), using combinative capabilities. The strategy is very important because if the innovation is not in a line with the strategy and internal environment, the innovation may fail and thus the learning-innovation link will not be related to performance. The key determinants of innovation are strategic behavior and market-oriented strategy. The organizational and strategic processes, which are have a social character, now replace the technological process. The agents of innovation are executives and professional managers rather than technocrats. Those innovations need to be guided by corporate strategy that the management tries to control. We can say that strategy must be a well-known and long developed concept. However, strategic behavior requires understanding of corporate needs today to create future value rather than control costs. It requires not only manager’s knowledge of their enterprise but also the entire economic chain, markets, and present and future competitors (Vlček, 2002).

Research context and methods

General business environment of the 21st century is mainly characterized by rapidly changing factors which are needed to address. Among the main factors that pushed the growing needs of innovative activities are according Rylková (2011), in particular: (1) Shortening life cycles of products and the need to develop constantly new and better ones. (2)Technological progress (nanotechnologies) is new opportunities for businesses (3) turbulent market globalization and the presence of new competitive threats, which means that missed opportunity becomes threat to businesses. (3) Demands of customers (cheap, quickly, high quality).To be able to withstand in competitive environment, the company must never interrupt development of new products/services. Therefore, when a product or service is successful on the market, innovation, which will replace it, must be worked on. Innovative activities are closely related to the firm’s survival on a globalized market and with competitiveness, which specifically reflects in the continuous process of renewal and improvement of goods and services production, production process and economic potential of enterprises.

In this survey we aim to identify the effect of investment on innovation, strategy preparation and the relationship between financial ratios and the performance of the company. To test the propositions, a field survey using questionnaires was conducted. The questionnaire survey was conducted with owners and managers of small and medium size businesses in the Czech Republic (under 250 employees) operating between the years 2009–2011. The companies fulfilled the criteria of (1) being designated as small and medium sized companies by their number of employees – fewer than 250, and (2) agreeing to a personal visit. Out of the total number of companies (722) entire 89% fall in SMEs according to the categorization (2003/361/EC). Survey finally participated 670 companies.

The questionnaire had six sections to describe dynamic factors, which influence company behaviour; these were strategy performance, crisis and risk management, personnel policy, production and innovation, grants and supporting policy and environmental policy. Data obtained from questionnaires were analyzed through the SPSS statistical packet program. The questionnaire was focused on seven areas of interest (51 questions): Strategic Enterprise Management (6 questions), Economic and financial business development, risk management (11 questions), Personnel policy of the company (7 questions), Production, Service and Innovation (8 questions) Grants and subsidies (4 questions), Energy and material savings and use of renewable resources (8 questions), Priorities in business sustainability (7 questions). Results were coded using a Likert scale (1–5 for non-numerical data and extended 0 to 10 in the last section for innovation potential measurement).

The sample size (n) was calculated by using the formula recommended by Olaru, Dinu, Stoleriu, Şandru and Dincă (2010, p.15).

where:
t….confidence level, corresponding to probability with which the accuracy of the results will be guaranteed, from the statistical tables of the Student distribution
p….prevalence, probability or proportion of the sample components that will explore the problem.
ω…….acceptable margin of error.

The sample size corresponds to recommended minimum value in probability of 0.95. The minimum sample size was computed according equation (1) as follows:

  • t value in α = 0.05 is 1.96, p value = 0.5559 is counted as proportion of businesses, which will be in a “good – B group” according ČEKIA stability rating for the year 2011 (ČEKIA, 2012), ω = 0.05 is acceptable error limit of 5 %. Minimum sample size = 1.962 x 0.5559 x (1 – 0.5559)/ 0.052 = 379.36 respondents.

Empirical findings

Innovative activities are closely related to the company’s survival in a globalized market and with competitiveness, which is specifically reflected in the continuous process of the renewal and improvement of goods and services as well as production processes and the economic potential of enterprises. The last question, which united the image of the services sector for this article, concerned the priority evaluation in the field of human needs, optimization of efficiency in terms of personnel, processes and products, as well as the attitude of the company towards the environment and how it contributes to the reduction of current and future costs, including improving the quality of production.

In this study, the sample consists from 50.1% of limited liability companies, followed by 29.4% of sole traders who slightly exceeded the threshold for representation, other forms not exceeded 19.5% (joint stock companies or without answer). To describe a proper picture of the current situation, we were interested in the average annual gross turnover of the period 2009–2011, which shows us that nearly 29.7% of the companies had an annual turnover of up to 10 million CZK (Czech crowns, nearly 400 000 €; exchange rate 1€ per 25 CZK). On the other hand, 21.7% had a turnover up to 1 million CZK (40 000 €). The third main group of 22.1% of companies achieved turnover up to 100 million CZK.

In the area of company size, there is significant to mention, that in our sample more than 42% of companies stated to have up to 10 employees and 25% of them were between 11 to 50 employees (sole proprietors had a share of 9% only). Support of innovation spirit is also connected with business cycle of the company. Most were businesses that have agreed to be in a growth phase. This phase concerned 50% of respondents. On the contrary, 39.35% of companies claimed that they are in decline. This ambivalence is a very interesting phenomenon and definitely worth it for further analysis.

Although it is continuously recommended, how important in volatile market conditions it is to innovate, our companies from the sample obviously do not comply. Only 30.2% of companies stated that 1% of turnover is invested to their innovation activities. Another category, 1–5% are not much better, full 31.9% of companies investing in innovations only 5% of their turnover. Innovative activities are closely related to the firm’s survival on a globalized market and with competitiveness, which specifically reflects in the continuous process of renewal and improvement of goods and services production, production process and economic potential of enterprises, there was the reason to compare two areas – an investment and revenues from investment (see fig. 1).

Fig 1. Investments and Revenues in innovation area in years 2009–2011.

As mentioned above the revenues are balanced with costs of investment in significance level of 1%. It is comparable with official statistical data, that usual rate of return ratio in innovation area in service sector is 0.9 to 1.4% from current turnover, after that the investment isn’t profitable (CSO, 2012). It is connected with the type of innovation, which SMEs prefer to provide – their main products (compare with fig. 2) to deal effectively with customer demand.

Fig. 2 Types of innovation in relationship with the company size

Potential evaluation for network building

Finally, all factors in area of innovative and sustainable business were taken from previous official national research results (CSO, 2012) and previous studies made by Pawliczek and Piszczur (2012) or Rylkova and Antonova (2012). Seven questions were asked in order to make a judgment within the extended Likert scale of 0–10, with 0 as zero priority and 10 the highest priority. The question about priorities of companies in the field of sustainable business and supporting creativity and the innovative spirit in the company was composed of 7 parts:

  1. The fulfillment of basic human needs (working space, customer and employee satisfaction); (NEEDS)
  2. The harmonization of the environment (HARM)
  3. Optimizing performance (people, processes, products); (OPTIM)
  4. Prevention of loss and waste (reduction of current and future costs); (LOSS)
  5. Improving the quality of production; (QUAL)
  6. Optimization of resource utilization (labor, raw materials); (RES)
  7. Extended lifespan of products (extending their potential profitability); (LIFE)

In each business, we would find different priorities in relationship with business cycle and strategic change. Overall priorities could be described in followed table:

According simple analysis, the most important priorities for sustainable business are fulfillment of basic needs, performance and quality aspect. As being noticed, 75 % of companies (25th percentile) reach the mark of 6 or 7 from the scale of 10. Finally, the fourth component as prevention of loss achieves the maximum mark in 75th percentile (compare table 1 and 2).

Table 2. Sustainability and strategic changes. Independent T-tests,α level = 0.05

Relationship between two directions – strategy and sustainability confirmed the conflict in planning future of the business and could be seen that values are statistically valuable in α=0.05 only in expanded plan, so in a group of A ranked businesses, in business cycle of growth. In other groups it doesn’t make sense to conclude that those priorities aren’t important. They should be, but they are not in a harmony with other parts of analyzed units (compare table 3 and 4).

Table 3. Business cycle and Sustainability. Independent T-tests,α level = 0.05

As could be seen below (tab. 4), small companies in area believe in their own resources or they do not have any strategy for the future cooperation to support innovative spirit in their local area. A small group, especially in the group of “above” average investors could be seen “spirit of external cooperation” in the form of partnership with Universities, technology centres or in the form of open innovations.

Table 4. Internal and External Sources of Cooperation in Innovations

Hypothesis evaluation

In our paper, we set up two main areas to evaluate as follows: Enterprises in decline period and their priorities and enterprises with innovative and cooperative potential.

  • Hypothesis 1: Enterprise, which was in the period 2009–2011 in decline business phase (without any innovation potential or cooperation vision), will mainly evaluate their priorities of business in grades of 5–7 (average and higher rating) as a priority to survive in the market in most areas.

The answer is supported by previous analysis, made in the table 4. Main priorities for businesses in the decline period are (1) The fulfillment of basic human needs (working space, customer and employee satisfaction), (2) The harmonization of the environment, (3) Optimization of resource utilization (labour, raw materials); and Quality. Finally, in the statistically significant areas they achieve marks above 6, so H1 must be confirmed.

  • H2: As a final connection to the innovative approach for businesses, if a company invests more than 5%–10% of their turnover toward innovative activities, will have high priorities in external cooperation for innovation.

In this phase of survey, growing businesses belonged into the group of innovation investors, who invested mainly into 5–10 % of their turnover. The sample was divided into three main groups of those innovative investors:

  1. First group, investors up to 1% (30.7 % from the sample) of their turnover, there is consisted of the group in decline stage (41.3 %),
  2. Second group (1–5 %, 32.4 % from sample), relatively the most frequent value for companies in a growth stage (56.2 %).
  3. Last group, 18 % from the sample, mostly from businesses in a growth (53.7 %), but a second group formed her – businesses in decline – 34.3 %.

This analysis is confirmed by correlation coefficient (better relationship, and statistically significant = 0.349, sig. = 0.000, α = 0.05 and χ2 test value 63.570, df = 30, sig. = 0.000). The hypothesis 2 we can statistically confirm on α level 0.05. Also, we can add connection with the table 4, priorities in cooperation, where are external factors of cooperation dominating.

Discussion and conclusions

The survival of the business unit not depends only on the area of business, but according the previous analysis, on non-financial ratios, like cooperation, level of project management and others. Very important factor, for future analysis, is to examine an impact of green behavior on innovations and innovation types provided. The importance of these factors rapidly increased in multistage analysis.

The practical value of the non-financial information regarding the correlation between significant factors for business success within innovation implementation is very important for predicting and evaluating current and potential situations. It would be helpful when working with the causalities of failures in business sector, because each innovation process needs a good business plan and must be evaluated (Altman, et al, 2008).

It is very important to understand, that the overall approach of one aim fitting every business unit is not true. In the previous analysis we briefly identified the main drivers of innovative behaviour across the life cycle theory. Previous experience in Germany supports our study with the argument that 57% of their respondents do not have a well-defined innovation strategy, against 19.4 % of non-innovators in 2008 (Bessant, Davies, 2007, p.89).

Innovation in manufacturing is not seen as a separate activity, represented by different characters, but as a set of activities leading to the creation of new complex solutions. Decisive role in increasing the competitiveness of companies (respectively the economy) is played by productivity growth. Driving force of the Czech economy seemed to be, also according to this indicator, mainly manufacturing, however, the service sector, contributed significantly to this growth – businesses increase productivity not only by use of new ”hard” technologies, but also the use of modern information systems, modern management methods, efficient financial services and other including outsourcing these activities. In today’s strengthening trend of economy, increasing interconnection of industry and services is still apparent.

Finally, it should be emphasized there are limitations of the available data giving evidence of innovation activities in the service sector. Available data are still tied to the traditional model of innovative activities related mainly to technical innovation in the industry and R & D activities (Pawliczek, 2011). Characteristics of innovations, way they originate and where their barriers are, however cannot be read in detail of the data. However, this survey was conducted on firms of Czech Republic, especially in the Moravia-Silesian region; so findings might not be transferable to all types of organizations. Thus, it is recommended that further researches can be conducted on small-scale organizations and in different regions for the transfer of findings.

Acknowledgements

This paper was supported by the project ”Innovation of Educational Programs at Silesian University, School of Business Administration in Karviná” n. CZ.1.07/2.2.00/28.0017.

Author

Jarmila Šebestová, assistant professor at department of Management and Business, Ph.D., School of Business Administration in Karvina, Silesian University in Opava, Czech Republic, sebestova@opf.slu.cz

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