Small businesses are the innovators of the world, while functioning in a climate in which innovation is rapidly becoming a word that's use is so ubiquitous that it's in danger of losing its power, and that would be a bad thing. Broadly, its usage is frequently synonymous with invention or creativity. Narrowly, innovation can sometimes refer to a particular part of the development of a new product or service, usually having to do with a specific type of technology.

Earlier this year, Babson College published a research report The State of Small Business in America 2016, highlighting the top challenges and opportunities that America's small-business owners face in today's economic climate. One of our most unexpected findings revealed the amount of innovation under way by small-business owners. Survey results aggregated insights of more than 1,800 small businesses across the U.S., all employers representing every industry sector, with a median age of 12 years in business, a minimum of four employees, and at least $150,000 in revenue. In other words, entrepreneurs who are the economic core of our country.

When met with the right mix of training and support, we know that America's small-business owners can innovate, grow their companies, and create meaningful impact in their communities. Our data on Goldman Sachs' 10,000 Small Businesses participants overwhelmingly demonstrates that companies receiving a business and management education are significantly more active in research and development and using innovation as a means of growing:

  • More than one-third are engaged in research and development for a new product or service
  • Nearly half are in the process of launching a new product or service
  • About two-thirds are improving the quality of an existing product or service

These numbers are consistent across both women and men business owners, and vary little across businesses of different ages.

This month, we conducted a focus group with Goldman Sachs' 10,000 Small Businesses participants to understand exactly how owners think about innovation and what it means to their businesses. Small-business owners don't necessarily use the word innovation with regard to their business activities initially; however, they enthusiastically describe innovation as a means of standing out from competition. Our in-depth discussion reinforced the notion that while small-business owners may not realize the extent of their innovation activities, they are certainly innovating in important ways that match the early entrepreneurial foundation of business innovation (with appreciation to Joseph Schumpeter for the five means of innovation that follow).

Small-business owners are indeed innovators, actively pursuing new opportunities and implementing strategic business changes to solve problems, grow, and create:

1. New products

Vinit Dhruva, owner of DFW Motel Supply & Textiles-NJ, a hospitality supplier and distributor, develops new products to meet client needs by continually looking at the clientele and identifying pain points in the industry. For instance, through this client-centric approach, DFW came up with a "one-time alarm clock radio" for hotels: You set it, it goes off at the appropriate time, just for you, and then the setting is gone. For all of us who have been woken up in a hotel because of a previous guest's alarm schedule, this is a welcome enhancement.

2. New methods

Evelyn Rodriguez, owner of the Aquiline Group, a full-service marketing and communications firm, acknowledges innovation is a tricky concept, because "you don't want to be constantly reinventing the wheel to keep up with competition," one that for her means a focus on how to advance new business methods to increase efficiency. Her goal is to use innovation "to be able to deliver our services in a way that we can distinguish ourselves." Jennifer Nemec, owner of design firm Ideation Studio, also prioritizes process. Jennifer believes her company's tight design process is currently one source of competitive advantage, as the studio also works to innovate within the sales process as another means of market differentiation.

3. New markets

Beulah Trey, owner of Vector Group Consulting, an international organizational consulting group providing executive coaching to health care leaders, says her team keeps an eye on the market. When they see that everybody is operating the same way, they know they have to create the systems and resources to do things differently. For Beulah, the usual way of doing business is not viewed as the pathway to growth. For one more example, when Gene Sausse, owner of BooKoo Bounce in New Orleans, doubled the space for his inflatable playground and party-place business, he transformed his customer base by adding an arcade area as an attractive party option for even older children.

4. New sources of supply

Gene shared that BooKoo Bounce was innovative in more than one way. He recognized a partnership opportunity with the supplier of his new arcade, as a resource for maintaining the gaming equipment. The supplier was in fact willing to provide some initial investment dollars as well as work out a financial split for an ongoing business relationship.

5. New market structures

Martin Parisien, co-owner of vanilla company Singing Dog Vanilla, ascribes much of its latest business success to revolutionizing the supply chain for the product, by not only avoiding the use of a distributor but also by refusing to sell to customers that insist it use a distributor. While admitting that can make it harder to get into the larger stores initially, Martin also suggests this approach has contributed to larger chains' creating a different kind of direct order system to better accommodate smaller suppliers.

Three keys to facilitating small-business innovation

Changing products and processes is not an easy thing to do, yet clearly is important to each of these business owners.

Small-business owners shared recommendations on how the government can address this mismatch and make it easier for their businesses to innovate:

  1. Local economic development agencies could support networks and physical spaces for a greater variety of small-business owners and businesses to connect and create in a way that leads to a more innovative business environment. Collaborative use of prototyping equipment, etc., could encourage more owners to test new ideas.
  2. The cost, rules, and paperwork required to protect intellectual property could be reduced. Training programs for small-business owners need to include innovation-focused information and tools. Data shows that cybersecurity and protection of intellectual property are two significant areas of exposure for small businesses.
  3. Access to working capital and lines of credit to help small businesses innovate could be facilitated. Small-business owners consider innovation critical, yet rarely have an innovation budget line. Being able to plan for capital investments in this area would support innovation that leads to business growth.