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blog article14 September 2022

How small and medium-sized enterprises can foster a culture of innovation

Innovation, key driver for SMEs
Hofstede Insights
By Hofstede Insights

How can small and medium-sized enterprises (SMEs) create and nurture a culture of innovation? Discover below seven steps companies should take to develop an innovative mindset and environment that supports growth.

Innovation is a key driver of productivity for businesses of all sizes. Companies prioritising innovation are able to increase their market share, outperform competitors, deliver superior growth, and better meet customer needs.

While some SMEs and start-ups are active innovators, the majority of them faces a number of hurdles to innovation. For instance, the limited size of these businesses means they often struggle to access the financing, business support, and skilled talent they need to innovate. The pandemic also slowed down innovation activities for SMEs that were hit hard by the crisis, shifting their focus towards fundamental survival. In the face of economic uncertainty, innovation can help companies recover faster in the short run while building resilience to crises in the long haul. Understanding how to foster a culture of innovation is therefore critical for organisations to handle disruptions and capture new business opportunities. We identified seven steps managers need to take to stimulate innovation in their companies.

1. Decide on why you want to innovate and conduct a needs analysis

Before pursuing innovation, executives should first understand what innovation means for their business and why it is needed. There are many reasons why companies may want to innovate, from gaining a strong competitive advantage and entering new markets to improving efficiencies. Yet, regardless of their reason, teams need to have a clear understanding of their ‘why’ before plunging into action.

More importantly, innovation should never be a goal in itself but a tool that leaders can leverage to bring their organisation closer to specific business goals. To identify the desired end goal of innovation, companies should first conduct a needs analysis. What are you trying to achieve through innovation? What resources will you need to get there? And where will innovation take place in the company? These are just several questions that should be top of mind for leaders interested in innovation.

2. Be clear on what kind of innovation you need

Once you know why you want to innovate, the next step is to identify what kind of innovation your organisation needs. There are two main types of innovation: incremental and disruptive. Incremental innovation takes place when companies gradually improve or upgrade current products and services. By contrast, disruptive innovation involves the establishment of new technologies, processes, or business models that transform industries or create new markets. Apple’s iPod, for instance, was a disruptive innovation because it generated a new market for digital music players. The latest versions of the iPhone, on the other hand, are examples of incremental innovation building on existing technology. Incremental innovation is often a more practical option for SMEs as it requires less investment compared to disruptive innovation. However, unlike larger businesses, start-ups and SME tend to be more agile and less risk-averse, which makes them better equipped to pursue disruptive innovation.

3. Understand how innovation works and create space and time for it

Innovation requires learning and experimentation. Yet too frequently employees are discouraged from challenging the status quo by rigid norms and cultural barriers that stifle creativity and participation. Companies aspiring to innovate should create a safe space where people are encouraged to take risks, practice exploration, and embrace setbacks as normal parts of the innovation process. To design a healthy innovation environment companies can, for instance, set up innovation ‘garages’ or ‘labs’ where multidisciplinary teams work together on key projects unconstrained by normal routines, ensure that lessons learned are assimilated, and acknowledge all innovation efforts irrespective of their outcome. 

In addition to space, innovation also needs dedicated time to focus, ideate, experiment, test, and optimise. This of course is easier said than done, especially in fast-paced environments. As such, leadership should set aside separate time to brainstorm and nurture a free-flowing exchange of ideas that support the strategic goals of the business. In concrete terms, this may mean encouraging employees to devote a percentage of their time to develop side projects aligned with the company’s mission, running hackathons, or investing in training where people can learn new innovation techniques.

4. Embrace diversity, elevate equity, and lead inclusively

According to a 2018 report by Deloitte, companies with diverse and inclusive cultures are six times more likely to be innovative and eight times more likely to achieve better business outcomes. There are several reasons why companies promoting diversity, equity and inclusion tend to be more innovative compared to homogenous ones. First, diverse teams can harness an eclectic range of skills, ideas, backgrounds and experiences to generate better ideas for solving problems. A diverse and inclusive workforce also leads to higher individual performance as employees feel valued and engaged. Second, diversity enables the adaptability and agility that innovation requires. For example, a diverse mix of members may help organisations recognise new market opportunities and expand their engagement with broader stakeholder groups, including marginalised voices. Third, businesses that adopt diversity, equity and inclusion policies are more successful at attracting and retaining a wider pool of talent, which is a vital asset for innovation. As a result, creating a sense of belonging, ensuring equal access to opportunities, and encouraging diversity of thought should be strategic imperatives for organisations aiming to foster innovation.

5. Align your organisational culture to support innovation

Organisational culture is the distinct way in which members of an organisation relate to each other, their work, and the outside world. Based on the Hofstede Insights Multi-Focus Model™, organisational culture is underpinned by six dimensions or variables: organisational effectiveness, customer orientation, level of control, focus, approachability, and management philosophy. Of these six dimensions, two in particular are crucial for innovation: the organisational effectiveness and the level of control, respectively.

Organisational effectiveness

The ‘organisational effectiveness’ dimension shows if individuals, teams or corporations focus more on how work is carried out (means-oriented) or what type of work is done (goals-oriented). In a means-oriented culture, employees avoid taking risks, invest little effort in their work, and follow established routines. By contrast, teams in a goals-oriented culture pursue specific goals, even if these involve higher risks. For example, an organisation which aims to improve its customer service may be better off exploring new ways of cross-functional collaboration – e.g., assigning an engineer to work with the customer service department or inviting a customer service agent to management meetings – rather than sticking to existing processes that fail to yield results.

Level of control

The ‘control’ dimension refers to the amount of control, internal structuring, and discipline within an organisation. The hallmarks of high control work environments are a strict work discipline, formality, and cost-consciousness. Conversely, lower levels of control in the workplace facilitate informal communication among team members and create a more relaxed atmosphere which can spur disruptive innovation. In this environment, individuals feel more comfortable sharing new ideas and taking bolder action.

But fostering innovation does not mean removing all forms of control and structure within the organisation. Unstructured ideas, while vital for brainstorming, can result in missed opportunities and wasted resources.  As such, companies should set up control mechanisms and organisational structures that reduce the risks associated with innovation while still creating space for novel thinking. Teams which implement well-designed innovation processes are more likely to succeed. 

6. Clarify roles and expectations

For innovation to create real value in a business, all stakeholders should have a clear image of the innovation goals and roles across the organisation. Put simply: how does innovation align with the overall business objectives? What does innovation mean in the specific context of the organisation or team? Which ideas are followed up within which teams? And which departments must be involved in the different innovation stages? Everyone can have good ideas, but choosing which to pursue and which resources to commit becomes problematic if people do not fully grasp the organisation’s innovation strategy. If information is withheld or miscommunicated, efforts may not support the right goals or may be duplicated.

Employees have greater confidence in their company’s mission and feel motivated to perform better when executives are transparent with their teams. Transparency also creates purpose: people know why they are performing a certain task and how it drives the organisation’s broader goals. Leadership encourages everyone to get involved and values all contributions, big or small.

7. Measure your success

Entrepreneurs aiming to foster a culture of innovation in their companies should always measure their success. Reliable innovation metrics are crucial for providing strategic direction, guiding resource allocation, holding people accountable, and improving innovation performance.

But measuring innovation is not always straightforward. For example, companies are often tempted to examine business and product metrics such as revenue growth or the number of new products developed, but these may not fully capture the organisation’s innovative processes. Instead, companies can better evaluate the outcome of their innovations by looking into a mix of relevant metrics, such as the speed to market, the resilience to external shocks, the environmental impact, and the employee participation in innovative activities. There is no standard metric for measuring innovation. Executives, however, should ideally rely on the same measurement method they used to evaluate the organisation’s initial state.

Innovation in practice: acting on ideas

Finally, innovation cannot take place without execution. While fostering a sense of innovation is important, organisations need to put effort into the implementation of the ideas that add the most value to the business. A company’s ability to execute new ideas is what makes the difference between successful innovation and simple ideation.

Taking action also boosts employee morale by showing individuals that not only are they encouraged to come up with fresh ideas, but that these solutions have been converted into concrete business plans.

About the author(s)

Hofstede Insights manages the impact of culture on work-life and helps the world’s largest organisations transform their intercultural and organisational challenges into business success stories.

The article was co-authored by Ruxandra-Laura Bosilca, PhD, Social Media and Community Manager for Enterprise Europe Network.