Introduction and purpose: Innovation has become an increasingly important part of organizational development, both product development and process development. This due to globalization and increased competitiveness on the market. Innovation is about to develop and adapt strategies to focal organization, and to improve capabilities that is useful for current situation and circumstances. This is something that has proved to be difficult for organizations. The case organization in this thesis work perceive to find strategies for how to structure their work with innovation management, by make use of the skills and available resources.   The purpose of this thesis work is to identify obstacles that prevent innovation and to suggest how a small and medium-sized enterprise (SME) with outsourced production can improve their innovation capabilities to be more competitive in market. Method: This thesis work is based on information collected and analyzed through semi-structured interviews with managers within a case organization. The interviews were carried out in order to create an understanding of current organization. Chosen questions concerned how the organization are working with innovation management. Results: Obstacles for innovation capabilities can be based on several different factors. For example, an obstacle in this case could be lack of internal competencies, lack of communication between the organizational departments or too extensive project. Such obstacles are commonly expressed within the organization. Even, unexpressed obstacles could be another factor. Structure and definition of the innovation work, or outsourced production processes which results in limited possibility for impact, are examples for unexpressed obstacles. Both types have a significant impact on innovation capabilities, but it may be different to encode. Conclusion: Through this thesis work, several obstacles that prevent innovation in organization have been identified. These obstacles regarding to structure and develop an internal functioning work with innovation, were all concerned parts promotes for an innovative organization. Increased market knowledge and external collaborations are also important strategies for SME organizations with outsourced production processes to consider, in order to improve their innovation capabilities. Keywords: Innovation Management, Innovation with outsourced production, Innovative culture, Be innovative with existing resources, Increase innovation capabilities.