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Small is Powerful: Innovation Culture in SME sector

Selected research offers a diverse understanding of the complex concept of organizational culture in light of core beliefs

SME sector

Sentinel Digital Desk

Dr B K Mukhopadhyay

(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

Selected research offers a diverse understanding of the complex concept of organizational culture in light of core beliefs, values and principles that guide the navigation and decision-making of businesses. Researchers have also looked at organizational culture as a correspondent of human personality, reflected through a set of customs, practices, rituals, beliefs and thought processes that human beings carve up with one another when they work together and share commonly defined and agreed goals. Most commonly, culture is defined as 'the way we do things around here, Edgar Schein's classic work defines the concept of organisational culture as "…the shared basic assumptions that make up the culture of a group can be thought of both at the individual and group level as psychological cognitive defence mechanisms that permit the group to continue to function." Over the years, for businesses large or small, there is a strong correlation between organizational culture, learning, market orientation, and the degree of innovation embedded within the firms.

For SMEs in particular, who focus on innovation culture and therefore embeds a knowledge culture within the firms that build organizational learning and information acquisition as a regular process. Usually, we study organizational culture by looking at what's visible on the surface and there is a whole lot beneath it that we do not see. The impact of an iceberg does come to our mind. What's visible on the surface includes work environment (cubicle or a private office, formal or informal engagement between employees), management style of leaders (autocratic or democratic), organisational rituals and practices (do they wear company uniform, suit, or casuals, how customers are greeted at reception), employee rights and benefits (is it carrot or stick culture?). Ultimately, the goal of the firms remains driven by financial performance, sustaining competitive advantage, and organisational effectiveness. This stands true even for commercial enterprises that run with a social motif. Therefore, there remains always a double-edged sword while trying to meet both market expectations and projected growth plans. For SMEs, however, agility and decision-making speed are big pluses.

Before a culture is introduced and practices are put in place to ensure that the culture stays and is nurtured over time, SMEs decide whether to the centralized or decentralized power structure. e.g., Should the decisions be made by intuition, relationships (e.g., Guanxi in China, Chaebol in Korea) or by professionalism and market knowledge? Further with time, as the SMEs expand in both operations and market, there is a natural move towards more bureaucracy and departmentalization to keep things in order and maintain established processes. So, ensuring better operations comes at the price of formalization. When culture kicks in after the firm has accumulated enough critical mass of experienced employees and stability in direction, the firms then start studying the impact of organisational culture on business performance and effectiveness. Culture also shapes and can direct organisational strategy, so it remains critical.

A) Culture guides strategic moves by SMEs

Besides Edgar Schein, another pragmatic definition of organizational culture is by Alvession who shares "Culture is thus highly significant for how companies and other organizations function; from strategic change to everyday leadership and how managers and employees relate to and interact with customers as well as to how knowledge is created, shared, maintained and utilised."

Surely, SMEs can be found from diverse characters, mission, external environmental relations, and their situational constraints that could dictate different cultural values and behaviour at the workplace; however, research shows that the cultural components that are most commonly observed in SMEs are A) confrontation, B) openness, C) experimentation and D) proactive response to tasks among others. Surely, if we take SMEs examples from IT, media, higher education, consultancy, or in the food and beverage industry – each firm settles with a particular culture that is suited best for their functional administrative strategy for improving organizational growth and employee retention. Certain cultural aspects such as if the society in the host or home country or region is more masculine or feminine, or the power distance is perceived to be too high, or informal relations matter a lot more than a merit-based environment, firms have to adapt accordingly without foregoing their core values and beliefs that pervades everything that they do. As Hofstede defined organizational culture, "the collective programming of the mind that distinguishes the members of one organization from another". There is a strong impact of the national or regional culture on the organizational culture, especially in host markets that require careful navigation.

B) Socialization at the workplace reduces staff turnover and increases job satisfaction

Studies have suggested that firms having a culture of a good level of socialization between employer-employees, employees-employees amongst other organizational communication affects the employee turnover intention. Workplaces, where there is a natural tendency of staff interacting and engaging in socialization, have also been found to have a higher level of perceived support. And this is more than just weekly team meetups or management retreats or usual open-door policies, it is about engagement at the ground level and knowing peers more in regards to their strengths, cultural alignment, and how complementary they are to each other. In this particular context, organizational culture could be categorised into two components i.e., organizational culture related to managers and leaders and organizational culture related to employees. When there is increased socialization within the firm, most research shows that it not only reduces staff turnover ratio but also increases job satisfaction due to a higher level of motivation and a positive mindset. This is crucial if the firms are in the innovation business.

C) Leading a culture

Either the founder or the appointed leader of a business, they have a range of roles to play to enthuse an innovative culture at the workplace, and also to see how that contributes to organizational performance and overall effectiveness. Regardless of how self-confident, determined, and charismatic the leaders are, the first steps towards building a culture at a small business always include leaders trying to embed and transmitting culture by sharing and supporting others to reinforce their values and beliefs in the organization. It is fundamentally about communication in the end, not the 'what' but 'how' the critical messages are communicated particularly the ones that require collective action. Some ways to determine what sort of culture leaders are trying to build and embrace depends on a series of observations, for example, A) how they react to crisis and internal incidents within a firm, B) how they allocate resources and whether it's a reward-based culture or punitive one, C) how much time do the leaders spend on developing, mentoring and selecting the right opportunities for the followers, D) how the power and organizational structure looks like, E) the right and rituals at the workplace and physical space at the workplace, F) finally, of course how mission statement and slogans sound, says a lot about the organisational core culture.

D) Culture of innovation in SMEs

A substantial chunk of major innovation is funded by the state, and this is true in most cases and places. Innovation in SMEs has contributed significantly to economic development, by upgrading knowledge & development, new networks, creating new partnerships, and boosting regional economy and jobs amongst many other factors. When SMEs embed innovation in the process, they embrace new ideas or behaviour within the organization; consequently, affecting the types of products, services, and technologies that they make. Through this process of discoveries and process change in which new output i.e., product, system, service or process, is realized – there has to be a culture of appreciation, risk-taking, and exploring newer forms of inter-firm partnerships along the way. When we understand innovativeness as a process of transforming opportunity into practical use, it only works when it is practised. Future-facing organizations welcome constructive feedback or criticism to work on building their capabilities further to enhance organizational performance and thereby securing a competitive advantage in the industry. Further work is recommended to build a more comprehensive framework for understanding the nature of innovation in SMEs and micro firms, particularly as most industries are increasingly moving towards a more virtual structure.

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