The Innovators Solution: Creating and Sustaining Successful Growth - Essay Example

? SMEs are better at innovating than larger organisations BY YOU YOUR SCHOOL INFO HERE HERE Introduction Many business practitioners and organisational stakeholders consider innovation to be tightly related to the product, representing a radical new technological innovation or unique product that completely disrupts an established market. This is referred to as a disruptive innovation, a completely new paradigm offered to customers that completely transforms an existing market, causing rapid loss of market share from non-pioneering companies in the industry (Christensen and Raynor 2003). However, this is a fundamentally incorrect assessment. Legitimate innovations are not always the commercialisation of a significant advance in product concept, but can be the process of making enhancements to an existing product. Beacham (2006, p.9) reinforces that innovation is “the successful exploitation of new ideas”, meaning that specific business processes or management ideology can be representative of legitimate innovation which radically or incrementally change the methodology by which a business improves itself. The end result of innovation as a new idea, rather than a radically exclusive and exceptional product development, is being able to differentiate the innovative firm from its competitor base. For the sake of argument, it should then be recognised that genuine innovations involve making non-replicable changes to business strategy, service delivery processes, internal cultural dynamics both professional and social, improving functionality through software technology implementation, or blending existing technologies to create greater value for the firm in a way that has not been conceived of by rival firms. When attempting to determine whether SMEs are better able to innovate than larger organisations, it is necessary to clearly define the concept of what actually constitutes an innovation. An initial assessment of innovation, using the premise that a legitimate innovation is solely related to radical product development, would seem to point toward a larger organisation being more equipped to provide innovation than their smaller business counterparts due to higher capital availability, more labour and divisional support, and more refined manufacturing capacity. Taking into consideration the tangible definition of innovation, involving a variety of conceptions not always related to product, it is actually much more realistic to believe that the SME is much better equipped to provide innovation than the larger corporation. This essay describes the characteristics of the SME that actually make innovation more easily achievable than larger businesses, including an emphasis on leadership, cultural development, the political hierarchy, the nature of SME team functioning, organisational structure and managerial prowess in understanding the relationships between inputs and outputs that assist in sustaining the small to medium enterprise. The political hierarchy and business culture In order to successfully innovate, it is necessary to transform tacit knowledge into explicit knowledge within an open culture environment. Tacit knowledge is highly specialised, consisting of expertise that is not easily translatable and transferrable to individuals within the organisation that do not maintain similar expertise. Explicit knowledge is generally defined as documented, easy-to-transfer information such as journals, drawings, schematics and internal procedures that is accessible and understood by all organisational members (Fodor 1968). In the large organisation, especially a multi-national company which maintains a high volume of inter-dependent business divisions, including procurement, research and development, sales and marketing, human resources, and manufacturing, each business unit/division maintains expert (tacit) knowledge labourers. Within the large corporation, it is uncommon for individuals that have been hired for their specific skills and capabilities to be cross-trained under a job rotation ideology in order to improve tacit knowledge understanding. Such a system of labour processes require a significant volume of managerial oversight, evaluation through metrics to determine whether the ideology is providing more cross-functional knowledge improvements, and even significant capital investment to sustain the policy. In general, many large multi-national companies must operate under a highly centralised, top-down hierarchy of control in order to ensure compliance and maintain a reasonable scope of managerial control. This type of structure demands that specialised workers remain within the confines of their specialised skill-sets and job roles to create a functional and fluid business system operating effectively. Stover (2004) indicates that if knowledge conversion is to occur and innovations to be conceived, it is impossible to work in isolation from others. In order to successfully transform tacit knowledge to explicit knowledge which is highly supportive of innovation development, interaction between diverse organisational members must occur (Stover 2004). Smaller enterprises maintain leadership that is entrepreneurial maintaining an emphasis on promoting team-based ideologies that enable appropriate informational exchanges and what is referred to as “human capital cross-pollination” by deliberately connecting disparate employees in the organisation to achieve organisational goals (Hayton 2005, p.27). The smaller organisation does not maintain the internal resources to sustain high volumes of specialised (tacit) expert workers within a dynamic value chain of activities necessary to support a large corporation. As such, this smaller organisation requires this cross-pollination of labour capital in order to meet operational cost controls by which job roles are streamlined and team-centric ideology drives knowledge conversion on a regular basis. It is not uncommon in the smaller-sized organisation for procurement workers to double as payroll labourers, or for shipping management to also oversee the dynamics of the receiving department as a duplicitous series of job responsibilities. Tacit knowledge in this environment, on a routine basis, is transformed into organisation-wide explicit knowledge as it relates to all functions along the business’ value chain model. It is, therefore, the structure of divisional job role responsibilities within the smaller enterprise that provides more opportunities for innovation development and implementation. As employees juggle multiple responsibilities along the business model in the SME, they gain valuable and relevant knowledge of the various processes, procedures and technologies associated with different inter-dependent divisions within the business, regardless of its complexity. Routine team functioning and cross-pollination of human capital learning in multiple business functions provide the foundation by which employees are able to contribute to new process developments, methodologies of innovating service delivery, or potentially incorporating various technologies in a unique way that gives the business innovative competitive advantages. The larger organisation, a hierarchy-driven model out of necessity, tends to limit cross-functional opportunities and chokes effective communications (Dess, Lumpkin and McKee 1999). Furthermore, in the bureaucratic and centralised organisation, political systems often drive motivations for certain individuals within the organisation to seek their own personal gain using either sanctioned or non-sanctioned practices to achieve desired outcomes for self-fulfilment. This is the nature of organisational politics: "the actions which persons undertake in pursuit of certain personally significant outcomes to influence others...to facilitate or hinder those outcomes and also different and potentially conflicting concerns to their own” (Mayes and Allen 1977, p.674). In the centralised business structure that impedes or prevents cross-functionality, job rotation for skills development, and autonomous working conditions, individuals seeking opportunities for promotional advancement or personal recognition engage in political behaviours that tend to alienate workers from engaging in effective inter-professional social systems. This type of alienation that is created by bureaucratic hierarchies of control creates an environment with a significant lack of communications effectiveness and minimal transparency as it relates to business strategy development and problem-solving (Terrell 1989). The professionally-stifling effects of various actors within the organisation, unable to advance their reputations or power position within the autocratic organisational structure, seek non-sanctioned and oftentimes inappropriate behaviours such as professional belittlement, back-stabbing, or inter-office reputational smearing. This is not a common cultural dynamic of the SME in which team functioning and routine interaction with cross-trained employees facilitates a more effective social networking environment where the management/leadership of the organisation rewards individuals for their contributions and works to diligently create an effective inter-professional social environment to improve cooperative outcomes. Essentially, all of the aforesaid as it relates to why innovation is more easily achievable in the SME is relatively self-explanatory. Much of the ability to create the interactive and knowledge-centric organisational structure and organisational ideologies necessary to produce new innovative conceptions is dependent on how the internal culture functions dependently with one another. Smaller organisations often develop corporate level strategies, which are those aligned with the vision and mission of the business. In order to forge commitment and dedication to this business mission, an organisation must develop a culture of coherence and dependency. Fairholm (2009) states that in order to develop a culture, a leader must be transformational. Under this leadership model, vision and mission are consistently reinforced throughout the entire organisational model, the leader becomes a visionary teacher and mentor to diverse employees, and opens lines of effective and transparent communications between employee and the leader (Fairholm 2009). Why is this important? In many smaller-sized enterprises, raising capital to sustain business improvement and engage in growth is difficult due to the lack of asset collateral in the business, global restrictions on credit availability, and the lack of public common stock securities more appropriate for a larger organisation. As a result of these limitations, the smaller organisation relies on venture capitalists or other private/public investors to assist in growing the business. Smaller business owners, maintaining entrepreneurial characteristics that are strongly correlated with innovation development, recognise that investors consider cultural cohesion to be a substantial competitive advantage, thus making investment in these firms more attractive (Very, Lubatkin, Calori and Veiga 1997). When the entrepreneurial SME is able to illustrate to investors that consider investment in culturally-cohesive firms to be world class organisations, the entrepreneur is able to procure capital for innovative product developments or improvements by increasing manufacturing and technological capacities. Larger organisations that procure capital through common stock are victims of fluctuating and unpredictable market conditions or losses on revenues tangible within the business model, thereby impacting their ability to sustain adequate assets over liabilities in the larger business model in the event of stock valuation drops or loss of market share in their competitive markets. Now, simply sustaining the business and maintaining its liquidity position becomes the primary target for the business rather than attempting to diversify product or create new innovative practices which, in the large business model, are difficult to incorporate without substantial cash investment or labour investment. The entrepreneurial SME, however, that was able to gain venture capitalist investment or other similar capital injections is now set to make incremental changes to product, technology or general service delivery processes without concern over suddenly approaching an illiquid business position. Whilst the larger organisation is concerned about simply sustaining its multi-national business operations, the SME leadership is moving with dedication toward creating a sustainable competitive advantage through incrementalism (still recognising cost factors) to assist in innovation delivery and development. Leadership competency in the SME promoting innovation development Larger organisations often consider their ability to create new innovations to be contingent on the development of cross-border business alliances, joint ventures, or other relevant foreign partnerships. These alliances provide shared expertise, oftentimes shared resources both labour and financial, and can improve business leverage (Steensma, Tihanyi, Lyles and Dhanaraj 2005; Lane, Salk and Lyles 2001). Larger organisations that seek new market entry, seeking to introduce an innovative product into a new sales territory, oftentimes pool resources for cost savings purposes with a variety of foreign partners that can facilitate cultural transition or build a positive brand in a market where consumers are unfamiliar with a foreign firm investing in the new market. Theoretically, this alliance and ability to share tangible tacit knowledge resources and financial capital would lay the groundwork for more rapid product innovation and product development. The aforesaid alliances and joint venture philosophies, however, create restrictive environments by which the larger organisation is unable to seek autonomous functioning. Often these alliances are contracted, involving the establishment of a cooperatively-owned business unit or subsidiary by which management, financial and operational controls are shared duplicitously between both firms involved in the contracted alliance. One business entering this alliance might have a centralised hierarchy with an emphasis on lean manufacturing and procurement as a low cost leadership strategy whilst the other partner in the alliance maintains a decentralised business culture where cost controls are most apparent in administrative and service delivery functions. In this situation where an alliance is ineffective due to the disparities between business ideologies, neither firm is able to exit this new joint venture/alliance without agreeing to terminate the new business entity which requires capital, time dedication, legal support, and many other costly business activities which could include, but is not limited to, expensive litigation. Whilst the intention for the alliance development was to experience synergies related to economies of scale, which provides more financial resources that can be deployed to the innovation process, the end result of some incongruent joint ventures is further disagreement, now broadly internalised, that impedes the creative and collaborative processes. This is not common in the entrepreneurial management and leadership ideology in the smaller organisation. SMEs understand their financial and human capital limitations in key areas and work to make moderate and incremental improvements in the business model to sustain more effective growth and cultural cohesion internally, without the necessity of complex and multi-faceted cross-border alliances and joint ventures. Deming (2002) indicates that the absolute catalysts for business successes and failures are directly attributable, in 85 percent of all business cases, to the management competency of the firm. King (2007) offers support for Deming’s position, defining the phenomenon of causal ambiguity, which is defined as managerial competency in understanding the inter-dependent relationships between business inputs and outputs effectively. Smaller business ownership is more attuned to the inter-dependency between existing resources and procured resources and how to effectively transform these inputs into quality and cost-recognised outputs that maintain the supplemental ability to improve service, product or processes of the business model. Smaller businesses are more considerate of cost control activities as they often engage in business under operational models that must be keenly aware of cash flow, asset liquidity versus short- and long-term liabilities, and which activities are relevant to on-balance sheet valuations. Larger businesses, on the other hand, take for granted the capital positions of the firm having become accustomed to larger budgetary opportunities, thus there is little need for senior executive-level leaders at the larger organisation to understand the complexity and dynamics of inter-dependent inputs occurring throughout the entire multi-national business model. As such, decision-making over the short-term is more effective in the smaller organisation with managers that understand the statistical and monetary contributions/hindrances of each and every business activity whilst monitoring tangible financial capability and constraints before making financially-risky decision-making that could jeopardise the longevity of the business. Smaller businesses are less reliant on alliances and joint ventures as the leadership of these firms understand contingency theory, the presumption that as external market conditions change, the internal organisational structure of the business must also change and adopt flexibility to respond to these conditions (Buchanan and Huczynski 2010). SMEs are more independent in understanding how to make contingency plans as part of proactive planning so that they can respond to predictable or unpredictable changing market conditions. The permanence of their business models relies on it, especially in the event of sudden external customer market demand declines or the presence of new competitive market entrants that have the resources to seize market share with higher resources that can be allocated to competitive marketing, streamlined distribution for improved stock replenishment or any variety of competitive advantages associated with resource capacity of the rival firm. As it pertains, therefore, to managerial competence and the ability to manage internal operations and business structuring without intervention of alliances or shared resources in the joint venture concept, the smaller organisation is better equipped to manage innovation development. In highly competitive sales markets, it is a necessity for the SME management to infuse flexibility into the business model and make periodic structural changes in order to successfully compete against larger businesses offering similar product categories in their operating territories. This is often engrained into the team-focused culture, associated with the firm’s vision and mission, which pre-establishes organisational commitment, motivation and dedication that assists in creating new solutions to problems or innovative methods of conducting business to maintain some dimension of competitive advantage both short- and long-term. Whilst larger organisations must deal with the psychological mechanisms that lead to change resistance that can conflict the process of injecting innovative change practices into the business model, smaller organisations have more satisfied and committed employee populations as a matter of transformational leadership that allows for unified focus on developing innovations for business security as well as individual job security for the employees of the firm. A discussion of findings Even though it would theoretically appear that larger organisations are better structured and capitalised to achieve faster launches of innovative products and to utilise expensive technologies that facilitate innovative service delivery or even manufacturing improvement, the larger organisation is limited significantly by the scope of its operations. Even though larger firms have been able to establish autonomous business units that specialise in certain activities supportive of the main parent company’s objectives, achieving effective communications and interaction necessary for innovation creation can be a substantial undertaking in this type of hierarchical environment. Certainly, modern technologies (such as videoconferencing) have improved the ability to engage tacit knowledge holders in the hopes of transforming this data into explicit knowledge, however research has indicated that political conduct in the business (whether sanctioned by the organisation or not) acts as a hindrance to effective team functioning and engagement. In the smaller organisation, where team performance is highly critical to maintaining a competitive business model, it is already chronic and deeply-rooted into the culture that the mission and vision of the business cannot be supported without unified and consistent team interaction. Innovation does not occur in a proverbial vacuum, a more recognised understanding in the SME business model than in the larger organisation that often relies on technical tacit expertise, autonomously (such as R&D) to provide innovative solutions with less emphasis on interaction between disparate employees throughout the business model. Conclusion The question was proposed as to whether the large organisation or the SME is better equipped to develop innovations. This essay defined the notion of innovation, providing the fundamental knowledge necessary to answer this question which described that innovation is not always linked to research and development prowess and capital investment into creating a market-disrupting, non-replicable product with the ability to rapidly seize market share from an established set of competitors. Innovation was illustrated as being opportunistic of not only product, but also processes, internal cultural development, integration of technologies to improve service delivery, or even enhancement of various support areas along the SME value chain. With the aforesaid definition in mind, the research clearly indicated what characteristics of the SME and its leadership/management ideologies provide the smaller organisation with the capacity and talents to produce innovations more effectively than larger business counterparts in an industry. Top-down, bureaucratic, and centralised organisations, by design, stifle the creative process that is often achieved through social and professional interaction between different organisational experts and support teams. These organisations seem to take for granted their capital availability and asset volumes, thus executives are not constantly focused on the more mundane financial inter-dependencies throughout the entire business model (which is complex and diverse in large companies). Smaller enterprises, however, have managers that are consistently and recurrently aware of every financially-related input and its relationship to outputs in order to achieve fiscal efficiency and sustain low operating margins as part of their routine activities. This allows the SME to make small-scale, yet relevant and recurring modifications to operations or general business structure proactively that allows the business to seek new innovative methods of sustaining the longevity of the business. There is clearly a correlation between the intensive budget-conscious mentality of the SME management team that is less prevalent in the larger organisation, giving the SME the advantage of creating flexibility through innovation and developing contingency plans to better secure the business from financial losses stemming from the external consumer market or the external competitive market. Based on all of the research, it is rather obvious that the SME is better equipped to innovate, even if the majority of innovation is simply a necessity to maintain some dimension of competitive advantage and sustain budgetary concerns. The organisational culture, cross-pollination of cross-functional human capital, leadership and management strategy ideologies, and better understanding of inputs versus outputs throughout the entire business are what provide SMEs with more innovation development capacity than larger organisations. References Beacham, J. (2006). 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