An Evolutionary Approach to Innovation and Strategy in Small and Medium-Sized Enterprises

Abstract

Most economic theories, which are based on concepts of equilibria and closed systems, do not sufficiently manage to describe the dynamics of the economic process. The Austrian economist Schumpeter already formulated at the beginning of the 20th century that revolutionary innovations are often necessary to survive in competition (Schumpeter, 1993 [1934]). Therefore one can argue that economic actors engage in a process of competition involving variation, selection, and retention. New products and processes weed out old ones, enterprises fail and are replaced by new ones (Alchian, 1950; Campbell, 1960; Nelson & Winter, 1982). Particularly innovative enterprises may provide solutions to new societal and economic problems emerging constantly in times of increasing globalization.

We argue that many traditional instruments and concepts of strategic management are not suited sufficiently for the situation of young, innovating enterprises. Classical hierarchical and planning-oriented tools often fail due to the dynamic character of modern economies and quickly changing situations for new and small enterprises. The consequence is a switch in focus from static to dynamic models (Meyer & Heppard, 2000). Uncertainty, complexity and the search for novelty are becoming increasingly important, particularly with respect to entrepreneurial ventures (Kraus & Reschke, 2004). For example, positioning advice and value chain analysis (Porter, 1980; 1985) are useful in stable or ‘defined’ environments, while re-engineering (Hammer & Champy, 1993) may be of help to managers of established firms under pressure from new competitors and technologies. ‘Learning’ perspectives (Hamel & Prahalad, 1994; Mintzberg, 1994) tell us what to do but do not convey information on where to go and how to get there. This requires an adaptation of existing tools and necessitates the development of new tools for small and young enterprises to deal with innovative products. We take the initial steps here, laying a theoretical foundation for their development.

The paper proceeds as follows: After a short description of theoretical concepts, we discuss the transfer of evolutionary theories to economics and strategies and develop an adaptation for human social systems. Subsequently we discuss classical concepts of strategic management and in conclusion develop a model of evolutionary strategic management which we relate to the situation of innovating small and medium-sized or new enterprises

Keywords: Innovation, Strategy, Entrepreneurship, Competition, Evolution, SME, Small Enterprisese, Model, Evolution, Population Ecology