Performance effects of innovation capability

The sub-question 1b, What are the effects of innovation capability on performance in SMEs?

was examined in publication II—The role of innovation capability in achieving higher performance.

Publication II

BACKGROUND AND OBJECTIVE

The objective of publication II was to study the relationship between innovation capability and performance. As presented in the methodology chapter, perceived innovation capability and perceived performance were studied as subjective items. Previous studies have studied the relationship between innovation, often measured through numeric values, for example the number of innovations generated, and performance (c.f., Akgün et al., 2009; Jiménez-Jiménez and Sanz-Valle, 2011). In addition, a majority of these studies has concentrated on large firms and relationship between their innovation and performance. Publication II goes one step further by studying the determinants of innovation capability and their effect on performance.

Publication II contributes to the current understanding by presenting the important determinants of SME innovation capability that have a direct effect on firm performance.

MAIN FINDINGS

The results reveal the importance of developing innovation capability for achieving higher performance. The findings show that three determinants of innovation capability, namely ideation and organizing structures, participatory leadership culture, and know-how development, have an effect on perceived performance. Further, the study identified the determinants of innovation capability that are most influential in perceived performance on the perspectives of management and employees.

According to the results of the study, ideation and organizing structures are positively related to perceived performance. However, the effect of ideation and organizing structures was notable only from the perspective of managers. The employees did not consider them influential. This is in line with the study by Jiménez-Jiménez and Sanz-Valle (2011) which showed that organizational routines that help firms to conduct their activities more efficiently and, therefore, obtain better performance. When the structures and ways of working function well, employees have time to concentrate on completing their tasks.

Another determinant that has an effect on firm perceived performance is a participatory leadership culture. This effect was significant only in the perspective of managers. A previous study by Zhu et al. (2005) concluded that leadership is one of the key driving forces for improving firm performance. However, in this study the effect was found to be negative between a participatory leadership culture and perceived performance. If the managers of SMEs, which usually have low organizational hierarchy levels, concentrate too much on the operative level actions, they may ignore their primary task: management of the firm. On the other hand, tight participation of the managers in operational activities may decrease employee idea generation and creativity. These two reasons may thus explain the negative relationship between a participatory leadership culture and performance from the perspective of managers. Also, the perception may be caused by managers’ personalities, formal structures, or organizational cultures that do not favor participation.

Thus, it can be suggested that for improving performance, managers should find a balance between participation in daily routines and managing the firm. This is especially important since employees did not perceive a negative relationship between participatory leadership culture and firm performance. Employees need some participation from the managers to guide their daily work. Despite participating in daily routines to some extent, leaders should not neglect their management duties. This means that management should organize work in a way that releases employees from extra pressure concerning ways of working. It means that managers should not get too tied up in daily routines, as it can result in neglecting their main task, which is managing the firm in relation to its strategic objectives. This conclusion is also supported by the results of this study.

Know-how development was also found to be positively associated with perceived performance. This positive relationship was found to be significant only from the perspective of employees. The previous studies by Schroeder et al. (2002) and Aragón-Correa et al.

(2007) showed that collective knowledge acquisition, knowledge sharing, and knowledge utilization positively affect performance. Employees seem to appreciate the possibility of educating themselves. In many industries, the firm is as competitive as its employees are, as all relevant knowledge is tacit and knowledge is retired the firm when the employees retire.

Thus, know-how development is considered important for perceived performance from the perspective of employees. From the perspective of management, the relationship between know-how development and perceived performance was not found to be influential. This may be a consequence of the fact that it is usually suggested that to achieve high performance a firm should develop its operations to adjust to the rapidly changing environment. On the basis

of management responses, performance is improved by developing operations. This is in line with the result that indicated that ideation and organizing structures are positively related to perceived performance.

Some determinants of innovation capability have a direct relationship with a firm’s perceived performance. To achieve higher perceived performance, firms should develop these determinants. Although there is a variety of studies confirming the positive effect of innovation on performance (e.g., Cainelli et al., 2004; Jiménez-Jiménez and Sanz-Valle, 2011), the determinants that foster firm innovation do not necessarily lead to higher performance directly. For example, the study by Armbruster et al. (2008) shows that organizational innovations act as prerequisites and facilitators of an efficient use of technical product and process innovations, and therefore they are sources of performance.

Organizational innovations themselves have an effect on productivity, lead times, quality, and flexibility (Armbruster et al., 2008).

There are also four determinants of innovation capability that were not found to be influential when achieving higher performance. One plausible reason for this is that the relationship between innovation capability and performance is more complex than expected according to initial theoretical development. The results do not mean that these four determinants do not have value when enhancing performance; the value of these other four determinants on performance might be realized through other determinants or in other firm-specific contexts.

Plenty of other predictors that affect performance rather than innovation capability could be found (e.g., competition situation, business cycle). Based on the results, it seems that innovation capability is not enough alone if the organization lacks the ability to utilize practical tools and concrete methods to realize this capability. The capabilities may also be linked to the process of innovation, having thus an indirect and long lasting effect on performance.

Answer to the research question

All in all, the results show a connection between innovation capability and perceived performance. Three determinants of innovation capability, namely ideation and organizing structures, participatory leadership culture, and know-how development, are most significant.

From the perspective of management, ideation and organizing structures are most influential when achieving higher performance. However, managers considered that participatory leadership culture negatively affects perceived performance. Regarding the responses from employees, the only determinant of innovation capability that had a positive effect on

perceived performance was know-how development. As a whole, ideation and organizing structures seemed to be most influential when looking at the big picture of overall perceived performance. There are also four determinants of innovation capability that had not direct relationship with perceived performance. It seems to be obvious that innovation capability is not enough alone if the organization lacks the ability to utilize practical tools and concrete methods to realize this capability. A lot of effort and resources may have been harnessed in developing innovation capability, but the benefits have not been realized due to the lack of appropriate methods.

4.3 Role of performance measurement in SME innovation capability