Small, Old, but Vital: Established Small Businesses and the Innovation Economy

Authored By 
Matthew Regele
Blog contributor 
Policy Fellow

We need to rethink small business and innovation. While it’s commonplace to state that small, old businesses aren’t innovative, this fails to consider their impact on customers. It turns out that such businesses’ stubborn refusal to change can paradoxically make them an invaluable resource for companies that are developing new products.

Customers often value small, old businesses for their specialized skills or experience. For example, I love the Parkway Diner in Worcester, Massachusetts because over the 50-plus years they have been in business, they have figured out how to make the perfect cheese omelet. But, this hardly seems to qualify as “innovation.” Indeed, to some extent it seems like the opposite – we value the fact that such businesses aren’t changing what they have learned to do so well. The last thing I want the Parkway to do is come up with a new omelet made from tofu and tree bark instead of eggs. In contrast, innovation requires developing new products. Thus, such small, old businesses seem to have little to do with entrepreneurial startups pioneering disruptive new ideas, or large corporations spending millions of dollars on R&D to develop complex new technologies.

But, translating ideas into commercially viable products often requires expertise and experience. Small, old businesses often possess this expertise.

Consider two industries I have been investigating in my research – aerospace and medical devices. These are two of the most innovation-driven sectors of the economy. Aerospace is extremely R&D intensive, with large players spending billions of dollars a year to develop new products. Innovation is also high in the medical device industry, with startups constantly introducing breakthrough new technologies. Yet, small, old businesses continue to operate alongside large dominant players and young startups in both sectors. For example, in Connecticut, where I live now, nearly 250 small establishments continue to operate in the aerospace industry. Similarly, New England medical device startups coexist with many small contract manufacturers that have been around for decades. If the owners of these businesses are the inflexible traditionalists we seem to think, then why and how do their businesses survive in such innovation-driven industries – in the high-cost Northeast, no less?

My ongoing work on these small, established manufacturers provides one answer. I find that such businesses can be critical facilitators of innovation. Even more interesting, it is actually small business owners’ stubborn refusal to leave their hometowns – by far the most common reason they give for their companies’ locations – that pushes them into this role. This is because stubbornly insisting on operating in high cost New England essentially eliminates manufacturing businesses’ ability to compete solely on price. Instead, they must rely on differentiation. Like the Parkway perfecting its omelets, small manufacturers’ achieve differentiation by developing expertise in a small number of complex production processes over many years. This ensures the businesses are the best at what they do. It also ensures a deep understanding of how those processes affect the materials with which they work. Such knowledge is critical to innovation in high-tech manufacturing industries like aerospace and medical devices, where designs ultimately need to be translated into physical products. Extensive outsourcing means that even very large players sometimes know little about what it will take to make such transitions. Similarly, startup entrepreneurs are often good at developing a concept, but rarely have the manufacturing experience needed to translate design into production. Established manufacturers’ help designers make these transitions in both cases. Without them, the “innovators” would have a difficult time making their designs come to life.

These insights suggest that businesses can be small and old, but vital. They may not create many jobs or introduce a lot of new technologies themselves, but they can facilitate innovation in other firms.

Policy makers would be well advised to keep all this in mind as they design economic development agendas. In addition to efforts to attract or retain large corporations and programs to help launch and support startups, they should seek to understand the expertise that has emerged in their regions over time, and how this expertise might inform innovation in various industries. Efforts should then be made to link this “old” expertise to the “young” innovators that need it, for example by creating new networking opportunities. Making such links may require changing the perspective of the small, old firms themselves. Often these businesses have been treated as if they are senile old curmudgeons waiting to die. They must be shown that they do not belong in the nursing home, but out sharing their advice with disruptive product designers in large corporations and young startups. And, if potential customers are smart, they will listen. After all, experience is not only valuable in the making of omelets.

Matthew Regele is an ISPS Graduate Fellow and a PhD student in Organizations & Management at the Yale School of Management.