TECH MONITOR  May-Jun 2007 17 Special Feature : Innovation & KM by SMEs G B G B 17 Managing innovation capability in SMEs The Fraunhofer three-stage approach Hans-Jörg Bullinger, Marc Bannert and Sabine Brunswicker SMEs need to innovate in order to survive and create competitive advantages. Com- petitive success is dependent upon an organization’s management of its innovation competencies. This article presents the three-stage Fraunhofer approach to assess, enhance and manage the company’s innovation capability in a targeted and sustain- able manner. It is based on an intensive review of existing literature and empirical research and builds upon good practices in innovation management in SMEs. This approach enables an SME to continuously control and improve innovation capabil- ity, independent of external experts. Prof. Hans-Jörg Bullinger President Fraunhofer Gessellschaft Hansastrasse 27C 80686 München, Germany Tel: (+49-89) 1205 1000 Fax: (+49-89) 1205 7500 Marc Bannert MT Innovative Technologies Tel: (+49-711) 970 2245 Fax: (+49-711) 970 2287 E-mail: marc.bannert@iao.fraunhofer.de Sabine Brunswicker Research Associate Competence Center Innovation Management Tel: (+49-711) 970 2035 Fax: (+49-711) 970 2299 E-mail: sabine.brunswicker@iao.fraunhofer.de Fraunhofer Institute for Industrial Engineering (IAO) Nobelstrasse 12 C, D-70569 Stuttgart, Germany now looking for products and services of high quality, enhanced performance and enhanced user experience - a fourth factor that comes into play. 1, 2 In order to sustain this increased competitive pressure, SMEs are forced to rethink their existing competitive strategies. Indeed, innovation is con- sidered as being the most valuable sources of growth and competitiveness. Traditional management practices, such as quality management or cost reduction measures, are not sufficient to sustain competitive performance. 3 A company’s capability to continuously generate innovation is now the key pre- requisite to position itself successfully in the market and to gain a unique and superior competitive posture. 2 Introduction T Special Feature : Innovation & KM by SMEs he need for small- and medium- sized enterprises (SMEs) to in- novate originates from various factors. First, globalization exposes SMEs to new competitors from distant parts of the world, resulting in an ac- celeration of the already rapid increase in competition. Secondly, niche markets that were traditionally served by SMEs are more intensively targeted by large enterprises as there is a tendency to make production processes more flex- ible in order to adapt them quickly to new market niches. A third factor is the rapid technological progress that has changed the nature of competition and makes existing products obsolete. Fi- nally, more demanding customers are