While some researchers argue that a strong organizational identity guides strategy and provides shared understanding among employees, others argue that it restricts change and makes it difficult for organizations to respond to external environment. In this study, we demonstrate that an organizational identity which is strong enough to foster shared purpose and clarity of vision but still fluid enough not to become restrictive to change is the optimal condition for small organizations. Data collected from 162 small and medium manufacturing businesses in India demonstrates a curvilinear relationship between organizational identity strength and performance, and this relationship is significantly influenced by participatory decision-making. Small businesses often need to redefine their sense of identity in order to appropriately address changes in the environment and seize new opportunities. Additionally, by utilizing data from a relatively under-explored context of SMEs, this study makes an attempt to fill a crucial gap in identity literature. Implications for theory are discussed.