Approaches to SME segmentation for innovation
There are different approaches to segmentation:
- A priori segmentation – this is probably the most common approach used to segment SMEs as it is the simplest approach. This consists of classifying SMEs based on publicly available characteristics such as industry and company size. However, the challenge with this methodology is that SMEs in the same industry and size may have different needs.
- Needs-based segmentation – this approach differentiates SMEs based on their needs. For example, SMEs can be divided based on their position in the innovation lifecycle. This assumes that they have different needs at different stages from start-up to internationalisation. The challenge with this methodology is that incentives and support may be provided to SMEs that have similar needs, but the R&D efforts do not necessarily correlate to impact. There is a risk to focus the support on SMEs that are ‘incentive’ junkies but do not translate any R&D into economic value.
- Value-based segmentation – this approach differentiates SMEs based on their economic value. SMEs with the same value level can be grouped into individual segments that can be distinctly created. Identifying high growth SMEs is one of the most common approaches to this segmentation as high growth SMEs are expected to be the companies providing the greatest impact and return on investment. For this reason, policymakers often target companies with high growth potential, where the impact of the incentive/support may be particularly strong. However, research has shown that growth processes are often random and unpredictable, making the identification of high growth businesses exceedingly difficult.
Clearly, there are drawbacks with most of the segmentation approaches currently used. There is the need for a simple segmentation methodology that can be based on value and impact that does not just rely on the impossible task of identifying high growth SMEs.
For the segmentation approach to be used by organisations, it must be simple and easy to implement. Many players provide support and incentives to innovative SMEs - some of the largest ones include the government, but some, such as SMEs are unlikely to recourse to complex segmentation methodologies that require external experts.