Leadership and dynamic capabilities of SMEs

Dr B K Mukhopadhyay

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

Dr. Boidurjo Rick Mukhopadhyay

(The author is an international award-winning development and management economist, formerly a gold medalist in Economics at Gauhati University)

A series of research on leadership evidence how significantly leaders could affect the morale and confidence of staff (or followers) depending on how leaders perceive mistakes either as opportunities for learning or brutally nudging the followers thereby damaging the self-worth of the latter. As Sir Richard Branson once said, "clients do not come first, employees come first. Take care of your employees, they will take care of the clients". Leadership, by its nature, can cultivate the foundation of culture to empower employees to achieve the company goals and realize how vital each of their contributions is to furthering those goals. At the same time, during the pandemic, and as we have seen how important it is for a leader to diversify efforts and strive to innovate for future success.

A) The essence of Leadership

Leadership can be defined as "a process whereby an individual influences a group of individuals to achieve a common goal". To transform oneself into an inspirational or transformative leader, one must focus on the social good of both employee and client. While other stakeholders (shareholders, suppliers, etc.,) are also equally or relatively important but the overall objective of leading an organisation should lead to the creation of a larger impact on the company's services and products. With AI, deep learning, and industry 4.0 tools connecting the global village at various levels and quite easily so, leaders need to identify the increasingly bigger roles that are expected of them today.

Organizations, big or small, aims at increasing their performance to be highly competitive in markets. The role of Small and Medium Enterprises (SMEs) and their performance is critical in any economy, both developed and developing states – e.g., Small and medium-sized enterprises (SMEs) represent 99% of all businesses in the EU. The main factors determining whether an enterprise is an SME are a) the staff headcount and b) either turnover or balance sheet total. Several studies show that the performance of SMEs is essentially related to the leadership of the firms. Leadership can move an organisation forward in a changing, competitive landscape by motivating, organising, managing and leading employees to a higher level of performance. However, the productivity problem is paramount as highlighted by studies.

A work by McKinsey shows that within the same sector or countries of similar size, the productivity gap between large companies and SMEs can vary by a factor of two or more. In construction, their study shows that the productivity gap between SMEs and large companies is 26 per cent in France, 41 per cent in Germany, and 54 per cent in Italy. In the food-services and accommodation sector, the gap is smaller for Italy, at 29 per cent, compared with 39 per cent for France and 41 per cent for Germany. These productivity differences reach 60 per cent in Turkey and 80 per cent in Greece in many sectors.

B) Small and medium-sized enterprises: Challenges and solutions

Some of the visible limitations experienced by SMEs are A) Number of employees, B) Financial resources, C) Technical and managerial expertise. Leadership in SMEs, therefore, needs to address these challenges at various levels. The effectiveness of leadership starts with 1) Mobilizing realistic and time-bound goals, 2) Laying out clear objectives and setting up the deliverables, 3) Building high-performance teams, 4) Creating a risk-resilient company culture, 5) Creating organisational knowledge building, and 6) Creating a culture of value. Surely, however, these are not magic bullets nor meant to address the challenges or promote SMEs growth overnight. The strategies and planned action that leaders take within SMEs would be largely determined by the stage of growth that a company is facing at a point in time.

Besides the internal strategic planning required to move up to the next level, there should be an equal focus on identifying and addressing external factors such as A) Determining factors that can ensure long-run growth and firm survival, B) Identifying stages of stagnation by detailing how particular firms can be better or worse at identifying new opportunities, managing competitive threats, C) Recognising changes in government regimes and regulations that could affect SMEs planning and management. For leaders of SMEs, one of the biggest fears is slow growth or loss direction and also equally importantly, to fall behind competitors. The three steps that could help on this score would be firstly, to take responsibility for company finances; secondly, making calculated decisions that allow the business to operate effectively and compete successfully, thirdly, to inspire the team, encouraging them to feel valued and therefore motivated to work hard and believe in the company.

Data shows how leadership is critical for SMEs since almost 50% of SMEs employees have quit a job because they were either not treated properly or valued at the workplace; 40% of SMEs employees have cited a lack of trust from current employers, 60% of them felt they were micromanaged and the workplace lacked autonomy and space for creativity. They also felt how micromanagement and constant management interference deterred company productivity and performance. It does certainly come back to the company culture which is also fundamental, and therefore certifies how leadership can be instrumental in developing and maintaining supportive and creative company culture. Effective leaders need to learn when to enforce, change, or let go of tools and processes that could potentially deliver results. It also involved working with followers, particularly in the context of SMEs because of the scope of business.

Leadership and inception of dynamic capabilities

One of the focus areas that Industry 4.0 has, a cross-disciplinary field of study, is to analyse and develop newer Dynamic Capabilities (DC) thereby leading the firm's capacity to identify new opportunities, and then to seize them by adapting and reconfiguring internal and external key assets and also activities. A popular definition of DC is "core capability as the knowledge set that distinguishes and provides a competitive advantage." This can also be critical for SMEs since DC can be embedded in the company's culture by A) Sensing - identify, develop, and assess of technological opportunities about customer needs (e.g., how Alibaba in its early days in China), B) Seizing - mobilising resources to address needs and opportunities, and to capture value (e.g., Airbnb or kayak - again, started small), C) Transforming - continued renewal (e.g., a range of social enterprises) where institutional partnerships also count. At every level, it is also important for SMEs to realise that these changes must be recognisable by the customers.

Senior executives in SMEs need to plan for both organisational knowledge building and also human resource development by devising and supporting mechanisms to enhance employee skills, knowledge and also experience (through job rotation, job revolvement, and job involvement). Executives in SMEs, while designing such a mechanism need to realise how they are helping the followers and also ways to improve association in terms of expertise, learning and experience. While skills, knowledge and improved expertise help the organisation in terms of productivity and growth, it is equally essential that employees develop a sense of belongingness to the organization. So, leaders must not be simply adaptable and assertive, but should also provide positive motivation and develop followers for the road ahead of the business.

D) Effective communication and (timely) information sharing

Another aspect that is most often overlooked by both research and highlighted by consultants is the importance of information sharing with followers and in time. While frequent interaction with employees is a good sign, letting go of micromanagement is wise, the amount of information shared with employees for the ongoing and upcoming projects is of paramount importance. It does come down to the basic yet crucial skill of communication. Middle management may not share the requisite information – amount and quality – with the followers in time and therefore the team cannot act as one and united thereby failing on their deliverables.

At the macro level, however, the state can improve the health of SMEs by A) Supporting ease of doing business and promoting a culture of entrepreneurship, B) Facilitating access to local and global markets, as appropriate, enabling access to technical expertise to drive innovation, and C) Providing a supportive business environment and infrastructure that supports SMEs productivity and technology adoption because why would only large firms gain from the honey of Industry 4.0.