It can happen at any moment: A bolt of innovation strikes, the competitive landscape of your industry suddenly shifts, and your entire business teeters on the edge of irrelevance. If you're in antiques, video stores, books, or used cars, you've long since been eBayed, Netflixed, or Amazoned. Accounting firms compete with TurboTax and car customizers tangle with computer-generated vinyl-graphics suppliers. If you're late in seeing the high-tech hit coming, of course, you're done for. On the other hand, you can really clean up if you're the one unleashing the innovation.
Yet despite the incursion of technology into nearly every aspect of every business, we still tend to think of companies as being either high tech or non high tech. This increasingly dubious distinction can really bite you when it comes to research and development. That's because while companies in explicitly high-tech sectors such as electronics and biotechnology consider R&D to be their lifeblood, non-high-tech companies typically put innovation on the back burner -- if they consider it at all. The truth is, all companies need strong research and development efforts -- to start operating as much like think tanks as providers of goods and services. The good news is that this isn't necessarily as big a stretch as you might think. The better news is that the government is prepared to pay you to do it. But more on that in a minute.
The problem is, many companies have an outdated notion of what R&D means, says David Audretsch, director of the Institute for Development Strategies at Indiana University and author of the forthcoming book The Entrepreneurial Society. "In the Cold War era, most technology in the U.S. came out of laboratory settings in large industrial corporations," Audretsch says. "The concept of R&D was invented for that environment -- and that's the way we still measure it." But these days, research and development doesn't necessarily have anything to do with engineers designing lasers on high-powered workstations or lab-coated technicians fine-tuning a DNA analyzer. It's about innovation -- any innovation -- in any aspect of the business. "We need to redefine R&D as creative work," Audretsch says, "as investigating where things are going."
Making such a shift is fast becoming a question of life or death for U.S. companies, thanks to another big trend: globalization. China has mustered a vast trove of capital investment and cheap labor that is undercutting American manufacturers of everything from socks to electronic chips; even service firms are under attack. "You're not going to be able to compete on price," says Audretsch. "You're going to have to live off of having a new idea that other companies around the globe don't have." A company that's doing all the things that used to guarantee success -- providing quality products backed by great service, marketing with flair, holding down costs, and managing cash flow -- is at risk of being flattened if it fails to become an engine of innovation.
It's not as daunting as it sounds. For example, Three Rivers, based in Mesa, Ariz., develops and markets products for people with disabilities. With just six full-time employees, the company can hardly afford a full-fledged research department. But Three Rivers is consistently innovative, developing products like a wheelchair with easier-to-turn wheel rims, as well as one that can fit down the aisle of a commercial aircraft and collapse to be stowed in an overhead bin. The four-year-old firm does it by scouring university research labs to dig up ideas it can license. "Our expertise is in deciding if there's a market for a new type of product, and in taking a lab prototype and developing it into a marketable, manufacturable version," says Ron Boninger, Three Rivers' co-founder and president. Most production work is done by outside manufacturers. But Three Rivers works closely with its contractors, encouraging them to come up with manufacturing innovations and design changes to make products more reliable and less expensive. One manufacturer, for example, was prodded into devising a new way to make specially designed wheelchair push rims -- a method that proved substantially cheaper than that offered by other contractors.
Innovation is not necessarily a function of big research budgets. Instead, it's a matter of constantly teasing out new thinking from every possible source.
For small but growing companies like Three Rivers, relying on outside expertise for innovation is critical, says Audretsch. Innovation, he says, is not necessarily a function of massive research budgets. Instead, it's a matter of constantly teasing out and usefully channeling new thinking from every available source: universities, suppliers, partners, VCs, board members, and all employees -- not just those who happen to be scientists or engineers. "It's not about traditional managing," Audretsch says. "It's about accessing and absorbing knowledge and finding a way to bring it to market."
The U.S. government apparently agrees -- and, believe it or not, is willing to put its money where its mouth is. With unusual foresight, the government back in 1982 created a program offering Small Business Innovation Research, or SBIR, grants or contracts to companies with 500 or fewer employees. The nominal purpose is to encourage small firms to provide government agencies with needed technology without having to suffer the frustrating bureaucratic hoop-jumping endemic to big contracts. But the government has never tried to hide the program's real agenda: to entice small and medium-size businesses -- which remain the heart of our economy -- into becoming more innovative for their own good. "We want to help companies get to where they're going, within their own business plans," says Edsel Brown, who oversees the SBIR program as head of the Small Business Administration's Office of Technology.
Each year, about 4,000 companies receive SBIR awards of up to $750,000; in 2003, the latest year for which figures are available, the grants totaled $1.8 billion -- and that number will climb for 2004, says Brown. But less than 1% of all eligible companies bother to apply. One reason is that most casual observers infer the grants are only for companies capable of producing high-tech breakthroughs for defense or other highly specialized applications. And if you look through the lists of "SBIR success stories" published on the program's website, you'll encounter tales of micro rocket thrusters, exotic electronic chips, nanofibers, laser-resistant optics, and a lot of other goodies straight out of a Tom Clancy novel.
But dig a little deeper and you'll also find companies that get grants for the stuff of everyday business: employee training, noise insulation, efficient logistics, waterproof inks, website development, and so on. Visibooks, a Frederick, Md., publisher of how-to picture books aimed at computer users, received a $487,000 SBIR grant in 2003 to develop versions of the books intended for learning-disabled and ESL students. The grant kept the company afloat while it continued to develop a new set of commercial products -- the first of which was recently introduced to a rush of orders. "These things will sell in the millions," says Visibooks founder and CEO Chris Charuhas.
If you simply make stuff, you're in a great position to collect: Last year, the Bush administration pushed through legislation that makes manufacturing innovation a "high priority" for SBIR grants. And you don't need to be working on a component of a spaced-based weapons system or a cure for cancer. Anything that's useful for the commercial market is probably going to be useful to someone in the government. The founders of a Hampton, Va., company called SmartCrane wanted to speed up ship loading at ports. Well, the Navy loads ships, and SmartCrane landed $300,000 in multiple SBIR grants in the 1990s to work on the technology. Since then, the company has swung commercial deals with crane manufacturers, including one with Rockwell Automation, and a $5 million deal with Mannesmann Dematic AG Gottwald. "We've got the swaying down to plus or minus two inches now," says SmartCrane co-founder Joseph Discenza.
Perhaps a byproduct of the SBIR program will be to help the U.S. economy morph into a giant innovation network that can keep us ahead of our global rivals. Now that would be government money well spent.
David H. Freedman, a Boston-based writer and Inc. contributing editor, is the author of several books about business and technology.