Business Development Paper

*MUST BE PLAGIARISM FREE, NOT PREVIOUSLY SUBMITTED WORK*

Rubric and Resouces Attached! 

Topic: Training and Development in Small Businesses

Assignment: 

Business Selected: Smallcakes Cupcakery (https://www.smallcakescupcakery.com/about/)

Imagine that you have been called into that business to provide a consultation on training. Create a comprehensive training proposal for the business. 

Write a 6–8 page paper in which you:

1. Analyze key elements of training and development geared toward improving the performance of the specific small business for which you are consulting.
2. Predict 3–5 potential challenges that the managers or owners of the business could face in addressing organizational performance.
3. Justify the effects of detecting organizational gaps in small business, providing examples to explain the rationale.
4. Propose a competitive training strategy that will improve the position of the business in the market. The strategy should include, at a minimum, an agenda of training activities, rationale for instructional strategies used, and the return on investment (ROI) that will be gained from the strategy you have developed.
5. Use the 3 references provided along with additional academic resources if needed. Note: Wikipedia and similar web sites do not qualify as academic resources. The reference page is not included in the required page length. 

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EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY
AN: 411486 ; Wang, John.; Advancing the Service Sector with Evolving Technologies : Techniques and Principles
Account: strayer

John Wang
Montclair State University, USA
Advancing the Service
Sector with Evolving
Technologies:
Techniques and Principles
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Advancing the service sector with evolving technologies : techniques and
principles / John Wang, editor.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-4666-0044-7 (hbk.) — ISBN 978-1-4666-0045-4 (ebook) — ISBN
978-1-4666-0046-1 (print & perpetual access) 1. Service industries–
Information technology. 2. Customer services–Information technology. 3.
Service-oriented architecture (Computer science) 4. Web services. I. Wang,
John, 1955-
HD9980.5.A384 2012
658’.05–dc23
2011041823
British Cataloguing in Publication Data
A Cataloguing in Publication record for this book is available from the British Library.
All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the
authors, but not necessarily of the publisher.
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Published in the United States of America by
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Library of Congress Cataloging-in-Publication Data
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Table of Contents
Preface ………………………………………………………………………………………………………………………………. xiv
Chapter 1
Predicting Ambulance Diverson ………………………………………………………………………………………………. 1
Abey Kuruvilla, University of Wisconsin Parkside, USA
Suraj M. Alexander, University of Louisville, USA
Chapter 2
Hybrid Value Creation in the Sports Industry: The Case of a Mobile Sports Companion as IT-
Supported Product-Service-Bundle ………………………………………………………………………………………… 11
Jan Marco Leimeister, Kassel University, Germany
Uta Knebel, Technische Universitaet Muenchen, Germany
Helmut Krcmar, Technische Universitaet Muenchen, Germany
Chapter 3
Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System …………………… 25
Paul F. Schikora, Indiana State University, USA
Michael R. Godfrey, University of Wisconsin Oshkosh, USA
Brian D. Neureuther, State University of New York, College at Plattsburgh, USA
Chapter 4
ICT Usage by Greek Accountants …………………………………………………………………………………………… 46
Efstratios C. Emmanouilidis, University of Macedonia, Greece
Anastasios A. Economides, University of Macedonia, Greece
Chapter 5
Exploring the Adoption of Technology Driven Services in the Healthcare Industry ……………………… 66
Umit Topacan, Bogazici University, Turkey
A. Nuri Basoglu, Bogazici University, Turkey
Tugrul U. Daim, Portland State University, USA
Chapter 6
Temporal Aspects of Information Technology Use: Increasing Shift Work Effectiveness ………………. 87
Roslin V. Hauck, Illinois State University, USA
Sherry M. B. Thatcher, University of Louisville, USA
Suzanne P. Weisband, University of Arizona, USA
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Chapter 7
Implementation Success Model in Government Agencies: A Case of a Centralized Identification
System at NASA ………………………………………………………………………………………………………………… 105
Yair Levy, Nova Southeastern University, USA
Theon L. Danet, NASA Langley Research Center, USA
Chapter 8
SERREA: A Semantic Management System for Retail Real Estate Agencies …………………………….. 120
Ángel García-Crespo, Universidad Carlos III de Madrid, Spain
Ricardo Colomo-Palacios, Universidad Carlos III de Madrid, Spain
Juan Miguel Gómez-Berbís, Universidad Carlos III de Madrid, Spain
Fernando Paniagua Martín, Universidad Carlos III de Madrid, Spain
Chapter 9
Mass Customisation Models for Travel and Tourism Information e-Services: Interrelationships
Between Systems Design and Customer Value……………………………………………………………………….. 135
Marianna Sigala, Democritus University, Greece
Chapter 10
Technology Fears: A Study of e-Commerce Loyalty Perception by Jordanian Customers ……………. 158
Ahmad Khasawneh, Hashemite University, Jordan
Mohammad Bsoul, Hashemite University, Jordan
Ibrahim Obeidat, Hashemite University, Jordan
Iyad Al Azzam, Yarmouk University, Jordan
Chapter 11
Predictive Models in Cybercrime Investigation: An Application of Data Mining Techniques ………. 166
A. S. N. Murthy, Indian Police Service, Karnataka, India
Vishnuprasad Nagadevara, Indian Institute of Management Bangalore, India
Rahul De’, Indian Institute of Management Bangalore, India
Chapter 12
Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated
Management ………………………………………………………………………………………………………………………. 178
Isabella Bonacci, Federico II University, Italy
Oscar Tamburis, ICAR – CNR, Italy
Chapter 13
Marketing and Reputation in the Services Sector: Higher Education in South Africa
and Singapore …………………………………………………………………………………………………………………….. 193
Johan De Jager, Tshwane University of Technology, South Africa
Werner Soontiens, Curtin University of Technology, Australia
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Chapter 14
Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions ……………… 208
Zhongxian Wang, Montclair State University, USA
Ruiliang Yan, Indiana University Northwest, USA
Qiyang Chen, Montclair State University, USA
Ruben Xing, Montclair State University, USA
Chapter 15
Understanding Expectations, Perceptions and Satisfaction Levels of Customers of Military
Engineer Services in India …………………………………………………………………………………………………… 219
Anand Parkash Bansal, Indian Institute of Management Bangalore, India
Vishnuprasad Nagadevara, Indian Institute of Management Bangalore, India
Chapter 16
Service Registry Design: An Information Service Approach ……………………………………………………. 239
Luís Ferreira Pires, University of Twente, The Netherlands
Arjen van Oostrum, University of Twente, The Netherlands
Fons Wijnhoven, University of Twente, The Netherlands & Wilhelms University of Muenster,
Germany
Chapter 17
Operational Performance Analysis of a Public Hospital Laboratory ………………………………………….. 260
Kamrul Ahsan, Auckland University of Technology, New Zealand
Abdullahil Azeem, Bangladesh University of Engineering and Technology, Bangladesh
Chapter 18
A Mashup Application to Support Complex Decision Making for Retail Consumers ………………….. 277
Steven Walczak, University of Colorado at Denver, USA
Deborah L. Kellogg, University of Colorado at Denver, USA
Dawn G. Gregg, University of Colorado at Denver, USA
Chapter 19
Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher
Education ………………………………………………………………………………………………………………………….. 295
María J. Martínez-Argüelles, Open University of Catalonia, Spain
José M. Castán, University of Barcelona, Spain
Angel A. Juan, Open University of Catalonia, Spain
Compilation of References ………………………………………………………………………………………………… 312
About the Contributors …………………………………………………………………………………………………….. 349
Index ………………………………………………………………………………………………………………………………… 359
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Detailed Table of Contents
Preface ………………………………………………………………………………………………………………………………. xiv
Chapter 1
Predicting Ambulance Diverson ………………………………………………………………………………………………. 1
Abey Kuruvilla, University of Wisconsin Parkside, USA
Suraj M. Alexander, University of Louisville, USA
The high utilization level of emergency departments in hospitals across the United States has resulted in
the serious and persistent problem of ambulance diversion. This problem is magnified by the cascading
effect it has on neighboring hospitals, delays in emergency care, and the potential for patients’ clinical
deterioration. We provide a predictive tool that would give advance warning to hospitals of the impend-
ing likelihood of diversion. We hope that with a predictive instrument, such as the one described in this
paper, hospitals can take preventive or mitigating actions. The proposed model, which uses logistic and
multinomial regression, is evaluated using real data from the Emergency Management System (EM
Systems) and 911 call data from Firstwatch® for the Metropolitan Ambulance Services Trust (MAST)
of Kansas City, Missouri. The information in these systems that was significant in predicting diversion
includes recent 911 calls, season, day of the week, and time of day. The model illustrates the feasibility of
predicting the probability of impending diversion using available information. We strongly recommend
that other locations, nationwide and abroad, develop and use similar models for predicting diversion.
Chapter 2
Hybrid Value Creation in the Sports Industry: The Case of a Mobile Sports Companion as IT-
Supported Product-Service-Bundle ………………………………………………………………………………………… 11
Jan Marco Leimeister, Kassel University, Germany
Uta Knebel, Technische Universitaet Muenchen, Germany
Helmut Krcmar, Technische Universitaet Muenchen, Germany
Integrated product-service packages (hybrid products) can open new markets and target groups to com-
panies. However, existing approaches to service or product development do not sufficiently address
simultaneous development and domain-specific issues. A very promising new field for such bundles is
the health and fitness industry. In this research, we designed and built an IT-supported training system
for running, the Mobile Sports Companion (MSC), which closely interlocks a product and corresponding
services using an iterative development process. We tested the pilot system with 14 recreational athletes.
The results of the field test show that the MSC proved to be a promising tool to offer athletes an effective
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individual, flexible, and mobile training. However, the system, as it is, did not sufficiently represent the
human trainer behind it, thus lowering its acceptance and the credibility of its recommendations. Our
next step is to integrate features that could strengthen the athlete-trainer relationship. The MSC could
turn out to be a promising field for future e-business applications in the sports service industry.
Chapter 3
Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System …………………… 25
Paul F. Schikora, Indiana State University, USA
Michael R. Godfrey, University of Wisconsin Oshkosh, USA
Brian D. Neureuther, State University of New York, College at Plattsburgh, USA
Managing customer service is critical for both nonprofit and for-profit dial-up modem Internet service
providers. When system operators face excess demand, they can either add capacity or adapt their man-
agement techniques to deal with their limited resources—this article considers the latter. We examine
system configuration options and the resultant effects on customer service levels in a simulated dial-up
modem pool operation. Specifically, we look at a single pool operation and examine the effects of impos-
ing time limits in a seriously overloaded system. We analyze the results on several key customer service
measures. The results show that imposing these limits will have a distinct, nonlinear impact on these
measures. Customer productivity and actual system load are shown to have major impacts on the perfor-
mance measures. Interactions between several system and environmental parameters are also discussed.
Chapter 4
ICT Usage by Greek Accountants …………………………………………………………………………………………… 46
Efstratios C. Emmanouilidis, University of Macedonia, Greece
Anastasios A. Economides, University of Macedonia, Greece
This study investigates Greek accounting offices use of Information and Communication Technologies
(ICT). Initially, a comprehensive questionnaire was developed. It contains 35 questions with multiple
answers and 2 open questions tailored to the accountants. One hundred accountants’ offices in a Greek
county answered the questionnaire. The findings present their current ICT infrastructure and their use
of ICT and accounting e-services. Greek accounting offices have made improvements in adopting new
technology in their everyday work. All use email, antivirus software, and the Web. Most submit VAT
(Value Aided Tax), Taxation Statements, and APS (Analytical Periodic Statement) via Internet. How-
ever, most are not cautious about backing up their data daily; they do not create electronic files for all
their documents; they do not update their software via Internet; and they do not use advanced software
applications. Finally, they expect the government and the Accountants’ Chamber to finance their ICT
infrastructure.
Chapter 5
Exploring the Adoption of Technology Driven Services in the Healthcare Industry ……………………… 66
Umit Topacan, Bogazici University, Turkey
A. Nuri Basoglu, Bogazici University, Turkey
Tugrul U. Daim, Portland State University, USA
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Recent developments in information and communication technologies have helped to accelerate the
diffusion of electronic services in the medical industry. Health information services house, retrieve,
and make use of medical information to improve service quality and reduce cost. Users—including
medical staff, administrative staff, and patients—of these systems cannot fully benefit from them un-
less they can use them comfortably. User behavior is affected by various factors relating to technology
characteristics, user characteristics, social environment, and organizational environment. Our research
evaluated the determinants of health information service adoption and analyzed the relationship between
these determinants and the behavior of the user. Health information service adoption was found to be
influenced by service characteristics, user characteristics, intermediary variables, facilitating conditions,
and social factors.
Chapter 6
Temporal Aspects of Information Technology Use: Increasing Shift Work Effectiveness ………………. 87
Roslin V. Hauck, Illinois State University, USA
Sherry M. B. Thatcher, University of Louisville, USA
Suzanne P. Weisband, University of Arizona, USA
The dynamic nature of organizations and technologies require a comprehensive understanding of how
organizational forms and information technology interact. While previous research and theories of in-
formation technology have investigated aspects such as organizational structure, individual and group
behavior, and inter-organizational relationships, shift work, an important temporal aspect often found
in service organizations, is surprisingly absent in the literature. The purpose of this paper is to examine
the effect that shift work has on employee use and satisfaction with information technology. The results
of a field study of a police organization indicate that information technology systems are valued differ-
ently by workers on different shifts. The authors discuss how this research helps advance theories of
technology use and effectiveness (such as task-technology fit and technology acceptance model) and
present important practical implications of this study for strategic alignment of technology in the areas of
systems design, implementation, addressing the needs of peripheral workers, and resource management.
Chapter 7
Implementation Success Model in Government Agencies: A Case of a Centralized Identification
System at NASA ………………………………………………………………………………………………………………… 105
Yair Levy, Nova Southeastern University, USA
Theon L. Danet, NASA Langley Research Center, USA
A recent presidential directive mandated that all U.S. government agencies establish a centralized iden-
tification system. This study investigated the impact of users’ involvement, resistance, and computer
self-efficacy on the implementation success of a centralized identification system. Information System
(IS) usage was the construct employed to measure IS implementation success. A survey instrument
was developed based on existing measures from key IS literature. The results of this study indicated
a strong reliability for the measures of all constructs (user involvement, computer self-efficacy, user’s
resistance, and IS usage). Factor analysis was conducted using Principal Component Analysis (PCA) with
Varimax rotation. Results of the PCA indicate that items of the constructs measured had high validity,
while Cronbach’s Alpha for each factor demonstrates high reliability for all constructs measured. Ad-
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ditionally, results of a structural equations modeling analysis using Partial Least Square (PLS) indicate
that computer self-efficacy and user involvement had positive significant impact on the implementation
success. However, the results also demonstrated that user’s resistance had no significant impact on IS
usage, while end user involvement had a strong negative impact on user’s resistance.
Chapter 8
SERREA: A Semantic Management System for Retail Real Estate Agencies …………………………….. 120
Ángel García-Crespo, Universidad Carlos III de Madrid, Spain
Ricardo Colomo-Palacios, Universidad Carlos III de Madrid, Spain
Juan Miguel Gómez-Berbís, Universidad Carlos III de Madrid, Spain
Fernando Paniagua Martín, Universidad Carlos III de Madrid, Spain
In the scenario of market competition in the Retail Real Estate Agencies (RREA) business, having exact
information regarding properties in supply and their associated demand is a differentiating factor for
organizations. The Semantic Web represents an opportunity to create extensible services that hold pre-
cise information concerning these types of markets. The objective of the current initiative is to use this
market data as a competitive advantage for organizations. In this article, the authors propose SERREA,
a management system for RREA based on semantics and constructed using Web Services, which has
been implemented successfully in one of the leading agencies in Spain. The goal of this paper is to show
how RREA benefits from using Semantic Technologies in the context of their business operations.
Chapter 9
Mass Customisation Models for Travel and Tourism Information e-Services: Interrelationships
Between Systems Design and Customer Value……………………………………………………………………….. 135
Marianna Sigala, Democritus University, Greece
Online travel firms exploit current ICT advances for developing mass customization (MC) capabilities
and addressing the needs of the sophisticated travellers. However, studies investigating MC in services
and specifically in tourism are limited. By adopting a customer-focused approach, this paper addresses
this gap by analysing the following issues: a) the ICT and product dimensions that online firms can
customise for developing and implementing different MC models; and b) the customer value and ben-
efits provided by the different MC models. After reviewing and illustrating the interrelationships of
studies coming from the fields of customer value, MC and IS design, the author proposes a customer
value based framework for developing MC models. The applicability and practical implications of this
framework are demonstrated by analysing the MC practices of three online travel cyberintermediaries.
Finally, the paper summarises the formulation of research propositions investigating the influence of
users’ characteristics on the customer value and benefits sought by MC practices and on the design of
the IS platforms supporting MC services.
Chapter 10
Technology Fears: A Study of e-Commerce Loyalty Perception by Jordanian Customers ……………. 158
Ahmad Khasawneh, Hashemite University, Jordan
Mohammad Bsoul, Hashemite University, Jordan
Ibrahim Obeidat, Hashemite University, Jordan
Iyad Al Azzam, Yarmouk University, Jordan
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The Internet and all other types of networks have changed life in general and doing business in particular,
and as a result, many companies are now conducting and transferring their businesses online. In this
paper, the authors evaluate whether loyalty issues are the major obstacles to the growth of e-commerce
in Jordan. A survey conducted for the study reveals that technology fears are major barriers to loyalty
in Internet banking and e-commerce activities among consumers. The results suggest that unless the
technology fears of adopters are acknowledged, some of them are not successful.
Chapter 11
Predictive Models in Cybercrime Investigation: An Application of Data Mining Techniques ………. 166
A. S. N. Murthy, Indian Police Service, Karnataka, India
Vishnuprasad Nagadevara, Indian Institute of Management Bangalore, India
Rahul De’, Indian Institute of Management Bangalore, India
With increased access to computers across the world, cybercrime is becoming a major challenge to
law enforcement agencies. Cybercrime investigation in India is in its infancy and there has been lim-
ited success in prosecuting the offenders; therefore, a need to understand and strengthen the existing
investigation methods and systems for controlling cybercrimes is greatly needed. This study identifies
important factors that will enable law enforcement agencies to reach the first step in effective prosecu-
tion, namely charge-sheeting of the cybercrime cases. Data on 300 cybercrime cases covering a number
of demographic, technical and other variables related to cybercrime was analyzed using data mining
techniques to identify and prioritize various factors leading to filing of the charge-sheet. These factors
and the respective priority rankings are used to suggest various policy measures for improving the suc-
cess rate of prosecution of cybercrimes.
Chapter 12
Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated
Management ………………………………………………………………………………………………………………………. 178
Isabella Bonacci, Federico II University, Italy
Oscar Tamburis, ICAR – CNR, Italy
The social frame of healthcare organizations in Europe (and in particular in the Italian Public Sector),
as a combination of relational, formal and informal aspects, is one of their most relevant sources of
complexity, which leads to different approaches about decisional, clinical and organizational processes
(Cicchetti, 2004). These issues have been enlightened as well by the increasing social incidence of
chronic-degenerative pathologies, such as Diabetes Mellitus type 2. In this regard, the Italian national
e-government strategy has first pointed out the need for paths of integration and interoperability among
information systems to ensure a safe exchange of information (CNIPA, 2008). The activity of “inte-
grated design” of information flows between doctors and patients allows the creation and development
of reticular organizational forms in which many non contiguous actors work at the same time on the
diagnosis and care process. This paper shows how the adoption of the Social Network Analysis (SNA),
as theoretical and methodological perspective that emphasizes the social reality as reticular framework
(Moreno, 1987), can provide an innovative approach for the study of the “pathology networks” and
the “integrated management” of Diabetes Mellitus type 2, where ICT solutions are (or are about to be)
currently involved.
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Chapter 13
Marketing and Reputation in the Services Sector: Higher Education in South Africa
and Singapore …………………………………………………………………………………………………………………….. 193
Johan De Jager, Tshwane University of Technology, South Africa
Werner Soontiens, Curtin University of Technology, Australia
Over the past few decades the tertiary sector has developed from a predominantly inward focussed industry
serving public interest to an internationalised and commercially competitive industry. Resulting from
this fundamental change is a drive to better understand the most prominent dimensions that impact on
internationalisation, more particularly, the expectations and experiences of students. Although some of
these can be argued to be country specific, and thus differentiate between markets, others are universal
and impact on the overall industry. One of the latter is a pressure to consider and treat students as clients
introducing all the dynamics of service delivery and management. The primary objective of this paper
is to identify the most important variables related to marketing and reputation issues when selecting a
university in South-Africa and compare the same for Singapore students. This study revealed that the
most important consideration for the South African sample, regarding marketing and reputation related
variables when choosing an institution of higher education, is the academic reputation of the institution,
while the marketing activities were regarded as priority by the Singaporean sample.
Chapter 14
Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions ……………… 208
Zhongxian Wang, Montclair State University, USA
Ruiliang Yan, Indiana University Northwest, USA
Qiyang Chen, Montclair State University, USA
Ruben Xing, Montclair State University, USA
Data mining involves searching through databases for potentially useful information, such as knowledge
rules, patterns, regularities, and other trends hidden in the data. Today, data mining is more widely used
than ever before, not only by businesses who seek profits but also by nonprofit organizations, government
agencies, private groups and other institutions in the public sector. In this paper, the authors summarize
and classify the applications of data mining in the public sector into the following possible categories:
improving service or performance; helping customer relations management; analyzing scientific and
research information; managing human resources; improving emergency management; detecting fraud,
waste, and abuse; detecting criminal activities; and detecting terrorist activities.
Chapter 15
Understanding Expectations, Perceptions and Satisfaction Levels of Customers of Military
Engineer Services in India …………………………………………………………………………………………………… 219
Anand Parkash Bansal, Indian Institute of Management Bangalore, India
Vishnuprasad Nagadevara, Indian Institute of Management Bangalore, India
Customer satisfaction and client orientation concepts are needed in all service providing organisations,
including those engaged in construction and infrastructure provision within the public sector where the
public perception about their services is at its lowest. This study measures the expectations and percep-
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tions of various service elements among clients of Military Engineer Services (MES) in India. Customers’
survey mode was used to measure the expectations, perception, importance and satisfaction. The perceived
quality of services provided by this department was measured with SERVQUAL instrument on selected
attributes using the Gap approach for identifying priorities. Additionally, this study also examines the
influence of demographic characteristics of clients on expectations and perceptions of the clients. The
results can be used by similar organisations for cultural and structural change to increase accountability
and performance, in which the results indicate that the three most important dimensions in the order of
importance among the clients of MES are tangibles, responsiveness and reliability.
Chapter 16
Service Registry Design: An Information Service Approach ……………………………………………………. 239
Luís Ferreira Pires, University of Twente, The Netherlands
Arjen van Oostrum, University of Twente, The Netherlands
Fons Wijnhoven, University of Twente, The Netherlands & Wilhelms University of Muenster,
Germany
A service registry is a Service-Oriented Architecture (SOA) component that keeps a ‘catalogue’ of
available services. It stores service specifications so that these specifications can be found by potential
users. Discussions on the design of service registries currently focus on technical issues, while service
registries should take into consideration information needs of business domain users. In this regard, the
authors consider service registries as information services and develop a comprehensive framework
for designing service registries. This framework introduces aspects that determine a design space for
service registries. In this design space, the authors identify views, requirements, processes, and means
in the design of a service registry that supports the lifecycle information of a service. A vital part of
these requirements is further implemented and demonstrated in a prototype built as a ‘proof-of-concept’
for the framework. This paper also discusses a case study used to evaluate the prototype. In this case
study, a registry prototype has been populated with realistic services of a large insurance company, and
21 experienced IT and business professionals from a consultancy organization evaluated the prototype
for its user satisfaction.
Chapter 17
Operational Performance Analysis of a Public Hospital Laboratory ………………………………………….. 260
Kamrul Ahsan, Auckland University of Technology, New Zealand
Abdullahil Azeem, Bangladesh University of Engineering and Technology, Bangladesh
Efficient utilization of scarce resources is an issue for any healthcare system. In developing countries,
proper tools, techniques, and resources must be widely used in healthcare operational planning. Consid-
ering the necessity of effective resource planning, this study focuses on the rural healthcare system of
Bangladesh and concentrates on the sub-district government hospital laboratory. The authors’ determine
possible ways to improve operations of laboratory facilities. To analyze existing system efficiency,
sample laboratory data is fed into a simulation model. This paper identifies several possible ways for
future expansion and suggests using simulation for better planning and analysis.
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Chapter 18
A Mashup Application to Support Complex Decision Making for Retail Consumers ………………….. 277
Steven Walczak, University of Colorado at Denver, USA
Deborah L. Kellogg, University of Colorado at Denver, USA
Dawn G. Gregg, University of Colorado at Denver, USA
Purchase processes often require complex decision making and consumers frequently use Web informa-
tion sources to support these decisions. However, increasing amounts of information can make finding
appropriate information problematic. This information overload, coupled with decision complexity, can
increase time required to make a decision and reduce decision quality. This creates a need for tools that
support these decision-making processes. Online tools that bring together data and partial solutions are
one option to improve decision making in complex, multi-criteria environments. An experiment using a
prototype mashup application indicates that these types of applications may significantly decrease time
spent and improve overall quality of complex retail decisions.
Chapter 19
Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher
Education ………………………………………………………………………………………………………………………….. 295
María J. Martínez-Argüelles, Open University of Catalonia, Spain
José M. Castán, University of Barcelona, Spain
Angel A. Juan, Open University of Catalonia, Spain
Information technologies are changing the way in which higher education is delivered. In this regard,
there is a necessity for developing information systems that help university managers measure the quality
of online services offered to their students. This paper discusses the importance of considering students’
perception of service quality. The authors then identify key factors of service quality, as perceived by
students, in online higher education. To this end, the Critical Incident Technique (CIT) is proposed as
an effective qualitative methodology. Some benefits of this methodology are highlighted and an explor-
atory research is carried out in a real environment to illustrate this approach. Results from this research
explain which quality dimensions are considered the most valuable to online students. Information
provided by this methodology can significantly improve strategic decision-making processes in online
universities worldwide.
Compilation of References ………………………………………………………………………………………………… 312
About the Contributors …………………………………………………………………………………………………….. 349
Index ………………………………………………………………………………………………………………………………… 359
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Preface
THE CURRENT STATE, OBJECTIVE, AND FUTURE TRENDS OF GREEN IT FOR
SERVICES
Introduction
Environmental issues have become an important topic of concern over the past decade, and Information
Technology (IT) services have not been left out of this trend, and for good reason. With the vast and
rapid pace of technology, there is no reason why IT cannot be “green” and environmentally friendly,
especially given the large influence of IS/IT on the current global business environment. There are some
key components of Green IT, and the direction that it will be taking in the future will be discussed here.
Green IT, also referred to as Green Computing, is the focus on environmental sustainability for the
IT sector. A definition of this is, “the study and practice of designing, manufacturing, using, and dispos-
ing of computers, servers, and associated subsystems—such as monitors, printers, storage devices, and
networking and communications systems—efficiently and effectively, with minimal or no impact on
the environment” (Murugesan, 2009, p.25). This is a global concern, as it aims at minimizing hazardous
materials usage while at the same time increasing energy efficiency and recyclability, in the context of
IT hardware, software, and services.
A well-designed Green IT system can be very sophisticated, and may include different networks,
hardware, and people with varying skills and backgrounds. The realm of Green IT encompasses Green
Outsourcing, Green Consulting, Green Network Services and lastly, Green Package Software. A For-
rester report foresees an increasing demand for Green IT services, estimated to grow by 60 percent each
year (Samson, 2008).
The notion of Green information technology services refers to a somewhat large set of services
available to businesses, both large and small, to help them reduce their carbon footprint in the world,
while also making attempts to save money. According to Wilson (2009), 97% of senior level information
technology executives have been discussing implementing green technologies into their businesses, and
45% have already started using some of these strategies. This can be considered a great improvement,
as most companies in the past have only tossed around and debated these ideas, but did not take con-
crete steps to implement them. Another trend in this survey is that of an individual company’s increased
awareness of their impacts on the environment. While the impetus of this in the past was on cost savings,
a recent and critical finding from this survey points to the fact that these companies are now genuinely
becoming interested in their ability to do less harm and to make a positive impact on the environment.
The Greening of IT has definitely become a driving force in the business world, but it still has a long
way to go (Beitollahi & Deconinck, 2011).
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One of the main focus areas of Green IT is to reduce IT emissions and the impacts of the broad spec-
trum of IT use, while subsequently increasing the sustainability of these technologies and their impacts.
But many wonder who is or should be responsible for this initiative in a firm, besides the most obvi-
ous, the CIO. While the “greening” of IT has become a very specialized industry that is changing very
rapidly, as more companies become interested in sustainability, these “green” efforts are taking off, and
people are being recruited from many different industries to help manage the myriad of techniques that
can be employed. Not only are there workers with expertise in the area of energy conservation, but also
needed are those skilled in electrical systems, energy auditing, chip design, and more efficient battery,
system, and server design (Sanchitanand, 2009; Marsan & Meo, 2011).
Many companies want to “go green” overnight, but the task can be more complex and involved
than it appears at first glance. Hedman and Henningsson (2011) suggest three ways in order to change
a business, from “appearing to be green” to a radical 360 degree transformation. One model of change
is the “storefront”. A storefront business promotes themselves as one that is green ”without changing
any of its business activities; in effect, the ‘storefront’ company investigates existing activities to see
if it can label any of them as green IT…” (p.55). This strategy does not, in reality, include any internal
changes in their processes or business operations, but makes an attempt to parallel their current ideas
with those that are “green.” While more along the lines of “window dressing” and being “for show”,
few new “green” strategies are being implemented. Hedman & Henningsson’s second approach involves
improving a given company’s current operations, including any viable “green IT” changes and strategies.
This strategy is great for companies that are really interested in being green, but don’t have the time, the
ability or the funds to drastically alter their company. The last category the authors describe what they
call “the redesign.” In this model, the company takes the a firm and solid initiative to implement Green
IT into every area of their business, and this may require the hiring of someone experienced to head this
project. Because of the scale and complexity of this initiative, it is typically only done in cases where
there is a significant upside to a drastic change, and also sufficient recognition and resources to manage
the risk in the case of failure or results that are unexpected. In short, it should be recognized that while
the payoff of Green IT can be substantial, the risks can also be considerable. While Green IT is such a
hot topic due to broad current interest of a “Green Revolution,” there is not enough research being done
in this area. Jenkin, Webster and McShane (2010) have developed a framework as to what direction
this research should be going proceeding. Currently, most of the research is done on Green IS, which is
(S) systems-focused as opposed to (T) technology-focused, and concentrate on how to improve these
kinds of systems in terms of greater efficiency, less emissions, and reduced costs. Example of these
could include more efficient super computers and data centers, for example. The author’s framework
suggests moving the general direction of research into a new direction, especially taking account of
the four components that they find to be vital, these being motivating forces, environmental initiatives,
environmental orientations and environmental impacts.
It should be understood that the transition to a sustainable, low-carbon footprint economy repre-
sents an enormous challenge. It is concerned with allocating sufficient resources so as to transform our
economy in a relatively prompt manner, but also keeping in mind the critical need to maintain environ-
mental and “green” considerations, while at the same time not undermining the prospects for prosperity
in the future. Specifically, investments in Green IT, technologies, and technologies will need to focus
on resource productivity, renewable energy, clean technology, green business, climate adaptation and
ecosystem protection, to name a few. These may bring about tangible effects that can be measured and
quantified. However, investments in eco-system enhancement and climate adaptation might not be able
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to demonstrate conventional financial returns at all, even though they are protecting vital ecosystem
services for the future, may have effects which are important to the environment, and can also help
reduce unemployment (Jackson & Victor, 2011).
In addition, environmentally modified national accounts offer a quantifiable sustainability concept
for produced and natural capital maintenance. For practical reasons, sustainability economics should
therefore have their primary focus on sustainable economic performance and growth. In the case of
efforts to coordinate these with other social goals, this is probably better left to the political realm (Bar-
telmus, 2010).
Current Research in Green IT
Ecosystem Services
The concept of ecosystem services is an approach widely discussed and employed to clarify and to as-
sess the dependence of human society on ecosystems and landscapes. Landscapes may be thought of
as merely for aesthetic effect, but may have impacts upon the environment and ecosystems, that must
be recognized. In order to better understand and evaluate the potential performance of ecosystems and
landscapes and the quality needed or demanded by society, Bastian, Haase, and Grunewald (2011)
suggest returning to a landscape potential concept originally developed by landscape ecologists in the
1970s. Employing both the original concepts and new approaches proposed by the authors, the result is
a proposed EPPS framework – ecosystem (or landscape) properties, potentials and services – which is
presented as a better way to link both potentials and services to help undertake planning, management
practice, and governance endeavors. The empirical part of their paper shows the potential applications
and effects of the EPPS framework in an urbanized region.
Green Cloud Computing Model
Another interesting and viable research area concerns the problem of data centers hosting cloud applica-
tions, which due to their high processing and input/output needs consumes huge amounts of electrical
energy, contributing to high operational costs and adding additional burdens to the carbon footprints of
the environment. The focus and goal of “Green” Cloud computing is not only to minimize operational
costs, but also to reduce the environmental impact of data centers. Beloglazov, Abawajy, & Buyya (2011)
define an architectural framework, and also principles for, more energy-efficient Cloud computing. Based
on this architecture, they presented their vision, including research opportunities, resource provisioning,
and allocation algorithms for more energy-efficient management of Cloud computing environments, and
other methods and techniques. The proposed energy-aware allocation heuristics distribute data center
resources to client applications in such a way that energy efficiency of the data center is improved, while
also maintaining a high level of Quality of Service (QoS).
The VALUE Model (Combining Cost–Benefit and Multiplier Analyses)
Increased urbanization has put a great deal of pressure on the availability of land, and its value in being
used for “Green” purposes. One problem lies in the fact that investments in green infrastructure are dif-
ficult to assess in terms of a quantified value. However, it is also a fact that the creation and designation
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of green spaces has had a proven positive effect on people living and working, in a given neighborhood.
In order to convince the public and other stakeholders of the usefulness of investments in green spaces,
it is necessary to give a correct, understandable and easily repeatable method to value these kinds of
investments. Vandermeulen, Verspecht, Vermeire, Van Huylenbroeck, and Gellynck (2011) present a
model that can be used to express the value of green infrastructure investments in economic terms. The
goals of evaluating a project at both the site and regional scales will give a complete overview of all
direct, indirect and use values of the investment. In addition, by using cost–benefit as well as multiplier
analyses, it is possible to come up with concrete, estimated monetary values. This article shows that the
employment of this model can help to justify the support for, and investment in, green spaces.
Layered Green Performance Indicators
Kipp, Jiang, Fugini, and Salomie (2011) present a layered Green Performance Indicators (GPI) ap-
proach, allowing for a clearly defined classification of the “greenness” of an IT service centre at differ-
ent hierarchical levels. In particular, the correlation and linkages between the GPIs at different levels
were presented, and IT service centres are continuously monitored through a suitable energy sensing
and monitoring infrastructure. Then, energy related data will be collected and the corresponding GPI
values will be computed. In order to better evaluate the correlation between GPIs at various levels, data
mining algorithms and statistical methods are used to analyze the collected data, with the goal of provid-
ing some indication of the predictive relationship between the GPIs, with a particular emphasis on the
relationship between high level (application, business processing, QoS – Quality of Service) GPIs and
low-level, hardware-related GPIs.
Integrating LCA and Dynamic Simulation
With sustainability increasingly becoming an important factor in business decisions and planning,
companies are now looking for methods and tools to help gain a fuller picture of the environmental
impacts caused by their manufacturing and supply chain activities. In line with Nwe, Adhitya, Halim,
and Srinivasan (2010), life cycle assessment (LCA) is a widely-used technique for measuring the envi-
ronmental costs associated with a specific product or service. However, one drawback is that LCA takes
a high-level view and assumes that there is a fixed supply chain structure and operation. Moreover, it
does not explicitly consider the effect of any supply chain design and practices that can make a posi-
tive environmental impact. The authors presented an approach integrating LCA indicators and dynamic
simulation techniques to address “green” supply chain design and operations. The environmental impact
indicators are incorporated into a dynamic model of the supply chain, along with the needs of maintain-
ing desired levels of profit and customer satisfaction, so that the sustainability of various design and
operational decisions can be assessed in a comprehensive manner.
Optimization Models
Overall, energy consumption from wireless networks is increasing rapidly, and in some countries amounts
to more than 55% of the entire communication sectors’ usage. As such, energy forms a non-negligible,
and in some cases, substantial part of the operational costs of mobile operators. With the advent of new
wireless technologies, exhibiting a growth rate factor of roughly 10 fold every 5 years, and also the
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dramatic increase in the number of users, results in a projected doubling of the power consumption of
cellular networks infrastructures every 4–5 years. Lorincz, Capone & Begušić (2011) present an approach
to create possible mobile network energy savings through optimized management of on/off states, and
the transmission of access station power based on traffic estimates associated with different hours (or
days) of the week. They propose an optimization approach based on ILP models that minimizes energy
consumption while desired area coverage and sufficient capacity for guaranteeing quality of service.
The proposed model can capture system characteristics, including considering different management
constraints that can be considered, based on varying traffic requirements and application scenarios.
Obtained results show that the potential exists for substantial energy savings, up to more than 50%, by
employing the proposed management strategies.
Simulation Models
By exploring the concept of productivity in post-growth economies and using a simulation model of the
UK economy, Jackson and Victor (2011) showed how a two-fold strategy – comprised both of work-time
reduction, and a sectorial shift to ‘green services’ – could contribute to achieving more desirable carbon
footprint targets in the UK. The proposed model demonstrated how such a strategy might help to maintain
full employment, even while there may be a slowdown in the economy as a whole. The employment of
the dual methods could contribute to achieving ‘deep’ carbon emission reduction targets while at the same
time helping to sustain an increased level of employment. This paper has the contribution of impacts
of these strategies on labour (and labour productivity) in the transition to a more sustainable economy.
Matsumoto (2010) presented a simulation model for reuse business markets. The model includes the
models of decision making of major actors and players in reuse markets, and it formally describes the
relationship between both the factors associated with these reuse businesses, and also the different pat-
terns associated with reuse markets. On the basis of the model formulated in this paper, future research
has been directed towards refining the model so that it can support the decision making strategies of
both companies and governments. The model can be refined, first, by dividing a single parameter into
several sub-parameters. In addition, the model proposed in this paper provided a basis to help make
these refinements possible.
As a result of Payments for Ecosystem Services (PES), conservation investments are increasingly
being implemented for the protection and restoration of ecosystem services around the world. Chen,
Lupi, An, Sheely, Viña and Liu (2011) present an agent-based simulation model to demonstrate the
evolution and impacts of social norms on the enrollment of agricultural land in a PES program. They
applied the model to land plots that have been enrolled in China’s Grain-to-Green Program (GTGP), with
the purpose of examining re-enrollment in an alternative payment program when the current payments
ceased. In the study, conducted at the Wolong Nature Reserve (Sichuan province, China) where several
thousand plant and animal species, including giant pandas, may benefit from the reenrollment program.
The authors found that a larger portion (over 15%) of GTGP land can be reenrolled at the same payment
if social norms were leveraged. The form of leveraging was accomplished by allowing more than 10
rounds of interactions among landholders regarding their reenrollment decisions.
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Two-Stage Game Theoretic Model
Environmental concern is increasingly gaining strength and attention in a large majority of industries
throughout the world. One of the areas that cause substantial environmental burdens from the business
sector is in transportation and logistics activities. In particular, a major factor in managing and evalu-
ating transportation and delivery environmental implications, are the characteristics of organizational
transportation fleets. As a result of heightened environmental concerns, many organizations in a wide
variety of industries have recognized that effective planning and management of their transportation
fleets requires recognition of the fleets’ environmental burden and impact.
For a more meaningful understanding of this interaction and the resulting equilibrium behavior of
firms, Bae, Sarkis, and Yoo (2011) analyzed the situation with the help of a quality-price two stage
game theoretic model, originally developed and used in the economics literature. By applying a widely
respected solution concept of the model, they derived numerous insightful results, such as the fact that
government R&D subsidies are more effective for overall industry performance, and that the employment
of tighter regulatory standards can be more effective towards the adoption of a “green fleet.” Overall,
using their current model the qualitative results and insights from the simulation show the capabilities
of the game theoretic model here to provide some very robust analyses and implications.
Green IT Research Using Surveys and Interviews
Sadly, many ecosystem services are currently in decline. As a result, local ecological knowledge and as-
sociated practices are essential to sustaining and enhancing ecosystem services such as those for gardens
and other kinds of “green spaces.” Barthel, Folke, and Colding (2010) focused on the “social–ecologi-
cal memory” of such gardens and had demonstrated its significance in terms of managing ecosystem
services. The authors examined and investigated where and how ecological practices and knowledge
are retained and transmitted by the garden communities; and their associated reification processes that
results in artifacts, rules-in-use and the structures of the gardens themselves. The research method in-
volved performing surveys and interviews over a four-year period, with a sample of several hundreds of
gardeners. The authors found some interesting results, namely that allotment gardens function as a kind
of community-of-practice, where participation and reification interact, and social–ecological memory
is a shared source of resilience of the community. The function of these can be described as being both
emergent and persistent, as they highlighted the critical role of urban gardens in maintaining and sup-
porting ecosystem services in times of crisis and change. In particular, the stewards of urban green areas
and the social memory that they carry may help to effectively counteract and stem the further decline
of critical ecosystem services.
It is an established fact that the value chain of many business enterprises is increasingly required to
demonstrate the profitability of a firm’s primary activities, starting from inbound logistics to operations,
outbound logistics, marketing sales, and finally to services. In the research conducted by Lai and Wong
(2012), the adoption of Green Logistics Management (GLM) presents an opportunity for Chinese manu-
facturing exporters to competently respond and address the escalating expectations of the international
community in terms of meeting increased levels of resource conservation, while at the same time exhibiting
both environmental concern, and profitability. Based on a survey of Chinese manufacturing exporters,
they found that the commonly held view that economic motivation is related to the adoption of GLM is
not supported. However, it was found that GLM positively affects both environmental and operational
performance, and the existence of regulatory pressure enhances the GLM-performance relationship.
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Young (2010) found that municipal forestry departments are giving greater attention to the manage-
ment of municipal green space to enhance ecosystem services. This is being perceived as an increasingly
important consideration for the goals and actions of their departments. Through a survey, this area was
investigated in greater detail. The results of the survey brought forth a number of interesting results:
first, the majority perceived traditional services such as tree planting and maintenance, and social aspects
such as beautification and enhancing public health and well-being to be high departmental priorities.
In addition, respondents rated managing municipal green space to produce ecosystem services, such
as efforts to bring about better energy and climate management; improved water quality, habitat and
biodiversity; as more important to their department than traditional objectives such as the maintenance
of property values or the protection of power lines, for example.
Björklund (2011) used a mail survey to investigate the nature and character of different factors that
can influence the environmental aspects of purchasing transportation services. Factor analysis suggests
that the factors can, to a large extent, be grouped according to the actors involved. The most significant
factors related to the internal management, firm image, resources of the firm, customer demands, car-
riers, and means of governmental control. In additions, the majority of the factors function as drivers.
Differences have been identified when comparing the surrounding environment of the environmental
aspects of purchasing transportation services with the surrounding environment commonly described
in the more general purchasing and environmental management literature.
A Combination of Different Models
Urban growth boundaries (UGBs) have been are used throughout the world by planners to plan, design,
and control urbanization by demarcating urban and rural boundaries. Currently, few UGB models ex-
ist to assist in the development of future urban growth boundaries. Tayyebi, Pijanowski, and Tayyebi
(2011) present an urban growth boundary model (UGB) which utilizes artificial neural networks (ANN),
geospatial information systems (GIS) and remote sensing (RS) to simulate the complex geometry of
urban boundaries, using the unique feature of integrated raster and vector formats. A variety of goodness
of fit land change model statistics are presented, many of which can be applied to purely raster-based
land change models. They summarize the use of UGBs in urbanization planning around the world,
and describe how this model can be used to assist planners in developing and better using future urban
growth boundaries. This is critical because an understanding can provide greater insights into how to
better understand, evaluate, and manage urban expansion.
Trappey, Trappey, and Wu (2010) developed a hybrid qualitative and quantitative approach, using
fuzzy cognitive maps and genetic algorithms, to model and evaluate the performance of RFID-enabled
reverse logistic operations. The use of fuzzy cognitive maps provides the advantage to linguistically
express the causal relationships between the various reverse logistic parameters. The other evaluation,
inference analysis using genetic algorithms, helps to enable performance forecasting and decision sup-
port for improving reverse logistic efficiency. In addition, Weber and Allen (2010) used an integrated,
multi-scale approach to evaluate aspects of environmental mitigation and stewardship as they relate to
transportation projects.
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Climate Impacts of Planning Policies
Regulating a local climate through the use of urban green areas is an important urban ecosystem service,
as it reduces the extent of the urban heat island and other effects, and as a result can enhance quality
of life in an urban area. Through local and regional planning policies, land use changes can be effected
in an urban area, which can then have an impact on the regulation of local climates. Schwarz, Bauer,
& Haase (2011) describe a method for estimating the impacts of current land use as well as local and
regional planning policies on local climate regulation, using a study of evapotranspiration and land
surface emissivity as the main indicators. This method can be implemented by practitioners as a way
of evaluating the effectiveness of these policies. For example, a case study on the application of this
method was discussed, and involved work done in Leipzig, Germany. The results gathered from six
selected planning policies in Leipzig indicated their distinct impacts on climate regulation and especially
the role its spatial extent. The proposed method was found to easily produce a meaningful qualitative
assessment of the impacts of planning policies on climate regulation.
Exploring Transportation Planning Issues
As host to a World Expo in 2012, Korea has been exploring the need to construct new inter-regional
transportation facilities so as to improve the physical, economic and social structure of the host city. Kim
(2011) examined the transportation planning tasks that should be done during the course of preparing
for the Expo and to define tasks, measures, and goals to effectively address this objective. The paper
conducted a review of four different aspects, the orientation of the government’s low carbon green
growth initiative, the governance system, the transportation facilities and traffic operational systems,
and the participation of the local community. These were selected as some of the critical factors affect-
ing the needs, and also the potential success of the Expo’s transportation needs. These factors are key
considerations in the preparations for the Expo, especially because Korea needs to prepare for the Expo
by associating and joining the low carbon green growth policy implemented by the central government
with the Expo’s theme “The Living Ocean and Coast.”
Future Trends of Green IT
The notion, goal, and implementation of Green IT services is a category of technology planning, design,
and innovation that has become a necessity for our future not only for its environmental benefits, but also
for its savings in terms of energy, costs, and other resources. Lamb (2009) described Green IT as “the
study and practice of using computing resources efficiently.” It is focused on reducing the environmental
impact of industrial processes and innovative technologies, and their usage, in part caused by the Earth’s
growing population. Since we have no doubt seen many signs of the worldwide climactic changes that
have caused many potentially disastrous events, and while some may not immediately see the direct
connection between IT use and climactic change, anything that can severely affect the environment can
be a contributor to undesired global change. In order to help move toward a “greener” future for IT in
general, it would be useful to start at the source. Thomas Friedman made a valid point, that in order to
achieve a greener product the materials itself must be environmental safer. “You can’t make a product
greener whether it’s a car, a refrigerator, or a traffic system, without making it smarter – smarter materi-
als, smarter software or smarter design” (Lamb, 2009, p.215).
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Green IT Strategy
Green IT strategy is not only about buying more carefully and efficiently, but is also an approach in
terms of how we go about thinking about the resources, energy and products that we use. One goal is to
stay focused on saving energy for the organization, the individual and also the government, which is a
worthy and practical perspective, but not the only one. The employment of alternative approaches and
technologies, including emerging infrastructure technologies, for example, virtualization and distributed
computing, can help to offer a higher level of flexibility and environmental sustainability.
Virtualization allows companies to obtain feedback, or to gather a more detailed view on the services
that they are providing. It is the most critical emerging technology because it can be more efficient in
terms of resource utilization, facility space savings, reduced power and cooling costs, while at the same
time reducing the server footprint and energy usage. Reduced energy usage is made possible by using
smaller servers and storages that have a larger capacity and more efficient processing. Also, it can help
to reduce carbon emissions and protect the environment by using cleaner and more efficient technolo-
gies. With server virtualization, IT departments can change virtual server configurations, without the
time-consuming labor required to maintain physical servers.
Distributed computing is made up of multiple independent computers, which communicate through
a network and interact with each other through communications links, in order to achieve a goal. Each
computer has a program that is installed in it and represents a direct link to the server. This setup can
also bring about a more environmentally-friendly approach to computing.
Environmental Impact of IT
Green IT can help to benefit the goals of global environmental sustainability. Few can argue against the
fact that environment conservation is essential, and that “green” IT can be used to help alleviate many
of the problems normally associated with pollution, urban sprawl, and emissions from manufacturing
facilities. “Although we all want to stop destroying our environment, Green IT is as much about doing the
right thing as corporate citizens as it is about making the best business decisions from a cost and growth
prospective” (Velte, Velte & Elsenpeter, 2008, p.24). The future of a Green IT environment will depend
on everyone; however, people are often unaware as to the ways in which to contribute to environmental
conservation or to the linkages between the environment and seemingly unrelated business decisions.
For example, according to Murugesan (2008), many people are unaware that the “simple” disposal of
electronic devices such as batteries, obsolete computers, and hardware devices can negatively impact
our environment. Simply stated, Green IT benefits the environment in many ways including improving
energy efficiency, lowering greenhouse gas emissions, using less harmful materials, and encouraging
reuse and recycling.
Green IT’s Growing Future
One of the most important elements of the future for green IT is that we must have better control over
energy use at the data centers supporting a corporation. Some of the organizations or companies that
have started using Green IT are Google and Microsoft. Through proper planning and development, they
have built green data centers in the Pacific Northwest, and are expecting their future utility expenses to
greatly decrease because of the efficiency and energy savings of their data centers.
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In addition, the creation of green PC’s by using nontoxic materials that would consume less power, be
easier to assemble and have an extended useful lifetime are all benefits that are appreciated and welcome.
Low Carbon Finance
There have been excellent results demonstrated by commercial banks in China, active in the implemen-
tation of green credit policy. While some local governments actively promote the green credit policy,
there have been many problems encountered in the implementation of low carbon finance in China. In
the future, China is actively developing a strategic plan for low-carbon finance development, improve
the legal framework for financial supervision, regulate the development of carbon finance, and foster
low-carbon financial innovation mechanism. In addition, there have been expressed the goal to innovate
and develop a variety of low-carbon financial instruments, improve low carbon financial intermediation
services, and actively promote an international carbon trading process, using the denominated RenMinBi.
Rebound Effect and Backfire
Households are expected to play a pivotal role in reducing greenhouse gas (GHG) emissions in the
UK, and the government is encouraging households to take specific steps to help meet desired targets.
However, as Druckman, Chitnis, Sorrell & Jackson (2011) discovered, only a portion of the GHG emis-
sion reductions estimated by simple engineering calculations are generally achieved in practice due to
a “rebound” effect resulting from the prescribed actions. Furthermore, emissions may increase in some
instances, a phenomenon known as “backfire”. Their study instead focuses on the benefits and importance
of shifting consumption to lower GHG intensive categories and also investing making investments in
low carbon technologies
A Holistic Strategic Analysis Framework
Zhang, Liu and Li (2011) suggest a holistic strategic analysis framework including considerations for
the environment and “green” IT. In the past, IT system design was driven mainly by two essential fac-
tors: technical merits and cost considerations. Environmental aspects have only begun to emerge under
the separate and distinct “green” IT perspective. Since the evaluation of any environmental and climate
impacts may be complicated and involve a great many parameters, some of which are indirect and hidden,
it is often difficult to come up with a rational analysis without the use of a more holistic framework. As
such, the authors propose to extend the goal-oriented requirements modeling language, GRL, to model
the rationality behind IT system design, with particular attention to how the environment related con-
siderations come into play in such design and decision making. The framework is sufficiently flexible
to facilitate decision making using different environmental settings.
Conclusion
The world is changing at a blistering pace and technology seems to be leading the way, but the technol-
ogy that is available isn’t always implemented or used in the most efficient way. While there are many
proposals and suggestions for Green IT, many of them have not been widely understood, studied, or
implemented. This is where a lot of research into Green IT services should be heading, as while invent-
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xxiv
ing new strategies is essential, finding ways and means to have them widely implemented and applied
has yet to fully accomplished. We have presented strategies and tools that can be used in order to help
ease companies into Green IT and the programs and processes associated with it, but only time will tell
if Green IT will take off. The recent interest in the environment and protecting it is very positive and
will further boost awareness. The advances made in Green IT outsourcing and consulting have shown
much promise, and hopefully these services and processes will become accepted in the business com-
munity, globally.
Financial concerns, constraints, global competition, and conflicting demands from within and or-
ganization complicate the many issues and directions that this area of research can take. As a result,
in some ways research progress in this area has not been as dynamic and substantial as many think it
should be. While Green IT is becoming a force to be reckoned with financially, more research is needed,
and hopefully the future will bring a greater interest in this area. With increasing external pressure from
government and consumers, this may be the time when a positive radical change will take place. Experts
predict that this area of research will develop dramatically in the future, and as a result would benefit all.
The future of Green IT is still very hopeful and almost limitless, and, as technologies and attitudes
change, the ways to efficiently maximize its power will change as well. That will be the ever evolving
and dynamic future of Green IT and the services it provides.
John Wang
Montclair State University, USA
Jeffrey Hsu
Farleigh Dickinson University, USA
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1
Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 1
DOI: 10.4018/978-1-4666-0044-7.ch001
BACKGROUND
A majority of Emergency Departments (EDs)
across the United States perceive they are at or over
capacity (Lewin Group, 2002). As ED visits have
been on the rise, the number of hospital EDs and
beds available at hospitals has decreased (Nawar,
Niska, & Xu, 2007; U.S. General Accounting Of-
fice [GAO], 2003) In literature, several authors
discuss factors contributing to ED saturation,
ranging from high patient acuity and bed short-
ages (Derlet, Richards, & Kravitz, 2001) to lab
delays and nursing shortages (Richards, Navarro,
& Derlet, 2000).
When EDs reach their capacity, ED staff is
unable to promptly care for new arrivals, and
services within the hospitals are unable to ac-
Abey Kuruvilla
University of Wisconsin Parkside, USA
Suraj M. Alexander
University of Louisville, USA
Predicting Ambulance Diverson
ABSTRACT
The high utilization level of emergency departments in hospitals across the United States has resulted in
the serious and persistent problem of ambulance diversion. This problem is magnified by the cascading
effect it has on neighboring hospitals, delays in emergency care, and the potential for patients’ clinical
deterioration. We provide a predictive tool that would give advance warning to hospitals of the impend-
ing likelihood of diversion. We hope that with a predictive instrument, such as the one described in this
paper, hospitals can take preventive or mitigating actions. The proposed model, which uses logistic and
multinomial regression, is evaluated using real data from the Emergency Management System (EM
Systems) and 911 call data from Firstwatch® for the Metropolitan Ambulance Services Trust (MAST)
of Kansas City, Missouri. The information in these systems that was significant in predicting diversion
includes recent 911 calls, season, day of the week, and time of day. The model illustrates the feasibility
of predicting the probability of impending diversion using available information. We strongly recommend
that other locations, nationwide and abroad, develop and use similar models for predicting diversion.
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2
Predicting Ambulance Diverson
commodate the specific needs of new ambulance
arrivals; hence ambulances must be diverted to
other facilities that can provide critical care. This
situation, referred to as “Ambulance Diversion,”
not only results in delays in emergency care
(Redelmeier, Blair, & Collins, 1994), but could
also contribute to patients’ clinical deterioration
(Glushak, Delbridge, & Garrison, 1997). We at-
tempt to develop a mathematical model whereby
hospitals/EMS agencies in a region can use 911
calls and diversion status of hospitals to predict
the likelihood of the occurrence of diversion.
LITERATURE REVIEW
A study of the literature shows that the rising
trend in ambulance diversions started causing
concern during the late 1980s (Richardson, Asp-
lin, & Lowe, 2002), resulting in reports, position
papers and task forces studying this problem from
the early 1990s (Frank, 2001; Vilke, Simmons,
Brown, Skogland, & Guss, 2001; Pham, Patel,
Millin, Kirsch, & Chanmugam, 2006). However,
owing to the elevated utilization level of EDs,
ambulance diversion continues to be an issue today
and is a common and increasing event that delays
emergency medical care (Redelmeier et al., 1994).
A wide range of literature exists, discussing
the problem and various solutions have been sug-
gested. A U.S. General Accounting Office survey
(2003) found that while about two of every three
EDs reported going on diversion at some point in
fiscal year 2001, a much smaller portion—nearly
1 of every 10 hospitals—was on diversion more
than 20 percent of the time. A cohort of twenty-two
master’s degree candidates from the University of
Virginia (2001) did a detailed study on diversion
at Richmond hospitals, and outlined problems
and solutions, analyzed via a simulation model. A
government study (U.S. House of Representatives,
2001), quoting instances of diversion from the
local press in all states, reported that ambulance
diversions have impeded access to emergency
services in the metropolitan areas of 22 states.
Vilke et al., (2001) tested the hypothesis that, if
one hospital could avoid ED diversion status, need
for bypass could be averted in the neighboring
facility. They concluded that reciprocating effects
can be decreased with one institution’s commit-
ment to avoid diversion, thus decreasing the need
for diversion at a neighboring facility. Neely,
Norton, and Young (1994) found that ambulance
diversions increase transport times and distances.
One community served by four hospitals reduced
ambulance diversion during a year, by 34% (La-
goe, Kohlbrenner, Hall, Roizen, Nadle, & Hunt,
2003). This was accomplished by sending daily
diversion statistics to hospital chief executive
officers and ED directors and managers, along
with each hospital individually implementing its
own measures to reduce diversion hours. Schull,
Mamdani, and Fang (2004) found that there was
an increase of diversion hours during the months
of November and December and correlated it to
the effect of flu on diversion. Only two papers in
medical literature referred to 911 calls being used
in a transport decision. Anderson, Manoguerra,
and Haynes (1998) explored the effect of divert-
ing poison calls to a poison center and Neely et
al. (1994) found that diversion of 911 patients
correlated strongly with unavailability of specific
categories of beds.
Several communities have also produced poli-
cies to honor patient requests regardless of diver-
sion status and to limit the total time of diversion
for each hospital. Some large metropolitan areas
have established oversight task forces to study
and track the diversion issue in their communities
(GAO, 2003). Some communities have addressed
this issue with political mandates by non-medical
personnel banning the use of diversion (Anderson,
2003). One city’s solution (Lagoe & Jastremski,
1990) was the installation of an ambulance di-
version system, whereby ambulances carrying
patients with relatively minor injuries were
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3
Predicting Ambulance Diverson
diverted, when necessary, from the city’s busy
emergency departments to less crowded ones in
neighboring counties.
A model that is able to predict the likelihood of
a hospital or a combination of hospitals going on
ambulance diversion would give advance warning
to hospitals and allow them to take proactive steps
to prevent it. The region itself would be better
served by, for example, rerouting ambulances
to alternate medical establishments. This would
reduce transportation time and free up ambulances
quicker for the next emergency. A survey of the
literature yielded only one model for predicting an
impending diversion. This model used the “work
score” of an ED to predict ambulance diversion
(Epstein & Tian, 2006). However, the model was
developed for individual hospitals and does not
consider the diversion status of other hospitals
in the region; also, the workscore is not an easily
available independent variable.
The model presented in this paper defines
the joint probability of the diversion status of a
collection of hospitals, based on readily avail-
able data, such as 911 calls and current status of
hospitals. The objective of this paper is to propose
a methodology and evaluate its feasibility for
predicting the likelihood of ambulance diversion
using readily available data, such as 911 calls and
the diversion status of hospitals. Its purpose is to
encourage metropolitan areas to develop similar
models to predict ambulance diversion.
SELECTION AND EVALUATION
OF METHODOLOGY
Since the purpose of this paper is to encourage
metropolitan areas to develop similar models to
predict the likelihood of ED diversion, we used
multinomial logistic regression, a widely accepted
statistical methodology that relates independent
variables to the likelihood of a dependent event.
The model developed uses data such as 911 calls
and the diversion status of hospitals in the region,
which is readily available from health/EMS agen-
cies. 911 calls have been used for transport deci-
sions (Anderson et al., 1998), and there is a strong
association between the number of ambulance
patients and diversion (Schull, Lazier, Vermeulan,
Mauhenney, & Morrison, 2003). Since the first call
made by, or for, a potential ED patient is to “911,”
the number of calls for transport to hospitals in
the region is an obvious leading indicator of the
patient load at an ED. Other variables that could
affect the number of patients at an ED include
the time of year or season (such as flu season),
the day of week, and time of day; hence, these
variables are also used as independent variables
in the model.
The proposed methodology was evaluated
through a retrospective examination of real am-
bulance diversion and emergency 911 call data for
the Kansas City metropolitan area. 911 call data
was obtained for the Kansas City metropolitan
area for the year 2003 and first 6 months of 2004.
Twenty-nine of the 36 hospitals in the region were
on diversion at some point during that period.
The emergency 911 call data for the Kansas City
metropolitan area was obtained from the Metro-
politan Ambulance Services Trust (MAST), the
ambulance service authority for the area. The data
included the time a call was received, the type of
emergency, and the hospital to which the patient
was initially transported. The diversion data was
obtained from “EMSystems,” a program that tracks
diversion status of hospitals. The system helps
emergency departments report their status and
thus coordinate and communicate with the other
hospitals/EMS agencies in the region. EMSys-
tems includes the time at which a hospital went
on diversion, the reasons for going on diversion,
and how long it stays on diversion.
Three hospitals with the most instances of
diversion from the region were selected for
analysis. The number of variables used in the
model increases exponentially as the number of
hospitals increases. Also, preliminary experiments
indicated that a logistic model was useful in de-
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4
Predicting Ambulance Diverson
termining the probability of diversion at each of
the hospitals based on the 911 calls, particularly
for hospitals where diversion was most frequent.
For these reasons, this study focuses on the three
hospitals with the highest incidence of diversion.
The preliminary logistic model was modified to
account for the correlations among the diversion
statuses of hospitals within a region, because the
state of any one hospital affects the impending
state of other hospitals. For instance, consider a
region with two hospitals A and B, and Hospital
A is similar to Hospital B with respect to any
specialized types of patients it accepts, such as
trauma patients. The current state of Hospital A
clearly affects the future state of Hospital B be-
cause Hospital B has responsibility for a larger
patient population when Hospital A is on diversion
and vice-versa (Vilke et al., 2001).
In order to simultaneously consider the cur-
rent ED state at each of the hospitals to predict
the probability of diversion at any one of the
hospitals, a multivariate multinomial model was
constructed. While the individual logistic models
provided valuable information on their own, the
collective valid are coded as 0, 1,…, K – 1; the
vector x denotes the p covariates. The logit func-
tions are represented as:
g x
PY k x
PY x
x k K
k
( ) ln
( | )
( | )
‘ , …, .=
=
=






= = −
0
1 1β
where β is a vector of unknown coefficients
Thus, the conditional probability that a hospital
is in a specific state, that is on diversion or not, is
given by the following equations:
PY x
e
PY k x
e
e
k
g x
i
K
g x
g x
i
K
i
k
i
( | )
( | ) ,
( )
( )
( )
= =
+
= =
+
=
=
−
=
−
∑
∑
0
1
1
1
1
1
1
1
11 1,…, .K −

One of the key assumptions of the multinomial
model is that the observations are independent.
Thus for each of the models, only one out of ev-
ery d observed values of the response variable is
used, so that no variable representing 911 calls in
a period is used twice. If all the observations of the
response variable were used, nearly all observed
911 data would be used d times (t-d+1 to period
t), in establishing the model, which would make
the assumption of independence less plausible.
This approach also significantly decreased the
computation time and improved the overall fit
of the models. The data processing and statistical
analysis were accomplished using Microsoft Excel
and the statistical packages R and SAS.
The data on ambulance diversion and 911 calls
is partitioned into bins of length 1 hour. For each
bin, the response variable gives the conditional
probability of the future state of the three hospi-
tals. There are eight possible outcomes that could
occur in the next period which can be denoted
by O, A, B, C, AB, AC, BC, and ABC. These are
coded as k = 0, 1, …, 7, respectively. The letters
denote which hospitals are on diversion. For ex-
ample, AC represents the state where hospitals A
and C are on diversion, but hospital B is not. The
state O represents the situation where none of the
hospitals are on diversion.
There are several explanatory variables that are
represented in the vector x. This includes the state
of diversion during the current hour, which is a
categorical variable with the same eight possible
states as the response variable. Also, included is
another categorical variable representing the pe-
riod of the day, which is defined by partitioning
the day into early morning (midnight–6 a.m.),
morning (6 a.m.–noon), afternoon (noon–6 p.m.),
and evening (6 p.m.–midnight). Additionally,
indicator variables enable distinguishing be-
tween different years, weekdays and weekends,
and seasons, such as flu season (which we have
specified as being the months of November and
December). In addition, three variables ct, ct-1,
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5
Predicting Ambulance Diverson
and ct-2 that represent the number of 911 calls
during the current hour, the previous hour, and
the hour before the previous hour, are included.
The explanatory variables included in the model
are shown in Table 1.
The multinomial logistic regression model is
defined using the explanatory variables and the
historical data on the state of the hospital EDs.
The statistical significance of the variables is
shown in the analysis of effects table, Table 2.
As indicated in the table, only the variable for
weekend is not statistically significant at a 5%
level; however, it is a natural variable to include
in the model.
Table 1. Codes for the data set
Variable Name Description Codes
Current The current state of diversion. O = no hospitals on diversion
A = only A is on diversion
B = only B is on diversion
C = only C is on diversion
AB = A and B are on diversion
AC = A and C are on diversion
BC = B and C are on diversion
ABC = all hospitals are on diversion
Period The period of the day. 0 = early morning (midnight–6am)
1 = morning (6am–noon)
2 = afternoon (noon–6pm)
3 = evening (6pm–midnight)
Weekend An indicator variable for the weekend. 0 = weekday
1 = weekend
Year An indicator variable for the year 2003. 0 = year 2004
1 = year 2003
Flu An indicator variable for the flu season. 0=not flu season
1=flu season
The number of 911 calls during the current
hour.
Non-negative integer
The number of 911 calls during the previous
hour.
Non-negative integer
The number of 911 calls during the hour
before the previous hour.
Non-negative integer
Table 2. Effect table for factors considered
Effect df Chi-Square P-Value
CURRENT 49 13590.9257 <.0001 PERIOD 21 154.9376 <.0001 WEEKEND 7 12.5411 .0841 YEAR 7 46.2325 <.0001 FLU 7 35.9705 <.0001 7 110.5531 <.0001 7 31.6680 <.0001 7 17.9957 .0120 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 6 Predicting Ambulance Diverson The Deviance and Pearson goodness-of-fit statistics also give no evidence against the model. The odds ratios are shown in Tables 3, 4, and 5. DISCUSSION The results indicate that the most recent 3 hours of the overall number of 911 calls are significant in predicting whether hospitals will go on diver- sion. Beyond that, the calls do not seem to be significant in predicting diversion. Also, other factors like the current state of diversion, indica- tor variables for flu, and quarter of day and the year were highly significant. The logistic model that has been developed illustrates the feasibility of predicting the probability of diversion. Since a number of EMS agencies are currently using online technologies with the data necessary for prediction readily available, this type of analysis might be timely. An early warning of impending diversion provided by this model could enable hospitals and EMS agencies to take appropriate actions to prevent and mitigate the effects of diversion. Such actions would include reallocation of resources and directing the transport of patients by EMS. The multinomial model presented in this paper is shown to be able to effectively predict the condi- Table 3. Odds ratios for weekend, year, and flu effects Odds Ratio Estimates Point 95% Wald Effect Future Estimate Confidence Limits weekend 0 vs 1 ABC 1.091 0.725 1.642 weekend 0 vs 1 ABO 0.700 0.494 0.990 weekend 0 vs 1 AOC 0.898 0.677 1.190 weekend 0 vs 1 AOO 0.835 0.662 1.052 weekend 0 vs 1 OBC 1.042 0.750 1.448 weekend 0 vs 1 OBO 0.788 0.617 1.007 weekend 0 vs 1 OOC 1.087 0.906 1.304 yr 0 vs 1 ABC 1.949 1.268 2.993 yr 0 vs 1 ABO 1.249 0.873 1.786 yr 0 vs 1 AOC 1.618 1.219 2.147 yr 0 vs 1 AOO 1.129 0.905 1.409 yr 0 vs 1 OBC 1.640 1.188 2.264 yr 0 vs 1 OBO 1.036 0.817 1.313 yr 0 vs 1 OOC 1.617 1.373 1.906 flu 1 vs 0 ABC 1.621 0.964 2.725 flu 1 vs 0 ABO 0.575 0.338 0.977 flu 1 vs 0 AOC 1.218 0.841 1.764 flu 1 vs 0 AOO 0.820 0.600 1.122 flu 1 vs 0 OBC 1.561 1.082 2.254 flu 1 vs 0 OBO 1.329 0.993 1.779 flu 1 vs 0 OOC 1.520 1.241 1.860 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 7 Predicting Ambulance Diverson tional probability of diversion at hospitals that are frequently on diversion. The model illustrates that the number of 911 calls and other factors are more closely linked with the occurrence of diversion, than with the duration of diversion. Hospitals have internal factors they take into consideration when they decide to go on diversion, such as average waiting time, number of patients in the waiting room, or number of ambulances waiting. These policies and decisions are currently hospital spe- cific and need to be integrated to derive maximum benefits from models, such as those presented in this paper, that signal impending diversion. The model presented in this paper could probably be improved by including additional causal factors like downstream inpatient bed availability to predict diversion. Also, the model is specifically developed using Kansas City EM system and 911 call data. The authors encourage the development of similar models for other regions in the United States. Similar models could also be developed in metropolitan areas of Canada or UK or where similar systems exist for collecting data on ambu- lance arrivals as well as emergency call data and where diversion is a public health issue. Table 4. Odds ratios for different periods Odds Ratio Estimates Point 95% Wald Effect Future Estimate Confidence Limits period 1 vs 0 ABC 4.359 1.899 10.005 period 1 vs 0 ABO 1.752 1.053 2.915 period 1 vs 0 AOC 4.662 2.794 7.778 period 1 vs 0 AOO 2.020 1.458 2.799 period 1 vs 0 OBC 1.604 0.926 2.776 period 1 vs 0 OBO 0.795 0.574 1.100 period 1 vs 0 OOC 1.305 0.997 1.707 period 2 vs 0 ABC 6.403 2.967 13.819 period 2 vs 0 ABO 1.654 0.861 3.175 period 2 vs 0 AOC 5.153 3.053 8.697 period 2 vs 0 AOO 1.188 0.794 1.776 period 2 vs 0 OBC 1.500 0.827 2.719 period 2 vs 0 OBO 0.751 0.485 1.162 period 2 vs 0 OOC 1.215 0.905 1.631 period 3 vs 0 ABC 1.017 0.516 2.002 period 3 vs 0 ABO 0.599 0.348 1.032 period 3 vs 0 AOC 1.019 0.641 1.621 period 3 vs 0 AOO 0.527 0.372 0.749 period 3 vs 0 OBC 1.381 0.859 2.220 period 3 vs 0 OBO 1.028 0.723 1.462 period 3 vs 0 OOC 1.045 0.815 1.339 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 8 Predicting Ambulance Diverson ACKNOWLEDGMENT The authors wish to thank Todd Stout, President, First Watch Solutions; Jonathan D. Washko, Presi- dent, Washko & Associates; Gil Glass, Director of Operations and the Metropolitan Ambulance Services Trust at Kansas City, Missouri, for provid- ing the impetus and data for this study; Ryan Gill, Assistant Professor, University of Louisville, for assisting with data analysis; the Editor-in-Chief of the journal, Professor John Wang; and reviewers for their invaluable input in developing this paper. REFERENCES Anderson, B. (2003, February 25). Fresno County bans diversion of ambulances. Sacramento Bee. p. A1. Anderson, B. D., Manoguerra, A. S., & Haynes, B. E. (1998). Diversion of 911 calls to a poison cen- ter. Prehospital Emergency Care, 2(3), 176–179. doi:10.1080/10903129808958867 Table 5. Odds ratios for calls during different times Odds Ratio Estimates Point 95% Wald Effect Future Estimate Confidence Limits Calls during time t Xt1 ABC 1.120 1.058 1.186 Xt1 ABO 1.072 1.015 1.131 Xt1 AOC 1.073 1.031 1.116 Xt1 AOO 1.029 0.994 1.065 Xt1 OBC 1.139 1.086 1.195 Xt1 OBO 1.089 1.049 1.131 Xt1 OOC 1.130 1.102 1.159 Calls during time t-1 Xt2 ABC 1.065 1.004 1.129 Xt2 ABO 1.029 0.973 1.088 Xt2 AOC 1.088 1.044 1.133 Xt2 AOO 1.067 1.029 1.105 Xt2 OBC 1.056 1.007 1.108 Xt2 OBO 1.000 0.962 1.040 Xt2 OOC 1.058 1.031 1.086 Calls during time t-2 Xt3 ABC 1.012 0.956 1.072 Xt3 ABO 0.961 0.909 1.017 Xt3 AOC 1.004 0.966 1.044 Xt3 AOO 0.967 0.934 1.002 Xt3 OBC 1.058 1.009 1.110 Xt3 OBO 1.011 0.972 1.051 Xt3 OOC 1.026 1.000 1.053 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 9 Predicting Ambulance Diverson Cohort. (2002). Metropolitan Richmond hospital diversions: A system analysis and change pro- posal. Project report, Systems and Information Engineering Executive Master’s Program. Char- lottesville, VA: University of Virginia. Derlet, R. W., Richards, J. R., & Kravitz, R. L. (2001). Frequent overcrowding in U.S. emergency departments. Academic Emergency Medicine, 8(2), 151–155. doi:10.1111/j.1553-2712.2001. tb01280.x Epstein, S. K., & Tian, L. (2006). Develop- ment of an emergency department work score to predict ambulance diversion. Aca- demic Emergency Medicine, 13(4), 421–426. doi:10.1111/j.1553-2712.2006.tb00320.x Frank, I. C. (2001). ED crowding and diversion: Strategies and concerns from across the United States. Journal of Emergency Nursing: JEN, 27(6), 559–565. doi:10.1067/men.2001.120244 Glushak, C., Delbridge, T. R., & Garrison, H. G. (1997). Ambulance diversion. Standards and Clini- cal Practices Committee, National Association of EMS Physicians. Prehospital Emergency Care, 1(2), 100–103. doi:10.1080/10903129708958797 Hosmer, D., & Lemeshow, S. (2000). Applied Logistic Regression (2nd ed.). New York: John Wiley & Sons. Lagoe, R. J., & Jastremski, M. S. (1990). Relieving overcrowded emergency departments through am- bulance diversion. Hospital Topics, 68(3), 23–27. Lagoe, R. J., Kohlbrenner, J. C., Hall, L. D., Roizen, M., Nadle, P. A., & Hunt, R. C. (2003). Reducing ambulance diversion: A multihospi- tal approach. Prehospital Emergency Care, 7, 99–108. doi:10.1080/10903120390937184 Lewin Group. (2002). Emergency department overload: A growing crisis. Chicago: American Hospital Association. Nawar, E. W., Niska, R. W., & Xu, J. (2007). Na- tional hospital ambulatory medical care survey: 2005 Emergency department summary (Advance data from vital and health statistics No. 386). Hyattsville, MD: National Center for Health Statistics. Retrieved March 30, 2009, from http:// www.cdc.gov/nchs/data/ad/ad386 Neely, K. W., Norton, R. L., & Young, G. P. (1994). The effect of hospital resource unavailability and ambulance diversions on the EMS system. Pre- hospital and Disaster Medicine, 9(3), 172–177. Pham, J. C., Patel, R., Millin, M. G., Kirsch, T. D., & Chanmugam, A. (2006). The effects of am- bulance diversion: A comprehensive review. Aca- demic Emergency Medicine, 13(11), 1220–1227. doi:10.1111/j.1553-2712.2006.tb01652.x Redelmeier, D. A., Blair, P. J., & Collins, W. E. (1994). No place to unload: A preliminary analysis of the prevalence, risk factors, and consequences of ambulance diversion. Annals of Emergency Medicine, 23(1), 43–47. doi:10.1016/S0196- 0644(94)70006-0 Richards, J. R., Navarro, M. L., & Derlet, R. W. (2000). Survey of directors of emergency departments in California on overcrowding. The Western Journal of Medicine, 172(6), 385–388. doi:10.1136/ewjm.172.6.385 Richardson, L. D., Asplin, B. R., & Lowe, R. A. (2002). Emergency department crowding as a health policy issue: Past development, future directions. Annals of Emergency Medicine, 40(4), 388–393. doi:10.1067/mem.2002.128012 Schull, M. J., Lazier, K., Vermeulan, N., Mauhen- ney, S., & Morrison, L. J. (2003). Emergency department contributors to ambulance diversion: A quantitative analysis. Annals of Emergency Medi- cine, 41(4), 467–476. doi:10.1067/mem.2003.23 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 10 Predicting Ambulance Diverson Schull, M. J., Mamdani, M. M., & Fang, J. (2004). Community influenza outbreaks and emergency department ambulance diversion. Annals of Emer- gency Medicine, 44(1), 61–67. doi:10.1016/j. annemergmed.2003.12.008 U.S. General Accounting Office. (2003). Hospital emergency departments: Crowded conditions vary among hospitals and communities (GAO- 03–460). Washington, DC: Author. Retrieved March 30, 2009, from http://www.gao.gov/new. items/d03460 U.S. House of Representatives. (2001). National Preparedness: Ambulance Diversions Impede Access to Emergency Rooms. Washington, DC: Special Investigative Division, Minority Staff for Representative Henry A. Waxman, Com- mittee on Government Reform, U.S. House of Representatives. Vilke, G. M., Simmons, C., Brown, L., Skogland, P., & Guss, D. A. (2001). Approach to decreas- ing emergency department ambulance diversion hours. Academic Emergency Medicine, 8(5), 526. This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 1, edited by John Wang, pp. 1-10, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 11 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 2 DOI: 10.4018/978-1-4666-0044-7.ch002 Jan Marco Leimeister Kassel University, Germany Uta Knebel Technische Universitaet Muenchen, Germany Helmut Krcmar Technische Universitaet Muenchen, Germany Hybrid Value Creation in the Sports Industry: The Case of a Mobile Sports Companion as IT-Supported Product-Service-Bundle1 ABSTRACT Integrated product-service packages (hybrid products) can open new markets and target groups to companies. However, existing approaches to service or product development do not sufficiently address simultaneous development and domain-specific issues. A very promising new field for such bundles is the health and fitness industry. In this research, we designed and built an IT-supported training system for running, the Mobile Sports Companion (MSC), which closely interlocks a product and corresponding services using an iterative development process. We tested the pilot system with 14 recreational athletes. The results of the field test show that the MSC proved to be a promising tool to offer athletes an effective individual, flexible, and mobile training. However, the system, as it is, did not sufficiently represent the human trainer behind it, thus lowering its acceptance and the credibility of its recommendations. Our next step is to integrate features that could strengthen the athlete-trainer relationship. The MSC could turn out to be a promising field for future e-business applications in the sports service industry. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 12 Hybrid Value Creation in the Sports Industry INTRODUCTION Services account for a large part of the value added in manufactured goods in developed countries (Sheehan, 2006). Severe competition and cost pressures limit the growth of many companies across various industries, and, especially in the case of small and medium enterprises, threaten their existence. This has contributed to the expan- sion of the service economy over the last several decades. Integrated product-service packages (hybrid products) can enable innovative offer- ings and open new markets and target groups to companies (Organisation for Economic Co- operation and Development, 2006). However, companies mostly design services and products in separate processes, services being a mere add- on component to the product (Ernst, 2005). This separation can also be observed in the research literature. Many widespread process models focus on product construction, such as systems engineering (Daenzer, 1977), various Verein Deutscher Ingenieure (VDI) guidelines (e.g., VDI 2223) (Verein Deutscher Ingenieure, 2004), the Three-Tier-Model (Giapoulis, 1996), or software engineering, such as the Unified Software Devel- opment Process (Jacobson, Booch, & Rumbaugh, 1999) or eXtreme Programming (Beck, 2000). Alongside this extensive literature about product development, there is also a distinct literature de- scribing new approaches to service development (see Bullinger & Scheer, 2003; Hermann, Krcmar, & Kleinbeck, 2005; Scheer & Spath, 2004), but they do not sufficiently address integrated, parallel development. Recent publications recognize this gap and present suggestions for integrated models (Spath & Demuß, 2006). However, the concept remains rather abstract and general. In addition, it does not consider domain-specific issues. In this research, we try to fill part of this gap while focusing on an example product development in the health and fitness market in Germany, a newly emerging and very promising field for innovative solutions like Computer Supported Collaborative Sports (Wulf, Moritz, Henneke, Al-Zubaidi, & Stevens, 2004). Personal health and well-being gain more and more attention in today’s industrial societies. In Germany, the sports, fitness, and recreation market has a market volume of more than 50 billion Euros. With an annual growth rate of 6% (Deloitte & Touche, 2005), it is one of the boom- ing markets in the health sector. The reasons for the rising attention are mainly twofold: For one thing, health awareness has increased throughout large parts of the population, being considered an important part of a modern lifestyle. Moreover, consequences of unhealthy personal lifestyles on the economy become more and more evident. Ail- ments as a consequence or complication of being overweight and/or a lack of physical activity, such as cardiovascular diseases, back problems, and diabetes, account for approximately one fifth of the present health costs of German health insurance companies (Scriba & Schwartz, 2004), heavily burdening health insurance companies and em- ployers. Schwarzer (2004) summarizes the results of various studies showing the correlation between certain diseases and lack of exercise. They amount to economic costs of about 530 million Euros per year in Germany (von Lengerke & John, 2005). In spite of these developments, the market for fitness and health service providers, such as gyms or equipment manufacturers, in Germany has been steadily declining over the past 5 years (for a detailed market analysis see Kamberovic, Meyer, & Orth, 2005). Cost pressure and compe- tition threaten small providers especially; many are put out of the market by emerging large fran- chise chains. To regain competitive advantage, especially above low cost operators, they need to offer innovative products and services going beyond the mere provision of sports equipment and occasional supervision that are common today. Personal training, that is individual supervision and support of each athlete by a trainer, could be a way of addressing both of the above-mentioned problems. On the one hand, personal training is EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 13 Hybrid Value Creation in the Sports Industry known to produce successful and effective results in competitive sports as well as in companies’ management health coaching, and thus is also very likely to show effects in the mass market as well. On the other hand, personal training as a service could be a means of differentiation for small fit- ness providers. The major obstacle for translating the service of personal training into recreational sports and health management is cost. Health service providers cannot multiply their support services without an immense increase in person- nel cost, whereas the clients, be it consumers or institutions on behalf of consumers, will not be willing and able to spend a considerably higher amount on health services. As in many other industries, the solution to this dilemma could be (partial) process automation. The idea of automating sports training and health services is not new. Many vendors have already tried to integrate IT-based training sup- port into a variety of devices, such as heart rate monitors or mobile phones. The most important vendor in the German market is Polar, whose ma- jor products are running and cycling computers. Apart from Polar, there are many small and very small vendors with different offerings (e.g., PCS- port.de, Technogym Wellness Wizard, iWorkout, PumpOne, etc.). However, virtually all existing systems fall short of solving the above-mentioned issues of integrating service into design. Most ven- dors try to achieve a full automation of the sports training, concentrating their efforts on hard- and software development, while totally neglecting the design of a corresponding service. Therefore, most systems on the market neglect necessary use scenarios for efficient training. Most systems are designed bottom-up based on and limited to the characteristics of an existing device or software. To make the design fit for use, it should be derived top-down from use scenarios, as well as users’ goals and requirements. Focus on single parameters. Existing systems base their training plans almost exclusively on heart rates. This is an appropriate method, when determined correctly, but many systems operate on rules of thumb, neglecting important influencing factors, such as physical well-being, stress, daily form, and sometimes even age, sex, and sport dis- cipline. Other effective methods for determining training intensities (for an overview see Neumann & Hottenrott, 2002) are not applied. Require previous knowledge. Many systems offer possibilities for data analysis but no guid- ance on how to interpret this data. Users who have little knowledge of training methods might not be in the position of adjusting the training to their needs. Especially in case of illness, professional advice is necessary. Depend on the users’ discipline. Most exist- ing systems are fully automated; no relationship between trainer and athlete is established. But especially inactive risk groups are not likely to motivate themselves for their training. To have a continued effect, the training must become part of the user’s lifestyle and be supervised and sup- ported by either a trainer or an institution The objective of this research was to design, build, and evaluate an IT-supported training system for running (MSC) that closely interlocks a prod- uct components and corresponding services. The development of both components was simultane- ous; the result was an integrated product-service bundle, which was then evaluated in a field test. DEVELOPING THE MOBILE SPORTS COMPANION Research Framework This research is designed as an explorative study. As a research object, “mobile information systems for fitness sport” is very new and not well-investigated, and general theories about the research object do not yet exist. Stating and vali- dating hypotheses purely deduced from theory, as is common in empirical-analytical research designs, are difficult to apply here. According to EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 14 Hybrid Value Creation in the Sports Industry Ulrich (1981), explorative research starts “... in practice, is focused on analyzing the context of use and ends in practice.” The intention of this research is to design an innovative system to improve real-world situations, following the tradition of the Action Research Method, which can be briefly described by its three main characteristics (Rapoport, 1970), (Lau, 1997): 1. The researcher actively intervenes in a social organization to advance both the organiza- tion’s well-being and scientific knowledge. 2. The project consists of phases of interven- tions and of reflection for research purposes. 3. The researcher has to live up to the ethical challenges of the intervention. Therefore, the effects of the mobile sports companion are tested in a pilot study (field test). Such field tests can, on the one hand, test the feasibility and effects of an innovation in a natural environment, and on the other, hand al- low the identification of new demands that need to be addressed in further development. They have the advantage of high external reliability (Witte, 1997). For the design of social innova- tions, such explorative methods are most fruitful (Szyperski, 1971; Schwabe & Krcmar, 2000b), as recent examples in healthcare (Leimeister, Ebner, & Krcmar, 2005) and government (Schwabe & Krcmar, 2000a) have shown. Research Design and Development Process Since system requirements were neither com- pletely nor exactly defined, a linear model did not seem to fit the uncertainty that arose from the field. An iterative model seemed to be more appropriate for several reasons. It allows to build the system step by step, and to evaluate the outcome of each interval of the iterative development periodically. Moreover, the type of development can be shaped according to the demands of the situation. To achieve this, we used Arnold, Leimeister, and Krcmar’s (2003) Community Platform Engineer- ing Process “CoPEP.” The heart of this process model is an iterative process, adapted from the generic spiral process model (Boehm, 1988; Wigand, Picot, & Reich- wald, 1998). It is combined with a prototyping approach. Each consists of four phases: planning, analysis, engineering, and evaluation. Different than in the original spiral model, a much stronger focus is put on the building of prototypes and the involvement of users in evaluations. The goal of the engineering phase of each iteration is the generation of a prototype (hardware, software, and services) in order to get a tangible version of parts or the whole product (for a promising conceptualization of service systems see Mora, Raisinghani, O’Connor, & Gelman, 2009) very early in the development process (for a similar, but rather heavyweight approach to service design see Moller, Chaudhry, & Jorgensen, 2008). Each prototype undergoes an evaluation at the end of its development cycle in cooperation with experts. After each evaluation phase, the next iteration starts over with planning again, but uses informa- tion that was learned from the previous iteration in the design. We adapted CoPEP’s iterations to our research topic, and decided to involve target users in the evaluations in addition to experts as their represen- tatives. Figure 1 shows the adapted process model that was used for the development of the mobile sports companion. The method used for evaluation was a mixture of interviews and group discussions. We presented the results of each cycle to a group of experts (iteration 1 and 2) and to a group of users (iteration 3 and 4) during the development phase. User and expert feedback was integrated into the planning of the next iteration. Finally, the finished prototype was tested in a field study. Through an early involvement of various stakeholders in the development cycle and the visualization of parts of the end product through EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 15 Hybrid Value Creation in the Sports Industry prototyping, the described process counteracts the danger of dragging wrong requirements fixed in the beginning along to the end product. Gen- eral requirements get more detailed as the devel- opment process goes on and mistakes created in the beginning of the process can be repaired. Results of the Iterations Iterations 1-3: Mock- Up to Web Interface In the first iteration, we conducted in-depth inter- views with a group of four experts. The experts represented four different scientific disciplines, including training theory, sports psychology, sports medicine, and runners training. The basic idea was to define a service level for training supervision and support in between the high service level offered to professional athletes and the virtually non-existent service level offered in recreational sports; detailed enough to ensure an effective training, but as simple as possible. Through brain- storming and discussions, the experts specified the relevant measurement categories, interdependen- cies, and interplays between them and developed a relatively simple model for training supervision and control. We then determined which data must be collected by professional trainers, which data should be collected and documented by the runners themselves, and which calculations the system was to make automatically. Limits and tolerance regions were determined. This model required the service to be made up of two components: first, a face-to-face support where trainer and athlete meet in person, and second, computer-mediated or fully automated support, where users interact with the system only. Based on this input, we developed a mock-up (i.e., a paper and pencil-prototype) of the mobile sports companion, which was approved by the experts. In the second iteration, we implemented the runner’s perspective in a first clickable prototype. The previously described experts checked if all relevant data was collected correctly, and tested the usability of the prototype. Their feedback was documented and implemented in the next iteration. The third iteration produced a functional pro- totype, including a Web interface for the runners and trainers and a server backend. Apart from the experts, four lead users tested and evaluated the system by means of a structured questionnaire. The lead users generally felt that the quality of their training was improved but complained about the missing flexibility and the long time needed for documentation, as they had to memorize their Figure 1. Development process (adapted from Arnold et al., 2003) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 16 Hybrid Value Creation in the Sports Industry training parameters, then find Internet access after the training, and then reproduce all data from memory or copy it manually from other devices. They wished for a mobile interface. Iteration 4: Fully Functional Prototype with Web and Mobile Interfaces In the fourth iteration, a mobile interface for the runners was added to increase the athletes’ independence and flexibility while training. This implied the development of new software to fit the mobile device, including an interface to receive data from heart rate monitor devices. Figure 2 shows the data flows in the system. At the beginning of a training period, trainer and runner meet personally. The trainer gathers basic information on the runner, such as height, weight, resting pulse rate, sport history, and con- ducts a standardized fitness test. Together, trainer and runner define the runner’s training objectives. Using the trainer web interface, the trainer creates a personal electronic file for the runner. Based on the training objectives and con- sidering the runner’s physical condition, the system suggests value ranges for the number, length, frequency and intensity of training units the runner should complete to reach his or her objective in a predetermined period. Within this range, the trainer adjusts the plan. The runner can interact with the system either by Web interface or by mobile device. Every morning during the training period, he enters his resting pulse rate, and rates his subjective feeling of well-being on a scale from 1-10. The system answers with a recommendation to do the train- ing unit as planned or to modify it. After having completed the day’s training unit, the runner feeds a number of performance indicators—either using the mobile device or the Web interface—into the system, namely time and duration of the training, perceived well-being, and average heart rate. Heart rates can be transmitted directly from the heart rate monitor to the mobile device. Once uploaded, the system analyzes the data, compares planned and actual values, and assigns the result to the stages of a traffic light (green = ok; yellow = contact trainer; red = stop training, contact trainer urgently). The trainer can access all data uploaded to the system by his runners, and monitor and supervise their progress. The traffic light system allows him to screen the state of all runners quickly, and to focus on the more problematic cases (i.e., red light) Figure 2. Data flows EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 17 Hybrid Value Creation in the Sports Industry first. This cycle repeats until the training objec- tives are realized or until the next control meeting. Independent from the system’s recommendations, if necessary, the athletes can contact their trainer at any time via a “contact trainer” button. As in the previous iteration, four lead users evaluated the system. The mobile client was highly appreciated, as it enhanced the user’s flexibility in documenting their training units. They also found the daily recommendations for their training very useful. Overall they felt that the quality of their training had improved. On the other hand, they felt a strong dependence from their trainer. As a consequence of these results, some more functions were added to the system in close cooperation with the before-mentioned experts. To better supervise the runners’ progress and by this increase the quality of the training, we increased the service level and introduced periodi- cal test runs and corresponding analyzing tools. In addition, a tool for weekly comparison of the planned and actual training units was implemented. The trainer was given more possibilities to adjust the system-generated training plans according to his own recommendations. With these alterations, the system was ready to be tested by a larger number of users. Field Test Purpose The purpose of the field test was to examine: 1. If the mobile sports companion could sup- port users in reaching their training goals (perceived usefulness) 2. How users felt to train with an automated training system (use, perceived ease of use, perceived well-being) 3. If the mix of face-to-face, computer-mediat- ed, and fully automated service components gave the impression of continuous individual support (perceived service level) 4. How the system could be further adapted to the user’s needs It is important to state that the MSC was evalu- ated as a whole; it is not adequate for an integrated product-service bundle to try and evaluate the single components separately. Setting The field test was conducted with 14 employees of a telecommunication company, 9 male and 5 female, all between 25 and 40 years old. The par- ticipants represented the whole range from sports novices to experienced runners. Figure 3 shows their training habits and weight classification. For the field test, the training period and goal was standardized for all participants: being able to run a half marathon (21 km) after 12 weeks of training, following an individual training plan managed through the mobile sports companion. The training period began with a thorough analy- sis of the participants’ anthropometric data, such as height, weight, sports experience, past and present diseases, and medications. It also in- cluded a lactate threshold test—an individual performance test to assess the physiological con- dition of each of the runners, lactate being a key indicator for determining training intensity and evaluating training results in endurance sports. In addition, the participants assessed their perceived exertion on a Borg scale2. Based on the diagnos- tic data, the individual training plans were cre- ated. We provided all participants with a mobile device (PDA) and a heart rate monitor. They were asked to document their resting pulse rate and perceived well-being everyday, first thing in the morning. In reaction, the system recommended them to train as planned, do not train and recre- ate, or to contact the trainer. The training units were divided into three categories with different training intensities (for details on the intensity EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 18 Hybrid Value Creation in the Sports Industry levels see Neumann & Hottenrott, 2002), setting a time and pulse rate. After 4, 8, and 12 weeks, all runners made a test run at given constant speed over a given distance. The heart rate served as an indicator for endurance improvement. The participants repeated the Borg rating. At the end of the 12 weeks training period, the lactate threshold test was repeated. To evaluate the subjective training success, perceived well-being and motivation, we used a structured questionnaire both at the beginning and at the end of the training period. Figure 4 illustrates the procedure. Figure 3. Characteristics of the participants of the field test Figure 4. Field test procedure EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 19 Hybrid Value Creation in the Sports Industry Technology The server was implemented as a J2EE web application based on the Struts framework. A MySQL database in the backend worked as a persistent data memory. A Web service interface at the server using the Apache Axis framework enabled the communication between the mobile devices (the clients) and the server. The client software was written in C# and based on the. NET 2.0 Compact Framework. It runs on PDAs with Microsoft Windows Mobile 2003 or newer versions. In the field test, the participants used mobile devices (PDAs) of the type O2 XDA II, XDA III, and XDA mini S respectively. The interface for the communication with the heart rate monitor was optimized for Polar S625X, as it is one of the most widespread heart rate monitors in the German market. Integrating the Polar device into the system was most challenging, as the commu- nication protocol was not laid open. A role concept defined the right to access and manipulate data; it comprised the three roles of trainer, runner, and administrator. Empirical Results The first questionnaire was administered at the beginning of the field test. It was completed by all 14 participants. The second questionnaire was administered at the end of the testing period. It was only completed by 10 participants. Two of the participants had already left and another two participants were not able to keep the appointed date of the survey. Empirical Results Use and Perceived Ease of Use On average, the users tended to agree that by use of the MSC, they trained more regularly than before. However, they did not document their training data and even less their diurnal data very accurately. Most of them felt especially the measuring of the resting pulse rate in the mornings as too time- consuming and annoying. Another reason could be the usability of the Web and mobile interfaces. Though their usability is rated slightly positively, the users do not judge it well (Table 1). Some users reported repeated difficulties in loading up their data from the mobile device to the server. Perceived Usefulness In respect to perceived usefulness, the respondents tended to assess the quality of their training and training supervision. Moreover, they clearly agree that using the MSC has advantages for them and consider technical devices in general as helpful for training (Table 2). Table 2. Perceived ease of use mean std. dev. With the MSC I feel better supervised and supported* 0.7 1.2 By use of the MSC, the quality of my training was increased.* 0.4 1.6 Using the MSC has advantages for me.* 1.2 1.2 Technical devices during training are…** 0.8 0.9 *Annotation: 5-point scale from “totally agree”=+2 to “do not agree at all”=-2 ; **+2=very helpful to -2=not helpful at all Table 1. Usage and usability of the MSC mean std. dev. By use of the MSC, I trained more regularly than before. 0.4 1.9 I have documented my diurnal data regularly. -0.7 1.7 I have documented my training data regularly. -0.2 1.6 The web interface was easy to use. 0.5 0.8 The mobile interface was easy to use. 0.7 0.8 *Annotation: 5-point scale from “totally agree”=+2 to “do not agree at all”=-2 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 20 Hybrid Value Creation in the Sports Industry The physiological data confirmed these percep- tions. In the lactate threshold tests, the heart frequency measuring, as well as the self-assess- ment according to the Borg scale, the participant’s performance had continuously increased. Perceived Well-Being After 12 weeks of training, the participants had the impression that their fitness level had increased, though still being far from ideal. They also felt more energetic and satisfied with their bodies (Figure 5). Perceived Service Level It was the idea of the field test that the trainers stayed in the background as much as possible, leaving the sportive guidance to the MSC. Personal interference should only happen if an athletes train- ing data was so unexpected that the trainer’s traffic light turned “red.” This however was not accepted well by the participants. Most of them repeatedly tried to contact the trainers instead of relying on them to communicate their recommendations via the MSC, if necessary at all. When the train- ers gave no or very little additional information, some participants were extremely dissatisfied, and the research team had once again to explain the reasons for their approach. Nevertheless, in the final discussion, the majority of the group wished for more personal advice. We think that the greater part of this reaction was due to an organizational misunderstanding in the beginning. The participants of the field study were recruited with the assistance of the corporate health service provider, not personally by the research team. As the task of contacting potential participants was passed on from one person to the other within the service provider, they might have communicated a wrong picture of the MSC. Some of the participants were told they would receive personal feedback to all ac- tions performed in the program (not only in case of problems and via the MSC channel). Naturally, these (wrong) expectations were not satisfied. In future studies, we will address this issue with standardized information material and training for the recruiters as well as for the participants starting the program. Nevertheless, offering a feedback channel within the MSC, such as an “E-Mail to trainer” button will be considered in future studies to en- able the participants to give proactive information (e.g. did not exercise because of illness) and for urgent questions. The principal exercise guidance however will still be communicated via the MSC. SUMMARY AND OUTLOOK We developed a concept and iteratively imple- mented a prototype of a semi-automatic training system. The starting point in each iteration was the Figure 5. Perceived well-being EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 21 Hybrid Value Creation in the Sports Industry athlete’s requirements and the necessary service elements deduced from them. We field-tested the prototype with 14 volunteers with different sports experience. In general, the MSC proved to be a promising tool to offer athletes an individual, flexible, and mobile training. In contrast to most automated training systems on the market, the MSC concept integrates personal services like the initial health checkup or face-to-face meet- ings with a trainer. However, the system, as it is, did not do a good job of representing the human trainer behind it, thus lowering its acceptance and the credibility of its recommendations. As a consequence, the service component seemed insufficient to the test users. Based on the experience gained in these stud- ies, we have two major action points for further developing the MSC. First, we must adapt the computer-mediated and automated service com- ponents to better resemble an individual support, and second, we must reduce cost and effort of the face-to-face service components. The next steps for our research are: 1. Develop motivational features: The volun- tary participation of the field-test participants attests to a certain degree of intrinsic motiva- tion for being physically active. However, training progress is a long-term process. Many people will not discipline themselves to follow the plan without strong extrinsic incentives. A combination of motivational features implemented in the software, for example, game elements (Lin, Mamykina, Lindtner, Delajoux, & Strub, 2006) and virtual group experience (Mueller & Agamanolis, 2005) would contribute to the perseverance in following the training plan. Incentives, for instance set by a company for their employees, could enforce this trend. 2. Set individual goals: Running a half mara- thon in 12 weeks proved to be too high a goal for the greater part of the participants. Especially in the field of recreational or preventive sports, more general goals such as “loose weight” or “stay fit” should be addressed (Stevens, Wulf, Rohde, & Zimmermann, 2006). 3. Extend and diversify methods of perfor- mance measuring and training plan design: The training plan design and control based on the lactate threshold proved to be very time-consuming and tiring for both athletes and trainers. Based on personal goals and proficiency level, other ways of testing and planning might be appropriate. Training documentation could be enhanced by further data, such as GPS data, weather, amount of sleep etc. 4. Establish trainer-athlete relationship: Seeing the trainer for control sessions and in case of unexpected events was not enough to give athletes the impression of a good supervision, even if they knew he would check their train- ing data on the server. We need to examine if this perceived deficiency can be reduced by altering the look and feel of the software, and at what time the trainer has to interfere personally. Based on the frequency of this interference and on the variations of data collection and performance tests mentioned above, a large variety of service levels could be developed. Business models and pricing are further questions in this area. 5. Further field tests including control groups: A large-scale field test including control groups who train without the support of the MSC would allow a comparison of cost and effect. We developed the MSC along an iterative process model, turning learning from earlier stages into requirements for later stages. Service components were considered from the beginning. Experts and users were integrated in all phases of development. The process seemed appropriate to collect and react to user suggestions and require- ments in all phases of the development. However, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 22 Hybrid Value Creation in the Sports Industry in the pilot test the MSC did not fully satisfy all participants. Therefore, we have to further explore and evaluate our method. In this research, our pilot study was carried out in a German telecommunications company with a quite homogenous group concerning education and cultural background. For future work, we plan to explore the MSC in multi-cultural environments in Germany (e.g., with the staff of a manufactur- ing company) and in international contexts. The creation of business models and the design of value networks that could offer the MSC also hold great potential for further research. LIMITATIONS OF THE STUDY This research has certain limitations. First, the test group was rather small, the statistic calculations showed a considerable variance. Second, as the members of the test group participated voluntarily and out of interest in the study, their motivation and positive attitude towards the MSC is not neces- sarily representative. Third, there was no control group to compare the effect of the MSC-supported training to a conventional training. Finally, self- report measures as we applied among others, can always be biased by the participants’ intended or unintended false answers. We believe that the major advantage of MSC is that it allows supervision of and situational reactions to user behavior, but at the same time, the computer-mediated delivery and supervisor support functions allow a fast and efficient su- pervision and administration. Therefore, practice will find the MSC and similar designs eligible and useful for large-scale corporate or public health programs, providing an alternative to conventional interventions requiring personal presence. REFERENCES Arnold, Y., Leimeister, J. M., & Krcmar, H. (2003). 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Witte, E. (1997). Feldexperimente als innova- tionstest—die pilotprojekte zu neuen vedien. Zeitschrift für betriebswirtschaftliche [zfbf]. Forschung, 49(5), 419–436. Wulf, V., Moritz, E., Henneke, C., Al-Zubaidi, K., & Stevens, G. (2004). Computer supported collaborative sports: Creating social spaces filled with sports activities. In Proceedings of the Third International Conference on Entertainment Com- puting (ICEC 2004) (pp. 80-89). Springer. ENDNOTES 1. An earlier version of this article appeared in the Proceedings of the Fifteenth Euro- pean Conference on Information Systems. H. Österle, J. Schelp, R. Winter (Eds.) (pp. 81-92), St. Gallen, Switzerland: University of St. Gallen. 2. The Borg Rating of Perceived Exertion or Borg Scale is a method of determining the intensity of physical activity. Perceived in- tensity is rated on a scale from 6 (no exertion at all) to 20 (maximal exertion). A person who wants to engage in moderate-intensity activity would aim for a Borg Scale level of “somewhat hard” (12-14) (Borg, 1998). The Borg Scale is widely used in clinical studies and in professional sports, and it is consid- ered an appropriate method for controlling physical activity intensity (Löllgen, 2004). This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 1, edited by John Wang, pp. 11-25, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 25 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 3 DOI: 10.4018/978-1-4666-0044-7.ch003 INTRODUCTION Schikora and Godfrey (2006) examined connect time limits in a dial-up modem pool (DMP). In that study, they examined the impact on the performance measures of the percent of lost customers and the percent of customers discon- nected when connect time limit restrictions were placed on the system. They found that imposing DMP time limits affected these key customer service measures. The study presented here is an extension of that previous work, providing more detailed results and examining the interaction of key experimental factors. Paul F. Schikora Indiana State University, USA Michael R. Godfrey University of Wisconsin Oshkosh, USA Brian D. Neureuther State University of New York, College at Plattsburgh, USA Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System ABSTRACT Managing customer service is critical for both nonprofit and for-profit dial-up modem Internet service providers. When system operators face excess demand, they can either add capacity or adapt their man- agement techniques to deal with their limited resources—this article considers the latter. We examine system configuration options and the resultant effects on customer service levels in a simulated dial-up modem pool operation. Specifically, we look at a single pool operation and examine the effects of impos- ing time limits in a seriously overloaded system. We analyze the results on several key customer service measures. The results show that imposing these limits will have a distinct, nonlinear impact on these measures. Customer productivity and actual system load are shown to have major impacts on the perfor- mance measures. Interactions between several system and environmental parameters are also discussed. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 26 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System Universities, corporations, and Internet service providers have long provided external access to computer networks using a DMP. Modems al- low data to be transmitted over standard analog telephone connections, providing long-distance access to a central computer from any place that has a telephone connection and a modem-equipped computer. Though the data transfer rates through a modem-to-modem connection are much slower than the transfer rates of a direct network connec- tion, modems are essential for providing flexible external access to a central network for most users. With the rapid growth in the use of home computers and the increasing popularity of the Internet over the past decade, DMP operators ex- perienced a corresponding increase in demand for their service (Naldi, 1999). Advances in broadband availability have since reduced demand for DMP service. However, narrowband users still account for 32% of active Internet users in the United States (Website Optimization LLC, 2006), 30% of Internet users in Australia (Daniel, 2006), and 70% of Internet users in New Zealand (Auckland, 2006). Even on the African continent, government leaders are urging broadband Internet providers to lower prices because broadband remains high priced and is leading to slowed down growth in In- ternet usage in South Africa (Miniwatts Marketing Group, 2004). Despite the promise of high-speed connectivity, dial-up access remains a viable, low- priced means by which a significant percentage of users still access the Internet. Walczak and Parthasarathy (2006) have argued that customer discontinuance and switching remain major issues for Internet service providers. In addition, Titus (2007) outlines advantages of dial-up modems and the convenience they offer in the electronics industry in the United States. He offers an outlook for the incorporation of dial-up modems by engi- neers to other modems. Further, an article in The Economist (“The Slow Death of Dial-up,” 2007) states that even though there is a decrease in the use of dial-up to access the internet, several seg- ments of society are expected to continue to use dial-up as their primary means for accessing the Internet. In fact, the article states, “The rumour of dial-up’s death has been greatly exaggerated.” Therefore, our research analyzes how to improve service to dial-up customers of Internet service providers. Specifically, we examine the situation where demand for service exceeds the capacity of an existing DMP system. The easiest way to remedy excess demand for DMP service is simply to increase capacity by enlarging the size of the DMP—often a vi- able option for a for-profit operator given that increased demand leads to increased revenues. However, this approach is expensive, so increasing capacity should not be done without regard for operating efficiencies. In the case of smaller or nonprofit operators (e.g. universities), additional capacity often is not a viable option due to budget constraints. In the case of system downsizing in markets with reduced demand, very high system utilization may result and persist for some time immediately after system resizing. Regardless of the provider’s demand forecast, or whether the pro- vider is for-profit or non-profit, system operators should be concerned with the efficiencies of their system and should focus more on using available resources efficiently. Krueger (2003) suggests using COM Port Redirector software to replace Desktop modems. This allows modem users to share a dial-out modem pool on a centralized server on their corporate network. This article examines DMP system configura- tion and management issues when user demand meets or exceeds the capacity of a DMP system. In such a situation, users wanting to access the system often will receive a busy signal (in stan- dard queuing terminology, they are blocked). They then have the option of continuing to try to access the system by redialing (retrials), or giv- ing up and leaving the system, possibly returning later. Those customers who give up and leave the system without being served are considered lost. [Care should be taken to note the meaning of a lost customer here. Customers are lost only in the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 27 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System sense of the current service encounter. They are assumed to return at some later point to try for service again. Therefore, customers are lost in the sense that they leave the current service provider for another.] While the blocking probability is an important performance measure in typical queuing systems, a more important performance measure in DMP systems is the percentage of customers that are lost. The widespread implementation of auto-redialing in personal computer systems minimizes the negative impact of blocking on any one connection attempt, from a customer service standpoint. Instead, the major negative impact on customer service occurs when a customer gets frustrated enough after repeated redials to give up and go away without receiving service. With a fixed system configuration and stable demand over a foreseeable horizon, the system administrator has few choices to improve this customer service measure. We examined the prac- tice of imposing per-call connect-time limits on users to distribute capacity more equitably among the user base. Various levels of time limits were studied, and we report on the resultant effect on two key customer service measures: the percent- age of lost customers and the percent of callers disconnected before their primary work tasks are complete. The next section of this article discusses the general problem structure as a type of retrial queue. The problem statement is then presented, followed by a review of the existing research and a description of the experiment methodology. Results of the experiment are then presented and discussed. Finally, a summary and suggestions for future research are discussed. General Problem Structure DMPs can be used in various system structures, based on the type of service provider, and the number of pools available to a local customer set (those that can access the pool with a local telephone call). The service provider can be local, providing service to a defined set of customers in a local—perhaps city or county-wide—area. An example of this type of provider is a university or community bulletin board service. A service provider also can be regional, providing service to customers in many different areas through local access numbers, all of which link up to a single central computer system. An example is a regional Internet service provider that serves a wide area within a state or several states. Finally, a service provider can be national, with local ac- cess numbers throughout the nation. A national provider could have all local numbers link up to a central system, similar to a regional provider, or it could group local service areas into different regions, with each region having its own central computer system that is linked to every other regional system, or perhaps linked to a single central computing system. Regional and national providers also could allow access from outside the local service areas through long-distance (possibly toll-free) connections. The communications links of a national provider resemble the hub-and-spoke systems in many transportation networks. Regardless of the type of system, DMP systems fit a general queuing model known as a retrial queue. A retrial queue operates in the following manner: a customer arrives at the system and if all servers are busy, the blocked customer leaves the service area but may return after some random time (Falin, 1990). In a DMP system, a customer leaves the service area by hanging up after receiv- ing a busy signal. Previously blocked customers waiting to return (retry) for service are said to be in orbit (or in the orbit queue or retrial queue). The orbit queue is comprised of customers who have received a busy signal but are redialing, or plan to redial very soon. The retrial queue is not a physical queue in the traditional sense—the orbit is an artificial construct to account for the blocked customers who will be returning for service. As such, there is no queuing discipline in orbit, and determination of the next customer to be served once a server becomes free is a random process. Customers in orbit are, in a sense, competing EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 28 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System with other orbiting customers and new arrivals for the next available server. Retrial systems also can contain an explicit queue, as in a customer service call center, where blocked customers can wait in a first come, first served (FCFS) queue. DMP systems generally have no explicit queue, so blocked customers either leave or enter the orbit queue. In addition to the physical structure of the system, DMPs can be defined further by their availability. The number of separate modem pools available defines what is called the availability of the system. When there is a single pool (by defini- tion accessed through a single telephone number), any free server (modem) in the system can be accessed by any customer. This type of system is called a full-available system. Alternatively, with a non-full available system, the modems serving a local area are broken into m different pools, with each pool i (i = 1, 2,... m) accessed by a different phone number. Any caller into a pool i can access only the modems in that pool (Yang and Templeton 1987). A DMP pool with retrial queuing (Figure 1) can be thought of as a two-station queuing net- work (Greenberg & Wolff, 1987). The modem pool is the first station; and customers in orbit waiting to redial comprise the second station, an infinite capacity queue. There is no waiting space in the system other than in the orbit queue. Callers arrive at some rate, λ, by dialing in from a remote telephone. If a modem is free when the customer arrives, then the customer is assigned immediately to that modem for service, which is completed at some rate, μ. When service is complete, the customer leaves the system. If all of the modems are busy when the customer ar- rives, then with some probability, r1, the customer enters orbit with the intent of redialing at some time in the future, and with probability 1 - r1, the customer leaves the system. Customers in orbit retry for service at some rate, ν. If an orbiting customer finds an idle modem upon retrying, the customer is assigned immediately to that modem for service. If the customer finds the system full, then the customer either re-enters orbit with some probability, r2, or with probability 1 - r2, leaves the system (Wolff, 1989). The probabilities r1 and r2 may be considered constants (non-loss or geometric loss), or more generally, some function of the number of retrials the customer already has made (wait-based loss). Problem Statement What sets DMP retrial queues apart from most other commonly-studied queuing systems is that in the DMP system, the customer often determines the length of the session. Regardless of the speed of an individual server—in this case a modem—the Figure 1. Typical modem pool retrial queue system EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 29 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System customer determines when to terminate the service encounter by hanging up. We assume that a cus- tomer arrives at the system with a predetermined amount of work to be done, requiring a certain amount of time and system resources to process. However, a user frequently will stay connected, and thus occupy a server, for some time longer than necessary to process the work. The excess time the user stays connected can be thought of as nonproductive time. In many instances, the nonproductive time for a customer will be quite significant, often exceeding the productive portion of the service time. We collected data from peak usage times at a DMP at a large Midwestern uni- versity. This pool, comprised of 192 modems, had been managed under a policy of unlimited connect time, and was overloaded very heavily for much of each day. An analysis of the connect-time data revealed a striking fact: a very small percentage of the customers—approximately 6%—accounted for half of the carried load. In most queuing systems, where service times are assumed to be distributed exponentially, some skewing of the service time is expected, but in this system, that characteristic was grossly exaggerated. Figure 2 shows a histogram of the length of 15,000 calls randomly sampled from this data. Several points can be noted from this graph. First, most calls are fairly short in length—in fact, over half of the calls sampled were 15 minutes or less. Also standing out in this plot is how very skewed to the right the distribution is. To make a reasonably sized graph, all of the calls over 10,000 seconds (2.78 hours) in length are grouped together as “More.” The call lengths in this category vary widely, with a maximum connect time of 654,001 seconds (181.67 hours, or 7.57 days). It is reasonable to assume that in these extended-length calls, a great deal of the capacity used is being wasted on non- productive connect time. Therefore, the purpose of this study was to determine the effectiveness of reducing non-productive time through the use of connect-time limits and on the resultant impact on customer service measures. Connect-time limits restrict the amount of time any user could be connected to the pool during a single call. Once the limit has expired for a par- ticular service encounter, the call would be dis- connected and the user would have to redial if he/ she needed more time. Connect-time limits are attractive in that the capability to implement them is inherent in most existing systems. Connect-time limits have the added benefit of being difficult, if not impossible, to circumvent. Additionally, these limits have a certain appearance of fairness because all users are subject to the same time Figure 2. Histogram of service length EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 30 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System constraints and compete for available resources on equal footing. Of course, a negative impact of these limits is that some customers will be discon- nected before their work is done. Compounding that problem for some users may be the fact that there is no notice prior to disconnection. If the call is disconnected in the midst of a file transfer, the entire transfer must be reinitiated on the next call, unless the caller is using software that allows recovery from an incomplete file transfer due to a system disconnect. LITERATURE REVIEW Retrial queues are encountered commonly in computer and telecommunication networks, and can be thought of as a type of network with re- servicing after blocking. They are not encountered commonly in manufacturing or service operations, where blocked customers are either queued or considered lost, so research on retrial queues generally is limited to pure queuing, telecom- munication, or statistical journals. The research on retrial queues is fairly extensive and extremely rigorous in mathematical analysis. A complete literature review of the field is beyond the scope of this study, and would, to a great extent, dupli- cate the work in previous surveys (see Amador & Artalejo, 2009; Artalejo & Gómez-Corral, 2008; Falin, 1990; Kernane, 2008; and Yang & Templeton, 1987). Published research relevant to DMPs in par- ticular has been very limited to date, with the ex- ception of Chiou (2004); Goodman (1999); Naldi (1999); Novak, Rowland, and DaSilva (2003); and Schikora and Godfrey (2003). Chiou (2004) surveyed Internet users in Taiwan to develop a model of consumers’ loyalty toward a given ISP. He found that perceived value and trust were significant factors influencing customers’ loyalty. Goodman (1999) studied modem delay as it relates to Voice over Internet Protocol (VoIP). He cited industry’s lack of effort toward reducing delays in modem transmission. Then he recommended methods for optimizing existing modems and designing lower delay modems. Naldi (1999) mea- sured the frequency and duration of calls placed to Internet service providers (ISPs) on a single telephone switch. He concluded that the Poisson distribution could be used to characterize the ar- rival of calls (using 15 minute intervals). Further, he found that the mean duration of calls during peak times ranged from 25 to 40 minutes. Being focused on a particular system implementation, the specific results are of limited use in a general study. Schikora and Godfrey (2003) analyzed the use of linear regression, neural networks, and data mining software for building predictive models of DMP system performance. They found varying levels of performance among the studied methods when predicting output statistics for the university DMP studied. This study was tangential to the work presented here. With respect to modem queues in general, Lam- bert, Van Houdt, and Blondia (2008) determined the optimal fraction of the uplink channel capacity that should be dedicated to the contention channel in a Data Over Cable Service Interface Specifi- cation (DOCSIS) cable network to minimize its mean response time. They ran several simulations to confirm the accuracy of their decomposition technique, and they further explored the impact of a variety of systems parameters (such as the number of cable modems, the initial backoff win- dow size, the correlation structure of the arrival process, and the mean packet sizes) on the opti- mal fraction. As multiple cable modems connect simultaneously to a single trunk line, the system configuration is fundamentally different than the DMP being studied here. Fontanella and Morabito (2002) examined the tradeoff between investing in capacity (service channels) and satisfying the target user service level of Brazilian Internet Service Providers. They analyzed and illustrated this trade-off utilizing a three step approach: (i) determining user arrival and service processes in chosen periods, (ii) selecting an appropriate EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 31 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System queuing model using some simplifying assump- tions, and (iii) generating trade-off curves between system performance measures. Their approach to the constrained capacity problem focused on adding capacity, making it essentially different from our approach of imposing time limits on the existing DMP structure. There are just two published works that specifi- cally addressed the issue of connect-time limits and their effects on DMP performance. Novak et al. (2003) used a network-specific simulation model to study the effect of session limits on a single measure of service—blocking probability—for a single pool, university DMP. They found that connect-time limits did not reduce blocking prob- ability significantly unless limits were set very short (less than or equal to 1 hour). On the other hand, their results showed a significant decrease in blocking probability from adding capacity to the single modem pool (although later in the article they noted that reductions in blocking probability from adding capacity often have been short-lived). In their study, the authors did not model customer retrials explicitly. Instead, retrials were considered implicitly as part of the modeled inter-arrival rate. Schikora and Godfrey (2006) used a general simulation model to study a similar full-available university DMP. They modeled arriving customers with a random amount of work to be completed and explicitly modeled retrials. The article sum- marized two key performance measures: percent of lost customers (those who leave the system after repeated blocking without being served), and per- cent disconnected customers (those disconnected before their work was complete). RESEARCH DESIGN AND METHODOLOGY This research examines the impact of per-call connect-time limits on the performance of overloaded DMPs. The research is based on the assumption that the service provider desires to distribute limited resources more evenly among the full customer base, especially during periods of system overload. Specifically, we study how system performance measures change when connect-time limits are imposed on a full-available (single pool) system. DMP operators often expe- rience cycles of excess demand (peak periods) followed by excess capacity (lull periods). We are, of course, interested in those periods where demand exceeds capacity and new customers are likely blocked. Due to the nature of these systems, excess capacity from lull periods cannot be stored for use during periods of excess demand, so we can study the system under peak period demand conditions without concern for the impact of the lull periods. The question to be answered in this research is straightforward: What is the relationship between time limits, other variable system parameters, and system performance? We are not simply interested in whether the proposed changes have a signifi- cant effect on the system—it is rather obvious that imposing timeout limits on an overloaded system with a highly skewed service time distri- bution will significantly impact the performance measures of interest. Rather, we are interested in how the system performance changes as the op- erating rules change, and whether we can predict system performance for a given set of operating parameters. A simulation model was developed to study this type of system. Standard graphical analysis was used to provide descriptive results presented later in this article. System Performance Measures Several important customer service and manage- rial performance measures were analyzed in this study. The objective of connect-time limits is to distribute system capacity over a wider customer base by reducing wasted capacity. If the limits succeed, one would expect to see more custom- ers served with a corresponding reduction in wait time in the orbit queue. Relevant service-related EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 32 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System measures of performance for this type of system include: • Percent of Lost Customers: Percent of new arrivals who leave the system without receiving service. • Average Time in Queue: How long cus- tomers have to wait in the orbit queue be- fore receiving service or leaving the sys- tem. This can be measured in number of retries or in time units. • Blocking Probability: Percent of custom- ers who receive a busy signal on their ini- tial arrival to the system. • Nonproductive Use: Percent of system use accounted for by nonproductive time (this is a measure of wasted capacity). • Percent Disconnected: Percent of custom- ers who are disconnected before their work is complete. These customers are differen- tiated from customers who are disconnect- ed during purely nonproductive time. From a customer service standpoint, the first four measures were expected to improve with time limits, and the last was expected to worsen. Additionally, the simulation study examined the managerial performance measure of server utilization, defined as overall modem-time-units used divided by total modem-time-units available. Due to the high demand situations studied, time limits were expected to have minimal impact on this performance measure. It can be argued that two performance measures are of primary interest here: percent lost customers and percent disconnected customers. Taken to- gether, they measure the key positive and negative impacts of time limits. While time in queue and blocking probabilities are very important measures in many queuing systems, their negative effects are minimized here by the automated redialing capability of most users’ computers. Multiple redials after blocking are common and handled by the computer automatically. During the resultant time in queue waiting for the connection to be made, customers can occupy their time with other productive or entertaining endeavors. Therefore, these two performance measures are not as critical in this type of queuing system. Simulation Design A simulation study was performed to examine the effect of per-call time limits on the listed perfor- mance measures. The simulation model was coded in the C programming language, using a version of the SIMLIB library of functions (Schikora & Godfrey, 2003) with slight modifications. The use of a general purpose programming language and the SIMLIB functions allowed us to model all of the details of the DMP pool operation explicitly, including the orbit queue and customer retrials/ reconnects. Data for building the simulation model were collected from the actual DMP operations at a large public Midwestern university, and used to determine realistic modeling parameters and ex- perimental factors for the simulation study. These data then were incorporated into the simulation model, which included both fixed parameters and experimental factors. Descriptions of the parameters and factors follow. Four fixed parameters were modeled in the simulation: number of modems, service time distribution, inter-retrial time distribution, and re- connect persistence. A discussion of each follows. 1. Number of Modems - The total number of modems available remained fixed, so results could be compared across identical resources. Because the DMP data were used also to help determine service rates, it was reasonable to choose a system size based on the real-world example. There were 192 modems available in the actual DMP, and our simulation used a fixed resource size of 200 modems. We assumed that there were EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 33 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System no modem failures, although this assumption could easily be relaxed in future research. 2. Service Time Distribution - The BestFit software package from Palisade Corporation was used to fit a distribution to the available service time data. Analysis indicated that either a Weibull or a Pearson VI distribu- tion—both commonly used to model task completion times—would fit the empirical data best. We assume readers generally are more familiar with the Weibull distribution, so it was used to model the customer service times in the simulation. This distribution had a shape parameter α of 0.651262 and a scale parameter β of 1524.1, with a mean of 2022 seconds, or 34.6 minutes. 3. Inter-retrial Time Distribution - The retrial rate defines how quickly customers in orbit try again for service, and usually is expressed as the distribution of inter-retrial times (IRT). In this study, IRT is defined as the time be- tween when a customer’s computer hangs up after receiving a busy signal, and when the computer next contacts the service center, the call either is connected to the service center or is given another busy signal. Because most retrial queue literature models the IRTs with an exponential distribution, it might seem appropriate to do the same here. However, it is important to note that prior research has focused on the human customer having to initiate the retrial attempt. In this study, it is reasonable to assume that most of the retrial attempts are made by the machine part of the customer—the computer. Usually computers are set up to redial automatically and im- mediately upon receiving a busy signal. As such, IRTs for an individual customer will be distributed so tightly as to be nearly constant. Therefore, we treated individual retrial times in a service encounter as a constant drawn from a tightly distributed uniform distribu- tion. The IRT for any single customer was modeled as a constant, drawn from a Uniform (5, 10) distribution (measured in seconds). The range of the distribution was based on personal experience with auto-redial capa- bilities of most computers. 4. Reconnect Persistence - This defines the probability that a customer who is discon- nected from the DMP will try to redial. We assumed that this probability equals 1 if a customer is disconnected before all productive work is completed and 0 if a customer is disconnected after all productive work is completed. The work time for the reconnecting customer was set to the work time unsatisfied in the initial call, with an additional non-productive time element ran- domly generated to fit the current factor in the simulation runs. After the initial reconnect attempt, the retrial process for reconnecting customers is modeled the same as for new arrivals. Four experimental factors were varied across simulations: the length of connect-time limits, the percent nonproductive time, mean system utilization, and retrial persistence. A description of these factors follows: 1. Length of Connect-Time Limits - Four levels of time limits were simulated: 30 minutes, 60 minutes, 120 minutes, and no time limit. 2. Percent Nonproductive Time - We modeled the assumption that each call contains some nonproductive time by generating a random variable, with a range of [0, 1], that represents the percentage of the overall service time in a call that, without limits, would be purely nonproductive time. There were no empirical data with which to model this assumed ratio. Therefore, we followed a recommendation of Law and Kelton (2000) and assumed that the ratio had a beta distribution, with shape parameters α1 and α2. By varying the shape parameters as an experimental factor, we varied the mean productivity of arriving EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 34 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System customers. Values for the levels of this fac- tor are listed in Table 1, and the resultant distribution plots are shown in Figure 3. 3. Mean System Utilization - The mean arrival rate of customers was varied to adjust the mean system utilization ρ across simulations. Because we were interested in analyzing the overloaded system, arrival rates were set to achieve various levels of congestion in the system. Based on empirical data and a chi-square goodness-of-fit test, this arrival process was modeled with a Poisson process defined by a mean arrival rate of λ. With mean system utilization ρ defined as λ/cμ (c = 200 in this case), the mean arrival rate λ was then set at different levels to achieve the desired ρ. This factor was set to three different levels: 1.0, 1.25, and 1.5. These levels might seem extreme at first, but note that the mean service time includes both nonproductive and work time. The system load accounted by work time is less than the level of ρ in each simulation, sometimes significantly so, and this is expected to be important when time limits are imposed. In addition, the high levels of ρ allow us to model the realistic situation where more customers are trying to access the system than can be accommodated without time limits. Retrial Persistence (R) - Actual customer retrial behavior was unknown. It seemed reasonable, however, that customers very likely would attempt a retrial after a busy signal on an initial arrival, but their likeliness to redial would decrease with the number of unsuccessful prior attempts. To model that behavior, we assumed that all new arrivals would join the orbit queue if they received a busy signal. We then defined R as the probability that customers in orbit would rejoin the orbit after receiving a busy signal upon their first retrial attempt. The probability that a customer in orbit would redial after the nth failed redial attempt was defined by rn, which we assumed to be of the form: rn=R n (1) The probability a customer would leave the system upon the nth failed redial attempt is simply 1 - rn. Next, we defined N as the number of redi- als a customer would make before leaving the system. Given (1), we can determine the probabil- ity density function (p.d.f.) – the probability that N will equal any particular number: P N n R R ni i n n( ) , , ,....= =       −( ) = = − ∏ 0 1 1 1 2 3 (2) The expected number of redials a customer would make before leaving the system is given by: E N R R ni i n n n ( )=       −( )          = − = ∞ ∏∑ 0 1 1 1 (3) Due to the exponential product nature of Equation (3), R must be very high to achieve any reasonably sized E(N) for this particular applica- tion. This gives the function the desired quality of highly likely initial retrials. It is this very same nature that causes the p.d.f. to reach a point where it rapidly decreases, properly reflecting the customer’s increased frustration at repeated busy signals. Four levels of R were considered. Values Table 1. Beta distribution parameters for percent nonproductive time Beta Distribution Parameters Level α1 α2 Mean Very Low 1.5 5 0.231 Low 2.5 4 0.385 High 4 2.5 0.615 Very High 5 1.5 0.769 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 35 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System for the levels of this factor are listed in Table 2. Representative retrial probability density plots are shown in Figure 4. Experimental Design Table 2 summarizes the parameters and factor lev- els used in this simulation study. The combination of the different factors resulted in 4 x 4 x 3 x 4 = 192 cells in the simulation design. For each cell, a simulation study was performed with multiple replications. In each replication, the simulation began with the system empty. Therefore, a suitable warm-up period had to be determined to eliminate the effects of transient states in the system and to ensure that data collected represented steady-state operations (Schikora & Godfrey, 2006). Following standard graphical analysis of various test simula- tions, this warm-up period was set at 10 hours. Each simulation was then run for a simulated 96 hours, resulting in 86 hours of simulated data col- lected per simulation run. Each simulation was replicated 20 times to reduce the effect of random variations on the simulated results. The total num- ber of simulation runs was therefore 192 x 20 = 3840. Results for each cell in the design (20 per cell) were collected, and the mean performance measures for each cell were computed and used in the results analysis. RESULTS Analysis for this research was based primarily on visual inspection of plots of performance measures against the different simulation factors. In describing the results, we looked at both the primary effects of the simulation factors on the performance measures and all relevant two-way interactions. This was accomplished by plotting Figure 3. Beta distribution plots for nonproductive to work time ratios Table 2. Summary of simulation design elements Parameter Fixed/ Varied Level(s) Number of Modems Fixed 200 Service Pattern Fixed Weibull (.651262, 1524.1) Inter-retrial Times (seconds) Fixed Uniform (5,10) Reconnect Persistence Fixed 0 or 1 Length of Time Limits in minutes (limit) Varied 30, 60, 120, no limit Mean Percent Nonpro- ductive Time (ratio) Varied .231,.385,.615,.769 Mean System Load (ρ) Varied 1.0, 1.25, 1.5 Retrial Persistence R (mean retrial attempts) Varied .995,.9993,.9997,.99985 (18, 47, 72, 102) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 36 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System performance measures against each pair of fac- tors that affected the performance measure. To aid in gaining insight into the interactions, each interaction was plotted in two separate graphs, alternating factors on the x-axis in each graph. The data plotted are averages across the factors not plotted in each particular graph. For example, Figure 5 plots Percent Lost Customers as a function of time limits and customer productivity ratios. For each of the 16 points plotted, the value plotted is the average output of all simulation cells that match that limit and ratio. For some performance measures, one or more factors had no effect on the results. In these instances, interactions involving those factors were not examined. In graphing the interactions, some accommo- dation had to be made for plotting data associ- ated with the no-time-limit level. A common method of graphing such data is to choose a nu- merical value that is substantially larger than the other observed values to substitute for the infinite level. This allows the researcher to show the data associated with the infinite value, but plot them far enough away from the other observed values to not greatly affect the underlying general shape of the curve. In this research, the largest time limit for a single pool is 2 hours, or 7,200 seconds. Figure 4. Representative retrial p.d.f. for various R Figure 5. Plot of PM1 as a function of time limits and productivity ratios EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 37 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System For the sake of graphing the data, the infinite time limit was assigned a value four times the largest limit—28,000 seconds. There were 52 different data plots originally examined in the research project. For the sake of brevity, and to focus on the key performance measures, we limit our discussion here to the following two key customer service performance measures: • PM1: Percent of lost customers (percent of new arrivals that leave the system with- out receiving service) and PM2: Percent disconnected (percent of customers who are disconnected before their work is com- plete). These are differentiated from cus- tomers who are disconnected during purely nonproductive time. Data plots relevant to these two performance measures are shown in Figures 5 through 12. Complete result data sets and remaining data plots are available from the authors on request. PM1: Percent of Lost Customers Plots relevant to this section include Figures 5 through 10. Time limits have a definite and non- linear impact on the percent of lost customers. Generally, as the limit is decreased, there is a reduction in this performance measure, as would be expected (Figures 5–7). The reduction in lost customers is fairly steep within the range of lim- its considered in this study. An exception occurs when plotting the effect of limits under different levels of ρ (Figure 6). When the system load is 1.0, the effect of time limits on lost customers ap- pears minimal and linear. This is due most likely to the relatively low incidence of lost customers with no time limits and ρ = 1.0—as such, there is little room for improvement. It is interesting to note the significant reduction in lost customers due to just the highest of limits. The longest time limit results in about a one-third reduction in the percent of lost customers on average, from 19.0% to 13.4% —a net gain of 5.6% of all customers who enter service. This compares to an increase in PM2 (percent disconnected) from 0 to 2.2%. It is expected that for most service providers, this would be a worthwhile tradeoff. The magnitude of the reduction is smaller with lower inefficiency ratios (more productive customers, Figure 5), and lower levels of ρ (Figure 6), indicating an interac- tion between time limits and these two factors. The system load ρ and customer inefficiency ratio also have an impact on the percent of lost customers. As ρ increases, there is an increase in the incidence of lost customers, as would be ex- pected when more customers are arriving per time Figure 6. Plot of PM1 as a function of time limits and system load EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 38 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System Figure 7. Plot of PM1 as a function of time limits and R Figure 8. Plot of PM1 as a function of productivity ratios and system load Figure 9. Plot of PM1 as a function of productivity ratios and R EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 39 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System unit and competing for the same limited resourc- es (Figures 6, 8, 10). Similarly, as customers become less productive with their online time, fewer customers are lost, as the number of discon- nected customers making reconnect attempts drops (Figures 5, 8, 9). Surprisingly, customer persis- tence has a minimal effect on the number of lost customers. A slight negative trend in lost custom- ers is evident as R increases, but it may, for all practical purposes, be considered negligible over the range of R considered in this study (Figures 7, 9, 10). There appear to be interactions between all the factors except R. The shorter the time limit, the greater the effect of customer productivity on PM1 (Figure 5). Conversely, the longer the time limit, the greater the effect of ρ on lost customers (Figure 6). The effect of customer productivity on percent of lost customers also is increased, as the system becomes more overloaded (Figure 8). Note that with ρ = 1.0, customer productivity has virtually no effect on this performance measure, while with ρ = 1.5, variation in customer produc- tivity accounts for a swing of about 40% in the value of this measure. This implies that operators of very heavily overloaded systems should be much more concerned about their customers’ online productivity than operators of systems who that are merely at the saturation point. Measuring the actual system load in a fully saturated system is difficult, however, as lost customers are not seen by the system. PM2: Percent disconnected Plots relevant to this section include Figures 11 and 12. This performance measure shows the percent of customers disconnected before their productive work time is completed. This is the main negative impact of imposing time limits; the results here must be weighed against the benefits of time limits to help practitioners better understand the overall impact of time limits. This performance measure is affected by only two factors in the experiment: time limits and customer productivity. As time limits decrease, more customers will be discon- nected before their work is done. In addition, as customers become less productive with their use of online time, it is less likely that a customer still will be working productively when the time limit is reached. Figure 11 shows that the effect of time limits is very nonlinear, and as time limits are shortened, PM2 increases at an increasing rate. As time limits approach 0, PM2 approaches its upper limit of 100%. Figure 10. Plot of PM1 as a function of system load and R EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 40 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System Customer productivity also has a definite effect on PM2, but unlike time limits, the effect of cus- tomer productivity appears to be quite linear (Figure 12). As customers become more unpro- ductive online, it is less likely that a customer who is disconnected by a time limit still is doing productive work when cut off. There is also an apparent interaction between customer productiv- ity and time limits. With no time limits, cus- tomer productivity has no effect, because custom- ers are never disconnected. As time limits decrease, the effect of customer productivity becomes more significant. If customers tend to be extremely productive with their online time, then decreasing time limits will, at some point, increase this per- formance measure, very rapidly, which is undesir- able. However, if customers tend to waste a lot of their online connect time, then decreasing time limits will result in a much more moderate increase in this measure. In any case, the effect of limits on this performance measure has to be weighed against the benefits of limits on other performance measures. As such, it is fortunate that this sole negative performance measure is dependent on only one other factor in the system. If a system operator could determine the general productiv- ity of customers, the system operator could better estimate the general effect of time limits on this measure. Figure 11. Plot of PM2 as a function of time limits and productivity ratios Figure 12: Plot of PM2 as a function of productivity ratios and time limits EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 41 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System SUMMARY AND FUTURE RESEARCH As expected, the implementation of time limits has a significant and nonlinear effect on every performance measure studied, including those not presented here. Generally, implementation of time limits has an increasingly greater effect as the time limits decrease. An examination of the call length distribution helps explain this nonlinearity, as decreasing the time limits has an increasingly greater impact on the number of customers affected by the limits. This implies that in the lower range of possible time limits, the choice of the exact time limit has a large impact on the number of customers directly impacted by the limits, and therefore greatly impacts the various performance measures. It also implies that imposing a call limit that is too long will have minimal effect on performance measures. In this study, the greatest effects of time limits are seen generally in the range below approximately three times the average service call length of 2078 seconds (34.6 minutes). Above 6000 seconds (100 minutes), the effect of limits tends to flatten out, as the limits impact fewer customers. This does not imply that longer time limits are not worth considering, however. As pointed out earlier, the longest time limit significantly reduces the num- ber of lost customers in moderately and heavily overloaded systems. For most performance measures, there is a strong interaction between time limits and cus- tomer productivity. Time limits are more effective at improving the “good” performance measures when customers are less productive in their use of online time. This is not surprising--as fewer productive customers waste more time, wasted time can be reduced by time limits. Less produc- tive customers also are less likely to attempt to reconnect after being disconnected, thus reducing general congestion in the system. However, very productive customers will limit the benefits to be gained from imposing time limits. Considering the “bad” performance measure PM2, the relationship between time limits and customer productivity is reversed. Time limits have a greater impact on this measure as customers become more productive. This again makes sense because more productive customers are more likely to be in the midst of their work when disconnected by a time limit. These two points taken together make it clear that the expected overall results from imposing a time limit, and thus the decisions to impose a limit and to determine its length, are highly dependent on the general productivity of customers in the system. Systems with nonproductive customers who generally waste resources can expect sig- nificant benefits from time limits, with minimum negative effects. Systems with conscientious, productive customers can expect limited overall benefits from time limits, but suffer greatly with respect to PM2. In deciding about time limits then, the system operator should have a measure of customer pro- ductivity to get a clearer picture of what to expect from time limits. It also would help to develop a cost-benefit model that prices out the cost of time limits—increased PM2—and the value of the benefits gained in PM1 and other measures previously discussed. To simplify such a model, an argument can be made that the most important of these measures from a customer service standpoint are those discussed here: PM1, the percent of lost customers, and PM2, customers disconnected before their work is completed. Each measure directly impacts the customers’ ability to obtain the service to which they are entitled, and thus is crucial to any measure of customer service. In most queuing systems, the wait in queue is also a critical measure. However, in a DMP system, with the computer doing all of the redialing, a customer can do other things while waiting to connect, and it is reasonable to assume that the wait becomes a lesser issue for the customer. Because the wait in queue is less important to a customer, the initial blocking probability also becomes less important. With the computer performing the wait in queue, so to speak, the customers are less concerned EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 42 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System with getting connected on the first try, as long as they can get into the system on one of the redi- als. Therefore, a meaningful cost-benefit model could be developed by examining the tradeoff between PM1 and PM2. By putting a value on each percentage reduction in lost customers, and a cost on each percentage increase in customers disconnected while still working, the net result of different time limits could be evaluated with a meaningful single cost-benefit measure. The general nature of this tradeoff can be shown with a simple comparison of PM1 and PM2. If we assume that a one percent change in either measure has the same unit value to the system, we can plot the net benefit/cost of imposing a certain time limit compared to no time limit at all. First we define PM1a,b as the measure of PM1 at time limit level a and customer productivity level b. PM2a,b is similarly defined. For the models with no time limit, a = ∞. We then define the following: ∆PM P PM ab b a b 1 1 1 , , , = − ∞ (4) ∆PM P PM ab b a b 2 2 2 , , , = − ∞ (5) β a b a b b PM P , , , ( )= + × ∞ ∆ 1 2 100 (6) Equation 6 defines the net unit benefit by imposing time limit a on a customer base with productivity level b. Positive values of βa,b equate to a net benefit from imposing that limit on that customer base; negative values equate to a net loss/ cost. Figure 13 plots the values of βa,b and shows that the nature of the tradeoff is highly dependent on the productivity ratio of the customer base. When customers tend to waste time online, the values of βa,b are all positive and there appears to be an optimum time limit level, somewhere in the middle of the levels tested, that maximizes βa,b. As the customer base gets more productive, the net benefit of imposing time limits is restricted to the longest time limits. These results assume an equal value placed on both PM1 and PM2. An argument could be made that PM1 should have a higher value than PM2 – it is better to have been served and disconnected than never to have been served at all. As PM1 takes on higher values relative to PM2, the net benefit increases and remains positive across a wider range of a and b. To demonstrate, we compute and plot the following in Figure 14, showing the cost-benefit tradeoff with PM1 twice as valuable as PM2. β2 2 1 2 100 a b a b b PM P , , , ( ) .= × + × ∞ ∆ (7) Figure 13. Plot of βa,b net performance measure tradeoff EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 43 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System Keys to a valid analysis of this type are es- timates of actual customer productivity and the true system load. Customer productivity could be estimated by data throughput logs for actual calls in the system. True system load is more difficult to measure, as customers lost during peak periods of system overload are not seen by the system. The system operator can easily see when the system is overloaded, but not by how much it is overloaded. A good estimate of this measure requires access to telephone system logs. While imposing time limits is an obvious method to improve customer service levels in overloaded DMP systems, other options are available. DMP operators can choose to segment their customers and resources by shifting to a non-full-available system structure, splitting modems into different pools with different access numbers. Different time limits would be applied to the different pools, thereby allowing customers with greater needs to try to access the longer limit pools. Similarly, customers with minimal needs could try to access the shorter time limit pools, with a greater expectation of being served due to the shorter time limits. Results of a study examining such an approach are forthcoming. Further research may possibly extend this work to the field of broadband Internet connections that are gaining in market penetrations. While the DMP system is constrained by a finite number of physical connections, broadband systems can manage signifi- cantly larger numbers of users, but are constrained by a fixed volume of bandwidth in a given physical configuration. Time constraints would not be as relevant in such a system, but rather the concept of bandwidth throttling could be used to manage user demand in a capacity-constrained system. A study of proper management techniques in such a scenario would require a completely different methodology from this article. Finally, it would be interesting to explore the relationship between this study and customer service issues in a customer call center. The service system structure bears many similarities to the DMP system explored here. There are a finite number of servers that customers dial into, and often customers cannot immediately enter service. The main differences are that the call centers typically have electronic queues, and the service times are a factor of both the customers and service agents. REFERENCES Amador, J., & Artalejo, J. R. (2009). The M/G/1 retrial queue: New descriptors of the customer’s behavior. Journal of Computational and Applied Mathematics, 223(1), 15–26. doi:10.1016/j. cam.2007.12.016 Figure 14. Plot of β2a,b, net performance measure tradeoff, double weight for PM1 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 44 Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System Artalejo, J. R., & Gómez-Corral, A. (2008). Ad- vances in retrial queues. European Journal of Op- erational Research, 189(3), 1041. doi:10.1016/j. ejor.2007.05.035 Auckland, J. S. (2006, April). 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All use subject to https://www.ebsco.com/terms-of-use 46 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 4 INTRODUCTION The profession of accountancy has experienced unprecedented change during the past 20 years. It has moved from paper-based to PC-based, and the Internet has become prevailing tendency. Similar to other professions in the service sector (Levy, Murphy, & Zanakis, 2009; Lexhagen, 2009), the recent technological developments have given ac- countants the opportunity to incorporate informa- tion systems in their profession. They use the PC, to a large extent, for customers’ book keeping and liquidation of income tax statements. They spend a large amount of time processing and producing many documents (Bhansali, 2006a). Also, they use the Internet extensively for submitting tax Efstratios C. Emmanouilidis University of Macedonia, Greece Anastasios A. Economides University of Macedonia, Greece ICT Usage by Greek Accountants ABSTRACT This study investigates Greek accounting offices use of Information and Communication Technologies (ICT). Initially, a comprehensive questionnaire was developed. It contains 35 questions with multiple answers and 2 open questions tailored to the accountants. One hundred accountants’ offices in a Greek county answered the questionnaire. The findings present their current ICT infrastructure and their use of ICT and accounting e-services. Greek accounting offices have made improvements in adopting new technology in their everyday work. All use email, antivirus software, and the Web. Most submit VAT (Value Aided Tax), Taxation Statements, and APS (Analytical Periodic Statement) via Internet. However, most are not cautious about backing up their data daily; they do not create electronic files for all their docu- ments; they do not update their software via Internet; and they do not use advanced software applications. Finally, they expect the government and the Accountants’ Chamber to finance their ICT infrastructure. DOI: 10.4018/978-1-4666-0044-7.ch004 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 47 ICT Usage by Greek Accountants statements to the government (Anderson, Fox, & Schwartz, 2005; Garen, 2006). The recent advances in e-government (Chatzopoulos & Economides, 2009; Economides & Terzis, 2008; Terpsiadou & Economides, 2009) have pushed accountants to follow. Furthermore, more than 2,000 accounting firms have Web sites registered with “The List of CPA Firms Directory” (Roxas, Peek, Peek, & Hagemann, 2000). Many software packages are available to help accountants with book keeping. However, many of these software packages become quite complicated and present problems of interoperability and us- ability, among others. Human-computer interface issues are extremely important for online service applications (Pinhanez, 2009). In parallel, many accountants lack the time or the patience to learn the skills needed to take full advantage of these advances. Even worse, the technology continues to move forward, getting more complicated and thus widening the gap between potential and actual use (Zarowin, 2004). While technology’s impact on the accountants’ profession has been considerable, there are many more developments to come. Thus, accountants must be technologically proactive (Johnston, 2005). During the next few years, the profession of accountancy will face unexpected new chal- lenges (Bhansali, 2006b). This study investigates the level of ICT use by accounting offices in a Greek county. In the next section, previous studies on these issues are presented. Then the methodology is described. The presentation of the results follows. Finally, conclu- sions are drawn and future research is suggested. PREVIOUS RESEARCH Not many previous studies exist on the use of ICT by accounting offices. Some detailed studies were conducted by the American Institute of Certified Public Accountants (AICPA). Gallun, Heagy, and Lindsey (1993) distin- guished between small and large public CPAs (Certified Public Accountants) and accountants in large enterprises (industry accountants) in the United States. They found that large accounting offices used more LANs (Local Area Networks) than small ones. Also, most accountants did not appear to worry very much about viruses and other security issues. Most used laser printers along with the essential dot matrix, and the most popular brand was Hewlett-Packard. Finally, a small percentage used portable printers. Khani and Zarowin (1994) showed that 23% of enterprises in the United States supplemented all forms electronically (e.g., liquidation of in- come tax statements), and 15% planned to do it in the future. Regarding security, 31% faced virus problems. Also, 37% used an antivirus program, 68% of which used Norton. Regarding backup, 83% backed up their data, 80% of which did this daily and 16% weekly. E-mail was used by 39% of the offices. Prawitt, Romney, and Zarowin (1997) classi- fied U.S. accountants in the following categories: 1) in big accounting offices (Big 6—national), 2) in intermediate (regional) offices, 3) in small offices (local and individual offices), 4) in organisations (business and nonprofit), 5) in schools (academic), and 6) in governmental organisations. The most popular operating system was Microsoft Windows. All accountants in the first two categories used networks. The most popular application office suite was Microsoft Office (Word, Excel, Access, and PowerPoint). All accountants used applica- tions for managing their contacts and timetables, and the most popular application was ACT! by Sage. (The small use of Microsoft Outlook was interesting.) Bush (2000) found that 96% of U.S. accoun- tants had access to the Internet. More than half reported that they “surf” every day. Also, 65% of men and 47% of women reported that the Internet created more opportunities for them. Finally, 47% EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 48 ICT Usage by Greek Accountants expected an increase in using the Internet for ac- counting research. Anders and Fischer (2004) found that the New York accountants were absolutely satisfied with the programs of accountancy that they used for third consecutive year. Also, an increase was observed in the creation of Web pages by accountants aim- ing at the satisfaction of their customers. Zarowin (2006) found that many accounting offices of all sizes transformed their offices to elec- tronic ones. In 2003, only 38% prepared invoices electronically. In 2005, the percentage increased to 46%. In 2003, 64% used internal local networks (Intranets) for the storage and processing of cus- tomers’ data. In 2005, the percentage increased to 72%. Finally, the number of accounting offices that stored their customers’ documents only in the computer without printing them (electronic paperless office) showed an enormous increase of 103% from 2003 to 2005. The use and development of Web pages for advertising by companies in the European Union during 2000–2003 increased, by 19% (Voiculescu, 2003). Advertising was the main reason for using and developing web pages (59%). It is remarkable that income acquisition was in third place (11%), behind customer service (26%). Gullkvist and Ylinen (2005) found that the most important reasons for the development of e-accounting systems by Finnish accounting agencies were the following: more efficient use of time resources, higher internal performance, availability of accounting information, and per- ceived requirements from authorities. Lack of time can clearly been seen as one of the key obstacles delaying the adoption of the e-accounting systems among small and medium-sized enterprises. The accountancy profession is feeling the strain of increased responsibility, away from the tradi- tional roles for which accountants were trained (Mintel International Group Ltd., 2005). Although the triggering factors for stress and increasing staff turnover are high, little is currently being done to improve the situation. A resounding 84% of U.S. companies said their accounting department was leading the compliance initiatives in the company. The same 84% stated that increasing compliance requirements have put them under greater pressure due to the increase in scope and volume of their work, and yet 88% were still manually re-keying data into spreadsheets for reporting and analysis (Mintel International Group Ltd., 2005). Although many Inland Revenue Service of- fices support electronic tax filing (Economides & Terzis, 2008), many accountants continue not to use these new electronic services. Each of the previous studies investigated only a specific area of accountants’ ICT use. For example, one study examined the types of networking technologies adopted; another examined the types of software used; and another examined the accountants’ Web sites. Therefore, a comprehensive survey needed to be developed to capture the complete view of accountants’ ICT use. Furthermore, most studies investigated accountants in the United States. Thus, a need also existed to investigate accoun- tants’ ICT use in other countries. METHODOLOGY Based on the OECD (Organization for Economic Co-operation and Development) (2002) model, our experience in surveying other services’ ar- eas, opinions of accountants after extensive discussions with them, and the previous studies presented above, we developed a comprehensive questionnaire to find out the utilization of ICT by accountants. Specially, fruitful discussions with members and officials of a local Accountants’ Club helped us finalize the questionnaire. We wanted to discover the ICT infrastructure that accounting offices in a Greek province owned and used. Also, we investigated what kind of accountant-specific software and e-government services the accountants used. We also wanted to identify the problems they faced in their daily accounting work regarding ICT. Suggestions to EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 49 ICT Usage by Greek Accountants the Greek government and the Greek Accountants’ Chamber could then be made. The questionnaire contains 30 closed-type questions with multiple choice answers and 2 open-type questions. We classified the questions into four categories: 1. General information about the accounting enterprises (5 questions), 2. ICT infrastructure of the enterprise (18 questions), 3. Internet use and Web presence (4 questions), and 4. Accounting software applications and ser- vices (8 closed + 2 open questions). One hundred twenty accounting offices are in the survey’s region. The research was carried out at 100 accounting offices (private as well as belonging to enterprises) in this Greek county, using interviews at each office. The remaining 20 offices did not participate due to their lack of available time. We faced several obstacles in trying to interview the accountants due to their limited time. We selected the specific survey’s region be- cause we have personal relationships with many accountants in this region, and expected that they would take the time to answer our questionnaire. During 2006–2007, we visited 75 offices and per- sonally interviewed the staff. Twenty-five offices were interviewed by phone. RESULTS General Information about the Accounting Enterprises Most accounting offices (53) employed four to nine people, followed by offices (37) with less than three people. There were also 10 offices employing more than nine people. Almost all offices (98) were autonomous private offices, while 2 were large enterprises. This was expected since most Greek accountants work mainly as free professionals, having their own private offices. Most offices (63) were active in the profession for more than 15 years. Most (31) were active for 23 years. Only 13 offices were relatively new in the profession (less than 6 years). ICT Infrastructure As expected, all offices used Internet and e-mail, since they need to use the e-government services of Inland Revenue Service. Wide Area Networks (WAN) were only used by two offices, the large enterprises (Figure 1). It is important to note that 63 offices set up LAN networks for better internal office operation. Considering the offices that have LANs, 21% employed 1–3 people, 62% employed 4–9 people, and 17% employed 10 or more people. This shows that the use of networks in small and medium- sized enterprises is becoming a necessity. The number of PCs was proportional to the number of personnel. In particular, 58 offices owned 4–10 PCs, and 42 offices owned 1–3 PCs. However, no office owned more than 10 PCs al- though 11 offices employed more than 10 people. Not all personnel were concurrently working on PCs; some were occupied at exterior works (e.g., Figure 1. ICT usage EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 50 ICT Usage by Greek Accountants visiting the Inland Revenue Service, the Social Security Organization, and banks). Out of the 63 offices that set up LAN networks, 21 used Client-Server technology and 42 used Peer-to-Peer (P2P) technology (Figure 2). This was expected for such small LANs since the P2P networks cost less and do not require specialised personnel for maintenance. It is also noteworthy that among the 37 offices that did not set up any network infrastructure, 29 planned to set up one in the near future, while 8 did not. Furthermore, 26 offices used a separate file server for central storage of all their files (in both Client-Server and P2P networks), 4 used Print Server (only in Client-Server networks), 12 used Backup Server (only in Client-Server networks), and none used Mail Server. Since most offices employed few employees, they usually met each other in person at the office. The 26 offices that used a file server realised that they were able to protect important files by placing them centrally and would not waste time updating the same data on separate PCs. It is also interesting to note that among the of- fices that used Client-Server, 10% owned 1–3 PCs (Figure 3). Also, among the offices that used P2P, 62% owned 4–10 PCs. Accountants may not have been fully aware of the different benefits offered by each one of these networking technologies. Usually, an office imitates others and decides to invest in something others suggest. Cost is also a very important factor in this choice. Instead of buying a new server, many small offices trans- formed an old PC into a File Server. The offices that did not plan to set up a LAN were small offices, usually with one PC and sometimes two or three. Roughly half of the of- fices that planned to set up a LAN owned 1–10 PCs (Figure 4). Only 34 offices owned laptops apart from PCs. Some accountants worked from homes using laptops at these offices. As expected, 92 offices owned Dot Matrix printers since printing is essential for their daily work, for example printing customers’ books (Figure 5). It is interesting to note that 30 offices had black and white Laser printers and 16 offices owned colour Laser printers. These offices were mainly large offices with many customers, as well as the two big enterprises. More than half of the offices owned new multi-machines (fax, Inkjet printer, scanner together), which is economically sound for small offices. Forty-two offices owned old fax machines. The new offices preferred to buy multi-machines. Sixty-six owned inkjet print- ers, which are the most economical for printing a few pages. Seven offices owned separate scan- ners. Only 16 offices owned photocopy machines (mainly big offices with many customers). All offices used antivirus programs, while hardly any of the 76 offices used separate firewall programs apart from that included in Windows XP Operating System (Figure 6). Also, 12 of- fices used full data backup systems. These were mainly big offices and the two large enterprises, which had explicit backup policies. Due to the high cost of such technologies, the remaining offices did not use such technology. Instead, they used more economical ways of backing up their data. The offices that did not use a firewall program were mainly small offices with few PCs; they did not wish to purchase separate programs, since the firewall included in Windows XP worked well. Regarding security problems faced by the of- fices during the previous year, 18 faced virus or spy-ware problems, 11 faced unauthorized access Figure 2. LAN types and plans to use LANs EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 51 ICT Usage by Greek Accountants Figure 3. Relationship between “LAN type” and “Number of PCs” Figure 4. Relationship between the “Plans for LANs” and “Number of PCs” Figure 5. Printers usage EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 52 ICT Usage by Greek Accountants into their PCs, and 1 faced a program exploitation problem (Figure 7). The main reason for these problems was that despite being equipped with antivirus programs, they did not update these programs daily or, in some cases, even have the programs activated. The unauthorized access could be associated with the fact that most offices did not use password and user name to log into Win- dows. Seventy-nine offices backed up their critical data daily, 11 did this weekly, and 10 did this monthly (Figure 8). They claimed that the main reason for not backing up daily was the lack of time and their belief that it is not important to back up daily. Regarding the media used for back up (Figure 9), most offices (86) backed up on the local disk (another partition or another file), 16 used a backup server, 8 used the old zip-drive, and 29 offices used CD-DVD. Twenty-one offices used more modern methods such as USB flash disk and external USB hard disk. Only two offices knew about and had a complete image backup of their hard disk. These two offices were small with less than people people, but these workers were young and familiar with new technology. As expected, they used Microsoft’s software for general use. They used Windows XP as the operating system, and the Microsoft Office 2000–2003 as their office suite. Most companies did not know about open source software. Sixty-eight offices used password and user name to log in to the Windows system. The re- mainder 32 offices were mainly small offices with few PCs, and they did not consider it essential. Regarding problems due to introducing ICT into their enterprises, 18 offices considered, as a problem, the lack of information and knowledge about ICT; 16 offices had problems with the ter- minology; and 13 offices were burned up by the time-consuming procedures (Figure 10). However, it is interesting to note that most offices (58) did not face any particular problem, and 5 offices were not interested in any of these problems. (Most offices Figure 6. Security protection mechanisms Figure 7. Security problems EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 53 ICT Usage by Greek Accountants Figure 8. Backup frequency Figure 9. Data media backup Figure 10. ICT problems EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 54 ICT Usage by Greek Accountants were staffed by young accountants who eagerly follow any new technological innovations.) Regarding the use of VoIP (Voice over Internet Protocol) technology, only four offices had used Skype (Figures 11 & 12). Most offices declared that this technology is still unreliable, and they will wait until it becomes perfect to use it again. Sixty-seven offices said they had not used it but intended to do so in the future, while 23 offices declared that they did not intend to use it at all. Their reasons for not using VoIP were that this technology is still new, unreliable, and there is no sufficient information about it. At that time, only two Greek telecommunications companies pro- vided VoIP in parallel with other services, and they did not advertise it enough. Sixteen offices declared that they were not interested in this new technology. Regarding their degree of familiarization with ICT and their continuing training policy, most offices (58) maintained a continuous training policy and were very familiar with ICT (Figure 13). In these offices, most accountants recognized the benefits of ICT. Internet explosion helped immensely. On the other hand, a few offices (eight) hesitated to use ICT. These were mainly old of- fices with elderly accountants, who could not keep pace with the new technologies and simply used only the essential items for their daily work. Sixty-four offices were very familiar with ICT, but they did not have any training policy, which happens mainly in small offices with one or two people. Regarding their expectations of their Chamber (oe-e.gr, pol.org.gr) or the government, 71 of- fices wished to be financed to purchase or use new ICT products (Figure 14). Accountants were willing to use the new technologies, but they needed money to proceed. Internet Use and Web Presence In this section, we present the results of our re- search on accountants’ Internet use. It is important to note that a Greek accounting office should have an Internet connection to connect to the Inland Figure 11. VoIP usage Figure 12. Reasons for not using VoIP EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 55 ICT Usage by Greek Accountants Revenue Service (TAXIS NET: www.taxisnet.gr). Forty-three offices used ISDN (Integrated Ser- vices Digital Network), while 53 offices adopted the new ADSL (Asymmetric Digital Subscriber Line) technology (Figure 15). However, four still used simple PSTN (Public Switched Telephone Network) connections via modems; these offices are small and staffed by elderly accountants who did not wish to upgrade their infrastructure. No office used wireless or satellite connections. More than half of the offices used an ADSL connection due to the aggressive policy of the main Greek telecommunication company (OTE). Recently, OTE lowered the price of ADSL, mak- ing it affordable for any office. Correlating these results with their upgrading plans, we see that most of the 53 offices that planned to upgrade their Internet connection used ISDN. Accountants also embraced ADSL technology because it was economically and technically accessible. Figure 13. ICT familiarity and training policy Figure 14. What accountants want from government and chamber EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 56 ICT Usage by Greek Accountants Only three offices had Web sites, which were developed by external personnel and hosted by an ISP server. Most accounting offices did not exclusively employ ICT specialists or an ICT service company, because they believed they needed a Web site only for advertising purposes. However, they did not consider this function es- sential. This conclusion is also supported by the fact that only five offices planned to create Web pages in the near future. As we have mentioned, an accounting office must have an Internet connection for transactions with public services, such as the Inland Revenue Service. Consequently, all offices said the main reason they used the Internet was to communicate with public services and ministries (Figure 16). Thirty-four offices also cited e-banking as a reason for their Internet use. Fifty-eight offices used the Web to find information. They rated the problems that affect their In- ternet use equally (Figure 17). These problems Figure 15. Internet connection type Figure 16. Internet usage reasons EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 57 ICT Usage by Greek Accountants were related to security, complicated technology, Web site cost, loosing time in surfing, communi- cation costs, and slow and unstable data com- munications. Most offices (47) considered these problems serious, 37 considered them fair, and 13 did not care. Therefore, most accountants were hesitant about the Internet. Accounting Software Applications and Services In this section, we report on the accountants’ use of accounting software and related services. The usual work of a Greek accountant is the book keeping of A and B categories. In the Greek market, there are software packages operating in a network environment that are useful for this purpose. These software packages can be used simultaneously by several people, depending on the licence. In 63 offices, such software packages were used by two or more people in a network environment. In the remaining 37 offices, a single person used them. This occurred mainly in small offices. In Greece, all enterprises are obliged to send a VAT (Value Added Tax) statement periodi- cally (every quarter for A & B categories) to the Inland Revenue Service. According to existing legislation, accountants do not have to send these statements electronically via TAXIS NET even if such possibility is provided. Most offices (82) periodically sent the VAT statement electronically, exploiting the electronic services offered by the state. Few offices (18) submitted their statement in person to the Inland Revenue Service. While almost all of these software packages support data exchange with MS Office, no office used this feature. The accountants may not have known about this possibility or did not need it. Although these software packages could be upgraded via the Internet, in real time (live update), most offices (61) did not download the new ver- sions. They may have not been familiar with this process, or they did not know it existed. On the other hand, 26 offices checked for new versions once per month, and 13 offices did so daily. When we examined the types of printers used to print out reports from these software packages, we found that 92 offices used all varieties. Eighty-nine did this daily and three did weekly. The remaining eight offices, which are small offices, owned and used only one printer (Figure 18). Figure 17. Internet problems evaluation EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 58 ICT Usage by Greek Accountants Next, we investigated the book keeping of C category. Large enterprises, with high turnover, must keep C category books. Thus, the book keeping of C category is mainly done by large offices with much experience. Regarding the si- multaneous use of software packages by two or more people, we have the same results as the book keeping of A and B categories, that is, accountants used networking technology. Sixty-three offices used this technology daily and 37 never. In these 37 offices, offices were included that did not serve customers of the C category. None of the offices used the software’s ability to connect to MS Office. For C category book keeping, accountants must frequently update their software packages. In terms of upgrading via the Internet in real time, 53 offices never updated in this manner, 13 monthly, 5 weekly, and 29 daily. Regarding printing work related to C category book keeping, 66 offices, with many of these customers, printed daily. However, 28 offices did not have such customers and therefore did not need to print this work, 3 offices printed a few times per month because they had one or two such customers, and 3 offices printed a few times per week (Figure 19). Only eight offices used CRM (Customer Re- lationship Management) systems daily, and the remaining 92 offices did not know about CRM. These eight offices were mainly large offices with many customers. Similarly, only the two large enterprises used ERP (Enterprise Resource Plan- ning) systems daily (Figure 20). Only large com- panies with a specialized accountants’ section used ERP. On the matter of payroll services in Greece, all enterprises that pay personnel are obliged to send the APS (Analytic Periodical Statement) to the Organisation of Social Security (IKA) every month. IKA offers accountants multiple ways to submit this statement. Currently, the two most popular methods are: 1) creating a compatible file using the payroll program and sending it to IKA, and 2) typing the elements into suitable forms on the Web site of IKA (www.ika.gr) and completing the sending of APS (Analytic Periodical State- Figure 18. A’ & B’ books category services usage EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 59 ICT Usage by Greek Accountants ment). The first method is used by 92 offices monthly (Figure 21). The second method is used by 71 offices monthly. Eight offices did not use any payroll software. Three offices upgraded their payroll software online daily, 87 monthly, and 10 never. Concerning electronic communication with banks or other institutions of social insurance (as well as the exchange of electronic data), 79 (re- spectively 82) offices never had such interactions, 10 (respectively 8) monthly, and 11 (respectively 10) daily (Figure 21). Figure 19. C’ books category services usage Figure 20. ERP, taxation software and CRM Services usage EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 60 ICT Usage by Greek Accountants Ninety offices used Windows-based account- ing software whereas only three used the old DOS-based software. Greek accounting software companies helped by adapting their products to new technological innovations. Figure 22 shows the specific accounting software programs offices used. UNION is used by 37 offices, while SINGULAR is used by 24. EPSILON-net is a powerful program, but it is more expensive; therefore, it is used by only 12 big companies. However, accounting offices did not utilize the new ways of upgrading their software. Sev- enty-nine upgraded via post (CD) (Figure 23). Although new technology is available, many of- fices insisted on using old methods. Eight offices upgraded their software directly via the Internet (live update) over a broadband Internet connec- tion, and 34 offices upgraded after downloading and installing the update file. The accountants kept themselves informed about new developments in their profession via multiple means. Ninety-two offices read peri- odicals, 53 offices read TaxHeaven (www.gus. gr), 37 offices read e-Forologia (www.e-forologia. gr), 26 offices read the online e-magazine EPSI- LON7 (http://www.epsilonnetwork.gr/epsilon7), and 29 offices were informed by discussions in various forums (Figure 24). Thus, many accoun- tants were informed not only through traditional written press but also via the Internet. Figure 21. Payroll services usage Figure 22. Program’s brands that accountants use EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 61 ICT Usage by Greek Accountants As we have reported, many accountants used the new e-services provided by TAXIS NET. Although sending VAT statements regarding the A and B book keeping categories electronically is not mandatory, 92 offices did in this manner. Also, 95 offices sent their customers’ final Taxa- tion Statements to TAXIS NET. The accounting offices realized the benefits of using the new online services that the government provided (Figure 25). Finally, Greek accountants were not familiar with the “paperless office” that prevails in the United States. Only two offices created an elec- tronic file for each customer by scanning the forms and storing them in e-files. Also, no office could send invoices to their customers in electronic form. Instead, they preferred to key the invoices’ data into the corresponding software. They did not use these technologies because 76 offices did not consider them to be important, and 50 did not have much time for such work (Figure 26). Finally, almost all offices considered the fol- lowing factors very important for their software packages: convenience of learning, ease of use, reputation of the software’s company, live update ability, specifications and functions, customer support, user friendliness, and online service (Figure 27). Figure 23. Program’s update Figure 24. Frequent profession’s informing EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 62 ICT Usage by Greek Accountants Figure 25. Greek government services (TAXIS NET) usage Figure 26. Reasons of not using “paperless Office” Figure 27. Software evaluation criteria EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 63 ICT Usage by Greek Accountants CONCLUSION The purpose of this study was to provide insights into the level of ICT use by the accounting offices in a Greek county. The Greek state provided various e-govern- ment services to accountants, which urged the accounting offices to use and develop an ICT infrastructure. Various Greek public organizations provide e-services. For example, the Ministry of Finance has the Web site for TAXIS NET (www. taxisnet.gr) and the Ministry of Employment pro- vides the Web site for IKA (www.ika.gr). These e-government services help accounting offices to save time and better serve their customers. The findings from this survey show that the accounting offices in a Greek county kept pace with ICT technological innovations. For example, Internet was widely used by them. However, elderly accountants seemed to be more resistant to adopt the new technologies. Briefly, the positive points were the following: • Many (63) offices set up a LAN, and 29 of the remaining offices planned to do so in the future. The accountants recognized the benefits of having a LAN in their en- terprise. Software companies helped with this implementation by allowing their pro- grams to be used in a network environment without extra cost. • All the offices had antivirus programs for their PCs. • Few (18) offices faced viruses’ problems during the past year. • Many (58) offices did not face any prob- lems using ICT. • Many (82) offices used the electronic sub- mission of VAT (in A and B category book keeping) via TAXIS NET, which is not mandatory. The negative points were the following: • Few (26) offices used separate file servers to store their data. • Few (12) offices used complete backup systems for their data. • Only 79 offices backed up their data daily. • Very few (2) offices had a complete image backup of their hard disk. • Very few (4) offices used VoIP for small time duration. They said this service was unreliable, and they did not have much in- formation regarding how to use it. • Many (43) offices still used the old ISDN Internet connection, although the prices of ADSL had fallen enough to be economi- cally comparable with ISDN. • Very few (3) offices developed their own Web site. • Very few (8) offices used CRM programs for daily operations. • Still, 3 offices used DOS-based profession- al applications. • Many (79) offices upgraded their software packages via post (receiving the upgrades in a CD), although almost all software packages had live update ability. • Very few (2) offices created electronic files of their customers’ documents (paperless office). Although there were two open questions, many accountants did not make any suggestions but the following suggestions were made: • Enable direct and complete interconnec- tion between their software programs and the public e-services of the Inland Revenue Service (TAXIS NET) and the Organisation of Social Security (IKA) without having to type the same data into forms on the these Web sites. Currently, this ability is provid- ed for some services. • Provide the possibility of sending a cus- tomer’s first VAT statement electronically. Currently, a new customer should record EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 64 ICT Usage by Greek Accountants his first statement in person with the Inland Revenue Service. Afterward, he can send the statements electronically. • Provide the possibility of sending the liq- uidation VAT statement electronically via the Internet. Currently, a pilot project of- fers this ability. • Training on accounting software should be offered by the software companies not only in Athens (the capital of Greece) but also in the province. Limitations of this study include the specific province and country sample of the accounting offices. A future study could cover all Greek regions, as well as other countries. Also, a cross- sector comparison with enterprises in other service professions could be made. Nevertheless, we hope that the results of this study provide an insight into the use ICT and electronic services by Greek ac- countants. These results could be a starting point for further research in this area. REFERENCES Anders, S. B., & Fischer, C. M. (2004). A hard look at tax software: 2004 survey of New York State practitioners. The CPA Journal. Retrieved October 14, 2006, from http://www.nysscpa.org/ cpajournal/2004/704/infocus/p18.htm Anderson, T., Fox, M., & Schwartz, B. N. (2005). 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Journal of Accoun- tancy, 195(4), 28. Zarowin, S. (2004). Top tools for CPAs: Technol- ogy products that make your work go faster and smoother. Journal of Accountancy, 194(5), 26. Zarowin, S. (2006). Rate yourself in the paper- less race: Have you overcome your resistance to the new technology? Journal of Accountancy, 201(5), 50–54. This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 1, edited by John Wang, pp. 49-70, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 66 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 5 INTRODUCTION The healthcare industry has grown rapidly over the past three decades and projected growth is likely to continue or even expand in the coming decades. As a result it is facing significant challenges on a number of fronts: healthcare reimbursement is decreasing, demand for larger volumes of health- care services, and increased pressure to publicly report quality data are a few of the factors driving change. While the healthcare industry has been slow to adopt technology, it will be forced to do so in the coming decade to meet not only the Umit Topacan Bogazici University, Turkey A. Nuri Basoglu Bogazici University, Turkey Tugrul U. Daim Portland State University, USA Exploring the Adoption of Technology Driven Services in the Healthcare Industry ABSTRACT Recent developments in information and communication technologies have helped to accelerate the diffusion of electronic services in the medical industry. Health information services house, retrieve, and make use of medical information to improve service quality and reduce cost. Users—including medical staff, administrative staff, and patients—of these systems cannot fully benefit from them unless they can use them comfortably. User behavior is affected by various factors relating to technology characteris- tics, user characteristics, social environment, and organizational environment. Our research evaluated the determinants of health information service adoption and analyzed the relationship between these determinants and the behavior of the user. Health information service adoption was found to be influ- enced by service characteristics, user characteristics, intermediary variables, facilitating conditions, and social factors. DOI: 10.4018/978-1-4666-0044-7.ch005 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 67 Exploring the Adoption of Technology Driven Services in the Healthcare Industry known challenges identified above but also other challenges that have not yet been identified in this rapidly changing marketplace. Health expenditures per capita, as a percent of gross domestic product (GDP), doubled between 1970 and 2001 in the United States for a total ex- penditure of $14.1 trillion in 2001 (Levit, Smith, Cowan, Lazeby, Sensening, & Catlin, 2003). This growth is driven by a number of factors, the primary drivers being increased demand for healthcare services and increasing cost of services. The number of Americans over the age of 65 is projected to increase by a factor of 2.5 by 2040 (Lee & Tuljapurkar, 1994). As a result of improved economic and technical environments, these “baby boomers” will not only increase the total volume of healthcare services provided (Reinhardt, 2000) but also drive the type of healthcare services re- quired. Baby boomers also have more disposable income than previous generations and as a result elect to have more elective procedures than any generation before them (Knickman, Hunt, Snell, Marie, Aleczih, & Kennell, 2003). In the healthcare sector, electronic information and communication technologies are intensively used to provide and support healthcare operations (Hsieh, Hjélm, Lee, & Aldis, 2001). However, compared to other industries diffusion of such technologies have been slow in the healthcare sector. This article focuses on this problem and identifies factors that may influence the adoption of such services. Telemedicine, and specifically remote monitoring, was picked as the case to analyze in this paper. Telemedicine systems were deployed in many medical fields. Remote monitoring systems were developed to capture disease specific measurements electronically. For example, data from insulin-dependent diabetes (Biermann, Dietrich, Rihl, & Standl, 2002) and asthma patients (Glykas & Chytas, 2004) are being captured remotely. Also, some systems are used for consultation purposes (Berghout, Eminovic, Keizer, & Birnie, 2007). Therefore, this research will have the follow- ing objectives 1. To search and find major determinants of health information service adoption among users (medical staff, administrative staff and patients) 2. To find individual, social, service and tech- nological components of adoption 3. To assess desirability of a service electronic interface prototype 4. To establish a more general framework that can be tested statistically in future studies In this study, we developed an electronic health service prototype for patients suffering from diabe- tes and obesity where its foundation had been set in preliminary work (Topacan, Basoglu, & Daim, 2008). Patient data is collected through various devices, such as a mobile phone, stethoscope, and glucose meter. Collected data is then stored on a medical server. Healthcare providers can monitor the patients through this system and make sug- gestions as necessary. As a result, we found that health information service adoption decisions of users were influenced by service characteristics, user characteristics, intermediary variables, fa- cilitating conditions, and social factors. LITERATURE REVIEW Adoption Theories Service adoption is influenced by various factors including user characteristics and requirements, service characteristics, and social factors. During the past decades, many theoretical models were developed by researchers to explain the human behaviors in the adoption process. Theory of Reasoned Action (TRA) (Fishbein & Ajzen, 1975) is one of the well known models. Fishbein and Ajzen (1975) used two main constructs, namely EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 68 Exploring the Adoption of Technology Driven Services in the Healthcare Industry attitude toward behavior and subjective norm, to predict the behaviors. Following the TRA model, many researchers attempted to expand it by adding new constructs or by applying it in different contexts. Theory of Planned Behavior (TPB) (Ajzen, 1991) was developed by adding perceived behavioral control to the TRA (Figure 1). Technology Acceptance Model (TAM) (Davis, 1989) was applied in the IS context to predict technology acceptance. TPB and TAM (Figure 2) are just two of such models expanding TRA. According to Davis (1989), two fundamental determinants of system use are perceived ease of use and perceived usefulness. The relative strength of usefulness-utilization relation is stronger than that of the relationship between ease of use and utilization (Davis, 1989). These findings are validated in many different studies (Venkatesh & Davis, 2000; Chau & Hu, 2002). Healthcare Systems Healthcare providers use various technologies to decrease cost, increase access to healthcare and improve quality in the medical services (Gagnon et al., 2003). Telemedicine is one of these tech- nologies that enable “remote medical procedures and examinations between patients and medical providers via telecommunication technologies such as the Internet, or telephone” (Al-Qirim, 2007). Chau and Hu (2002) studied healthcare professionals’ decisions regarding acceptance of telemedicine. They compared TRA and TAM and found that TAM is a more suitable model than TRA in predicting the technology acceptance in the medical sector (Chau & Hu, 2002). Others found factors that influence acceptance of both medical providers and patients. How the service is perceived and used by the users significantly affects adoption process. With the rapid development of telecommunica- tion systems, intelligent monitoring and control systems have become the major application areas of telemedicine. Such applications include ‘Smart homes’ for telecare by means of movement detec- tors, oxymeters, tansiometers, and various other devices (Rialle, Lamy, Noury, & Bajolle, 2003), such as a ring-sensor that monitors patient’s blood oxygen saturation (Yang & Rhee, 2000) and a Web-based electrocardiogram monitoring application facilitating collection, analysis and storage of patient data (Magrabi, Lovell, & Celle, 1999). Many different devices and techniques are used to collect more accurate patient informa- tion. A spoken dialogue system was designed by Giorgino et al. (2005) to test the reliability of a speech recognition system. Finally, compared to traditional patient care, telemedicine systems pro- vide many benefits to the physicians and patients. Brink, Moorman, Boer, Pruyn, Verwoerd, and Bemmel (2005) found electronic health informa- tion and monitoring systems help physicians in early detection of occurring head and neck cancer Figure 1. Theory of planned behavior (Ajzen, 1991) Figure 2. Technology acceptance model (Davis, 1989) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 69 Exploring the Adoption of Technology Driven Services in the Healthcare Industry problems. Telemedicine systems are reported to reduce number of clinic visits significantly (Chae, Lee, Ho, Kim, Jun, & Won, 2001). Factors Influencing Adoption Effort expectancy, defined as “the degree of ease associated with the use of the system,” (Venkatesh, Morris, Davis, & Davis, 2003) is one of the fac- tors related to service characteristics. The more users think that the service is complex to use, the slower their adoption. Also, compatibility, which is defined as “the degree to which an innovation is perceived as being consistent with the existing practices, values, needs and experiences of the healthcare professional,” influences acceptance of information and communication technologies in the case of occupational therapists (Schaper & Pervan, 2003). Besides, availability, quality, and value of the information provided by the service are other important characteristics (Aubert & Hamel, 2001). In addition, some of the adoption factors are related to individual characteristics. Chen, Yang, Tang, Huang, and Yu (2008) studied user specific characteristics such as age, educational level, and job experience to explore the intention of nurses towards Web-based learning. Also, user satisfac- tion which is defined as “the overall evaluation of a user’s experience in using the system and the potential impact of the system,” significantly influences the adoption process (Yusof, Kuljis, & Papazafeiropoulou, 2008). Moreover, users’ in- trinsic motivation about adoption and perceptions about ease of use are influenced by the satisfac- tion of the user with the medical care (Wilson & Lankton, 2004). Apart from service and users, adoption is influenced by the organizational, en- vironmental, or external characteristics as well. Rewarding and financial incentives were found to accelerate adoption of computerized physician order entry with clinical decision support systems (Simon, Rundall, & Shortell, 2007). Gagnon et al. found that social norms are one of the significant predictors of physicians’ intention toward using medical technology (Gagnon et al., 2003). Table 1 summarizes the factors cited in the literature. Table 1. Factors influencing adoption Class Literature User Characteristics Aubert & Hamel, 2001; Bruner & Kumar, 2005; Chang, Hwang, Hung, Lin, & Yen, 2007; Chau & Hu, 2002; Chen et al., 2008; Dishaw & Strong, 1999; Gagnon et al., 2003; Schaper & Pervan, 2003; Thompson et al., 1991; Venkatesh & Davis, 2000; Venkatesh et al., 2003; Wilson & Lankton, 2004; Yusof et al., 2007 Service Characteristics Aubert & Hamel, 2001; Bruner & Kumar, 2005; Chang et al., 2007; Dishaw & Strong, 1999; Karahanna, Straub, & Chervany, 1999; Liu & Ma, 2005; Schaper & Pervan, 2003; Thompson et al., 1991; Tung et al., 2008; Venkatesh & Davis, 2000; Yusof et al., 2008 Ease of Use Aubert & Hamel, 2001; Bruner & Kumar, 2005; Chang et al., 2007; Dishaw & Strong, 1999; Chen et al., 2008; Chau & Hu, 2002; Karahanna et al., 1999; Liu & Ma, 2005; Schaper & Pervan, 2003; Taylor & Todd, 1995; Thompson et al., 1991; Tung et al., 2008; Venkatesh & Davis, 2000; Venkatesh et al., 2003; Wilson & Lankton, 2004 Social Factors Aubert & Hamel, 2001; Chau & Hu, 2002; Karahanna et al., 1999; Schaper & Pervan, 2003; Taylor & Todd, 1995; Thompson, et al., 1991; Venkatesh & Davis, 2000; Venkatesh et al., 2003 Usefulness Aubert & Hamel, 2001; Bruner & Kumar, 2005; Chau & Hu, 2002; Chen et al., 2008; Dishaw & Strong, 1999; Karahanna et al., 1999; Liu & Ma, 2005; Schaper & Pervan, 2003; Taylor & Todd, 1995; Tung et al., 2008; Venkatesh & Davis, 2000; Venkatesh et al., 2003; Wilson & Lankton, 2004; Yusof et al., 2008 Facilitating Conditions Aubert & Hamel, 2001; Chang et al., 2007; Gagnon et al., 2003; Karahanna et al., 1999; Schaper & Pervan, 2003; Thompson, et al., 1991; Venkatesh et al., 2003; EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 70 Exploring the Adoption of Technology Driven Services in the Healthcare Industry METHODOLOGY Research Method Prior to the study, a health information service prototype was developed for patients and their healthcare providers. The service was designed to • Collect patient data via various devices like stethoscope, treadmill, bascule, mo- bile phone • Support collecting patient information and transmitting to the healthcare providers • Facilitate the early detection of health problems by means of monitoring patient data Qualitative research method was applied in the study to analyze the topic and to take advantage of interviewees’ creative ideas and experiences. Semi-structured open-ended questions were asked to the potential users, physicians, and nurses. The interviewee list was prepared such that distribu- tions of gender, age, and work experience were balanced. At the beginning of the interview, inter- viewees were informed about the service with a presentation that takes approximately 5 minutes. After presentations, physicians used the prototype developed for physicians and potential users the one developed for them. Finally, the interview was conducted by asking 14 questions (see Appendix A for questions). In the analysis phase, the following steps have been realized • Interviews’ audio-records were deciphered and written in a file sentence by sentence. • The sentences were examined so that we can extract casual relationships where an outcome is attributed by one or more fac- tors and consequently dependent and inde- pendent variables were set. A sort of modi- fied attribution coding has been realized (Silver, 2004). The variables list also grew out of this conception. • A second expert also repeated the same re- lationship coding. In case of any discrep- ancy, a discussion has occurred to resolve the conflict. • All produced casual relationships that were weighted based on how critical they were perceived by the interviewees. The weight was accepted as 1 by default. If the partici- pant mentioned the same factor more than once or gave special emphasis, the rela- tionship was assigned a score of 1.5. • After content analysis and coding, the rela- tionship scores were summed and divided by total weights, and depicted in Table 5 for further analysis. Proposed Service A home based telemonitoring service was designed for obesity and diabetic patients. The service (Figure 3) mainly consisted of • Hypothetical devices that were capable of sending data via Bluetooth technology ◦ Treadmill for cardio information ◦ Bascule for weight information ◦ Stethoscope for blood pressure ◦ Glucose meter for blood glucose level • Prototype of the patients’ application de- veloped for mobile devices to collect in- formation about patient • Prototype of the physicians’ application developed for mobile devices to get patient information • Prototype of the PC application installed in the desktop computer of physicians to monitor patient status • A medical server to store and manage pa- tient data collected from various sources Both the patients’ and physicians’ prototypes work as follows: EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 71 Exploring the Adoption of Technology Driven Services in the Healthcare Industry The mobile device reads the menu to patient/ physician. The patient/physician selects operation by pronouncing the operation name and saying the keyword “OK.” The service listens the voice of patient/physician and syntheses it. After the service hears “OK,” it goes onto the next step based on the selected operation. Thus, a dialogue occurs between patient/physician and the service. In Appendix B, many typical dialogue examples have been given. Table 2 shows the functions of the electronic service. The proposed system also has reminder ser- vices for both patients and physicians. If the patient takes medicine at regular times, the service warns him or her when this time comes. Also, if the patient does not enter any information at a spe- cific time, the service prompts him or her to enter. Moreover, physicians can define reminders based on specific patient data. As an example, they can define so that the service can warn them when the patient’s blood glucose level decreases to below “3 mmol/l” (dialogue and sample warning texts are in the Appendix B). Developed PC ap- plication prototype enables physician to monitor all of the patient’s data, such as what the patient eats, how much calorie he or she gets, and what exercises he or she does. Figure 4 shows a sample screen of the prototype. In this screen, physicians can generate calorie, fat, protein, blood sugar, and weight graphs of the patient for a specific period. RESULTS Profile of Interviewees Twenty-five people participated in this study. Educational level, age group, gender, computer literacy, and mobile phone experience variables were taken into consideration in the selection process. Age of the interviewees ranged between 22 and 50. Fifteen were female and 10 were male. Educational level of the sample consisted of high school graduates, university graduates, and graduate students. Table 3 contains details about the profile of interviewees. Figure 3. Proposed service Table 2. Menu of the services Patients Menu Physicians Menu - Enter Meal - Enter Information ---- Enter movement or exercise ---- Enter Trauma ---- Enter pain ---- Enter drug ---- Return main menu - Meal Suggestion - Get Calorie Information - Exit. - Calorie Information - Blood Glucose Information - Blood Pressure Information - Exit EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 72 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Findings Service Characteristics Service characteristics should match the user needs and requirements for better performance and effortless adoption (Goodhue, 1995). Content: Potential users attempt to use services that meet their needs and requirements. Thus, required information content differs based on doc- tors’ area of specialization and patients’ disease types in the case of health information services. As an example, general surgery doctors need cardio information and diabetic patients show concern for blood glucose level. One of the comments was: …As a general surgeon, I do not care what patient eats or drinks. I just care about his/her blood pressure, electrocardiogram … if I were an internal specialist; I probably would use the service because information content fits with an internal specialist’s or a dietician’s data require- ments (Male, Doctor, 32). An anesthesia expert said the following about the content; … I do not care about the weight, the calories, or the blood pressure. Pruritus, headache, and nausea information are more useful in my profes- sion (Female, Doctor, 32). Users think that appropriate, comprehensive, and quality content improve the usefulness of the service. The relationship between content quality and usefulness is also supported in the literature (Ozen & Basoglu, 2006). Figure 4. PC application screen Table 3. Interviewees’ profile Number Average Age (in years) Computer Experience (in years) Mobile Phone Experience (in years) Doctor 6 40 18 10 Nurse 2 32 8 7 Potential User 17 27 10 9 Total 25 31 12 9 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 73 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Cost: One of the major predictors of behavior intention to use an IS system is the perceived cost (Mathieson, Peacock, & Chin, 2001). Tung, Chang, and Chou (2008) defined cost as the mon- etary expense for using the electronic information system. It negatively affects the adoption of the service. One of the participants said the following: … my usage preference of the service depends on the cost of it. If it costs much, I do not prefer to use it (Male, Potential User, 25). Another comment is given below: If the cost of using the service exceeds the cost of visiting a doctor, I prefer face-to-face communica- tion with a doctor (Female, Potential User, 23). Based on the participants’ comments, the more costly the service, the less people prefer to use it. Thus, the findings about the cost were parallel with the literature (Tung et al., 2008). Sound quality: The voice used in the mobile device to communicate with the patient/physi- cian was that of a mechanical male. Most of the participants disliked the voice and proposed a more human one. The voice of the service is mechanical and hoarse. Sometimes, it is very difficult to understand what it says (Female, Potential User, 30). Also, another comment from a participant: It should be a female voice (Male, Potential User, 30). Participants are more comfortable with a non- mechanical female voice in the conversation with mobile device. Security: Security affects the adoption of IT services (Cheng, Lam, & Yeung, 2006). Security is the condition of protecting user specific data against others. Security is very important for me. I do not prefer to share the data that shows my health status with others (Male, Potential User, 47). Mobility: Users can benefit from a mobile service anywhere at any time. According to Klein- rock (1996), two of the well-known dimensions of mobility are time and place independence. What participants said about the mobility also supports these findings. Especially, doctors pay more attention to the mobility characteristics of the service in the adoption process because they could reach patient data even if they were outside of the hospital. One of the doctors commented about mobility: I may refer this service to my colleagues because doctors can monitor their patients on the week- ends and holidays. You are not confined to office hours to access the patient information (Female, Doctor, 32). Mobility affects usefulness of the service in a positive way. Another comment about mobility indicated: … there are similar services on the Internet. You enter what you eat to the application and it calculated how many calories it has. The most significant advantage of the proposed service is that it can be used in a mobile device. You can get advice whenever you need” (Female, Doctor, 37). Thus, mobile applications were found more useful by the potential users because they could use these applications whenever the need arose. Time factor: Time factor is a person’s belief about the time spent interacting with the service and the response time of the service concerning patient status. If entering data to the service takes too long, users prefer seeing the doctor. Biermann et al. (2002) also found that 30% of the patients prefer entering extra data into a system if it is not time-consuming. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 74 Exploring the Adoption of Technology Driven Services in the Healthcare Industry … the time I spend during data entrance affects my usage decision. If I spend a lot of time while entering information about me, I would not pre- fer using it. I visit the doctor instead of using it (Female, Potential User, 23). Participants emphasized that time is a signifi- cant factor that affects adoption. Thus, designers should develop services that do not require much time. Users do not prefer to spend much time using the service. User Characteristics Health status: With some health conditions, like chronic illness, patients need more healthcare than normal conditions. Although Wilson and Lankton (2004) did not find a strong relationship between patients’ healthcare need and intention to use provider-delivered e-health, participants in the study would use an e-health service if they had a disease. I do not need to use the service because my health status is good. However, I wish to use it on account of ill health (Male, Potential User, 47). Age: Behavior of the user toward computer use is also influenced by the user’s age (Liu, Pothiban, Lu, & Khamphonsiri, 2000). Chen et al. (2008) studied age as a determinant of intention of nurses toward Web-based learning. Others examined age as a moderator variable in the technology adop- tion context (Chau & Hu, 2002; Venkatesh et al., 2003). The following is one of the participants’ comments about age: I do not need the help of others while using the service. I think all of the doctors can use it except aged ones (Male, Doctor, 50). In the study, it was found that both potential users and doctors considered age as a factor that affects effortless use of the service. It is a general belief that older people would have difficulties adopting or using a technological device. Users’ time constraint: Participants think that people who do not have enough time to visit a doctor may prefer to use the service. Hard-working people who do not spare time to visit a doctor, but they want to be under control of the doctor may prefer to use (Male, Potential User, 47). Subsequently, in addition to service-related time factors like quick data entry and rapid response, users’ time limitations also affect the attitude of users toward using health services. Intermediary Characteristics Usefulness: Usefulness is the key determinant of attitude in the technology acceptance research field. Davis (1989) defined usefulness as “the degree to which a person believes that using a particular system would enhance his or her job performance,” and found that usefulness is the strongest predictor of behavioral intention. Many researchers support Davis’ findings about use- fulness (Taylor & Todd, 1995; Venkatesh et al., 2003). Venkatesh et al. (2003) called usefulness as performance expectancy and defined it as “the degree to which an individual believes that using the system will help him or her to attain gains in job performance.” One of the comments of the participants about usefulness is: I ask people who use the service for its functional- ities and try to understand how I can benefit from it in my job. Then, I make a decision whether or not to use the service (Female, Nurse, 25). Another comment: If I think that information given from the service is useful for me, I start using the service (Male, Potential User, 25). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 75 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Many comments were about the usefulness of the service. Therefore, it can be said that health information service users pay great attention to how the service would improve their job perfor- mance. These findings are in parallel with previous research findings (Davis, 1989; Taylor & Todd, 1995; Venkatesh et al., 2003). Ease of use: Perceived ease of use (EoU) de- fined as “the degree to which a person believes that using a particular system would be free of effort” is one of the core constructs in TAM (Davis, 1989). Significant effect of EoU on behavior intention was also confirmed by many other researchers (Taylor & Todd, 1995; Venkatesh & Davis, 2000). Moreover, comments of potential users about the EoU supported these findings. Two of these com- ments are given below: There are some questions in my mind. One of them is about ease-of-use. Effortless use of the service affects my intention about service usage (Male, Potential User, 25). … the more the service is simple and easy to use, the more people will intend to use it (Male, Doctor, 50). Social Influence Social influence contains three main constructs: subjective norms defined as “The person’s per- ception that most people who are important to him think he should or should not perform the behavior in question” (Ajzen, 1991), social factors, which is “The individual’s internalization of the reference group’s subjective culture, and specific interpersonal agreements that the individual has made with others, in specific social situations” (Thompson, Higgins, & Howell, 1991), and im- age defined as “The degree to which use of an innovation is perceived to enhance one’s image or status in one’s social system” (Moore & Benbasat, 1991; Venkatesh et al., 2003). In the study, eight of the interviewees answered the question that stated “Do you attempt to use the service if you notice someone who uses it?” as follows: I try the service if I see someone who uses it (Male, Doctor, 50). In the study, participants referred to the subjec- tive norms and image constructs of social influ- ence. People are influenced by others’ opinions and behaviors. People may use a service if he or she believes that becoming one of the service users will improve his or her social status. Facilitating Conditions User guidance: In the previous studies, facilitat- ing conditions were found significant when they were examined with intermediary variables like age or experience. For example, it was found that they only matter for older users (Venkatesh et al., 2003). However, in the research, participants did not mention age or other variables when talking about the facilitating conditions. They indicated that all of the users need some help to use the service: Users may need a user’s guide that explains how to use the service (Female, Potential User, 22). DISCUSSION As a result of the data gathered through these interviews, we propose a health service adop- tion taxonomy, which is shown in Figure 5 and the weights of variables in Table 4. It has been produced with the constructs that were found significant by the participants and researchers cited in this article. According to the taxonomy, health service adoption has five main aspects: service charac- teristics, user characteristics, intermediary vari- ables, social factors, and facilitating conditions. Three of these aspects contain some subcategories. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 76 Exploring the Adoption of Technology Driven Services in the Healthcare Industry While cost, content, sound quality, security, mo- bility, and time factor constitute subcategories of the service characteristics, health status, age, and time constraint compose users’ sub categories. Usefulness and EoU are two of the intermediary variables. Finally, a theoretical framework is developed (Figure 6). This framework draws upon both prior research, such as TAM and TRA, and the findings of this study. A larger scale data would help us to test the relationship proposed in this framework. We found that service characteristics have more impact on usefulness when compared with other variables. Rich and accurate content were indicated to be more useful by the interviewees. Also, two of the participants said that the service Figure 5. Proposed health service adoption taxonomy Table 4. Weights of health service adoption tax- onomy Class Study Service Characteristics 55% User Characteristics 26% Intermediary 8% Social Factors 6% Facilitating Conditions 5% Figure 6. Propositions for future research EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 77 Exploring the Adoption of Technology Driven Services in the Healthcare Industry capabilities, such as reminders for medicine time, make the service more useful. Mobility offers advantages to the service by enhancing job per- formance of the doctors as well. Variables in Table 5 are collected from 17 different technol- ogy acceptance and adoption papers (see Table 1 for details), and grouped according to relevant classes. Then, occurrence number of these class- es has been determined to calculate the percentage values in the literature column in Table 5. Values in the study column in Table 5 are computed by dividing sum of weights of each class studied in this paper to the grand total weight of these classes. According to Table 5, classes are examined equally in the literature. However, most of the comments in this study were about the service characteristics, indicating a major need to research service characteristics. When we examined the data acquired from the interviews (see Appendix C), we observed further implications of our findings. These impli- cations can be interpreted as future propositions as listed in Table 6. These propositions will need to be tested with further data collection. CONCLUSION This article contends that health information service adoption decisions of users are influenced by service characteristics like cost, content, sound quality, security, mobility, and time factor; user characteristics like health status, age, and users’ time constraint; social factors; and facilitating conditions like user guidance. In line with previ- ous technology adoption studies, usefulness and ease of use are found two significant determinants of user behavior. Based on the findings, electronic health service designers and developers may focus on financial cost of the developed service. The cost of the service should be less than the cost of visiting a doctor. Moreover, content of the service should be related to the doctors’ profession and users’ requirements. Users attach importance to reach accurate, relevant, and quality information in a minimum response time. Another implication is that security and time factors should be taken into consideration when designing such services. Us- ers do not prefer using services that are insecure and require a lot of time. Also, similar to prior research (Tung et al., 2008; Venkatesh & Davis, 2000), people intend to use systems that are ef- fortless and improve job performance of the user. For future study, a comprehensive quantitative research with large sample size can be conducted to test validity of the results. Proposed prototype can be expanded by adding new functionalities and capabilities to examine their affect on the health service adoption process. Table 5. Literature and study comparison Class Literature Study User Characteristics 24% 26% Service Characteristics 21% 55% Ease of Use 16% 3% Social Factors 15% 6% Usefulness 15% 5% Facilitating Conditions 9% 5% Table 6. Propositions developed for future study Ease of Use is influenced by the following attributes of the health services: user guidance, sound quality, age, and language. Usefulness is influenced by the following attributes of the health services: content, service capability, mobility, and job fit. Attitude of the potential users is influenced by the following attributes of the health services: cost, health status, social influence, useful- ness, content, users’ time constraint, and security. Content quality is influenced by the following attribute of the health services: communication standards. Service quality is influenced by the following attribute of the health services: sound quality, communication standards, and language. 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According to you, which functionality/properties of the service are beneficial? b. In your opinion, which functionality/properties of the service are inadequate? 3. Do you advise the service to your colleagues and friends? a. According to you, which functionality/properties of the service do you advice? b. According to you, which functionality/properties of the service do not you advice? 4. If you encounter someone who uses the service, do you attempt to use it? 5. What do you think about the one that uses the service? 6. Did you need help while using the service? a. If you need, in which part of the service do you need help? 7. Do you think the service is ease of use? What type of difficulties did you encounter while you were using the service? 8. Is the information given by the service useful? Which information is the most useful for you? 9. Do you suggest any extra information for the service? 10. How much money would you want pay for using the service? 11. Do you mind privacy and security of your data stored in the service? 12. Do you think that people intend to use this service? In your opinion, who are the people that need this service at most? 13. What do you think about the interface’s sound used in the service? 14. Do you have any additional comment for the proposed service? APPENDIX B: DIALOGUE BETWEEN PATIENT/PHYSICIAN AND THE SERVICE Patient Dialogue Service: Hello. What is your username? Patient: Tiger (okay) Service: Enter your password. Patient: Enter 1224 (okay) Service: Select your operation. Enter Meal, Enter Information, Meal Suggestion, Get Calorie Informa- tion, Exit. Patient: Enter Meal (okay) Service: What did you eat or drink? Patient: I eat hamburger (okay) Service: How much you eat or drink Patient: One (okay) Service: Do you eat or drink anything else? EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 82 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Patient: Yes (okay) Service: What did you eat or drink? Patient: I drink coke (okay) Service: How much you eat or drink? Patient: I drink one bottle (okay) Service: Do you eat or drink anything else? Patient: No (okay) Service: Select your operation. Enter Meal, Enter Information, Meal Suggestion, Get Calorie Informa- tion, Exit. Patient: Meal Suggestion (okay) Service: You can eat 1 Cups of Spaghetti, 3/4 Cup Tossed Salad, 1 Cup Apple Juice. Do I repeat or return main menu. Patient: Repeat (okay) Service: You can eat 1 Cups of Spaghetti, 3/4 Cup Tossed Salad, 1 Cup Apple Juice. Do I repeat or return main menu. Patient: Return main menu (okay) Service: Select your operation. Enter Meal, Enter Information, Meal Suggestion, Get Calorie Informa- tion, Exit. Patient: Enter Information (okay) Service: Select your operation. Enter movement or exercise, Enter Trauma, Enter pain, Enter drug, Return main menu Patient: Enter Pain (okay) Service: What is your pain? Patient: I have headache and chest pain (okay) Service: Select your operation. Enter movement or exercise, Enter Trauma, Enter pain, Enter drug, Return main menu Patient: Enter movement or exercise (okay) Service: What type of movement or exercise you did? Patient: Today, I run 3000 meters and ride a bicycle 6000 meters. Service: Select your operation. Enter movement or exercise, Enter Trauma, Enter pain, Enter drug, Return main menu Patient: Enter drug (okay) Service: Enter drug information. Patient: I get one sulfonylurea.(okay) Service: Select your operation. Enter movement or exercise, Enter Trauma, Enter pain, Enter drug, Return main menu Patient: Return Main Menu (okay) Service: Select your operation. Enter Meal, Enter Information, Meal Suggestion, Get Calorie Informa- tion, Exit. Patient: Get Calorie Information (okay) Service: Today you got 4200 cal and you can got 1000 more in today. Do I repeat or return main menu. Patient: Return main menu (okay) Service: Select your operation. Enter Meal, Enter Information, Meal Suggestion, Get Calorie Informa- tion, Exit. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 83 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Patient: Exit Service: Bye bye Warning to Take Medicine Service: Hello Mrs. James. This is a reminder service of the Medical Record Server. It is time to take sulfonylurea. Bye Bye. Warning to Enter Information Service: Hello Mrs. James. This is a reminder service of the Medical Record Server. You do not enter any information to the system last 8 hours. Thank you. Bye Bye. Physician Dialogue Service: Hello. What is your username? Physician: Tiger (okay) Service: Enter your password. Physician: Enter 1224 (okay) Service: Select your operation. Calorie Information, Blood Glucose Information, Blood Pressure In- formation, Exit Physician: Calorie Information (okay) Service: What is your patient name? Physician: Peter Brown (okay) Service: Peter Brown got 3000 calories in today. He can take 1230 more calories. Do I repeat or return main menu. Physician: Return main menu (okay) Service: Select your operation. Calorie Information, Blood Glucose Information, Blood Pressure In- formation, Exit Physician: Blood Glucose Information (okay) Service: What is your patient name? Physician: Mary Brown (okay) Service: There are two Mary Brown. What is the birth date of Mary Brown? Physician: 4th of April (okay) Service: Blood glucose of Mary Brown is 6 mmol/l and recorded at 10:00 am in today. Do I repeat or return main menu. Physician: Repeat Service: Blood glucose of Mary Brown is 6 mmol/l and recorded at 10:00 am in today. Do I repeat or return main menu. Physician: Return main menu (okay) Service: Select your operation. Calorie Information, Blood Glucose Information, Blood Pressure In- formation, Exit Physician: Exit Service: Bye Bye EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 84 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Warning to Physician Service: Hello Mr. James. This is an alert service of the Medical Record Server. Blood Glucose level of patient Mary Brown decreases under 3 mmol/l. Bye Bye. APPENDIX C: DATA EXTRACTED FROM THE INTERVIEWS (TABLE 7) Table 7. Class Independent Content Quality Service Quality Ease of Use Usefulness Attitude Grand Total No. % No. Percent No. Percent No. Percent No. Percent No. Percent Service Character- istics Communica- tion standards 2 0.71% 2 0.71% 4 1.42% Service Character- istics Sound Quality 5 1.77% 8 2.84% 13 4.61% Service Character- istics Language 2 0.71% 5 1.77% 7 2.48% Service Character- istics Accurate Input 1 0.35% 2 0.71% 3 1.06% 6 2.13% Service Character- istics Output Qual- ity 1 0.35% 2 0.71% 2 0.71% 5 1.77% User Char- acteristics User Involve- ment 1 0.35% 2 0.71% 2 0.71% 5 1.77% Service Character- istics Customizable 1 0.35% 1 0.35% 2 0.71% Facilitating Conditions User Guid- ance 10 3.55% 10 3.55% User Char- acteristics Age 7 2.48% 8 2.84% 15 5.32% Service Character- istics Input Type 4 1.42% 3 1.06% 7 2.48% User Char- acteristics Experience 4 1.42% 3 1.06% 7 2.48% Service Character- istics Input Quan- tity 3 1.06% 1 0.35% 4 1.42% Service Character- istics Sound 3 1.06% 1 0.35% 4 1.42% continues on following page EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 85 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Service Character- istics Length of Menu Items 3 1.06% 0.35% 3 1.06% User Char- acteristics Tech-savvy 2 0.71% 5 1.77% 7 2.48% Facilitating Conditions Help Button 2 0.71% 2 0.71% 4 1.42% Service Character- istics Device Type 2 0.71% 2 0.71% Service Character- istics Service Com- plexity 1 0.35% 1 0.35% 2 0.71% Service Character- istics Input Quality 1 0.35% 1 0.35% Service Character- istics Content 16 5.67% 12 4.26% 28 9.93% Service Character- istics Service Capa- bilities 5 1.77% 2 0.71% 7 2.48% Service Character- istics Mobility 3 1.06% 6 2.13% 9 3.19% Service Character- istics Job Fit 3 1.06% 4 1.42% 7 2.48% Service Character- istics Rapid Re- sponse 1 0.35% 1 0.35% 2 0.71% Service Character- istics Service Ac- curacy 1 0.35% 1 0.35% 2 0.71% Service Character- istics Cost 16 5.67% 16 5.67% User Char- acteristics Health Status 16 5.67% 16 5.67% Social Influ- ence Social Influ- ence 15 5.32% 15 5.32% Intermedi- ary Usefulness 14 4.96% 14 4.96% User Char- acteristics Users’ Time Constraint 9 3.19% 9 3,19% Service Character- istics Security 1 0.35% 9 3.19% 10 3,55% Class Independent Content Quality Service Quality Ease of Use Usefulness Attitude Grand Total No. % No. Percent No. Percent No. Percent No. Percent No. Percent Table 7. Continued continues on following page EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 86 Exploring the Adoption of Technology Driven Services in the Healthcare Industry Service Character- istics Time Factor 8 2.84% 8 2.84% Service Character- istics Face-to-face Communica- tion 6 2.13% 6 2.13% Intermedi- ary Ease of Use 1 0.35% 1 0.35% 6 2.13% 8 2.84% User Char- acteristics Income 4 1.42% 4 1.42% User Char- acteristics Educational Level 3 1.06% 3 1.06% User Char- acteristics Gender 3 1.06% 3 1.06% User Char- acteristics Requirement 3 1.06% 3 1.06% Social Influ- ence Image 2 0.71% 2 0.71% Service Character- istics Service Qual- ity 1 0.35% 1 0.35% User Char- acteristics Trust 1 0.35% 1 0.35% Grand Total 2 0.71% 15 5.32% 55 19.50% 37 13.12% 173 61.35% 282 100.00% This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 1, edited by John Wang, pp. 71-93, copyright 2010 by IGI Publishing (an imprint of IGI Global). Table 7. Continued Class Independent Content Quality Service Quality Ease of Use Usefulness Attitude Grand Total No. % No. Percent No. Percent No. Percent No. Percent No. Percent EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 87 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 6 DOI: 10.4018/978-1-4666-0044-7.ch006 Roslin V. Hauck Illinois State University, USA Sherry M. B. Thatcher University of Louisville, USA Suzanne P. Weisband University of Arizona, USA Temporal Aspects of Information Technology Use: Increasing Shift Work Effectiveness ABSTRACT The dynamic nature of organizations and technologies require a comprehensive understanding of how organizational forms and information technology interact. While previous research and theories of in- formation technology have investigated aspects such as organizational structure, individual and group behavior, and inter-organizational relationships, shift work, an important temporal aspect often found in service organizations, is surprisingly absent in the literature. The purpose of this paper is to examine the effect that shift work has on employee use and satisfaction with information technology. The results of a field study of a police organization indicate that information technology systems are valued differ- ently by workers on different shifts. The authors discuss how this research helps advance theories of technology use and effectiveness (such as task-technology fit and technology acceptance model) and present important practical implications of this study for strategic alignment of technology in the areas of systems design, implementation, addressing the needs of peripheral workers, and resource management. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 88 Temporal Aspects of Information Technology Use INTRODUCTION The dynamic nature of organizations and technolo- gies necessitate that we develop a comprehensive understanding of how organizational forms and information technology interact to affect work. While previous research and theories of informa- tion technology have investigated aspects such as organizational structure, individual and group behavior, and inter-organizational relationships, an important temporal aspect of service organi- zations, shift work, is surprisingly absent in the literature. Although studies have investigated many as- pects of shift work, the majority of these studies have not considered relatively recent organiza- tional changes. Perhaps one of the biggest changes that we have seen in organizations is in the use of information and communication technology to enable new ways of working. For example, prior to the introduction of email, the Internet, and knowledge management systems, night shift workers were limited with regard to the people and resources that they were able to access, most of which operated on a 9-to-5 schedule. Now, night shift workers are able to utilize different technologies to access resources that were not previously available to them. Thus, this research examines how information technology unleashes the potential to leverage shift work in a way that has not yet been studied. In May 2004, more than 17.7% of wage and salary workers, or approximately 21 million employees in the United States worked alterna- tive shifts that at least partially fell outside of the standard working hours (i.e., hours other than 9am- 5pm) (McMenamin, 2007). Shift work in general refers to a schedule of work that falls outside the standard daytime working hours (Spurgeon & Cooper, 2000). Shift work is most prevalent in organizations providing 24-hour services. For example, it is estimated that 55% of protective service employees, 42% of employees in food services, 37% of employees in transportation services, and 36% of health service employees are shift workers (Beers, 2000). With the increased need for organizations to work effectively across time zones in the international arena (Holsapple, Luo, & Morton, 2000) and given the advent of technologies that support work without temporal boundaries, shift work has become a more preva- lent means of work in all types of organizations (Fandray, 2000). Thus, it is imperative to under- stand the relationship between shift work and information technology use. There is considerable literature on the effects of shift work on a number of different types of physiological, organizational, and social variables (Furnham & Hughes, 1999). Research on the re- lationship between shift work and physiological outcomes has shown that night shift workers are more likely to suffer from sleep problems, body function problems, and gastrointestinal disorders than day shift workers (e.g., Bøgglid, Burr, Tüch- sen, & Jeppesen, 2001; Morshead, 2002; Oexman, Knotts, & Koch, 2002). Studies looking at shift work and organizational variables have shown that working the night shift is related to job dis- satisfaction (Barton, 1994; Furnham & Hughes, 1999) and job stress (Barton & Folkard, 1991; Kandonlin, 1993). Night shift workers also suffer more familial and home conflicts (e.g., Dunham, 1977; Demerouti, Geurts, Bakker, & Euwema, 2004) as community and life activities are often built around a traditional 9-5 day. While the effects of shift work on physiological, organizational, and social variables have been studied, there is little in the literature examining the relationship between shift work and information technology use. Thus, we are interested in exploring the effects that a shift system has on information technology use and productivity. To frame our examination of shift and technol- ogy, we focus on the work context of professional service providers who must provide job cover- age 24 hours a day, 7 days a week. Emergency medical technicians, patrol officers, nurses, fire fighters, and television news crews are examples EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 89 Temporal Aspects of Information Technology Use of these service providers. These types of jobs require trained individuals who must often make immediate decisions based on the information and resources currently available to them (Geisler, 2009; Tucker, Edmondson, & Spear, 2002). In this paper, we present the results of a field study at a police organization to explore the effects that shift work has on information technology use, effectiveness, and satisfaction with technology. To explain these expected effects we build off of and extend existing theories in the areas of task- technology fit and technology acceptance models. The results of this study will help organizations that use a shift system better understand how information technology use can differ between employees working different shifts. LITERATURE REVIEW Although there are different types of shift work that have been studied in the literature (see e.g., Kogi, 1985), the type of shift work that is of interest to our study is fixed shift-work. Fixed shift-work refers to the type of permanent, non-rotating shift work where specific activities are done during specific day or night shifts (Blau & Lunz, 1999; Sagie & Krausz, 2003). Because fixed shift employees continuously work the same shift, we can be more certain that the work patterns and behaviors that are of interest of this study are truly established. An underlying issue of our study is that in many organizations employing a shift system, the type of work required during the night shift can be inherently different from work required during the day shift. In other words, the context of work (i.e., the night shift) affects the content of the work, (i.e, work characteristics) (Bøgglid et al., 2001). Before discussing the effects of shift on technology use, we must first review the underlying mechanisms that differentiate work performed during the night from work performed during the day. There are three aspects of work that may be different depending on the shift one works: level of routinization, workload differ- ences, and resource need and availability. Routinization refers to the degree to which the content of the job (i.e., tasks) are standard with little variability (Baba & Jamal, 1992). Studies indicate that routinization levels are inherent to the work context found during different shifts. Blau and Lunz (1999) in their study of medical technologists found that day shift technologists had a lower level of routinization (i.e., more task variety) than night shift technologists. While Blau and Lunz’s 1999 study found that the night shift was related to higher job content routinization, the sample used in the study were medical technicians responsible for conducting various laboratory tests. However, the opposite may also be true in different work contexts; for example, work during the night shift for protective services such as the police may result in lower routinization of tasks. Another way in which shift can affect work is by affecting workload, the amount of work conducted by a worker in a specified time period. Different industries will use different measures of workload. For example, in a police organiza- tion, workload can be measured by the number of cases that an officer or detective handles (see e.g., Punkett & Lundman, 2003), while in the medical field context, workload can be measured by number of activities performed on patients (see e.g., Cass, Smith, Unthank, Starling, & Collins, 2003). Previous research has found a relationship between workload and shift work. For example, researchers observed a drop in work activities and workload for nurses on the night shift (Grant, 1979). In contrast, Sagie and Krausz (2003) looked at the relationship between shift work and psychological correlates for nurses working in different shifts and in different departments. Nurses who worked the night shift perceived a higher workload than nurses who worked other shifts (Sagie & Krausz, 2003). A third aspect of shift work is the need for, and availability of, resources. Resources come in many forms such as knowledge from other individuals, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 90 Temporal Aspects of Information Technology Use paper documents, technological support, supervi- sors, and social support derived from coworkers. The ability and level of effort needed for employ- ees to access resources are important factors in problem solving (Tucker et al., 2002). Without the ability to access key resources, an employee will be less likely to engage in problem-solving activities (Geisler, 2009). During the day shift, workers have a greater window of opportunity to access more resources and more types of resources since more individuals tend to work during day shifts (Dunham, 1977; Zedeck, Jackson, & Marca, 1983). Night shift workers have limited access to resources and are often faced with the challenge of finding and accessing required resources. For example, during the day shift, nurses have access to many other nurses and physicians while nurses working the night shift are more limited in their access to these resources (Maloney, 1982). Given that these aspects of shift (i.e., routiniza- tion, workload, and resource availability) affect employee effectiveness, it is reasonable to assess the extent to which technology supports tasks when done in different shifts. Using the theory of task-technology fit to develop our hypotheses, we examine the impact of shift on technology use, technology satisfaction, and employee ef- fectiveness. HYPOTHESIS DEVELOPMENT The task-technology fit (TTF) model has been used in numerous contexts to explain the usage of different information technologies (see e.g., Dennis, Wixom, & Venderberg, 2001; Dishaw & Strong, 1998). TTF research indicates that the utilization of information technology and its positive impact on individual performance is a result of the fit between the technology and the tasks it supports (Goodhue & Thompson, 1995). The better the fit between what the technology is able to do and the needs defined by the job task, the higher the individual’s performance. Task technology fit is an ideal framework for study- ing shift work because tasks take on different characteristics when conducted in different shifts. As we have discussed previously, the level of available resources and the need for resources can be influenced by the shift worked. For example, nurses may not need a wide variety of resources in a non-intensive care unit during the night shift as the population of patients is stable and the tasks are relatively routine. On the other hand, during the day shift, a nurse in the same non-intensive care unit may need more and different resources since existing patients may leave, new patients arrive, and doctors are prescribing new forms of care for various patients (Maloney, 1982). In police work the type of task required of police officers is affected by the shift as many criminals operate under the cover of night. Thus, the type and amount of resources needed for patrol officers working the night shift vary substantially from that required during the day shift (Stephens & Long, 2000). Given the tasks and needs of night shift workers, there is a better “fit” between what information technology can offer for night shift workers than for day shift workers. Access to certain resources and expertise may only be available during the day (Dunham, 1977). For example, police officers who work the day shift can easily contact detectives, who work typical day shift hours, for information on a particular suspect or case (Stephens & Long, 2000). Because detectives typically do not work at night unless they are processing a specific crime, officers in the night shift do not have access to detectives as a resource and are forced to find alternative resources. Buren and Stenzel (1984) found that over half of the police departments using permanent shift assignments felt that the lack of communication between personnel work- ing different shifts was a concern. Nurses must contend with the fact that during the night shift there are fewer physicians and staff available for consultation (Grant, 1979). Therefore, in a society where the majority of people work from 9-to-5, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 91 Temporal Aspects of Information Technology Use the potential for access to human-related sources of knowledge decreases for night-shift workers (Dunham, 1977). Use of information technology can improve resource access for employees work- ing the night shift. We know from earlier studies that employees who are peripheral to an organization or isolated in some fashion can benefit from technology. Scientists who are not in research intensive institutions (e.g., have fewer resources for con- ducting research) benefit more from the use of technologies than their mainstream counterparts (Hesse, Sproull, Kiesler, & Walsh, 1993; Luo & Olson, 2006). Similarly, we expect that night-shift employees who have task variability may benefit from information technology as they may be able to access some of the information they desire. While task-technology fit suggests that specific technologies should be used for specific tasks, individuals do not always act as recommended. The theory of reasoned action (TRA; Fishbein & Ajzen, 1975) and its extension, the theory of planned behavior (TPB; Azjen & Madden, 1986) posits that behaviors (e.g., to use a particular technology) stems from user intention to engage in the behavior. The antecedents of user intention are an individual’s attitude, the subjective norm towards the behavior, and perceived behavioral control (Agrawal, 2000; Ajzen & Madden, 1986). Thus, it is not only important to consider the extent to which a technology is right for the task but it is also important to understand employees’ attitudes and intentions about using a particular technology. The Technology Acceptance Model (TAM) developed by Davis (1989) draws from both TRA and TPB to refer specifically to the adoption of information technology and includes perceived usefulness and ease of use into the model. TAM argues that technology will be accepted and used when a user believes that the technology is useful to her/him. TAM has been tested extensively with various types of technologies such as groupware (Lou, Luo, & Strong, 2000), CASE tools (Dishaw & Strong, 1999), spreadsheets (Venkatesh & Da- vis, 1996) and e-learning (Liao & Huang, 2009). The TAM model has been modified by a number of researchers to include antecedents to perceived usefulness and perceived ease of use. For example, in TAM2 Venkatesh and Davis (2000) include the constructs of individual differences, system characteristics, social influence, and facilitating conditions as being determinants of perceived usefulness and ease of use. In our current study, we expand the theories of technology adoption to include the specific organizational arrangement of shift-work. The shift that an employee works is one factor that may influence the perceived usefulness of a technology. Day-shift employees have relatively more access to social networks and other resources available at a low cost (in terms of time and effort), and will view the technology to be less useful and thus, be less likely to use available technologies. On the other hand, we expect that night-shift employees will perceive technology to be highly useful and be more likely to accept and use technology as it is a resource existing in a resource-constrained environment relative to day-shift employees. H1a: Professional service employees who work during the night shift will report a higher level of general computer use than employees who work during the day shift. H1b: Professional service employees who work during the night shift will report a higher level of work-related information systems use than employees who work during the day shift. Few studies have investigated the extent to which shift work affects effectiveness. On the one hand, working during non-traditional shifts has been found to increase health problems, de- crease satisfaction, increase family conflicts, and increase sleep deprivation (Barton, 1994; Furnham & Hughes, 1999; Morshead, 2002; Demerouti et al., 2004). All of these may lead to decreases in EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 92 Temporal Aspects of Information Technology Use performance as measured by an increase in errors and accidents (Monk & Folkard, 1985). On the other hand, employees working day shifts (e.g., 9-5) may be constantly interrupted by supervisors or coworkers (Bohle & Tilley, 1998) reducing the amount of time they can spend on a task (Grant, 1979). In environments where there is a lot of uncertainty and task variability (e.g., police depts., hospitals, fire stations) individual decision-making may be influenced by politics and relationships rather than by data or unbiased information (Choo, 1998). Thus, when individuals are acting alone and without the influence of others, they will rely on the information to which they have access. In addition, Dalton and Mesch (1990) found positive effects (e.g., decreased absentee- ism and turnover) of shift workers because of the increased autonomy and responsibility afforded shift workers. Thus, controlling for any differences due to workload, we expect that effectiveness will be higher for employees working the night shift than employees working the day shift. H2: Professional service employees who work during the night shift will have higher levels of effectiveness than service employees who work during the day shifts. We have argued that shift affects both technol- ogy use and effectiveness. In fact, we expect that technology use may be one of the reasons why night shift workers have higher rather than lower levels of effectiveness than day shift workers. Thus, employees who make decisions based on information provided to them by the information technology system may experience higher levels of effectiveness than those who do not use the technology (Dawes, 1996; Hesse et al., 1993; Nunn, 2001). Previous studies have shown that information from computer systems may contain fewer organizational and political barriers than information from human sources (Andersen, 2005; Sproull & Kiesler, 1986). In addition, employees who use work-related information technology systems may receive quick feedback enabling them to be more efficient and make good decisions (Northrop, Kraemer, & King, 1995). The efficiency and decision-making effects are likely only for those who use work-related information technology systems. This relation- ship is also supported by the Task-Technology Fit model (Goodhue & Thompson, 1995). Night shift workers who need access to information to complete their tasks will turn to technology for their information due to the lack of other available resources. Thus, there will be a “fit” between the task and the technology for night shift workers. Given this, we predict a mediating role of work- related information systems. H3: Work-related information systems use will mediate the relationship between type of shift worked and effectiveness. Although IT may provide accurate and timely information to night shift workers, night shift employees are less likely to be satisfied with the information technology and their access to information than day shift workers. Previous studies have found that night workers were more dissatisfied with the physical conditions of their work (Furnham & Hughes, 1999). Since night shift workers have fewer options than day shift workers in their ability to accumulate information from different sources, night shift workers are very dependent upon the resources to which they have access (Manning, 1996). When the system does not give them the information they need or when they have problems with the technology, they have fewer options than day shift workers to get answers to their questions. In addition, a number of studies have shown that co-worker and supervisor support provide positive attitudinal benefits for employees (Colvin & Goh, 2005; Kirmeyer & Lin, 1987). During night shifts, which tend to be more isolating than day shifts, there is less personal support (Bøgglid et al., 2001; Furnham & Hughes, 1999; Hurrel, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 93 Temporal Aspects of Information Technology Use 1987). For example, Bosch and Lange (1987) found that social isolation was a key problem for nurses working weekend and night shifts in the Netherlands. Stephens and Long (2000) found that police officers who talked about work events were better able to alleviate stress than officers who did not talk about work events. The use of technology can change the nature of the relation- ships between individuals. For example, Schultze and Orlikowski (2004) found that the use of in- formation technology reduced the frequency of interaction between sales reps and customers as well as altered the nature and quality of informa- tion that was shared. Thus, we expect that despite the effectiveness improvements seen by night shift workers who use technology, night shift workers will feel less satisfied about the technology and their ability to access information. H4a: Professional service employees who work during the night shift will report less satisfac- tion with work-related information systems than service employees who work during the day shift. H4b: Professional service employees who work during the night shift will report less satisfac- tion with access to information than service employees who work during the day shift. METHODS Research Setting and Sample The present study was conducted among police officers in two patrol divisions working in the primary law enforcement organization for a metropolitan area with approximately 500,000 people. For a period of six-months, data was col- lected in the form of archival records and rosters. In addition to having a fixed night shift system, officers in law enforcement, particularly patrol of- ficers, are primarily car-based and incident-driven (Maltz, Gordon, & Friedman, 2000). As in many police organizations across the United States, officers work their shifts alone in one-person cars. Measures drawn from the archival records included amount of work (workload) and work effectiveness (number of arrests). Division rosters designated the shift that officers were scheduled to work for the year. In addition to the archival data, surveys were also collected. Of the approximately 240 officers from the two divisions, 166 officers completed the questionnaire, yielding a response rate of 69 percent. To ensure that there were no differences between respondents and non-respondents we compared the demographic characteristics of of- ficers who participated in the study to the general population of officers in the entire organization. Overall, officers in the general population were on average about thirty-five years old, had an average tenure of six years, and were 85% male. The average age of the officer who participated in the study was thirty-three and the average tenure was sixty-four months or 5.3 years. The gender breakdown for officers included in our sample was 88% male and 12% female. We also tested for non-response bias for workload level and effectiveness by conducting t-tests and found no significant difference between officers who completed the survey and those who did not. Measures Shift. The dataset was divided into two shift categories: DAYS and NIGHTS. Patrol officers who worked in the DAYS group worked the majority of their hours during daylight hours (from 7:00am to 5:00pm). Officers who were in NIGHTS worked during primarily night hours (5:00pm to 7:00am). Of the 166 subjects par- ticipating in the study, 85 worked DAYS and 81 worked NIGHTS. The mean workload levels of officers during the night and day shifts were not significantly different (F (1, 164) =.135, p =.713). Task variety levels between day shift officers and night shift officers were also pretty similar. To EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 94 Temporal Aspects of Information Technology Use examine task variety we conducted interviews and ride-alongs with a sampling of police officers from each squad all of whom participated in the survey. Day shift officers conducted an average of ten different activities and night shift officers conducted an average of nine different activities. However, there were differences between the types of tasks conducted during the day shift and the night shift. Patrol officers working both day and night shifts commonly conducted routine traffic stops, apprehended stolen vehicles, responded to domestic violence reports, and interacted with drivers thought to be driving under the influence of alcohol. Activities more common to day-shift officers included bank robberies, checking on the welfare of neighbors or employees who have not been seen or heard from, responding to house burglar alarms, responding to calls from busi- nesses (for example, to investigate a disturbance or loitering/solicitations), investigating reports of shoplifting, and dealing with problems associated with transients. Night-shift officers, on the other hand, were more likely to encounter crimes in progress, crimes related to drugs/narcotics, shoot- ings, prostitution, and calls regarding disturbances of the peace (based on ride-alongs and interviews with 24 patrol officers). Work activities described by the officers are consistent with those reported in a number of studies describing police work (Cordner, 1979; Famega, 2005; Liederbach, 2005). Thus, while workloads and routinization levels (e.g., task variety) were similar, the actual tasks themselves varied considerably (Famega, 2005). In addition, as a night shift officer reported during one of our interviews, resources in the forms of other police personnel were severely diminished in night shifts. Effectiveness. Effectiveness refers to the number of criminal arrests made by each study participant. Arrests are made based on evidence that a criminal violation has occurred and that there is sufficient evidence for prosecution. Arrests can be made based on a call in progress as well as a result of an issued warrant. Number of arrests is an important statistic used by the police agency for determining organizational effectiveness and all officers have an equal opportunity to make arrests over a period of time (Schroeder, personal com- munication, March 9, 2006). Therefore, number of arrests by officer was used in this study as a measure of individual effectiveness. The number of arrests was captured from the police organiza- tion’s management database over a period of six months. The number of arrests that each officer made over this time period was matched to the survey data. General Computer Use. All police officers have access to computer terminals in the police substation as well as to the terminals in their vehicles. To assess the level of computer use, subjects were first asked to report their level of use on five items: computers in general, the In- ternet, a word processing application (e.g., MS Word), a spreadsheet application (e.g., MS Excel), and a browser (e.g., Internet Explorer). Subjects were asked to rate each of the five items using a five-point Likert scale anchored from “never” to “many times every day.” The Cronbach alpha for this item is.80. Work-Related Information System Use. In addition to the general measure of computer use, we included the use of a number of specific in- formation systems for police work, located on the substation terminals. Subjects were asked to rate their level of use on a five-point scale for each of the three systems: the criminal records manage- ment system, a multimedia criminal database, and a photo database. For each system, subjects rated their level of use: from “never” to “many times every day.” Because we are interested in the level of usage across the three different police information systems this measure was created by summing the scores for the three items. User Satisfaction with Work-Related Informa- tion Systems. To measure end user satisfaction with the work-related information systems for police work, a variation of Rocheleau’s (1993) end user satisfaction scale was used. The measure, which EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 95 Temporal Aspects of Information Technology Use included twelve items, asked officers to rate the extent to which the system allowed them to ac- cess the precise information they need, whether the system is accurate, whether the information returned by the system is timely, if the content of the system meets their needs, whether the infor- mation returned by the system is clear, whether they are able to get sufficient information from the system and whether the system’s information is up-to-date. Responses were based on a 5-point Likert scale ranging from “almost never” to “al- most always,” and had a Cronbach alpha of.93. Satisfaction with Information Access. In ad- dition to asking about satisfaction with specific police information systems, we also asked of- ficers to rate their satisfaction with the level of information that they could access. We modified Rocheleau’s (1993) measure of satisfaction by removing four measures that referred to specific system characteristics and to address informa- tion access more generally. The 8-item measure for satisfaction with information access has a Cronbach alpha of.91. Control variables. Given that newer and younger police officers may be the officers more likely to work the night shift, age was used as a control variable in this study. By controlling for age, we can better focus on the effect that shift has on our outcome variables. We also control for workload as patrol officers who have more cases may be more likely to make arrests. Finally, we control for computer self-efficacy as previous stud- ies have found that self-efficacy is a significant factor in determining technology use (Compeau & Higgins, 1995). RESULTS Means, standard deviations, and correlation matrix of all the variables in the study are presented in Table 1. As the table shows, our control variables are related to the variables we suspected. Age is strongly correlated with shift (r = -.26, p<.001) suggesting that younger officers were more likely to work at night. Computer self-efficacy is signifi- cantly correlated with both general computer use (r =.45, p<.001) and work-related IT systems use (r =.20, p<.05). Workload is significantly related to number of arrests (r =.22, p<.01). Officers working the night shift had more arrests (r =.26, p<.001), used computers more often (r =.20, p<.01), and used work-related IT systems more often (r =.17, p<.001) than did officers working the day shift. Officers who worked the night shift rated their satisfaction with the work-related IT systems lower than day officers (r = -.17, p<.05). There was also a significant positive correlation between Table 1. Means, standard deviations, and correlations Variable Mean (s.d.) 1 2 3 4 5 6 7 8 1 Age 32.98 (7.53) 2 Workload 208 (85) -.23** 3 Computer self-efficacy 5.62 (2.02) -.26*** .10 4 Shifta -.26*** .03 12 5 General computer use 8.46 (4.18) -.11 .03 .45*** .20** 6 Work-related IS use 4.25 (2.41) -.03 -.12 .20* .17* .30*** 7 Effectiveness/Arrests 26.56 (18.36) -.05 .22** .19* .26*** .17* .21** 8 Sat. with info access 3.45 (.64) .08 -.04 .01 -.09 -.06 -.07 -.06 9 Sat. with work-related IS 3.62 (.57) .10 .02 -.02 -.17* -.09 -.12 -.00 74*** ***p <.001,**p <.01, *p <.05 aShift: day shift is coded as 0 and night shift is coded as 1 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 96 Temporal Aspects of Information Technology Use both general computer use and work-related IT systems use with the number of arrests made (r =.17, p<.05 and r =.21, p<.01, respectively). The results of the hierarchical multiple regres- sion analyses are presented in Tables 2 and 3. In Step 1, the control variables, age, workload, and self-efficacy were entered. The main effect of shift was entered in Step 2. We predicted in Hy- pothesis 1a that night shift officers will use com- puters in general more often than day officers. We found support for this hypothesis; officers who worked the night shift reported a higher level of computer use than day officers (β = 0.16, p <.05). Because Hypothesis 1a examines gen- eral computer use, we also looked specifically at the use of police information systems. We found a significant main effect for shift on the use of these work-related information systems (Hypoth- esis 1b). Officers who worked the night shift re- ported using these technologies more often than day officers did (β = 0.17, p <.05). We found support for Hypothesis 2 which stated that officers working the night shift would have higher levels of effectiveness as measured by number of arrests (β = 0.26, p <.001). In support of Hypothesis 3, the level of work- related IT use partially mediates the relationship between shift and effectiveness as described in Hypothesis 2. Using the method described in Baron and Kenny (1986), we tested for mediation by regressing both shift and work-related informa- tion systems use on productivity (see Table 3). In the full model, the beta for shift was.23 (p <.01) and the beta for work-related IS use was.19 (p <.05), indicating that work-related information system use partially mediates the relationship between shift and effectiveness. Table 2. The effects of shift on information technology use, effectiveness, and satisfaction Independent Variable General Computer Use Work-related IS use Effectiveness Satisfaction with work-related IT Satisfaction with Info Access Step 1 Step 2 Step 1 Step 2 Step 1 Step 2 Step 1 Step 2 Step 1 Step 2 Age .00 .04 -.01 .04 .04 .11 .07 .02 09 .07 Workload -.01 -.01 -.12+ -.14+ .21** .22** -.002 -.004 -.02 -.03 Self-efficacy .45*** .44*** .21** .20* .18* .17* -.05 -.04 .03 .04 Shift .16* .17* .26*** -.18* -.07 F 13.48*** 11.51*** 3.37* 3.68** 4.66** 6.73*** .44 1.50 .47 .55 Adj R2 .186 .204 .041 .075 .063 .123 -.011 .012 -.01 -.01 Δ Adj R2 .201 .023 .059 .025 .08 .064 .008 .029 .009 .005 ***p <.001,**p <.01, *p <.05, +p <.10 Table 3. The mediating role of information tech- nology use on the shift-effectiveness relationship Independent Variable Effectiveness Step 1 Step 2 Age .04 .10 Workload .21** .25*** Self-efficacy .18* .13+ Shift .26*** .23** Work-Related IS use .19* F 4.66** 6.79*** Adj R2 .063 .150 Δ Adj R2 .08 .096 ***p <.001,**p <.01, *p <.05, +p <.10 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 97 Temporal Aspects of Information Technology Use To further test the relationship between ef- fectiveness and work-related IT use within the night shift, we ran an additional model testing only the night shift officers. As seen in Table 4, we found a main effect of work-related IT use on effectiveness (β = 0.25, p <.05). This finding provides stronger support for the idea that during the night shift, the most effective officers are those who use work-related IT. We also tested relation- ship between effectiveness and work-related IT on the sample of day shift officers. As we predicted, we did not find a main effect for work-related IT use (β = 0.11, p = ns). Therefore, work-related IT is particularly important to night shift officers as it has a direct impact on their effectiveness; an impact that is not replicated for day shift officers. We expected that night officers would report a lower level of satisfaction with work-related information systems (Hypothesis 4a) as well as a lower level of satisfaction with the information that they access (Hypothesis 4b). Hypothesis 4a was supported as patrol officers who worked in the night shift reported less satisfaction with the work-related information system than those work- ing in the day shift (β = -.18, p <.05; Table 2). Support for Hypothesis 4b was not found. DISCUSSION AND IMPLICATIONS The aim of this study was to investigate the ef- fects that shift work can have on effectiveness and how information technology is viewed and used. The results of this study suggest that information technology systems have different value for work- ers on different shifts even if the task goals are the same. Therefore, the inclusion of shift work in future studies will lead to a better understand- ing of how the context of work (i.e., shift) affects the use of technology by affecting the content of work (i.e., availability and need for resources). An important finding in this study is that night shift patrol officers had higher levels of effective- ness partially as a result of using work-related information technology systems. We also found that night shift officers not only use specific work- related information systems more often than their day shift counterparts, they also used computers in general more often. Furthermore, we found that the use of work-related IT mattered more to night shift officers than to the day shift officers in terms of increasing effectiveness (i.e., making arrests). Compared to their day shift counterparts, night shift officers must use technology-related tools for information access as they have fewer Table 4. The effects of work-related IT use on effectiveness (within each shift) Independent Variable Effectiveness: Night Shift Effectiveness: Day Shift Step 1 Step 2 Step 1 Step 2 Age .27* .24* -.12 -.11 Workload .34** .40*** -.02 -.12 Self-efficacy .11 .06 .29* .27* Work-related IT use .25* .11 F 5.16** 5.47*** 3.39* 2.78* Adj R2 .135 .183 .079 .079 Δ Adj R2 .167 .056 .113 .011 ***p <.001, **p <.01, *p <.05 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 98 Temporal Aspects of Information Technology Use resources with which to complete their tasks. This empirical finding supports a conceptual argument made by Luen and Al-Hawamdeh (2001) that po- lice officers who are able to assess, assimilate and use knowledge effectively will be able to perform effectively. Although day shift officers have the same ability to access these new technologies, they were less likely to access them than were night shift officers. In addition to using more work-related IT, there may be other differences in the work environment that lead night shift officers to have higher levels of task effectiveness than day shift officers. For example, as described earlier, the nature of cases during the night and day shifts differs. Night shift officers often deal with crimes-in-progress (e.g., burglaries) and there is more opportunity to make immediate arrests. Furthermore, criminals may be more easily found during the night at their places of residence so more arrests may take place. We are not suggesting that the sole reason that night shift officers are more effective is that they use more work-related IT systems; our results con- firm this as the use of work-related IT systems is a partial mediator of the relationship between shift and effectiveness. Our results however do suggest that when officers make use of the IT systems provided to them by the organization that there are beneficial outcomes for the organization. Finally, the model testing system satisfaction suggests that increased reliance on a technology also causes increased expectations (Levy, Murphy, & Zanakis, 2009). When those expectations are not met, satisfaction may decrease. Thus, police officers working the night shift were less satisfied with their technology than were officers in the day shift. Brown and Brudney (2003) provide an alternative explanation for why there is a positive relationship between shift and information systems use and a negative relationship between shift and satisfaction with information systems. Brown and Brudney, in a study of police officers, found that while all officers agree information technol- ogy was important, only officers that preferred a structured approach to problem solving were satis- fied with the technology tools available to them. Although we did not measure problem-solving preferences, it is not inconceivable that officers working the night shift prefer non-structured ap- proaches to problem-solving. By investigating the role of work shift in affect- ing individuals’ technology use, we are essentially looking at temporal rhythms of work. Temporal rhythms or patterns of work refer to the “broad temporal pattern of the work iterated over time” (Reddy & Dourish, 2002, p. 348). The temporal work rhythm of shift breaks down work into dif- ferent types and intensities of activities that are useful in determining the needs of the different shift workers. Although the two-fixed shift system that was used in this study is a broad pattern or a large-scale rhythm dictated by the organization itself, we were able to find key differences in effectiveness as well as the use of technology. Therefore, understanding different temporal rhythms of work can be an important aspect in the study of individual outcomes and technology use. Our study on the effects that shift work can have on information technology use and percep- tions has strong implications for affecting orga- nizational effectiveness. Organizational leaders should carefully schedule shift work along with information technology needs, access, and train- ing; thus providing an important organizational resource to night shift workers that can greatly enhance productivity and effectiveness. By bet- ter meeting the informational needs of the night shift population, organizations can strategically utilize information technology to compensate for the lack of other informational resources that are readily available to day shift workers. Our focus on technology use among employees working in different shifts has some important theoretical implications. First, one of the most influential frameworks of technology use, the Technology Acceptance Model (TAM; Davis, 1989), should be extended to consider the ways that context influences the characteristics of work. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 99 Temporal Aspects of Information Technology Use While our results clearly show the benefits of technology use in the police context, the TAM model might consider organizational arrangements that influence personal motivations for technol- ogy use. We have included Figure 1 to show how the basic TAM model can be extended to include organizational arrangements, such as shift work. In this case, working different shifts affects the perceived usefulness and perceived ease of use of the information technology. Other aspects of shift (differences in levels of routinization and task variety) may also influence the extent to which individuals see value in adopt- ing and using technologies. Choo (1998) has suggested that information technology systems are not helpful in environments with high task uncertainty and task variability as individuals in these conditions prefer to rely on political decision- makings. Our study suggests that when resources are limited, officers use information technology systems more often; and when they use these systems more often, there are positive outcomes. We believe that in cases where individuals work autonomously, it is important to manage their attitudes about technology; however, this may be especially difficult when employees work in shifts. As we have discussed, another framework for understanding the extent to which technology is used and accepted is that of Task-Technology Fit (Goodhue & Thompson, 1995). This model ex- plains how employees with a particular set of tasks need to find the right technologies to help them complete their tasks. The problems arise when the set of tasks assigned to an employee is so large and varying that the technology may only help in some subset of tasks. If there are other ways that an employee can access the resources or informa- tion needed to complete a task, technology may be deemed unnecessary or redundant. Thus, the same task in different contexts may not require the same technology. This study shows that although the goal of the task is the same (e.g., reducing crime), the time during which the task takes place (i.e., night versus day) can affect the degree to which the technology is useful. Thus, the boundaries of task-technology models should be extended and empirically tested to include dynamic factors such as shift work to better address the fit between the user’s needs and the technology. Future studies should investigate the role of shift work and information technology in other types of organizations, such as call centers, hos- pitals, and manufacturing operations. The effects of night and day shift work are likely to be vastly different among these different organizational forms. Hospitals and police departments are simi- lar in that night shift workers are often as busy as day shift workers and face emergencies relatively frequently. Night shift workers in call centers and manufacturing operations may have more routine tasks and they may be less busy than those on the day shift. Although the value of technology may Figure 1. Potential TAM extension including the organizational influences of shift work (adapted from Venkatesh & Bala, 2008) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 100 Temporal Aspects of Information Technology Use be equally important (due to the lack of other information resources) the degree to which the technology is used, updated, and valued may be extremely different. Thus, in investigating the relationship between shift work and technology in other contexts, one must consider the degree to which tasks are varied and routinized, as well as the extent to which there are differences in workload levels. In this study, we discuss the need for different information resources across different temporal work groups. To better understand patterns of work and resource needs, future research should look at specific types and levels of resources accessed by the different temporal groups. In addition, examining the different characteristics and values associated with different types of resources (e.g., social network-based resource versus repository-based resource) can provide additional insights on the relationship between shift work and technology use. An extremely important and practical impli- cation of this research is in the area of systems design. This research indicates the importance of addressing the needs of peripheral workers, such as night shift workers, in the design of information systems. Although the voices of these workers are likely to be underrepresented in the requirement determination process, the resulting technology may serve a more crucial need for this group of workers as compared to the “mainstream” day shift workers. In addition, this process may determine that night shift workers and day shift workers do fundamentally different tasks. This research can also guide managers in better resource allocation for different types of workers within an organization. By focusing on the specific needs of peripheral workers, like night shift em- ployees, human resource departments can have a better understanding of the relationship that exists between shift work and technology use. The result is a strategy of technology deployment that will not only lead to better resource utilization for the organization, but also better address the needs of their employees. As shift work continues to be an alternative mode of work for many organizations, especially in the service sector (McMenamin, 2007), how information technology is viewed and utilized becomes pivotal. In order for organizations to fully address the needs of all employees, including shift workers, they need to closely examine how information technology resources are used in the absence of other “traditional” resources. To the best of our knowledge, this is one of the first studies to look at shift work and its effect on technology needs and use. We believe that this study indicates the importance of looking at temporal aspects of work as part of an organization’s structure when examining technology use from both from a prac- titioner’s and researcher’s point of view. Not only does this research affect organizations that utilize a shift system, it also impacts our current theories and models of organizational forms and technology use. ACKNOWLEDGMENT The authors wish to acknowledge IJISSS Editor- in-Chief Professor John Wang and the anonymous reviewers for their valuable input on a previous version of this paper. 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This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 2,
edited by John Wang, pp. 1-18, copyright 2010 by IGI Publishing (an imprint of IGI Global).
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Chapter 7
DOI: 10.4018/978-1-4666-0044-7.ch007
Yair Levy
Nova Southeastern University, USA
Theon L. Danet
NASA Langley Research Center, USA
Implementation Success Model
in Government Agencies:
A Case of a Centralized
Identification System at NASA
ABSTRACT
A recent presidential directive mandated that all U.S. government agencies establish a centralized
identification system. This study investigated the impact of users’ involvement, resistance, and computer
self-efficacy on the implementation success of a centralized identification system. Information System
(IS) usage was the construct employed to measure IS implementation success. A survey instrument was
developed based on existing measures from key IS literature. The results of this study indicated a strong
reliability for the measures of all constructs (user involvement, computer self-efficacy, user’s resistance,
and IS usage). Factor analysis was conducted using Principal Component Analysis (PCA) with Varimax
rotation. Results of the PCA indicate that items of the constructs measured had high validity, while
Cronbach’s Alpha for each factor demonstrates high reliability for all constructs measured. Additionally,
results of a structural equations modeling analysis using Partial Least Square (PLS) indicate that com-
puter self-efficacy and user involvement had positive significant impact on the implementation success.
However, the results also demonstrated that user’s resistance had no significant impact on IS usage,
while end user involvement had a strong negative impact on user’s resistance.
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Implementation Success Model in Government Agencies
INTRODUCTION
In 2004 Presidential Directive (PD) 12 mandated
that all United States (US) government agencies
enhance security, increase government efficiency,
reduce identity fraud, and protect personal privacy
(The White House, 2004). All US government
agencies should establish a mandatory, govern-
ment-wide standard for secure and reliable forms
of identification issued by the Federal Govern-
ment to its employees and contractors (The White
House, 2004). The PD 12 provided justification for
central identification and account administration
infrastructure. However, the complexity arises in
the implementation of a centralized identification
system (CIS). As a result, it was the central aim of
this study to look at several constructs that may
impact the success (or failure) of a CIS implemen-
tation as mandated by the PD 12. Evaluation of
information systems (IS) success is a complex and
perplexed issue (DeLone & McLean, 1992, 2003).
Several factors are believed to impinge upon the
success experienced by organizations regarding
their deployment of IS (Hunton & Beeler, 1997;
Jiang, Waleed, Muhanna, & Klein, 2000; Lane,
Palko, & Cronan, 1994). Those factors generat-
ing the largest amount of research activity have
involved the influence of individual differences
upon IS design, implementation, and usage (De-
Lone & McLean, 1992, 2003). However, very
little attention has been given in literature to IS
implementation success in the context of govern-
ment and federal agencies. The assumption taken
by this work is that in the context of IS implemen-
tation, government and federal agencies can be
viewed as a unique sub-set of the general service
sector as they provide services to the government
and/or other entities. Additionally, if government
and federal agencies are being viewed as non-
for-profit service providers, the implementation
success of functional systems, such as CIS, may
be warranted a separate investigation (Ebbers &
van Dijk, 2007). Therefore, this study was aimed
at assessing the impact of key user perceptions
on the success (or failure) of a CIS in the context
of a federal agency.
THEORETICAL BACKGROUND
Introduction
Prior research has been conducted on various
models of implementation success (DeLone &
McLean, 1992, 2003). However, such models
have been repeatedly validating a somewhat fixed
set of constructs such as user satisfaction, system
quality, information quality, and IS service qual-
ity. Although such construct are valid, the aim of
this study was to go beyond such strongly vali-
dated constructs and investigate other individual
constructs that appear promising as predictors
of IS implementation success. Specifically, the
implementation success as described under this
investigation concentrated only on the constructs
of user involvement, user resistance, computer
self-efficacy, and IS success. Thus, a brief review
of the literature for each of these key constructs is
provided and serves as the theoretical foundation
for this study.
User Involvement
The construct of involvement, defined as a psy-
chological construct, needs to be differentiated
from other psychological construct and user per-
ceptions, particularly attitude (Barki & Hartwick,
1994). While many different definitions of attitude
have been proposed over the years, the classical
work by Fishbein and Ajzen (1975) defined at-
titude as a general conceptualized construct that
is referred to an affective judgment of a person
towards another person, object, or an event. User
involvement is conceptually different than attitude
as it focuses on the feelings one has about his/
her own feelings of belonging to a larger group
of individuals, rather than his/her own affective
judgment of external entities. User involvement
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107
Implementation Success Model in Government Agencies
refers to participation in the system development
process by representatives of the target user group
(Ives & Olson, 1984). Baronas and Louis (1988)
suggested that when employees are given the op-
portunity to enhance their control during a system
implementation, they will adapt to the resultant
changes and more readily accept the system. With
increased user involvement, users will have an
increased desire to participate in development
(Barki & Hartwick, 1994). Hunton and Beeler
(1997) concluded that the key IS success factor is
to provide users with a sense of overall responsi-
bility and system ownership. They indicated that
having users involved early in the implementation
stage will increase their sense of overall owner-
ship, which results in successful implementation
(Hunton & Beeler, 1997).
Adams, Berner, and Wyatt (2004) investigated
the role of user involvement and user resistance
in the context of IS implementation in healthcare.
Based on a case study, they also suggested that
user resistance and user involvement are two key
constructs in the success or failure of IS implemen-
tation within healthcare organizations. Barki and
Hartwick (1994) suggested that predevelopment
states of user involvement toward a proposed IS
are positively related to a user’s desire to partici-
pate in upcoming development activities. They
also indicated that additional research is needed
to understand the role of user involvement in any
IS related endeavor.
User Resistance
Research on IS implementation problems indi-
cated that user resistance to change appears to
be a key factor in the success of such endeavors
(Jiang et al., 2000). Jiang et al. (2000)’s study at-
tempted to make it explicit, based on system type,
key reasons for user resistance and the remedies
designed to promote implementation success.
Using a sample of 66 managers, they developed
taxonomy to identify reasons for user resistance.
They concluding by indicating that although user
resistance is a key construct contributing to IS
implementation success, “there are significant
differences in the reasons users resist [different
types of ISs]” (Jiang et al., 2000, p. 32). Ebbers
and van Dijk (2007) indicated that the construct
of user resistance should be investigated in the
context of IS implementation success in govern-
ment agencies as prior models may not properly
represent issues related to such organizations.
Myers and Avison (2002) indicated that imple-
mentations of new systems that alter the balance
of power by users in organizations are resisted by
those who lose power and accepted by those who
gain it. Fjermestad and Romano (2003) indicated
that reducing user resistance is a key construct for
the success of system implementation and maybe
effected by user involvement during earlier stages
of the system development. However, they noted
that additional research is needed to explore such
relationships in other contexts. Jiang et al. (2000)
also found that user resistance is critical for the
success of IS implementations. They also indicated
that additional research is needed to investigate
the role of user resistance in the success of IS
implementations.
Computer Self-Efficacy
Self-efficacy (The White House, 2004), the belief
that one has the capability to perform a particu-
lar behavior, is an important construct in social
psychology (Compeau & Higgins, 1995). Lucas,
Walton, and Ginzberg (1988) provided some of
the earliest evidence of the individual behavioral
factors that influence IT adoption. Compeau and
Higgins (1995) built upon Bandura’s (1977,
1982, 1986) research on self-efficacy theory to
propose and develop the construct of computer
self-efficacy (CSE). They indicated that CSE is a
more focused construct than SE, in that it relates
to an individual’s beliefs about their abilities to
competently use computers to perform an activity.
Compeau and Higgins (1995) stated that under-
standing the factors that influence an individual’s
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Implementation Success Model in Government Agencies
use of IS has always been a key goal of IS research.
Their model was developed to test the influence
of CSE, outcome expectations, affect, and anxi-
ety on IS usage. Significant relationships were
found between CSE and outcome expectations,
as well as between CSE, affect, anxiety, and IS
usage (Compeau & Higgins, 1995). Compeau
and Higgins (1999) indicated that additional
research is needed to fully understand the role
of CSE in adoption of IS as well as its impact on
implementation success and the generalizability
of CSE to other contexts.
Information Systems Success
The classical work of DeLone and McLean (1992)
developed a model to organize the diverse research
attempting to identify factors that contribute to IS
success. DeLone and McLean (1992) built upon
the work of Ives and Olson (1984)’s and Zmud
(1979)’s extensive reviews on the measurement
of IS success. Ives and Olson (1984) adopted two
classes of IS outcome variables: system quality
and system acceptance. They indicated that user
involvement leads to improved system quality
as well as increased user acceptance, which in
turn increase IS usage. Baroudi, Olson, and Ives
(1986) developed a measure of IS usage by in-
corporating a list of activities developed by the
organization’s system project managers. They
indicated that user involvement increase IS usage,
while IS usage serves as a surrogate measure of IS
success (Baroudi et al., 1986). Additionally, Jones
and Young (2006) noted that IS usage is the most
critical issue that top IS executives are faced with
when implementing new IS in their organization.
Doll and Torkzadeh (1998) developed a mul-
tidimensional IS usage measure. They indicated
that IS usage is a critical construct in the system-
to-value chain that links upstream research on the
causes of IS success with downstream research on
the organizational impacts of IS (Doll & Torkza-
deh, 1998). The goal of their research was to
make a preliminary effort to rethink the IS usage
construct and develop appropriate instrumenta-
tion. According to Doll and Torkzadeh (1998),
several factors have impeded the development of
new multidimensional IS usage measures: (1) a
primarily upstream IS research agenda, where a
unidimensional IS usage construct is an adequate
indicator of implementation success; (2) the lack
of a theory base in the IS literature that provides
a taxonomy of usage behaviors; and (3) the re-
alization that, where use is mandatory, measures
of IS usage may indicate only compliance, not IS
success. They indicated that the potential of the
IS usage construct depends on how it is concep-
tualized and operationalized (Doll & Torkzadeh,
1998). Doll and Tokzadeh’s (1998) empirical
results provided evidence of the instrument’s
reliability, validity, and general applicability.
DeLone and McLean (2003) recommended that
researchers consider adopting and applying this
more comprehensive systems usage instrument.
DeLone and Mclean (2003) revisited their
original work on the IS Success Model (DeLone
& McLean, 1992). Their follow up work indicated
that over 285 studies used their original model
(DeLone & McLean, 2003). They discussed the
important IS success research contributions of
the prior decade, focusing especially on research
efforts that apply, validate, challenge, and propose
enhancements to their original model. They indi-
cated that IS usage is an appropriate measure of
IS success. However, some scholars noted that
additional research on the implementation of new
and unique technologies is still warranted (Jones
& Kochtanek, 2004).
METHODOLOGY
This study was based on a quantitative assessment
of four constructs. The four constructs assessed
were: user resistance (URES), user involvement
(UI), computer self-efficacy (CSE), and IS usage
(ISU). IS usage was assumed to be a surrogate
measure of CIS implementation success. This
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Implementation Success Model in Government Agencies
study used a survey instrument to collect quan-
titative data on the three independent variables
(URES, UI, CSE) and the dependent variable
(ISU) based on prior measures validated in IS
research. Figure 1 shows the conceptual model
that was used for this study.
This study posed four hypotheses:
Hypothesis 1: User’s computer self-efficacy has
a positive impact on information systems
usage.
Hypothesis 2: User’s internal resistance has a
negative impact on information systems
usage.
Hypothesis 3: User involvement has a positive
impact on information systems usage.
Hypothesis 4: User involvement has a negative
impact on user’s internal resistance.
Instrument
An attempt was made in this study to use the
original non-revised/non-reduced measures as
much as possible. Thus, as a result of the lit-
erature review, Web-based survey was designed
based on existing validated measures found in
literature that identified the source or one of the
original measures for all measured constructs.
This study utilized the measure proposed by
Barki and Hartwick (1994) to assess the construct
of UI. The validated measure of user resistance
by Jiang et al. (2000) was used to assess URES.
Additionally, the classical validated and reliable
measure of CSE by Compeau and Higgins (1995)
was used to assess the construct of CSE. Finally,
Doll and Torkzadeh’s (1998) validated and reliable
measure of IS usage was slightly revised and used
in this study to measure the dependent variable,
IS usage. Appendix A depicts the specific items
used in the study.
User Involvement Measure
Barki and Hartwick (1994) presented a theo-
retically–grounded perspective to account for
effects of involving users during implementa-
tion, and provided an initial test of their model.
They developed and validated a measure using
a 7-point, bipolar scale to measure frequencies
from (1) ‘insignificant involvement’ to (7) ‘highly
involved’. This study used Barki and Hartwick’s
(1994) measure of UI.
Computer Self-Efficacy Measure
Compeau and Higgins (1995) stated that un-
derstanding CSE is important to the successful
implementation of systems in organizations.
Figure 1. Implementation success model of centralized identification system
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110
Implementation Success Model in Government Agencies
This study used their validated, reliable measure
of user’s CSE and its impact on implementation
success of the centralized identification system at
NASA. Compeau and Higgins (1995) developed
and validated a 10-item CSE measure on a scale
of (1) ‘lowest level of confidence’ to (10) ‘highest
level of confidence’. This study used the original
Compeau and Higgins’ (1995) CSE instrument to
measure the CSE construct.
User Resistance Level Measure
Jiang at al. (2000) stated that user resistance can
create a negative impact on the success of IS
implementation. They developed a measure to
assess URES. This study used their 7-item URES
measure on a 7-point scale, where (1) represented
‘lowest negative impact’ and (7) represent ‘highest
positive impact’.
Information Systems Usage Measure
This study measured implementation success
by using Delone and McLean’s (2003) IS usage
(ISU) variable derived from their success model.
This study used the instrument proposed by Doll
and Torkzadeh (1998) to measure end users’
reported IS usage as part of the evaluation of IS.
Following Doll and Torkzadeh (1998), this study
used a 9-item measure to assess ISU. A 5-point
Likert-type scale was used where (1) ‘not at all’,
(2) ‘a little’, (3) ‘moderately’, (4) ‘much’, and
(5) ‘a great deal’.
Data Collection
This study took place at NASA Langley Research
Center (LaRC). The rollout of this CIS was part
of an initiative put by Network Control Security
Branch (NCSB). The sample size for this study
was approximately 700 participants. Each par-
ticipant received an email from the IT Security
Manager stating the purpose of the survey and the
importance of participating in it. The Web-enabled
survey was emailed to system users. Over 230
responses were submitted representing a response
rate of over 33%. Following Mahalanobis distance
multivariate analysis, four cases were removed for
demonstration of outliers. Moreover, according
to Levy (2006), response-set is when respondents
mark the same score on all items in the survey.
Response-set represent a minor threat to data
analysis and should be considered for removal
prior to fill analyses (Levy, 2006). Thus, nine
more cases were removed due to response-set.
Data Analyses and Results
An exploratory factor analysis was done using
Principal Component Analysis (PCA) method
to verify the construct validity of the measures.
This procedure is used to study the correlations
among a large number of interrelated quantitative
variables by grouping the variables into a few
factors; after grouping, the variables within each
factor are more highly correlated with variables
in that factor than with variables in other factors
(Mertler & Vannatta, 2001).
The PCA analysis was based on Varimax rota-
tion and forced to four factors because there were
four constructs measured. The overall cumulative
variance was 70.5% based on the four factors.
The partial correlation between the item and the
rotated factor helped to formulate an interpretation
of the factors or components. All partial correla-
tions were between 0.784 and 0.914 for the CSE
items, 0.627 and 0.937 for the UI items, 0.527 and
0.871 for the IS usage items, and between 0.613
and 0.770 for the URES items. Table 1 shows the
block structure of each construct and demonstrat-
ing support for construct validation.
Reliability Estimates
Reliability estimates were calculated for each
construct’s responses using Cronbach’s Alpha.
Research indicates that reliability estimates ex-
ceeding 0.70 are desirable (Mertler & Vannatta,
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111
Implementation Success Model in Government Agencies
2001). The Cronbach’s Alpha were 0.911 for UI,
0.831 for URES, 0.965 for CSE, and 0.901 for
ISU demonstrating high reliability for all construct
measures. Table 2 shows the summary of each
construct’s Cronbach’s Alpha.
Partial Least Square (PLS)
Data was analyzed using Partial Least Square
(PLS) (Chin, 1998; Chin, Marcolin, & Newsted,
2003) with SmartPLS 2.0 (beta) (Ringle, Wende,
& Will, 2005). As a sub-type method of struc-
tured equation modeling (SEM), PLS is widely
used in IS research (Gefen & Straub, 2005).
With the demonstration of the good reliability
results indicated above and nice block-structure
results of the PCA analysis, the constructs under
investigation appears to provide adequate con-
vergent and discriminant validity. Results of the
standardized PLS path coefficients model for
the proposed theoretical model are presented in
Figure 2. The numbers noted above the arrows in
the model represent the path coefficient, where
results indicated that all path coefficients were
significant at least at the.05 level. Results of the
R-squared (R2) values are indicated in the upper
right corner above the given constructs where R2
is applicable. Wetzels, Odekerken-Schröder, and
Van-Oppen (2009) suggested a global fit measure
(GoF) for PLS path modeling as a geometric
mean of the average communality and average R2.
They also indicated three cut-off points for GoF
GoFsmall=0.1, GoFmedium=0.25, and GoFlarge=0.36.
Following such global fit measure, the calculated
GoF for this model (Figure 2) is 0.6325 that well
exceeds the.36 cut-off point value of the large,
indicating that the overall proposed theoretical
model (Figure 1) is sound.
Results of the PLS analysis demonstrated that
CSE had a significant positive impact on ISU
(βCSE→ISU= 0.407, p <.001), UI had a significant positive impact on ISU (βUI→ISU= 0.230, p <.05), UI had a significant negative impact on URES (βUI→URES= -0.676, p <.001), and URES demon- Table 1. Varimax rotated component matrix (N=218) Component Item 1 2 3 4 CSE7 0.914 0.003 0.111 0.025 CSE10 0.906 -0.035 0.059 0.036 CSE5 0.904 -0.030 0.055 0.010 CSE9 0.888 -0.052 0.058 0.027 CSE6 0.886 -0.014 0.046 -0.046 CSE4 0.884 -0.004 0.090 -0.116 CSE8 0.861 0.005 0.152 -0.052 CSE3 0.842 0.067 0.113 -0.109 CSE1 0.837 0.079 0.135 -0.061 CSE2 0.784 0.139 0.166 -0.131 UI3 0.052 0.937 0.068 0.046 UI4 0.081 0.935 0.091 0.127 UI5 0.057 0.915 0.084 0.133 UI1 0.108 0.908 0.029 -0.004 UI7 0.003 0.905 0.127 0.193 UI8 0.116 0.761 0.144 0.158 UI2 -0.099 0.657 0.048 0.104 UI6 -0.045 0.627 -0.010 0.242 ISU2 0.069 0.151 0.871 0.062 ISU1 0.040 0.201 0.835 0.057 ISU3 0.096 0.147 0.833 0.018 ISU7 0.221 0.136 0.800 0.020 ISU8 0.143 0.038 0.782 0.054 ISU4 0.049 -0.033 0.689 0.040 ISU9 -0.008 -0.093 0.641 -0.050 ISU6 0.110 -0.076 0.619 0.073 ISU5 0.111 0.076 0.527 -0.111 URES2 -0.063 0.030 0.088 0.770 URES6 -0.062 0.184 -0.031 0.742 URES4 0.025 0.060 -0.062 0.736 URES5 -0.068 0.093 0.047 0.695 URES3 0.043 0.254 -0.007 0.651 URES7 -0.048 0.321 0.115 0.638 URES1 -0.079 0.062 0.014 0.613 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 112 Implementation Success Model in Government Agencies strated a non-significant negative impact on ISU. Such results indicated that hypotheses 1, 3, and 4 are supported, while hypothesis 2 is not sup- ported. Ordinal Logistic Regression According to Marcoulides, Chin, and Saunders (2009), PLS has a key limitation with its linearity. They noted that “the latent variables in PLS are estimated as exact linear combinations of their indicators (or manifest block variables)” (p. 173). Additionally, Marcoulides, and Saunders (2006) criticized PLS for its assumption of linearity. In order to add for the robustness of the findings provided by the PLS analysis, an ordinal logistic regression (OLR) was also performed. Accord- ing to Mertler and Vannatta (2001), “logistic regression requires that no assumptions about the distribution of the predictor variables (IVs) need to be made by the researcher… the pre- dictors do not have to be normally distributed, linearly related, or have equal variances within each group” (p. 314). Moreover, they noted that “Logistic regression is able to produce nonlinear models, which again adds to its overall flexibility” (p. 314). Thus, reporting here the results of OLR appears warranted to augment those found by the PLS analysis. Unlike nominal scales, values on an ordinal scale can be ‘ordered’ to reflect differing degrees or amount of the characteristic under study (Mertler & Vannatta, 2001). As this study utilized survey items that are ordinal, OLR analysis was also conducted to test hypotheses H1, H2, and H3. Table 2. Reliability analysis-Cronbach Alpha (N=218) User Involvement (UI) User Resistance (URES) Computer Self-Efficacy (CSE) IS Usage (ISU) Reliability Coefficients (Cronbach’s Alpha) 0.911 0.831 0.965 0.901 No. of Items 8 7 10 9 Figure 2. Results of the PLS analysis (N=218) Table 3. Summary of hypotheses results Hypothesis Relations: Sig. Positive Impact H1: CSE → ISU Yes H2: USER → ISU No H3: UI → ISU Yes H4: UI → USER Yes EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 113 Implementation Success Model in Government Agencies The OLR model developed a predictive model using the three independent variables (UI, URES, and CSE) as predictors of the dependent variable (ISU). Results of the OLR model provided weights for each of the independent variables in order to predict the probability of the dependent variable. OLR results indicated that two of the three inde- pendent variables were significant (p<.01, marked with *, p<.001 marked with **, in Table 4). The results indicated that the OLR model is reliable: -2 Log Likelihood=209, χ2(df=3)=26.1, p <.001. Results of OLR analysis are presented in Table 4. Results of the OLR analysis are consistent with those of the PLS results, aside from the H4 testing, which this OLR model didn’t account for. As such, the OLR results also confirmed that URES provided no significant contribution to the prediction of the probability of ISU. Results also demonstrated that CSE was significant (p<.0001) in predicting the probability of ISU. While results also demonstrated that UI was significant (p=.006) in predicting the probability of the dependent variable, ISU. DISCUSSION AND CONCLUSION Summary of Results The central problem that this study investigated was the challenge that occurred with NASA’s implementation of a CIS. As a result, it was the central aim of this study to look at key constructs that may impact the success (or failure) of CIS implementation. More specifically, this study investigated the impact of user involvement, computer self-efficacy, and user resistance on the CIS implementation success at a NASA center. This study was built on prior validated instruments that analyze and measures assessed. This study hypothesized that if organizations incorporate the concept of user involvement, recognize the impact of resistance levels, and identify the importance of computer self-efficacy before the implementation process; it will increase the chance of a success- ful implementation. Based on an empirical data collected at a NASA center, results showed that computer self-efficacy and user involvement are significant predictors of IS usage. Additionally, results showed that user resistance appears to have little or no effect on IS usage, at least in the context of this federal agency. Moreover, results of this study showed that user involvement is significantly impacting user resistance, however, this did not translate into a significant effect on IS usage. Although such results may appear counter intuitive, it may very well be that user resistance is somewhat overshadowed by other stronger constructs. Also, prior research such as Fjermestad and Romano (2003) as well as Myers and Avison (2002) indicated that user resistance is a viable construct in the pursuit of IS implementation success. However, such research was done based on utility type systems (i.e., customer relations management system, Web-based services, etc), while this study concentrates on operational and functional type systems, specifically an identifica- tion system. Additionally, the development and implementation of functional type systems, such as identification systems, is somewhat different Table 4. Results of the OLR analysis in predicting IS usage (N=218) Estimate Std. Err. Wald df Sig. 95% Confidence Interval User Involvement (UI) 0.596 0.217 7.585 1 0.006 * 0.172 1.021 User Resistance (URES) -0.027 0.258 0.011 1 0.916 -0.478 0.533 Computer Self-Efficacy (CSE) 0.268 0.067 15.919 1 0.000 ** 0.136 0.399 * p<.01 ** p<.001 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 114 Implementation Success Model in Government Agencies than utility type systems in the fact that functional type systems are used by all members of the orga- nization. This notion is supported by Jiang et al. (2000) who indicated that the specific type of an IS may have a significant mediating effect on the effect of user resistance on the IS implementation success. As such, resistance for a system that may perceive by the users to be required functional system in the future may deem to be insignificant. However, the role of user resistance in functional systems such as identification system may warrant additional investigation. Implications of the Study This study has several implications for research- ers and practitioners. According to Levy and Green (Forthcoming), considerable amount of IS research has been done over the years to develop and validate models using students as the main source of study participants. Thus, researchers in the field of IS implementation success may value the results of this study due to its unique data in US federal agency (i.e., NASA), rather than the use of students. Additionally, the results of this research may aid other researchers when attempting to investigate the impact of government issued policies, such as the US’s PD in this study. This study also has significant implications for practitioners in the service sector as well as for those from government agencies. The first impli- cation for practice is the recognition of computer self-efficacy as the key success construct in the implementation of IS within government orga- nizations. Government decision makers who are in charge of IS development and implementation should provide the nurturing environment for their users to enhance their computer self-efficacy by providing them with field workshops and other avenues that might increase their computer self- efficacy. The second implication for practice is the recognition of user involvement in the de- velopment stage of a system as a key factor that may impact the success of the IS implementation. Government decision makers who are in charge of IS development and implementation should pay close attention ensuring the involvement of system users in all the stages of the development to increase the likelihood of the system success. Limitations of the Study There is one key limitation to this study. It relates to the fact that this study measured data from a single NASA center. Although there appears to be little variation in government agencies like NASA between centers on the issues measured in this study, some considerations should be made when attempting to generalize the results found here to the service sector. Moreover, in the US there is a considerable amount of service organizations that are either spin-offs of previous government organization’s projects or service organizations founded by prior government individuals, the results found here maybe valid for such service organizations. Future Research Future research may include several avenues. First, future studies may attempt to validate such findings of this work in other government agencies that provide services and also in government agen- cies of other countries. For example, additional work can look at the impact of user involvement, computer self-efficacy, and user resistance on the IS implementation success in agencies of the European Union, China, etc. Moreover, additional work can look at the impact of such constructs related to e-government services. Second, another set of studies may attempt to investigate the pre- decessor causes for the two constructs that were found significant in this work. For example, more work should look at the way organizations can increase computer self-efficacy of its employ- ees. Additionally, more work should investigate techniques to increase user involvement in the system development and implementation phases EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 115 Implementation Success Model in Government Agencies of IS within government agencies. Third, as a CIS could have an impact on the daily work in organizations it might be important to add the so- cial impact of such implementation to the model. Additional work may attempt to combine other social aspect and test it in the context of service oriented organizations. ACKNOWLEDGMENT The authors would like to thank all the anonymous NASA employees that participated in this study. The authors would like to thank the editor-in-chief Professor John Wang, as well as the anonymous referees, for their careful review and valuable suggestions. Additionally, the authors wish to acknowledge the input of participants at the De- cision Science Institute (DSI) 2008 conference in Baltimore, MD, Nov 2008, where an earlier version of part of this article was presented. REFERENCES Adams, B., Berner, E. S., & Wyatt, J. R. (2004). Applying strategies to overcome user resistance in a group of clinical managers to a business software application: A case study. 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All use subject to https://www.ebsco.com/terms-of-use 118 Implementation Success Model in Government Agencies APPENDIX: SURVEY INSTRUMENT User Involvement (UI) items: I was able to make changes to the formalized agreement of work to be done during implementation The Information Systems staff kept me informed concerning progress and/or problems during imple- mentation I formally reviewed work done by Information Systems staff during implementation I developed test data specifications for this system I reviewed the results of system tests done by the Information Systems staff The Information Systems staff held a “special event” to introduce the system to me I participated in designing the user training program for this system I participated in developing the user procedures manual for this system User Resistance (URES) items: I feel this system implementation will create a loss of status in my current job I feel this system implementation will affect my salary or potential increase in salary I feel this system implementation will alter interpersonal relationships I feel this system implementation will change my job duties I feel this system implementation will change my decision making approach I feel this system implementation will create a loss of power for me in my current position I feel this system implementation will create a personal level of uncertainty on the purpose of the imple- mentation Computer Self-Efficacy (CSE) items: I could complete the identification using this system if there was no one around to tell me what to do as I go I could complete the identification using this system if I had never used a system like it before I could complete the identification using this system if I had only the software manuals for reference I could complete the identification using this system if I had seen someone else using it before trying it myself I could complete the identification using this system if I could call someone for help if I got stuck I could complete the identification using this system if someone else had helped me get started I could complete the identification using this system if I had a lot of time to complete the job for which the software was provided I could complete the identification using this system if I had just the built-in help facility for assistance I could complete the identification using this system if someone showed me how to do it first I could complete the identification using this system if I had used similar systems before this one to do the same job EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 119 Implementation Success Model in Government Agencies Information System Usage (ISU) items: I use this system to assist me in the identification process I use this system to help explain my identification issues I use this system to analyze if problems occur with my identification I use this system to control my identification process I use this system to help me manage my identification accesses I use this system to monitor my own performance I use this system to plan my identification accesses I use this system to keep my supervisor informed I use this system to document to others my identification accesses This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 2, edited by John Wang, pp. 19-32, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 120 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 8 INTRODUCTION The importance of Information Systems (IS) in different domains in today’s society is without doubt. Moreover, according to Targowski (2009) Web technology is key solution for the provision of e-Service systems. In the domain of Real Estate, the importance of technology has been emphasized by numerous authors since the 1990s (e.g., Weber, 1990; Fung et al., 1995; Rodriguez et al., 1995; Bible & Hsieh, 1996; Pace & Gilley, 1997), a trend which continued during the 21st century (Crowston et al., 2001; Fryrear et al., 2001; Zeng & Zhou, Ángel García-Crespo Universidad Carlos III de Madrid, Spain Ricardo Colomo-Palacios Universidad Carlos III de Madrid, Spain Juan Miguel Gómez-Berbís Universidad Carlos III de Madrid, Spain Fernando Paniagua Martín Universidad Carlos III de Madrid, Spain SERREA: A Semantic Management System for Retail Real Estate Agencies ABSTRACT In the scenario of market competition in the Retail Real Estate Agencies (RREA) business, having exact information regarding properties in supply and their associated demand is a differentiating factor for organizations. The Semantic Web represents an opportunity to create extensible services that hold pre- cise information concerning these types of markets. The objective of the current initiative is to use this market data as a competitive advantage for organizations. In this article, the authors propose SERREA, a management system for RREA based on semantics and constructed using Web Services, which has been implemented successfully in one of the leading agencies in Spain. The goal of this paper is to show how RREA benefits from using Semantic Technologies in the context of their business operations. DOI: 10.4018/978-1-4666-0044-7.ch008 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 121 SERREA 2001; Kummerow & Lun, 2005; Pagourtzi et al., 2006; Krol et al., 2008). Turban et al. (2003) present several advantages for the use of Information Technology (IT) in Real Estate, such as saving time for the client and the broker, and improving the organization of proper- ties according to criteria, facilitating the search process. According to Crowston et al. (2001), Real Estate is an information-intensive business. Agents, who are pure market-intermediaries, con- nect buyers to sellers and do so through control and dissemination of information, being particularly vulnerable to changes in the availability of such information. In a general sense, according to Kummerow and Lun (2005), a Real Estate Agency entails brokerage - bringing together buyers and sellers (sales and leasing). Thus, retail real estate may be referred to as the activity responsible for success- fully performing the management of retail stores, in the context of sales and leasing. Examining the work of Q4 in 2008 by Cushman and Wakefield (2008), the demand for retail, particularly in prime locations, continues to be active in various coun- tries (Austria, Greece, France, Germany), while in others (Italy, Portugal, Spain) investment is in a period of “wait and see”, given that the profit- ability of prime shopping centers is about 6%. In this scenario, in spite of the global eco- nomic situation, which has decelerated growth, RRE continues to be an attractive area for invest- ment and technological development, and also is presenting a dramatic increase in its interactions with new technological artifacts, known as highly specialized service systems (Spohrer & Kwan, 2009). This paper presents SERREA, a platform for RREA support designed using semantic tech- nology for the definition of the characteristics of retail stores. The application, which has been developed to act as support to the service which a particular RREA offer, enables them to provide an improved service using the application of a set of leading technologies, including semantics. This application is different from other RREA solutions. Many of the features of the application are similar (search, locate…), but semantics brings a well defined meaning, that in words of Berners-Lee, Hendler and Lassila (2001) can “enable comput- ers and people to work in co-operation better”. In other words, semantics and ontologies can bring new features to service sector: better integration of services and improved cooperation among organizations. The aim of this paper is twofold. On the one hand, to introduce SERREA as a novel and promising solution that supports RREA busi- ness process using semantic technologies and, on the other hand, by means of the application of a questionnaire, to show results of its implementa- tion in a particular RREA. The remainder of the paper is organized as follows. The next section defines the state of the art in semantics, semantic information systems and their use in the RREAs environment. This is followed by a description of SERREA, detailing its architecture and implementation. Subsequently, the paper provides a case study of this implemen- tation in a Spanish RREA. Next section analyzes the results of the evaluation of the tool. Lastly, the paper presents the principal conclusions and future work of the study. STATE OF THE ART The platform presented in the current work inte- grates two types of technologies, or more specifi- cally, two distinct IT philosophies. In the first place, it incorporates the vision of the Semantic Web for the annotation and efficient use of the information which characterize the different retail stores. In the second place, the platform benefits from the technology provided by Web Services to equip the system developed with extensible features. The arrival of the Semantic Web represents a revolution for the form of access and storage of information. The term “Semantic Web” was coined by Berners-Lee, Hendler, and Lassila (2001), to describe the evolution from a document-based EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 122 SERREA web towards a new paradigm that includes data and information for computers to manipulate. The Semantic Web enables automated information access based on machine-processable semantics of data. The Semantic Web was defined by these authors as “an extension of the current web in which information is given well defined mean- ing,” and can “enable computers and people to work in co-operation better”. The Semantic Web provides a complementary vision as a knowl- edge management environment (Warren, 2006) that, in many cases has expanded and replaced previous knowledge and information manage- ment archetypes (Davies, Lytras, & Sheth, 2007). Ontologies (Fensel, 2002) are the technological cornerstones of the Semantic Web, because they provide structured vocabularies that describe a formal specification of a shared conceptualization. Ontologies were developed in the field of Artificial Intelligence to facilitate knowledge sharing and reuse (Fensel et al., 2001). Ontologies provide a common vocabulary for a domain and define, with different levels of formality, the meaning of the terms and the relations between them. Knowledge in ontologies is mainly formalized using five kinds of components: classes, relations, functions, axi- oms and instances (Gruber, 1993). Classes in the ontology are usually organized into taxonomies. Sometimes, the definition of ontologies has been diluted, maybe because taxonomies are considered to be full ontologies (Studer, Benjamins, & Fensel, 1998). The formal semantics underlying ontology languages enables the automatic processing of the information in ontologies and allows the use of semantic reasoners to infer new knowledge. The shift enabled by the use of machine understandable ontologies can outperform the current endeavors that require finding data spread out across the Web or dynamically drawing inferences, which are continually hampered by their reliance on ad-hoc, task specific frameworks. The fundamental aim of the Semantic Web is to answer the ever-growing requirement for data integration on the Web. The benefit of adding semantics consists of bridging nomenclature and terminological inconsistencies to include under- lying meanings in a unified manner. Given that a universally shared data format is not likely to arise and diffuse, the Semantic Web provides an alternative solution to represent the comprehensive meaning of integrated information and promises to lead to efficient data management by establish- ing a common understanding (Shadbolt, Hall, & Berners-Lee, 2006). In this new scenario, the challenge for the next generation of the Social and Semantic Webs is to find the right match between what is put online and methods for doing useful reasoning with the data (Gruber, 2008). Regarding semantic web methodologies, there are methodologies for building ontologies from scratch (Staab, Studer, Schnurr, & Sure, 2001) and methodologies for the collaborative and coopera- tive construction of ontologies (Noy & Musen, 2003). Moreover, there are several methods to develop semantic web applications and semantic web services. See Wahl and Sindre (2009) for a detailed review. In recent years, Semantic Web research has resulted in significant outcomes and the adoption of this technology from the market and the industry is becoming closer (Lytras & García, 2008). With regard to the application of the Semantic Web in real systems, there have been numerous applica- tions of the Semantic Web in service environ- ments. Applications have been seen in the field of the hiring of human resources, such as Prolink (Gómez-Berbís et al., 2008), in the collaborative development of software, for example, platforms such as Global Software Repository (Colomo- Palacios et al., 2008), logistics (Corcho, Losada, & Benjamins, 2008), or tourism (García-Crespo et al., 2009a). Especially, for the real estate sector, searching and comparing offers on the internet is extremely time-consuming and not very efficient (Langeg- ger & Wöß, 2007). Taking into account the im- portance of the functional environment of Real Estate, a multitude of efforts have developed and EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 123 SERREA implemented initiatives in this application envi- ronment which benefit from the Semantic Web (e.g., Stubkjær, 2000; Michalowski et al., 2004; Pretorius, 2005; Zhang et al., 2005; Hess & de Vries, 2006; Langegger & Wöß, 2007). Many of the initiatives focus on the adoption of semantic technology to improve searches for property and facilitate integration between different systems. However, these solutions do not consider the spe- cific characteristics of RREAs in the definitions of the technologies used. Lastly, in relation to Web Services, the stan- dard definition is that stated by the W3C (2004): A Web service is a software system designed to support interoperable machine-to-machine in- teraction over a network. Other systems interact with the Web service in a manner prescribed by its description using SOAP messages, typically conveyed using HTTP with an XML serialization in conjunction with other Web-related standards. The benefits of Web services include the decou- pling of service interfaces from implementations and platform considerations, the enablement of dynamic service binding, and an increase in cross-language, cross-platform interoperability (Ferris & Farrell, 2003). The subsequent section describes the tool developed which combines the two technologies in a novel solution specifically customized for RREAs. Firstly, an overview of the tool is provided, followed by a detailed description of the architecture. Semantic Management System for Real Estate Agents (SERREA): Overview Architecture The SERREA architecture presents a set of sig- nificant decisions about the organization of the software system, by selecting a number of struc- tural elements and their interfaces. Components might be related to the behavior as specified in the collaboration among those elements, turning those structural and behavioral elements into pro- gressively larger subsystems and the architectural style that guides this organization. This section introduces a loose-coupled view of the architecture. The explanation of this view is aided by describing the architecture in a layered design. The advantage of layering is the conceptual distinction and functionality between layers, given that each layer has a particular and precise func- tionality. Layers exhibit a bottom-up dependency relationship, indicating that the upper layers rely on some functionality of the lower layers. Layered architectures are used in different domains, and particularly in communication systems where each layer implements a different aspect of the information exchange. The layer view is shown in Figure 1. The architecture is comprised of three operat- ing layers. Firstly, the User Layer is composed by a number of devices / Graphical User Inter- faces (GUI, for short) through which users can interact with the SERREA architecture. Sec- ondly, the Business Logic Layer encompasses the Reasoning, Inference and Business Logic Man- agement functionalities. It is connected to the User Layer through the Web Services Interface, a Service Oriented Architecture based on the Service Bus concept, where a number of loosely- decoupled software components or interfaces can communicate through Web Services Interfaces. Finally, the Persistence and Storage Layer is composed by Semantic Repositories, storing both the Domain Ontologies and Semantic Annotations. In the following, we will detail several of the core components in each layer: The User Interface Layer has two core software GUIs, namely the Intranet GUI and the Internet GUI: • Intranet GUI: Provides the functionalities which realize the interaction with the user who works in the intranet for the manage- ment of business activities. Additionally, it offers a semantic annotation retrieval func- tionality for the user, based on both the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 124 SERREA Reasoning Engine and the Query Engine use encapsulated by Web Service. In the former, retrieval is envisaged as loca- tion of a subset of concepts by means of Description Logics subsumption. In the latter, the retrieval is provided by SPARQL (Prud’hommeaux & Seaborne, 2008) defi- nitions to find, manage and query Resource Description Framework (RDF) triples fol- lowing particular criteria. Agreeing with Pinhanez (2009) that software tools and online service applications are intrinsically different, proposed GUI has been designed been aware of service science in order to take full advantage of the service science perspective. • Internet GUI: The Internet GUI provides a subset of the functionalities of the Intranet GUI, designed to display properties to reg- istered users on the Web. • Web Service Interface: The element re- sponsible for defining the functionality of the platform, with the objective that it can be used by different GUIs. This in- terface can transmit its messages via an HTTP Post (like any other SOAP-based service) but also using HTTP Get request. Traditionally a HTTP Get request should be used when the request will not cause any changes to the serve where at a HTTP Post request could cause some change on the server. Since in SERREA every ser- vice is annotated with the type of request it should be used, client applications can benefit of using either HTTP Post or HTTP Get to adapt the invocation to their interest and preferred way of communication. The Business Logic Layer provides cutting- edge functionalities through the following com- ponents: Agent: The agent component collects, man- ages, and processes the information regarding what is available on the market and what is demanded, and brings together demanders and suppliers. It is responsible for systematically Figure 1. SERREA architecture EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 125 SERREA checking the existence of elements which fulfill the characteristics demanded by clients. At the moment that a match is encountered, the client is notified by email or SMS. The preferences of the users are stored in such a form that they can be utilized by the search algorithm based on the application of the Ordered Weighted Averaging (OWA) operator (Yager, 1988) and the Multi Attribute Utility Theory (MAUT)-based feature comparison. In MAUT, given a request (a retail real estate product) r with the attribute values ai = [0, 1] and relative weights wi = [0, 1]: r= ((a1,a2,..,am), (w1,w2,...,wm)) and a real estate product p with the attribute values bi = [0, 1]: p= (b1,b2,..,bn) the score is calculated according to this function: score r p w util a b i i m i i ( , ) ( , )= ∗ = ∑ 1 While the scoring function calculates the overall score of an offer in respect to the user’s preferences, an utility function util (ai, bi) → [0,1] calculates the utility of each single attribute ac- counting for the overall score. When scores for all existing results have been calculated, the results can be used to rank product offers and select the best matching candidates. On the other hand, OWA is a vector of weights which is used to weigh mul- tiple ordered attributes. The implementation of the agent component is based in Java as a standalone application, where most of the check procedures are hardcoded. It uses standard Java communica- tion libraries for email and SMS notification and also provides a rough implementation of the OWA algorithm. A combination of weighted scoring and OWA operators was presented by Langegger and Wöß (2007). • Reasoning Engine: This component de- rives facts from a knowledge base, reason- ing about the information with the final purpose of formulating new conclusions. In the SERREA framework, we use OWL Description Logics as the OWL flavor which will be used to reason. Hence we are based on the Description Logics knowl- edge representation mechanism. For the implementation of the Reasoning Engine, we use Pellet, a Java-based Description Logics reasoned which also provides SPARQL querying and RDF management through the Jena framework. From the de- velopment perspective, we simply use the subsumption-based DL reasoning to find sets and subsets of annotations based on logical constraints. • Query Engine: The Query Engine com- ponent uses the SPARQL RDF query lan- guage to make queries into the storage sys- tems of the back end layer. The semantics of the query are defined not by a precise rendering of a formal syntax, but by an in- terpretation of the most suitable results of the query. This is because SERREA stores mostly RDF triples or OWL DL ontologies which also present an RDF syntax. In the knowledge representation research field, there are technologies that not only ease knowledge representation, but also enable the sharing and reuse of knowledge components. One of these technologies is ontologies, which allow static knowledge representation. Ontolo- gies enable knowledge sharing and reuse, thus reducing the effort needed to implement expert systems. Ontologies were conceived in the scope of Artificial Intelligence as a means to facilitate sharing and reuse. Since the 1990s, ontologies have been a latent research topic and different research communities have been involved in their evolution such as knowledge engineering, natural language EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 126 SERREA processing, and knowledge representation. One of the reasons of the increasing popularity of the study of ontologies is what they promise: a shared and common understanding of a particular domain which can be communicated between people and software applications. In summary, the use of ontologies provides a chance to increase the likeli- hood of successfully enacting any task related to knowledge and information management. Both the Domain Ontology and the Semantic Annotations are implemented with the Web Ontology Language (OWL) in its OWL-DL flavor, what allows the reasoning based on Description Logics explained previously. The ontologies were implemented using Protégé, the most extended world-wide framework for the creation and management of ontologies. Protégé is a free, open source ontol- ogy editor and a knowledge acquisition system. Protégé is written in Java and relies on Swing to create its user interface. Finally, the Persistence and Storage Layer con- sists of a semantic data store system that enables ontology persistence, querying performed by the Business Logic layer components, and offers a higher abstraction layer. This enables fast storage and retrieval of large amounts of OWL DL ontolo- gies together with their RDF syntax while keeping a small footprint and a lightweight architecture approach. Examples of these systems could be the OpenRDF Sesame RDF Storage system, or the Yet Another RDF Storage System (YARS), which deal with data and legacy integration. In our case, for the implementation, we used the Jena Framework as the backbone technology, for two main reasons. Firstly, Jena relies on a MySQL database. The semantic information (ontologies and annotations) stored in Jena are provided with RDF and OWL support and has been used for storing the Semantic Information. Jena is a framework for Java that provides an API for writ- ing and extracting data from OWL descriptions. IMPLEMENTATION The implementation of the architecture as a whole has been based on Sun Microsystems J2EE (Java to Enterprise Edition) technology. J2EE is a widely used platform for server programming in the Java programming language, adding libraries which provide functionality to deploy fault-tolerant, distributed, multi-tier Java software, based largely on modular components running on an application server. Fundamentally, parts of the architecture such as the agents, reasoning engine and user profiles have been developed using existing Java applications. Particularly in the reasoning engine case we use self-contained loosely coupled soft- ware components providing such functionality. Current reasoning approaches on the Semantic Web are grounded on classical logic, with its notions of deduction, semantics, model-theory, soundness and completeness. For the liaison between the business logical and the presentation layer, it is based on the Model- View-Controller design pattern, where the GUI layer corresponds with the view, the business logic layer corresponds with the controller, and the persistence layer corresponds with the model. For the GUI a web interface enhanced with AJAX technology has been chosen. With the objective of enabling the geo-location of properties, the Google Map interface has been used for interac- tion with the platform. The communication of the different software components is hence based on the standard J2EE communication mechanisms, despite it could also be based on more decoupled frameworks such as Web Services. Regarding the Domain Ontology, semantic annotation and communication between these different parts they are all based on the Web On- tology Language (OWL), a family of knowledge representation languages for authoring ontologies, and is endorsed by the World Wide Web Consor- tium. This family of languages is based on two (largely, but not entirely, compatible) semantics: OWL DL and OWL Lite semantics are based on EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 127 SERREA Description Logics which have attractive and well-understood computational properties, while OWL Full uses a novel semantic model intended to provide compatibility with RDF Schema. Furthermore, the Semantic Annotation and Query functionalities provide retrieval and se- lection of propositions contained in large-scale semantic repositories. Retrieval and selection are needed to support ceiling-free reasoning since they need to be able to dynamically reduce or expand the data set we are working with depending on factors such as cost of processing or confidence in result. For any particular task the choice of selection method depends most crucially upon three factors: • Cost/Benefit. The affordability of different scales of reasoning process and the expect- ed cost-per-statement of the process. In other words, both the size and nature of the propositional content under consideration and the intended nature of the reasoning process must be taken into account when choosing a selection method. • Provenance. The source of a proposition is evidence of its relevance to a particular reasoning task. For example, propositions that have been derived from or linked to a document collection can be selected by using clustering and search methods from information retrieval. • Context. The context of the reasoning pro- cess can be used as a filter on the relevance of propositional content. For example, a degree of similarity to content on the user’s desktop or in their browser history is an in- dication of relevance in certain conceptual search scenarios. • Determination of the optimal mapping between these three factors and the selec- tion methods that the project will adapt and develop requires quantification of the performance of each method when op- erating according to parameters derived from a representative sample of task envi- ronments. In other words, we must apply empirical measures to gather data for our theory of selection and of selection method choice. Finally, the main software architecture prin- ciples followed by the SERREA architecture are defining structural issues in the SERREA soft- ware system that include global control structure, protocols for communication, synchronization and data access, assignment of functionality to design elements, physical distribution, composi- tion of design elements, scaling and performance and selection among design alternatives based on the J2EE technology framework which provides full support for them from an implementation viewpoint. CASE STUDY The company NEREAL (fictitious name) was established in Madrid, Spain in 2005. NEREAL aims to exploit the experience held by one of its two partners, here named ILA, a textile firm of Spanish origin which has achieved the largest number of business expansions of the decade since the year 2000. ILA’s business model was conceived as a RREA in prime locations, which correspond to the main commercial streets of large cities. ILA’s business model includes both buying operations as well as the renting of business premises in these zones, principally for international companies in the textile industry. The operating strategy of NEREAL is overall, highly personalized, given that both negotiations with clients as well as with owners is done by ILA. Subsequent to two years of performance, the success achieved by the company in the opera- tions undertaken by ILA leads them to consider changing their organizational strategy, which changes the size of the company, and in parallel, the business model. The company considers the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 128 SERREA creation of a network of agents for the location of business premises in various Spanish cities. However, this move evokes the requirement that the management of the offer and the request should be supported by automated techniques which aid ILA in making the offer to companies in expan- sion. These agents should be empowered to make notifications regarding the discovery of premises which fulfill existing requests or demands. The number of clients of the company is moderate, and therefore its requests are highly varied and depend on the circumstance and intuition of the decision makers in the client organizations. Thus, NEREAL decides to implement SERREA for the management of its relations with clients and providers. In addition to the diverse capacities related to the operations of the company, the use of SERREA focuses on two fundamental aspects. In the first place, the company adapts SERREA so that the agents input the commercial premises which characterize the subsequent offer, or which simply represent leads (without communication with the owner of the property). In the second place, SERREA is utilized to store customer preferences. At the moment at which a lead or a property is added, ILA is informed, as well as the corresponding account agents, using email and SMS to inform them of the new avail- ability. ILA continues to be responsible for com- munication with important clients, even though it delegates other agents to negotiate with the owners of commercial premises and carry out the administrative affairs of negotiation with clients. The information is completed with the references of the system to national property/site values, as well as spatial information regarding the property. Lastly, the property is always geolocated using XY coordinates, storing these coordinates in a persistent repository. In the first year of use of the tool, a total of 700 leads were codified in SERREA, of which 37 resulted in a successful deal, 86% of which were renting operations and 14% sales deals. The preferences of the clients were codified by an ILA agent based on his notes, and analyzing the agent’s data, the matching realized by SERREA was considered crucial for the closing of opera- tions (specially for operations in Madrid, the loca- tion of the headquarters of the company). In this year, NEREAL presented an increase of 26% in its commissions, 28% its operations and 21% its EBITDA. Today, NEREAL continues operations using SERREA as a management system and a communication tool with its agents. EVALUATION Research Design Evaluation of the proposal was required in order to determine the level of acceptance of SERREA among NEREAL workers. With the objective of calculating the level of adjustment of the proposal, a study was designed which was aimed towards NEREAL workers. This evaluation was carried out by means of the application of a questionnaire. The questionnaire was applied after the subjects had used the SERREA tool for a period of time not less than nine months. The questionnaire was composed of three sec- tions. In the first place, the subject was required to provide identification data: age and gender. Secondly, the users were asked about the different perceptions they had about the use of SERREA. Users were asked to answer three questions regarding SERREA: Overall evaluation, User experience and Performance. The responses to these questions were coded using a Likert scale ranging from 1 to 4 points, with the following values. 1: Limited, 2: Regular, 3: Good, 4: Very Good. Thirdly, the subject was asked about the capacities of SERREA compared with other Real Estate applications used by them in their previ- ous jobs. To do so, users explain with their own words their experience in tools devoted to Real Estate. After that, users compare SERREA with EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 129 SERREA their previous experience in Real Estate tools using Likert scale ranging from 1 to 5 points (1: SERREA is clearly worse than other tools, 2: SERREA is slightly worse than other tools, 3: More or less the same, 4: SERREA is slightly better than other tools, 5: SERREA is clearly bet- ter than other tools). After that, users were asked to identify the differencing features in SERREA (Faceted Search, Annotation…) and rank them. Questionnaires were sent to targeted indi- viduals via email and filled out by them with the online supervision (via chat) of one member of the research team. Sample The sample was composed of NEREAL workers and ex-workers. These workers use SERREA as a tool to support their work in NEREAL. The sample was composed of 2 women (14%) and 12 men (86%), with an average age of 34.7. Among respondents, four of them are not currently work- ing in NEREAL, but they have left the company recently (less than 6 months). All respondents had previous experience in top RREAs either in Spain or abroad. Results The results of the surveys, which were filled in using electronic documents, were subsequently coded in the statistical analysis tool Statisti- cal Package for the Social Sciences (SPSS). In Table 1, the average and standard deviation of the responses offered by the subjects are shown in relation to overall evaluation, user experience and performance. Taking into account the results provided, those related to “User experience” are more than prom- ising. This value presents an average of 3.79 points over 4, with a highly adjusted standard deviation of 0.43, which indicates that, apart from the scor- ing being high, the agreement between the subjects is more than acceptable. Thus, the attempts to develop the Graphical User Interface of SERREA so that it would be attractive to users have been judged positively by test users. Apart from this, and taking into account results displayed in Table 1 and Figure 2, all factors are above 3 points and present moderate standard deviation figures (high concentration of values and low disparity). On the other hand, users reported a total of four tools used by them in their previous jobs: Salesforce (6 users), SAP (4 users), Sage (3 users) and in-house developments (6 users). None of these tools implement semantic technologies yet. Figure 3 shows the results of the comparisons made by users among these tools and SERREA (1: SERREA is clearly worse than other tools, 2: SERREA is slightly worse than other tools, 3: More or less the same, 4: SERREA is slightly better than other tools, 5: SERREA is clearly bet- ter than other tools). The comparison among SERREA and other Real Estate (or general purpose tools customized to operate in a Real Estate scenario) tools is also very promising. SERREA can be seen as a useful tool compared to In-house developments (SERREA is clearly better in 5 of 6 opinions) and also compared with Sage, and, in a lower but important level, with solutions like SAP or Sales- force. Finally, users identified a total of 6 charac- teristics of SERREA as differencing features. Table 2 displays characteristics, occurrences and average rank. Table 1. Overall evaluation, user experience and performance: average and standard deviation Average Std. Deviation Overall evaluation 3.21 0.58 User experience 3.79 0.43 Performance 3.29 0.61 The frequency of the scores in the scale defined for the dif- ferent factors may be viewed in Figure 2 (Values: 1: Limited, 2: Regular, 3: Good, 4: Very Good): EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 130 SERREA Taking into account the results provided in Table 2, SERREA top 3 features are pure seman- tic features. In particular, “Faceted Search” is perceived as the leading feature. In “Faceted Search”, based on previous works (García Crespo et al., 2009b; García Crespo et al., 2009c) a num- ber of RDF based faceted navigation mechanisms were developed that help the user to navigate through the results. With faceted metadata, the information space is partitioned using orthogonal conceptual dimensions of the data. These dimen- sions are called facets, and represent the charac- teristics of the information elements. These facets are used then to select or filter the relevant ele- ments in a certain information space, leading users to the exact information needed. These facets are the properties defined in the domain ontologies. Figure 2. Overall evaluation, user experience and performance: score frequencies Figure 3. Overall evaluation, user experience and performance: score frequencies Table 2. SERREA top features Occurrences Avg. Rank Faceted search 14 1 Semantic annotation tool 14 2 Keyword Search 14 3 Finder agent 8 4 SMS 8 5 Email integration 7 6 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 131 SERREA Secondly, the “Semantic annotation tool” provides the functionality of linking a particular object with a given concept, populating ontologies in an easy and effective way. Finally, “Keyword Search” also presents good values, but, due to the popularity of this feature in both semantic and non-semantic tools, this feature has been judged as less relevant by subjects. Taking into account the test, and from the perspective of the results, the implementation of SERREA may be considered a success: pure se- mantic features are perceived as the main features of SERREA and SERREA as a whole is perceived as a useful tool in RREA domain. CONCLUSION AND FUTURE WORK In the environment of market competition in Retail Real Estate, dynamism and exactness of information represent two of the characteristics of successful organizations. Taking into account that Retail Real Estate is an information-intensive business and that the agents are pure market intermediaries, control in the dissemination of information also represents a feature which is highly valued by agencies that today information systems cannot afford in a full way. SERREA contributes these capacities to the management of information in an environment defined as Retail Real Estate. On the one hand, as a result of the application of agents based on semantics, it enables the instantaneous delivery of informa- tion to interested parties. Additionally, the use of semantic technology facilitates the precision of the information, which constitutes the novel solution in SERREA. Here, the benefit of adding semantics consists of bridging nomenclature and terminological inconsistencies to include underly- ing meanings in a unified manner. Lastly, control of the dissemination of information is achieved due to the use of profiles for access to the information. Regarding its implementation, SERREA has been tested in a Spanish top RREA domain with good results. On the one hand, this agency has improved its results and on the other hand, users opinions and evaluations of SERREA can be con- sidered more than promising. In this scenario, the aim of testing if semantic technologies, and more in particular, SERREA can be useful to RREAs is passed with good marks. The development of SERREA represents the beginning of a prolific applied research domain. Therefore, as future research efforts three differ- entiated lines are proposed. In the first place, with the objective of integrating semantic multimedia capacities into the platform, the researchers pro- pose to incorporate semantic annotation capacities to multimedia video formats. This characteristic would contribute a value added feature, provid- ing a service to the client by enabling him/her to view with precision the elements of the property which fulfill his/her requirements through mul- timedia video formats. The semantic annotation of multimedia formats on the Internet represents a common future line of work for Semantic Web researchers. Using this feature, a given user could locate a movie in which a given building appears. More precisely, this user could point the exact minute and second in which a certain part of a given building appears in the movie. 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Chapter 9 DOI: 10.4018/978-1-4666-0044-7.ch009 Marianna Sigala Democritus University, Greece Mass Customisation Models for Travel and Tourism Information e-Services: Interrelationships Between Systems Design and Customer Value ABSTRACT Online travel firms exploit current ICT advances for developing mass customization (MC) capabilities and addressing the needs of the sophisticated travellers. However, studies investigating MC in services and specifically in tourism are limited. By adopting a customer-focused approach, this paper addresses this gap by analysing the following issues: a) the ICT and product dimensions that online firms can customise for developing and implementing different MC models; and b) the customer value and benefits provided by the different MC models. After reviewing and illustrating the interrelationships of studies coming from the fields of customer value, MC and IS design, the author proposes a customer value based framework for developing MC models. The applicability and practical implications of this framework are demonstrated by analysing the MC practices of three online travel cyberintermediaries. Finally, the paper summarises the formulation of research propositions investigating the influence of users’ characteristics on the customer value and benefits sought by MC practices and on the design of the IS platforms supporting MC services. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 136 Mass Customisation Models for Travel and Tourism Information e-Services INTRODUCTION During the 19th century the industrial revolution took place and mass production was the common manufacturing term used; i.e., products were produced in large quantities at low and afford- able prices. The success of mass production was undeniable as products were manufactured on massive levels, in direct response to consumer demands. In the 21st century, however, consum- ers became more sophisticated and demanding regarding issues pertaining to the design, quality and functionality of their products and services (Clemons, Gao, & Hitt, 2006; Clemons, Gu, & Spitler, 2003). The tourism industry does not constitute an exception from such developments. In particular, the following factors have increased tourists’ demand for affordable and reliable ser- vices that correspond exactly to their specific individual needs (Sigala, 2005): increased online price and product transparency; the use of customer recommendation and information personalisation systems by online firms that allow customers to participate in and customise processes such as product development, design and production (e.g., Dell, Travelocity.com dynamic package possibili- ties). Moreover, as the disposable income, the time and flexibility of travellers’ increases, demand for pre-packaged and static packaged tours decreases. Moreover, an increasing number of travellers are nowadays willing: to afford little more money for buying personalised tourism services; to spend some time to plan and organise their own vaca- tions by assembling and selecting their own tour package components; and to create their own flexible trip itineraries. For addressing individuals’ requests, travel information service companies have traditionally followed a niche marketing strategy by focusing on specific travellers and offering them differentiating travel products-services at premium prices (e.g., specialised travel agents). However, current com- petition prevents firms from charging for product customisation, while ICT advances and tools (e.g., collaborative filtering) enable firms to adopt flex- ible operating procedures that reduce the cost of product customisation at mass production output levels, i.e., mass customisation operating models (MC). Indeed, recent research provides evidence of a positive relationship between increased ICT investments and a firms’ capability to produce a large product variety (Gao & Hitt, 2004). In e-tourism, MC practices are mainly reflected on the wide adoption and development of per- sonalised travel services and dynamic packaging (Anite, 2002; Sigala & Christou, 2005). However, despite the business necessity of MC in tourism, research in MC in tourism, as well as in services in general, is scarce (Peters & Saidin, 2000). Indeed, most of the MC studies have primarily focused on investigating the operational and technologi- cal capabilities of mass customisers specifically within the manufacturing sector (Papathanas- siou, 2004). Thus, limited academic debate and evidence are currently provided identifying the MC models and analysing how the latter can be designed for delivering enhanced customer value. This is because previous studies on MC typologies have adopted a business value chain and process centric approach for categorising MC models (e.g., Spira, 1996), as MC implementation demands the integration and participation of customers in value chains. However, when MC implementation is centred around value chains rather than customer value, customer adoption of MC is not guaranteed (Piller et al., 2004). Previous MC typologies also implicitly assume that the success of MC increases as customer involvement in the value chain in- creases. Nevertheless, this assumption does not consider whether customers are also willing, have the competencies and/or perceive and get any value by participating in value chains and becoming co-producers of personalised services. Therefore, there is a need to adopt a customer value centric approach for identifying and analysing how to develop MC models that can deliver customer value and benefits. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 137 Mass Customisation Models for Travel and Tourism Information e-Services This paper aims to develop an overall frame- work that can be used for identifying, developing and categorising different types of MC models from a customer value centric approach. By fo- cusing on MC implementation in the context of online travel information service companies, the study does not only address the gaps of MC within the service sector, but it also investigates a major competitive necessity in e-tourism. To achieve this, the study first analyses the drivers, the concept and the application of MC in general and then, it focuses on MC in the context of online travel and tourism information services. As a result, the paper identified and reviewed the various types and dimensions of MC models and then, it proposed a customer value centric framework for analysing the MC models and customer values delivered by online travel firms. When MC is implemented over the Internet, its supporting information system (IS) platform needs to be appropriately designed in order to provide users with different MC func- tional, utilitarian and emotional values (Franke, & Piller, 2004; Oon & Khalid, 2001; Kamali & Loker, 2002; Liechty, Ramaswamy, & Cohen, 2001). Recently and Lexhagen (2009) has also demonstrated the need to design and assess travel websites by adopting a customer-value centred approach. To that end, the proposed framework also identifies the different IS design issues that need to be considered when designing the online MC IS platform so that the latter would address and fit the physical, cognitive and affective profile of its users. In this vein, the framework is devel- oped by borrowing and synthesising concepts from the fields of human-technology interaction, IS design and customer value. The applicability of the dimensions and customer values of the proposed MC framework are illustrated by ana- lysing the online MC services provided by three travel cyberintermediaries. Because all travellers do not give the same importance to functional and emotional MC customer values, while other contextual (e.g., type of task to be performed) and social community (e.g., peer groups) factors may also affect travellers’ preferences and needs regard- ing the design, the functionality and the customer values provided by the IS platform supporting the MC services. Hence, the study concludes by developing several research propositions aiming to guide further research investigating the design of IS platforms supporting the development and provision of MC models and customer values. MASS CUSTOMISATION: CONCEPT, DRIVERS AND IMPLEMENTATION The term mass customization was coined by Stan Davis (1987) who predicted that the more a com- pany was able to deliver customized goods on a mass basis relative to its competition, the greater would be its competitive advantage. This view is also supported by Pitt, Bertham, and Watson (1999) and Duray and Milligan (1999). Pine, Victor, and Boynton (1993) described the synergy of mass customization as a `new’ competitive strategy challenging ‘old’ strategies such as mass production. Hart and Taylor (1996) offered an operational definition of MC claiming that ‘MC is the use of flexible processes and organizational structures to produce varied and often individu- ally customised products/services at the price of standardised, mass produced alternatives’. MC means that firms can reach the same large customer numbers as in mass production, but they have the additional ability to address their customers individually as in customised markets (Parker, 1996). Flexibility, variety and responsiveness of processes as well as resource reconfiguration are all essential to MC, while companies need to understand what customers really want and then respond quickly with an offering which costs the customer relatively little more than standardised, mass produced alternatives (Duray & Milligan, 1999; Pine et al., 1995; Boynton et al., 1993). The justification for the development of MC systems is based on three main ideas and develop- ments (e.g., Pitt et al., 1999; Duray & Milligan, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 138 Mass Customisation Models for Travel and Tourism Information e-Services 1999; Pine et al., 1995; Duray, 2000): a) new flexible manufacturing systems and ICT enable production systems to deliver higher variety at lower cost; b) an increasing demand for product variety and one-to-one customization; and c) the shortening of product life cycles and the expanding industrial competition that have led to the break- down of many mass industries and the need to adopt production strategies focused on individual customers. Pine’s (1993) market turbulence map identified the following additional drivers to MC: the `quality consciousness’ of customers consid- ered as `meeting whatever the customer wants’, and the competitive activity. Considering e-tourism, the following trends have led to the urgency to adopt MC practices in the travel and tourism intermediary sector (Anite, 2002; Sigala & Christou, 2005): reduction of com- missions provided to intermediaries by tourism suppliers; the need of travel intermediaries to find new revenue models by providing enhanced customer value and new customer services; the possibility of dynamic packaging to provide new revenue streams and customer loyalty; the rise of no-frills airlines that have increased the number and willingness of travellers to travel indepen- dently and to create their own itineraries and tour packages; and the increased online competition amongst cyberintermediaries and tourism sup- pliers both offering flexible and customisable travel information services and products. Overall, the ability to sell in the mass travel market by simultaneously addressing individual travellers’ needs through personalisation tools is no longer considered as a differentiating factor, but rather as a competitive necessity. Indeed, the number of cyberintermediaries adopting personalisation practices has boomed (Anite, 2002). Duray et al. (2000) and Duray (2002) identified two critical dimensions for implementing MC: the basic nature of customization; and the means for achieving customization at or near mass produc- tion cost. The first dimension concerns the stage and level of customer’s involvement within the value chain process (e.g., at the design, production, assembly, delivery and/or usage stage) and it is used for determining the degree of customization. The second dimension is related to modularity. Modularity is used as the critical aspect for gaining scale volume or ‘mass’ in MC, since a modular approach: can reduce the variety of components while offering a greater range of end products; allows part of the product to be made in volume as standard modules; and creates product distinc- tiveness through combination or modification of the modules. Overall, modularity provides both economies of scale and economies of scope, as component modularity restricts the range of choice and so, it decreases the possible variety of components which in turn allows repetitive manufacturing. Modularization in the travel product is easy to identify as travel services consist of different modules (e.g., accommodation, flights, leisure activities) for each one of which a traveller can select specific providers and services and then, assemble each module and option together for creating a personalised vacation (i.e., the creation of a dynamic package). Furthermore, each travel module can be further modularised into smaller components, e.g., on Virgin Express’ website, a traveller can design and buy customised flight services by selecting the location and leg-room of his/her seat, pre-order and pre-pay for any special in-flight catering service etc. Travel websites also offer travellers the opportunity to personalise their services by engaging and participating at differ- ent stages of the travel value chain process. For example, at the product design stage, travellers can select different travel modules and components for designing customised vacations; at the travel consumption-production stage, travellers can co-produce as well as influence the selection and consumption of tourism experiences by reading, uploading, and distributing personal travel reviews and feedback in online travel communities and social networks (e.g., www.tripadvisor.com, www. expedia.com); at the purchase stage, travellers can EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 139 Mass Customisation Models for Travel and Tourism Information e-Services choose the payment form (e.g., type of credit card etc) of their personalised travel experience as well as select the method for receiving the information and confirmation of their purchase, bookings and travel documents (e.g., by e-mail, SMS). Many travel cyberintermediaries allow travellers to personalise and customise the content and the functionality of the travel website even further. For example, travellers may upload their profile and personal travel data (such as dietary preferences, airport closed to their home, airline frequent flyer card numbers), so that the website’s search en- gines and content are automatically configured to consider these personal parameters when filtering and suggesting travel information, availability and other travel options. This personalisation function of the website is usually referred to as ‘my...’ (e.g., my yahoo, my travelocity, my expedia). MASS CUSTOMISATION TYPOLOGIES: A CUSTOMER CENTRIC APPROACH Previous Typologies of MC Strategies and Dimensions Previous research in MC has been dispersed and so, many studies have attempted to summarise previous findings in order to categorise MC imple- mentation models and strategies in appropriate types. This is because typologies that analyse and differentiate the implementation characteristics and impacts of different types of MC models could help in further building and testing a MC theory (Doty & Glick, 1994; Kotha & Vadla- mani, 1995). Previous studies (e.g., Lampel & Mitzberg, 1996; Pine et al. 2005) classifying the types of MC implementation models have used the two previously discussed MC dimensions (i.e., modularisation and customer involvement in the value chain) for identifying different types of MC. Based on these MC typologies, customer involvement at the early stages of the value chain reflects higher levels of MC implementation than customer involvement at later stages (which is regarded as cosmetic MC), because the former enables substantial changes to happen at the prod- uct design and fabrication stages. For example, MC can range from low customisation levels (i.e., involvement at the product delivery stage whereby customers simply “adapt” products’ packaging), up to high customisation levels (i.e., when cus- tomers determine the customization of the sale, design, fabrication, and assembly of products). Table 1 summarises this literature by placing the types of MC implementation models proposed by different authors according to the level and stage of customer involvement within the value chain (i.e., the first dimension of MC as identified by Duray et al., 2000) that these models represent. The table also illustrates and explains how these types of MC implementation models are applied in the e-tourism field (Sigala & Christou, 2005). As many authors (Piller & Moller, 2004; Piller, 2005; Franke & Piller, 2003; Sigala, 2006) have previously recognised, the above mentioned typologies of MC implementation have led firms to adopt an operations-centric approach to MC. This is because, the suggested MC typologies gave emphasis on the need to find ways to integrate and involve customers within value chains, which in turn led firms to focus mainly on how to design their processes for better integrating and engaging customers into their operations. However, as Berger, Moslein, Piller, and Reichwald (2005) advocated this operations-led approach to MC implementation provides limited insight into the value and the benefits that customers get from their involvement and contributions to MC imple- mentation. In other words, although this approach provides useful guidelines on how to design busi- ness operations for integrating customers within value chains, it does not explain why customers should and would be willing to take an active role in business operations. Other authors (e.g., Siga- la, 2006; Franke & Piller, 2003; Piller, Schubert, Koch, & Möslein, 2005; Huffman & Kahn, 1998) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 140 Mass Customisation Models for Travel and Tourism Information e-Services have also claimed that this operations centric ap- proach to MC does not answer questions related to the following customer related issues: does the higher degree and level of customer involvement in value chain lead to greater customer value and benefits? do customers always require to get more involved with product customisation? which are the dimensions of the services’ modules-compo- nents whose customisation can provide enhanced customer value? what types of customer value are delivered by (different) MC models? do all types of customers require and demand to cus- tomise all these dimensions of services’ modules – components? are there any customers’ and/or contextual factors that demand the customisation of specific services’ modules – components? Moreover, as the adoption of any technology based innovation depends on the users’ perceptions regarding the technology’s easy of use and useful- ness [e.g., see Christou and Kassianidis (2003) and Kargin, Basoglu, and Daim (2009) for a review and analysis of the implications of the Technol- ogy Acceptance Model (TAM)], frameworks suggesting the development of successful types of MC models should be based on and identify the service dimensions and components that cre- ate and deliver enhanced MC driven customer value and benefits. To achieve that, the following section adopts a customer-oriented approach that emphasises the need of MC to deliver customer value (Piller et al., 2005; Franke & Piller, 2003) for proposing a framework for modelling the design and implementation of MC models. Spe- cifically, the framework identifies and is built on Table 1. Generic levels of MC applied in the travel sector MC generic levels Pine et al. (1995) Lampel & Mitzberg (1996) Pine (1993) Spira (1996) MC in travel 8. Design Collaborative, transparent Pure customization Collaborative design of travel products between supplier- customer and within travellers virtual communities 7. Fabrication Tailored customization Flexible Itineraries determined by the traveller 6. Assembly Customized standardi- sation Modular production Assembling standard compo- nents into unique configurations Traveller selection of travel modules and components from a supplier’s predetermined choice list: dynamic packaging 5. Additional custom work Point of delivery cus- tomization Performing ad- ditional custom work Customizing features / services of travel products, e.g. excess weight, destination tours, insurance 4. Additional services Customized services, quick response Providing addi- tional services Personalised services, e.g. SMS alerts for flights cancellations, delays 3. Packaged and distribu- tion Cosmetic Segmented standardisa- tion Customizing packaging Selection of distribution- delivery systems, e-mail, SMS delivery of an 3D e-ticket and e-boarding pass 2. Usage Adaptive Embedded customiza- tion Adaptation of pre-defined packaged tour 1. Standardisa- tion Pure standardisation Pre-defined packaged tour designed by the intermediary EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 141 Mass Customisation Models for Travel and Tourism Information e-Services the services’ modules-components that can be mass customised in order to directly enhance the customer value that travellers get from online mass customised travel information services. MC in Online Travel Information Services: A Customer Centric Framework The previous discussion revealed that successful MC strategies should focus on and identify how customer engagement in business operations should provide and deliver customer values. In this vein, when examining the types of MC implementation, Piller et al. (2004) adopted a customer-centric approach for identifying the customer values that customers get when they customise the following product features (the discussion is also enhanced in order to provide examples of customer values provided by MC types found within the tourism sector): Adaptation of form: Mass customisation can be used for adapting a product’s form and design. Customers’ motivations, value and benefits for adapting products’/services’ aesthetic features include: better product- service fit with other products (e.g., cus- tomisation of the watch’s colour to match the colours of one’s cloths) and customer needs (e.g., customisation of the size and the colours of the fonts and the background colour of a website to match the user’s eye abilities); expression of personal style, taste and personality (e.g., customisation of the website backgrounds, the mobile phone’s colours, screens, ring-tones and the travel information and products in order to fit with the user’s profile and personality). Adaptation of fit: Another factor (less related to aesthetics) motivating customers to individu- alise products is the need to get customer value and benefits deriving from custom- ised products/services that fit customers’ characteristics and needs. Practical reasons are most important: e.g., garment adaptation to individual’s physical structure and body measure; in-flight catering customised to the religious and dietary customers’ needs; leisure activities and sightseeing tours that match tourists’ interests; button sizes of mobile phones according to one’s finger sizes. For example, the destination portal of Switzerland allows travellers to find an appropriate conference centre based on their preferences and needs (e.g., distance from airports and city centres, capacity and layout designs, the provision of other busi- ness services), while users of the destination portal of Germany can search and find a spa centre and/or hotel that provide the appro- priate wellness services and treatments that match their personal health circumstances and needs. Adaptation of function: customers get also value and so, they are motivated to individualise products-services, because customised prod- ucts deliver benefits of better functionality. Many customers are known to the dilemma of modern products, which in most cases have way too much functionality, but which, in a great measure, will never be used by a single customer. As products-services are getting more and more complex, the harder it becomes for the customer to handle and use such products-services. Sometimes custom- ers may even expect different functionality (Dellaert & Stremersch, 2005). Thus, firms usually integrate services-products with the whole variety of expected functionalities in order to satisfy a lot of different customers and/or develop multi-functional devices, products and services, and then, firms ask customers to customise functionality based on their needs and preferences. As customers begin to long for products that have exactly those functionalities that they want them to have, customers’ ability to customise prod- EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 142 Mass Customisation Models for Travel and Tourism Information e-Services uct functionality is becoming very critical. Recognising this functionality confusion amongst users, Vodaphone has recently launched two devices (called Vodafone simply) equipped with three buttons that al- low users to directly divert to the three most popular and highly needed functionalities of mobile phones, i.e. make a call, access voice mail and send an SMS. Additional practical examples of MC models adapting product functionality include: travelocity.com allows travellers to configure its lowest fare tracking system, so that the latter will automatically search the web for special offers and tours that match the user’s profiles and requests (e.g., search for flights to specific destina- tions at specific dates and days of week) and then it will alert travellers about the search results on pre-specified interval periods and by using pre-specified mediums (e.g., SMS or e-mail alerts) previously determined by the traveller. Adaptation of modalities: This dimension of MC identifies the values that customers get when they can determine the functionality and the forms of the production and delivery of products and services. For example, the customer may want to choose by herself/ himself, which firm and personnel should perform a specific service and which produc- tion method should be used. The customer may also be enabled to influence the service delivery time and place. Many only travel firms allow travellers to create their own profile based on which information provi- sion and search as well as website interface are customised; (for example the website system searches and provides information only about the airlines or hotels for which the user has previously provided a loyalty card on his profile; flights’ availability will be provided only for flights departing from airports located nearby the traveller’s home). Travellers can also customise the delivery options for receiving products and services (e.g., travel alerts delivered by SMS or through e-mails; tickets delivered by post, SMS and/or e-mail). Finally, travellers can also choose and customise the payment forms by simply selecting the information and payment options that they have previ- ously uploaded into their profile. Overall, the possibility to interactively influ- ence and adapt the features of a product/service according to one’s personal needs and preferences (and so, to obtain value and benefits), is one of the most fundamental motivation persuading custom- ers to invest time and efforts to participate in MC operations such as creating and updating online their personal profiles and customising recom- mender systems. In other words, in exchange of resources and time spent for providing personal information and for customising products, custom- ers expect to obtain extra benefits and value (such as, fast and easy purchases of products-services customised to user’ needs, time savings, enhanced product usefulness and functionality addressing personal needs and desires). As previously anal- ysed, these types of customer value can be easily obtained when customers have the possibility to customise the form, the fit, the functionality and the modality of the product-service. The appli- cability of this customer centric framework for implementing MC was verified by Sigala (2006) who measured and provided evidence of the dif- ferent types of customer value (functional, social, emotional, epistemic and conditional value) that users get when they customise the following fea- tures of their mobile phone services: form, code, substance, layer, visual aspects and interaction. However, the product and services of online travel and tourism information providers are closely interlinked with and are inseparable from the ICT system that supports them. In this vein, in order to propose MC strategies in the online travel sector that are customer effective, one should also identify the features of the ICT system EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 143 Mass Customisation Models for Travel and Tourism Information e-Services whose form, fit, functionality and modality has to be adapted for creating customer value (Franke & Piller, 2004; Oon & Khalid, 2001; Kamali & Loker, 2002; Liechty et al., 2001). To decompose the travel ICT systems into its design features, the following three major layers of digital com- munication systems were used (Benkler, 2000): physical, code and content layer. The decomposition of the ICT system in its components is argued as a useful framework for identifying and modelling MC implementation models because: • It is consistent with the concept of modu- larisation, which is one of the two MC di- mensions facilitating MC implementation; so, ICT components represent modules whose features can be customised in terms of their form, fit, modality and functional- ity for enhancing customer value; • Most travellers frequently do not know what they want as well as they do not have the knowledge and expertise to identify, select and customise the appropriate mod- ules for addressing their individual needs. Thus, the identification and the analysis of various customisation options for each tourism module and component can help and educate travellers on how to easier identify and specify the modules’ dimen- sions that can satisfy their needs; • The components-modules of the ICT sys- tem can directly influence customer value. For example, recent research provided evidence of the different types of value that customers get, when they create MC mobile phone services by customising the ICT components (in terms of fit, form, functionality and modality) of their mobile phones services to their individual prefer- ences and needs (Sigala, 2006). Earlier, Sigala (2002) has also demonstrated how to adapt the form and the functionality of e-learning systems and tools, so that the learning platform can reflect and match the learners’ cognitive styles, learning orienta- tions and preferences. The physical layer includes the physical tech- nological device and the connection channel used to transmit communication signals. The code or middle layer consists of the protocols and software that make the physical layer run. By customising the code, the user can customise and control its interaction with the technology (i.e. determine the way and time of accessing and delivering informa- tion services, e.g. e-mail alerts etc). On top, there is a content layer, which consists of multimodal information. It includes both the substance and the form of multimedia content (Saari, 2002). Substance refers to the core message of the in- formation. Form implies aesthetic and expressive ways of organising the substance, such as using different modalities and structures of information (Saari, 2002). In this vein, travellers can select the colour and mode of information (e.g., choose between text, 3D pictures, webcams etc) that better match their personality, preferences and style. Travellers can also request to solely see or search the information (substance) that is relevant to their profile; for example, if they travel always with their spouse or children, then search engines and information results about hotel availability are designed and filtered to consider their family needs; similarly if they travel always with airlines that are members of the “star alliance” group in order to accumulate air miles, then search results about flights’ availability will include flight avail- ability only by “star alliance” member airlines. In general, customisation of the information/ content can be individual-centric when the content is personalised based on the user’s profile, or it can be more community-centric when the content is customised based on other users’ profiles and behaviours (i.e., collaborative filtering). These ICT components are amenable for further numerous customisations. Content can be selected, grouped, and organised, form can EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 144 Mass Customisation Models for Travel and Tourism Information e-Services be tailored to suit individual needs and prefer- ences (e.g., My Excite allows users to select their preferred website fonts, themes, colours etc) and delivery methods can be tailored by selecting the communication-technology platform to receive information updates and alerts. The possibilities to change the content structure and the interrela- tions amongst the three layers of the ICT system provide additional numerous opportunities for designing mass customised travel information services that add customer value. For example, imagine the situation whereby a traveller creates an online profile and informs the content of his personal calendar by including the anniversaries and celebrations of all his/her friends. The com- pany can create different interrelations amongst customised content giving the option to the user to further determine and customise how the per- sonalised calendar content can be interrelated- connected with other travel related functions, e.g., the automatic delivery of e-mails to the persons who celebrate an anniversary, the automated and programmed purchase of user pre-selected ser- vices (e.g., a flight ticket to visit the friend on his/ her celebration and the reservation of a meal at a favourite restaurant). In another occasion, content interrelation can help a business man whose flight is cancelled or changed; in this case, content inter- relations in the online travel information services should be created, so that the businessman’s hotel reservations are automatically changed and the respective hotel is also automatically informed, alternative flight arrangements are made for other travel itineraries etc. Overall, such personalised online travel services provide travellers with a wide variety of benefits-value, e.g., functional (e.g., time savings and convenience) as well as emotional (e.g., emphathy and responsiveness). The aim of the following section is to analyse in depth the types of customer value that travellers gets from MC online travel services. Types of Customer Value Fostered by MC Types Current research on the customisation-personal- isation of information systems (IS) places great emphasis on the utilitarian value of personalised information delivery (Abidi, 2003). Nevertheless, other dimensions of value provided by customised IS are nowadays being recognised that are also equally important to the users’ experience. For example, users are often active in tailoring ICT systems to better reflect their own personality and identity (e.g., ring tones, backgrounds) (e.g., Guay, 2003), but these forms of user initiated personalisation have been overlooked in the lit- erature (Saari & Turpeinen, 2003; Sigala, 2006). In reviewing the literature, Abidi (2003) identified different dimensions of personalisation such as, special attention and empathy, customization of products-services, pseudo-personalization of mes- sages, depersonalization/re-personalization of the relationship by the ICT, etc. In her study investi- gating the customer value of MC mobile phone services, Sigala (2006) identified the following types of perceived customer value: functional- convenience value; social value; emotional value; conditional value; epistemic value; and control value – freedom of choice. By synthesising this literature, MC customer values are clustered into two major dimensions of personalization (Abidi, 2003; Sigala, 2006): The utilitarian MC: Utilitarian mass customisation and personalisation also refers to service features that mainly aim to provide functional value and convenience in service provision rather than experiential value (emotional). For example, the creation of a traveller’s profile will enable him/her to make online bookings faster, as he/she will not need to re-enter personal data. In general, this dimen- sion of MC refers to the individualization, the made-to-order customization, the tailor of the offer or else the MC done with the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 145 Mass Customisation Models for Travel and Tourism Information e-Services customers in a routine bases. Examples of this dimension of MC may include the fol- lowing: pseudo-, routine personalisation reflecting user recognition on the website by his name and – or user adaptation of website information and interface. The emotional/symbolic MC: this type of MC refers to the customisation of service features aim- ing to provide customers with emotional and/ or symbolic value (e.g., social recognition). Although this MC dimension is above all es- tablished in interpersonal service-encounter, current studies also speak about emotional personalization in person-computer service encounter (like e-commerce). For example: Moon (2002) argued that there is social in- teraction even between the PC and the user; Hopkins and Raymond (2004) investigated the emotional user responses of telepresence; Gretzel et al. (2004) showed how destination recommendation systems can use personality user characteristics for customising content and for creating appropriate user emotional responses; Vrehopoulos et al. (2004) proved how the layout and the structure of an e-store can affect utilitarian, cognitive and emotional user values such as perceived usefulness, easy of use, time savings, entertainment; in investigating the dimensions of website interactivity, Chen and Yen (2004) provided evidence on the impact interactive website features on constructs related to customer values such as user control, playfulness, reciprocal communication, social presence, choice, information selection. Lexhagen (2009) provided evidence of travel website features that evoke and provide emotional customer values to travellers. Sigala (2006) measured the impact of MC features of mo- bile phone services [(such as customisation of ring tones with songs matching users’ per- sonality; mobile phone screens designed with photos taken by the user; personalised SMS alerts providing customised information services (e.g., horoscopes)] on the emotional value, social recognition and esteem value perceived by mobile phone users. Overall, these studies provide evidence that it is possible to create MC models that deliver emotional/symbolic values in e-commerce platforms and that technology mediated servicescapes are also ideal for supporting customer interactions over the time and establishing a personal and more intimate relationship and social bonding between the e-retailer, the customer and customer communities. In other words, utilitarian MC focuses on providing functional customer values, while emo- tional MC focuses on delivering emotional and social customer values. Saari (2002) summarised the features of the ICT components whose cus- tomisation can enhance emotional and utilitarian customer values as they are presented in Table 2. Saari’s arguments are also expanded (in Table 2) in order to illustrate how these ICT layers can be customised for designing MC models within the context of online travel and tourism information services. The applicability of this framework is also demonstrated in Table 3, whereby the frame- work is used for analysing several examples of MC information services currently provided by three major travel cyberintemediaries. Information Systems Design: Trends and Interrelations with IS Supporting MC Implementation and Customer Values The adoption of MC services in an e-commerce environment heavily depends on the design of the IS platform that customers can use for customising products and services (Franke & Piller, 2004; Oon & Khalid, 2001; Kamali & Loker, 2002; Liechty, Ramaswamy, & Cohen, 2001). In general, it is also widely advocated that the user adoption and satisfaction from the use of an IS enhance when: a) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 146 M ass C ustom isation M odels for Travel and Tourism Inform ation e-S ervices Table 2. ICT features for functional and emotional types of MC Layer Key factors Online travel services Physical Hardware - large or small vs. human scale - mobile or immobile - close or far from body (intimate personal- social distance) Travellers can select the ways and devices (e.g. by SMS, e-mail, transfer of information and synchronisation of PC with the PDA and iPhone) for: receiving travel information alerts, storing and accessing travel information, receiving travel bookings and itineraries, receiving electronic tickets etc Code Interaction - degree of user vs. system control, proactivity through user interface Visual-functional aspects - way of presenting controls in an interface visually and functionally Customisation of interaction Travellers can request, control and customise the delivery (frequency and timing) of au- tomated e-mail alerts that provide them with customised travel information services such as flight changes and delays, arrival of flights, traffic alerts, weather conditions etc Customisation of functional aspects Travellers can request, control and customise the services and functionality of website software: e.g. a tracker software can be configured so that it searches and alerts travellers (by e-mail SMS etc) about changes in prices and availability of pre-specified flights, hotels, etc Content Substance - the essence of the event described - type of substance (factual/imaginary; genre, other) - narrative techniques used by authors Form 1. Modalities: text, video, audio, graphics, animation, etc. 2. Visual layout - ways of presenting various shapes, colours, font types, groupings and other relationships or expressive properties of visual representations - ways of integrating modalities into the user interface 3. Structure - ways of presenting modalities, visual layout, other form elements and their relations - linear-non linear structure: sequential, parallel, narrative techniques, hyper- textuality Customisation of SUBSTANCE: Travellers can upload and create their travel profile and preferences so that the website content is customised and filtered to their profile. Website content can be customised to any of the 4Ps (product, price, promotion, place) dimensions of the travel services, e.g. search for flights only when economy fare class tickets are available, search for and display hotel availability only for hotel chains for which the user holds a loyalty card, etc Customisation of FORM: Travellers can customise issues related to the information modality of the website: text, 3D pictures, web cams of destinations. For example, travellers may request to search and review hotels for bookings only when hotels provide online photographs of their rooms EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 147 M ass C ustom isation M odels for Travel and Tourism Inform ation e-S ervices Table 3. Examples of MC from online cyberintemediaries Orbitz.com Expedia.com Travelocity.com P hy si ca l Orbitz provides mobile access to its customised services so that users can also use their mobile phones to: o Retrieve their travel itinerary in My Trip o Check their flight status o See hotel deals & availability for same-day travel in selected markets o Contact customer service Multichannel delivery of content: Orbitz Insider provides Podcasts via RSS or iTunes. Thus, users can select the type and timing of information to be delivered to them as well as the delivery medium (e.g. iPod, RSS reader) The user can request the receipt of personalised deals via RSS Expedia users can get personalized travel deals delivered right to them—when and where they want them. If users have a personalized homepage (like My Yahoo!, My AOL, or a Google Homepage), it only takes a few simple clicks to get the deals users want. Users just specify to Expedia which destinations they would like to watch, what type of trip they prefer, what type of package they prefer (luxury or standard), from where they want to travel, and Expedia sends them per- sonalised travel information to their personalised portal. The user can request and get personalised information (e.g. Flight reminders, status alerts, gate change notifications etc) through various media (e.g. mobile phone, fax, PDA, or pager). RSS personalised Deals Feeder: users can find out fast when fares to their favorite destinations drop by at least 20%. Users just choose the destinations they like Travelocity to watch, and the company keeps them informed through My Yahoo!, My MSN, Pluck or another RSS news reader of the user’s choice. C od e Users can ask for automated customised e-mail alerts (user driven functionality) relating to travel news, special offers, and Fare Sales alerts for flights departing from any airport the user prefers - specifies. Users can also request e-mail alerts for local weather fore- casts as well as they can specify the timing parameters for the delivery of this information Orbitz’s TLC alerts for flight delays, cancellations, street closures, gates changes etc (users can specify the timing of the alerts, between 3-5 hours before departure, as well as the device for receiving alerts, e.g. mobile phone, pager, PDA, phone, e-mail etc) The above mentioned MC services are provided to the user by the firm itself. Orbitz also provides users the possibility to search, share and read personalised real-time information updates (e.g. about security wait times, traffic & parking, taxi lines) that are uploaded from fellow travelers in a mash-up application including google maps and a social network of travelers (such MC information services are created by the travel- ers’ community itself, i.e. MC enabled and supported by a community of travelers) The e-mail alerts that an Orbitz’s user can configure and request to receive before his trip include: o Hotel information including traveller confirmation number, hotel address and phone number o 3-day weather forecast for traveller destination o Confirmation information on activities traveller may have booked for his/her trip o Links to city guides so you can plan your activities before you go o Links to Insider Podcasts that will give you unique insights on select cities o Quick tips from previous Orbitz hotel guests on dining & more Expedia allow the users to request and configure individualised e-mail alerts and marketing messages for travel deals Fare Alert software, created and provided by Expedia, allows users to personalise and automate the search of individualised travel deals. When users download Fare Alert, a small, unobtru- sive icon is installed onto their desktop. Users can double-click the icon any time to see the current low fare, and when Expedia finds a fare that meets or beats your pre-set price limit, a small window will pop up briefly to notify users. Travelocity FareWatcherSM is a free, personalized subscrip- tion service that tracks the best round trip fares published by airlines for up to five city pairs of users’ choice. When users subscribe, they decide which cities to track, for how long (how many days and/or depending on price level changes) and whether they want to be notified of changes to those fares via email or in the personalised user FareWatcher web- page. The FareWatcherSM page is available 24 hours a day, tracking the fares that are most important to users (i.e. MC possibilities between the user and the firm) Travelocity’s innovative ExperienceFinder(sm) planning tool: this is a toolkit supporting users to design their person- alised travel experience based on their profile, preferences, wish lists and reviews, critics of a social network of travel- lers (i.e. co-creation of MC services amongst a community of travellers) Users can request the delivery of timely notifications about sales, special promotions, and Travelocity exclusives so that they can get the best deals on the right time and the right device while deals are still available continues on following page EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 148 M ass C ustom isation M odels for Travel and Tourism Inform ation e-S ervices Table 3. Continued Orbitz.com Expedia.com Travelocity.com C on te nt Product customisation: Orbitz gives the possibility to users to create their profile (that may include for example user’s membership in hotel, rent a car, airlines frequent customer programmes, preferred departure city and aircraft seat, in flight meal requirements), so that information can be filtered and provided according to this user profile, as well as the user will not have to re-enter these personal data in every transac- tion and website search. Product customisation can also be configured for up to 25 friends accompanying the user in any trip, but friends profile has also to be uploaded online. Orbitz provides dynamic packaging possibilities whereby travellers can assembly their personalised travel packages Price customisation: users can request E-mail alerts for special offers and prices and newsletters delivery whose content can be individualised based on the specified interests (activities, lifestyle and destinations) of the user. Subscribed Orbitz users get a webpage with special prices and offers that are customised according to their profile, loyalty programmes and website usage. Payment and Delivery customisation: The user can also specify payment methods (type of credit cards) and shipping addresses for information- tickets delivery. The following personalised services are also offered by Orbitz in order to support users in their efforts to create personalised travel packages: Orbitz Insider Podcasts keep users up to speed on what’s hap- pening in the greatest cities - User can subscribe to get and use podcasts for: o Hearing unique insights from experienced travellers o Learn about different neighbourhoods & what makes them special o Get the inside scoop on events around the city each month o Discover local favourites off the beaten path, like restau- rants, shops & more Orbitz’s pre-trip e-mail alert provides users with several links to different databases and services of Orbitz (e.g. Podcasts, city guides etc). This interconnection of content and functionality creates further opportunities for developing infinitive MC possibilities Product customisation: Expedia gives the possibility to users to create their profile (membership in hotel, rent a car, airlines frequent customer programmes, departure city, seat preferences, in flight meal requirement), so that information can be filtered and provided according to this profile, while the user does not have to re-enter the data at every transaction. Profile customisa- tion also available to users’ friends and co-travellers. Expedia also allows its members to book travel for their co-workers or friends by updating and accessing their profile (friends and colleagues should have first given permission to their friend to do so). Travel arrangements are made directly in a co-worker’s or friend’s account, so travel plans are accessible to them via Expedia.com whether they are on the road, at home, or in the office, 24 hours a day, 7 days a week. Users can customised website content and information search by: • Specifying home airport for flights checking. • Specifying preferred routes • Specifying preferred destinations Dynamic packaging possibilities whereby the user assembly its own personalised tour package that is priced on real time with a unique price that is different from the profile of other users Price customisation: From time to time, Expedia.com sends coupons to its customers, generally via postal mail or e-mail (users need to first request and customise these alerts). these alerts also provide users with individualised promotional cou- pons and prices - deals based on their profile. Payment customisation: Users that have pre-uploaded their preferred payment information on their profile are given the opportunity of express booking by simply confirming credit card details The Fare Alert of Expedia provides users with several other links to complementary information (hotel deals, car rentals etc) which in turn provide users with the possibility to link and create infinitive number of MC products and e-services Product customisation: Travelocity gives the possibility to users to create their profile (membership in hotel, rent a car, airlines frequent customer programmes, departure city, seat preferences, in flight meal requirement), so that information can be filtered and provided according to this profile, while the user does not have to re-enter the data at every transac- tion. Profile customisation also available to users’ friends and co-travellers. Provision of dynamic packaging possibilities whereby the travellers can assembly their personalised travel packages Payment customisation: Pre-specification of credit card details, and then users need to simply confirm payment methods at the purchase stage Delivery options: users can select from and use 3 e-mail addresses for the personalised delivery of information: 1) formal e-mail; 2) e-mail for real deals; 3) e-mail for special offers My offers: a webpage functionality that provides users with personalised special offers individualised to the users’ travel details: e.g. a users that has bought a flight to New York can be offered a special price for renting a DVD movie or a New York destination guide in order to watch during the journey EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 149 Mass Customisation Models for Travel and Tourism Information e-Services IS design fits the human-computer interface, and b) IS services are customised to the user charac- teristics and to the technology task that he/she has to complete (Vessey & Galletta, 1991; Baecker et al., 1995; Goodhue & Thompson, 1995). The fol- lowing analysis reviews the current trends related to these issues of IS design and then, it identifies their interrelations with the design of IS used for supporting MC implementation. Concerning the concept of fit between the IS and its user, fit has been conceptualized so far as physical fit, cognitive fit and only recently as affective fit (Te’eni, 2005). Physical fit (e.g., ergonomic fit) allows for comfortable operation by minimizing physical effort in accomplishing a task and considering user’s overall well-being (Buxton, 1986). Cognitive fit seeks to match the information representation displayed to the user’s mental model of the task demands. Similarly, cognitive fit minimizes the cognitive effort for transforming representations and performing a task, reduces the propensity for error and reduces the effort and time required to complete the task (Vessey & Galletta, 1991). Incongruence between the cognitive style of the user (learning style) and the IS design may reduce student performance (Sigala, 2002). Affective fit is conceptualized as interface design considerations that promote user’s positive affect, or in a more generalized form as fit with a user’s desired affective state. Research in the role and importance of affective fit is currently being developed and is related to system design methodologies that are people oriented (Avital & Te’eni, 2006). In terms of performance, research studies have mainly focused on performance di- mensions and measures that relate to task related criteria of efficiency, accuracy, or productivity (Zhang & Na, 2004; Avital & Te’eni, 2006). On the other hand, interpreting performance solely in terms of productivity has been sufficient some years ago when technology was viewed as a tool whose major role was to increase operational efficiency and productivity. However, technol- ogy tools and IS’ role have been advanced and transformed. Nowadays, IS are interactive and communicative and they are expected to provide several opportunities for instilling and enhancing users’ innovation, creativity, affective behaviour and well-being. To address these gaps in IS design, Avital and Te’eni (2006) introduced the concept of generativity and developed two corresponding IS design considerations namely generative capac- ity and generative fit. In reviewing the concept generativity in several social sciences, Avital and Te’eni (2006) concluded that the generative capacity is the ability to rejuvenate, to produce new possibilities and configurations, to reframe the way we see and we understand the world, to think out-of-the-box and to challenge the normative status quo. In this vein, they (2006) argued that a systems’ task-related performance has two unique components namely operational efficiency and generative capacity. Operational efficiency is the kind of task performance that is usually observed in the literature and it relates to tasks with low ambiguity, finite in nature, well-articulated and in which one is expected to be efficient, accurate and on time. Generative capacity, however, relates to one’s ability to deal with a task with high ambiguity, open-ended in nature, unclear in a considerable part and in which one is expected to be innovative, expansive and to make a difference. In other words, generative capacity refers to one’s creativity, ingenuity and mental dexterity. Hence, in applying generative capacity in IS design, Avital and Te’eni (2006) defined generative fit as the interface and IS design considerations that have a positive effect on the generative capacity of the system. In other words, generative fit refers to the extent to which a particular IT artifact, or part thereof, is conducive to evoking and enhancing that generative capac- ity. In their case study, Avital and Te’eni (2006) provided evidence that IS designed by adopting generative dimensions can help IS users to en- hance their: creative work, unstructured syntheses, serendipitous discoveries, and any other form of EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 150 Mass Customisation Models for Travel and Tourism Information e-Services computer-aided tasks that involve unexplored outcomes, or who expect fresh configurations, or aim at boundary spanning results. Unlike other types of fit, generative fit is inherently dynamic and enhances human processes, and Avital and Te’eni (2006) study illustrated that generative fit has a critical impact on user related affective-based performance criteria and particularly on the user’s well-being. Recently, Levy, Murphy, and Zanakis (2009) have also provided evidence of the role and the impact of user-perceived cognitive value of IS on the effectiveness and user satisfaction from IS. Avital and Te’eni (2006) identified the fol- lowing IS design parameters and factors that can enhance and create generative fit: • Integration of systems and information da- tabases: Integrated platforms and databas- es that can provide real-time information and flexible interoperability between het- erogeneous systems can promote system- wide boundary-crossing, across-the-board sharing, and cross-fertilization. • Communication: Providing ubiquitous ac- cess and fast connectivity to knowledge based systems. • Intelligence: adaptive systems that incor- porate continuous learning and continuous improvement based on user feedback and other performance measures. • Visualization: incorporating human-cen- tred visualization tools that provide inte- grative views, scaling, zoom in and out, and easy movement in the task space. • Rejuvenation:supporting iterative pro- cesses and generating an infinite number of configurations. Building an integrative path for innovation. Based on the above mentioned developments in the area of IS design, the following conclusions are derived related to the interrelations between the current trends in IS design and the design of IS supporting the implementation of MC online services: • Research in IS design increasingly recog- nise the need to design IS interfaces and capabilities that will not only improve the utilitarian – functional value that the sys- tem provides to the user. Equally, IS design should consider and include features that also enhance the affective-emotional value provided to the users as well as enhance users’ cognitive capabilities for processing more information and creating new ser- vices. Such arguments are directly related to the features and the functionality (dis- cussed in Tables 2 and 3) of the ICT sys- tems supporting the MC of online services in order to provide both the functional – convenience (i.e., cognitive capabilities of users) as well as the emotional-symbolic customer values. Avital and Te’eni (2006) identified the above mentioned five IS design parameters enabling generative fit, which also relate and refer to the ICT features identified in Table 2 that can be mass customised for providing both functional and emotional value to users. So, integration and rejuvenation relate to the capability to inte- grate different systems, platforms and databases; visualisation relates to the customisation of the physical layer, while communication relates to the customisation of the code layer. • The concept of generative fit in IS design implies that users should be able to gen- erate infinitive possibilities and configura- tions. In a similar vein, it was previously showed that the interrelations between the ICT components create numerous MC pos- sibilities. Therefore, it can be argued that by creating integration capabilities amongst the ICT components, the generative ability of the IS increases, which in turn allows EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 151 Mass Customisation Models for Travel and Tourism Information e-Services the IS and its users to continually identify and create infinitive types of mass custom- ised information services based on the us- ers’ needs, context and circumstances. Overall, it becomes evident that recent research in IS design follows similar people-oriented paths as the proposed framework for designing and implementing MC models that deliver customer value within the context of travel information e- services. By following people-oriented approaches emphasis is given on creating different types of customer value namely functional (task related operational efficiency), cognitive (rejuvenation of infinitive customised services) and emotional (affective and user well-being) value. VARIABLES MODERATING THE USER IMPACT AND CUSTOMER VALUE OF MC INFORMATION SERVICE: IMPLICATIONS FOR FUTURE RESEARCH When a user interprets information, a complex set of hierarchical variables may influence the users’ psychological response to mass customised infor- mation e-services, such as presence and experience of the information, learning and emotion. These variables may be clustered as Mind (individual differences and social similarities of perceivers), Content (information substance and form embed- ded in technology with certain ways of interac- tion) and Context (social and physical context of reception) (Saari, 2002). For example, searching for travel information for buying a routine flight ticket and searching for travel information for creating personalised vacations in unknown destinations are two totally different tasks whose completion, even by the same user, would require different utilitarian and emotional values and func- tionalities from the IS supporting the MC online travel services. In the first case, the traveller will prefer and seek to use MC features that make his online booking process faster and easier, in the second case, the traveller would prefer services and MC features that will help him/her to: select travel products and services that enhance his/her experiential and emotional value when creating his/her itinerary, evaluating and selecting travel components (e.g., features reducing the customer perceived risk and stress due to the information chaos by ensuring that the personalised travel package that was created is socially recognised and positively reviewed and evaluated by other travellers). Being able to systematically and reli- ably predict the appropriateness between the IS features to be mass customised and the travellers’ preferences and/or values sought is the key for using mind-based ICT systems for creating MC information e-service and targeting them to par- ticular market segments at the most appropriate times and contexts. Based on previous studies, it can be hypoth- esised that the following travellers’ characteristics may affect users’ preferences on the types of the MC features and the value expected to be gained. The level of customer involvement with the prod- uct may also effectively moderate the type of MC benefits sought by travellers. For example, travel- lers may find some travel and tourism services of greater personal relevance and importance (e.g. a honey moon trip, a family vacation versus a business strip) (Christou, 2006). It appears that travellers with higher product involvement levels would attach greater importance to confidence, social and emotional benefits and value to be provided by MC features rather than utilitarian benefits (Christou & Kassianidis, 2003). Avital & Te’eni, (2006) also recognised that the extent of desired operational efficiency, the fit of an IS design (i.e., functional value) and the extent of generative capacity (cognitive and affective) may differ according to the characteristics of the computer related task. For some tasks operational efficiency is critical and generative capacity is counterproductive (e.g., tasks related to manufac- turing control systems), for other tasks operational EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 152 Mass Customisation Models for Travel and Tourism Information e-Services efficiency is not relevant and generative capacity is critical (e.g. tasks related to scenario planning). Two extreme circumstances may exist: a) a con- vergent action requiring users to be concrete, accurate, effective, and fast and with little or no deviation from standard operating procedures; and b) a divergent action requiring users to be imaginative, creative, innovative, and provoca- tive and with little or no conformism. Overall, it is proposed that future studies can investigate the following proposition: User involvement influ- ences the type of MC features and value-benefits that travellers consider important. Under condi- tions of high involvement, travellers will value the psychological benefit of increased confidence derived from features of MC e-services (such as suggestions based on the opinions, reviews and experiences of other travellers) more than features of MC e-services that provide utilitarian benefits (such as faster online bookings). Travellers’ participation in MC depends not only on their willingness to take part in the service production and personalised design process, but also on their capability to evaluate and select the most appropriate service components that match their profile and preferences (Pillar et al., 2004). However, whereas product involvement signals the interest or willingness of travellers to carry out complex and analytic processes for customising their services, expertise affects the extensiveness of this customization process and the users’ abil- ity to engage in such a process. Expertise makes the travellers’ cognitive structures more complex, increases travellers’ ability to differentiate across many competing alternatives and options, prompt- ing finer discriminations with greater reliability. Not only are experts better equipped to understand the meaning of service customization, but they also need a lower amount of cognitive effort for any specific level of comprehension. Thus, expertise will affect the travellers’ process for customizing travel and tourism services. In addition, expert travellers may engage in a more complex problem solving activity simply because they are aware of a greater amount of relevant issues to be kept informed about or because they are more capable of formulating specific questions and requests about a larger amount of e-service attributes. Thus, it is proposed that future research should test the following proposition: The higher the travellers’ expertise the higher their expectations for the availability and the use of features of MC that enable them to customise travel and tourism information e-services. Travellers’ expectations about the importance, availability and impact of MC features may also differ based on their gender and cultural profile. Women tend to be rated higher for empathy and communication than men, and so, they may empha- size the affective features of MC e-services more than males, because females show a relatively high tendency towards emotion, tender-mindedness and empathy. Males may show greater focus on features of MC e-services that concentrate on functionality and form, as they tend to be more autonomous and to show relatively tendency toward emotion. Furthermore, travellers from Asian cultures are usually risk averse, so they may not prefer to take control and participate in the customisation of travel and tourism e-services, as this may increase their perceived purchase risk, i.e. the possibility that the user-customised product may not be able to satisfy their need or be of good value. On the other hand, travellers from western cultures tend to be more innovators as well as adventure and risk seekers. Thus future research could test the following hypothesis: Users’ gender and cultural profile affect their preferences and use of features of MC e-services as well as their expectations of MC customer values sought. Moreover, research in the area of IS design enabling online MC has solely focused on IS features supporting company-to-customer interac- tions and ignoring the issue that communities of customers (and so, customer-to-customer online interactions) can also take part in online MC pro- cesses. IS design issues enabling and supporting customer-to-customer interactions for supporting EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 153 Mass Customisation Models for Travel and Tourism Information e-Services online MC are currently becoming important and critical when considering the wide diffusion of Web 2.0 tools. For example, wikis and blogs allow multiple interaction and communication possibili- ties (e.g., many-to-many, one-to-many) as well as generate a huge social intelligence that in turn provides a useful information resource that users can use for customising services online. Piller et al. (2005) defined the types of MC that exploit communities of customers as communities for collaborative co-design and advocated that the latter are important for the success of MC because they reduce the mass confusion phenomenon, i.e., the complexity, effort, and perceived risk that cus- tomers feel when involved in co-design activities. Analytically, Piller et al. (2005) identified three customer community features that overcome the mass confusion phenomenon: 1) generation of customer knowledge for pre-configuration of customised services; 2) support of collaborative co-design fostering in forms of problem solving; and 3) building of trust and reduction of perceived risk for MC users. In this vein, future research on the design of IS supporting MC should also aim to identify the IS design characteristics and functionality that can support and enable the cre- ation of the following three features of customers’ communities: community knowledge, collabora- tive problem solving and trust building. Future research could also focus on demonstrating the different types of customer value (e.g. functional, social, cognitive, emotional) that web 2.0 tools can provide for supporting MC implementation. However, Piller et al. (2005) identified and solely talked about the functional and technical assistance that communities of co-design provide to users, ignoring the emotional and social ben- efits that customers also expect to get from their engagement in MC processes. On the contrary, research on virtual communities and recent studies on social networking provide evidence that users’ participation in collaborative activities is driven by the fulfillment of a variety of needs-motives such as the gain of self-esteem, self-actualisation, cognitive needs, peer-pressure, belongingness etc. Therefore, future research should also focus on investigating and measuring the values of so- cial support as well as the functional values that virtual communities and online social networks (such as facebook.com and blogs) may provide to customers when engaged in the implementation of online MC. CONCLUSION The website cost can increase by more than 3 million Euros when individualisation and MC capabilities are added. But, are all types and levels of individualisation and mass customisation worth it? Studies argue that customisation pays for itself as it greatly affects customer loyalty and online average spending. As nowadays most travel and tourism websites offer customisation options, online travellers are increasingly getting used to being treated as individuals and MC strategies are loosing their business differentiation competi- tive value. In this vein, this paper has assisted in answering such questions in the following ways. First, the study helped in identifying and categorising different types of online MC imple- mentation models by proposing a customer value oriented framework that specifies the types of customer value that users get by customising different features of the IS used to support the implementation of MC. This analysis has filled in a gap in the literature regarding MC implemen- tation in services and particularly in the context of web-based travel and tourism information e-services. Since online travel and tourism in- formation services are interlinked with the ICT system that delivers and supports them, the ICT layer framework was used for developing the customer value centred MC models’ typology. In general, two main types of MC implementation strategies were found: the utilitarian MC and the symbolic/emotional MC. The implications and interrelations of this framework with the current EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 154 Mass Customisation Models for Travel and Tourism Information e-Services trends related to IS design were also recognised and reviewed. Second, the study has also identified the differ- ent customer values and benefits that customers can obtain from the different features and func- tionalities of MC e-services. However, studies in usability, affective computing and mind-based IT entail that emotional MC dimensions have different psychological user responses and behaviour than simply pseudo-utilitarian MC. For this reason, several research propositions were analysed and proposed in order to indicate how future studies can examine the importance and the impact of different MC types and features on travellers’ preferences and usage patterns of MC models. In other words, the respective research propositions have helped in speculating the different user characteristics and contextual factors that may affect the types of features and MC models that different users may require at different contexts. However, as customisation preferences are complex and may differ across users and contexts, future studies would need to use large scale and cross-cultural samples of users and e-services in order to refine and validate these research propositions. 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Designs that fit: An overview of fit conceptualizations in Human Computer Interaction. In Zhang, P., & Galletta, D. (Eds.), Human-Computer Interaction and Management Information Systems – Foundations. Advances in Management Information Systems, 4. Armonk, NY: M. E. Sharpe. Vessey, I., & Galletta, D. (1991). Cognitive fit: An empirical study of information acquisition. Information Systems Research, 2(1), 63–84. doi:10.1287/isre.2.1.63 Zhang, P., & Na, L. (2004). An assessment of human-computer interaction research in manage- ment information systems: Topics and methods. Computers in Human Behavior, 20(2), 125–147. doi:10.1016/j.chb.2003.10.011 This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 2, edited by John Wang, pp. 48-69, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 158 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 10 INTRODUCTION The situation of the internet has changed glob- ally since 1999 (Al-Jaghouob & Westrup, 2003). Internet plays a significant role in commerce and business in the whole world (Bagchi et al., 2007), which connects millions of people and millions of computers at the same time (Ali, 2004; Kha- sawneh, 2008). The number of Internet users are increasing day after day (Kulchitsky, 2004), and it is used in many sectors, especially in conducting business on the internet (Khasawneh & Stafford, 2008), because Internet achieves more work with- out any increase in cost, and improves the quality of services as well (Stafford et al., 2006). But, this does not mean every online business can be a success (Mistry, 2005), because Internet and the Ahmad Khasawneh Hashemite University, Jordan Mohammad Bsoul Hashemite University, Jordan Ibrahim Obeidat Hashemite University, Jordan Iyad Al Azzam Yarmouk University, Jordan Technology Fears: A Study of e-Commerce Loyalty Perception by Jordanian Customers ABSTRACT The Internet and all other types of networks have changed life in general and doing business in particular, and as a result, many companies are now conducting and transferring their businesses online. In this paper, the authors evaluate whether loyalty issues are the major obstacles to the growth of e-commerce in Jordan. A survey conducted for the study reveals that technology fears are major barriers to loyalty in Internet banking and e-commerce activities among consumers. The results suggest that unless the technology fears of adopters are acknowledged, some of them are not successful. DOI: 10.4018/978-1-4666-0044-7.ch010 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 159 Technology Fears new information and communication technologies encourage and help hackers and online criminals to attack any kind of business and disrupt it; this makes loyalty a major issue to tackle, as hackers might access and steal customers’ personal infor- mation and details. In addition, since the internet gives people the ability to access any web site everywhere, they can search for better products and services, and as a result this increases the competition among companies. Internet provides a long range of opportunities and advantages for both business holders and customers as well, such as, reducing cost, saving times and so on. On the other hand, Internet enables hackers and internet criminals who attempt to enter and assault computer systems to obtain information illegally. LITERATURE REVIEW Loyalty has been researched and proved by many researches that it is a critical and significant fac- tor that leads any company to expand in its size, besides being popular and famous in the whole world. The cost of retaining customers to be loyal is less than acquiring new customers; as a result, this leads to increase profits (Lake & Hicky, 2002). There are many definitions for loyalty and loyal customers. (Bowen & Chen, 2001) identify loyal customers as those who have good feelings of ap- preciation for the company’s brand and commit to stay buying products or services and recommend them to other customers. Customer loyalty will last or remains as long as the customers will stay with specific company brand and trade mark (turban et al., 2004). Applix (quoted in Sterne, 2000, p. 295) defines loyalty as “a feeling that results from an organization’s ability to deliver three things to their customers: knowledge, anticipation of future requirements and superior communication”. Nowadays companies are struggling to cre- ate and maintain online loyal customers because there are new factors appearing with Internet, (Vatariausombut et al., 2004) claim the following factors that affect online customers loyalty: sav- ing cost in online searching, internet and network technologies provide many tools and software that help customers in finding their needs effectively and efficiently by providing them the related in- formation at lower costs and time as well. Thus customers can use these tools in searching on the internet and then buying the cheapest thing, Internet enables new business entrants to enter with minimum costs, new companies can imitate some of the famous and reputable companies and then use the technologies in building their website more powerful than the existing. As a result this leads to new strong competitors, and reduces the uniqueness of companies as well (Fletcher, 1995). LOYALTY BENEFITS Loyalty generates many benefits and advantages for the companies which have loyal customers. (Humby et al., 2003) claim that loyalty Increases sales, when customers become loyal to any orga- nization they commit themselves to come back to the same organization instead of competitors, and loyal customers are willing to buy products or services from different sales channels as well (Duffy, 2003). As a result this increases the company’s sales, increases the customization of marketing communications and tracks customers’ styles as well. Loyalty helps companies in doing one to one marketing because the loyal customers keep doing their transactions just in a specific company. This generates much data about customers’ preferences. The company can then use the data in customising products and services for its loyal customers; in addition it helps the company to know the way that their customers do shopping and what kinds of products and services they choose, in order to change its performance to another form to match customer needs. Further it reduces the cost of transactions, marketing, lost customer expenses (Turban et al., 2004). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 160 Technology Fears MEASURING LOYALTY Loyalty assists the company to promote trust; and loyal customers will start talking about their company to other people. This will cause other people to trust the company and try their products and services; and loyalty improves company’s brand. Loyal customers when they have bad feel- ings about the products or services for the brand that they are loyal to it, they are only complaining instead of going to other brands because the real loyal customers feel that they own the brand and try to make it strong and famous Loyal custom- ers are not the same in the degree of their loyalty into specific brand or vendor; there are levels and categories of loyalty. There are many ways to measure customer loyalty. Bowen and Chen (2001) claim that the loyalty can be measured by three different approaches; behavioural measure- ments, attitudinal measurements, and composite measurements. Behavioural measurements refer to customers who have repeated buying behaviour for the same brand of products or services, but the weakness of this approach is that it does not show the real customer’s emotion about the brand. Attitudinal measurements deal with customers who have good feelings about the brand, but they do not try it or continue to buy it because of its price but they recommend it to other customers. The third one, Composite approach, combines the behaviour and attitudinal measures together to measure the customers’ loyalty who have repeated buying behaviour while at the same time having good feelings about the brand. Loyalty can be created through many ways, (Vatariausombut et al., 2004) recommend compa- nies which are interested in creating and maintain- ing customer loyalty to have a powerful security system, excellent customer service, have good reputation, as well as excellence of quality of products and services and an awareness of their customer’s concerns. (Sterne, 2000) suggests the following three steps in building loyalty: 1. Make customers satisfied with the infor- mation and knowledge that the company provides them. There are four different types of knowledge and information that customers expect from any company in order to convince them that the company is more familiar and knowledgeable than its competitors: ◦ Information about the company such as its history, strength and positions in the market. ◦ Information about the market, for instance, market behaviour, and performance. ◦ Information about the products or services such as offers, packages and prices. ◦ Information about customers, for ex- ample, the way that customers deal with the company. 2. Predication of customer’s requirements: This process consists of three sub processes: ◦ Predictions of new products or ser- vices that might be valuable to the customer’s needs and requirements. ◦ Developing new technical services that might mitigate or avoid problems that customers may face. ◦ Prediction of products or improve- ment of services depending on cus- tomer’s feedback. ◦ Keep in touch brilliantly with the customers in order to let them know about what it’s the current situation of the market in order to make them feel that they constitute the important key in the market. CATEGORIES OF LOYALTY Loyal customers are not the same in the degree of their loyalty into specific brand or vendor; there are levels and categories of loyalty. (Dick & Basu, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 161 Technology Fears 1994) characterize the loyalty into four different categories depending on the customer’s feeling about products or services and his/her repeated pa- tronage: Loyalty, Latent loyalty, spurious loyalty, and No loyalty, and the customers are classified according to these four types of loyalty as well: • Loyal customers: the customers who have great feelings about the products or servic- es but with high repeat patronage. • Latent loyal customers: the customers who have great feelings about the products or services but with low repeat patronage. • Spurious loyal customers: the customers who have ordinary and low fellings about products or services and with high repeat patronage. • No loyal customers: the customers who have low feelings about products or ser- vices as well as repeat patronage. Rowley (2005) proposes the following differ- ent types of loyalty: captive loyalty, convince- seeker loyalty, contented loyalty, and committed loyalty. 1. Captive loyalty where customers remain buying products or services because there is no choice for them to change to other products or services and their feeling about the brand is unbiased and neutral. However this type is under risk to change via many factors such as new competitors, develop- ments, changes in customers’ social life and culture and other situations that might make customers to be not captive. 2. Convince-seeker loyalty; where customers routinely buying products and services and they do transactions usually related to the brand. This kind of customers does not have any feeling or attitude to brand excluding some of them. The threats that might face this kind of loyalty are new offers from other competitors such as buy one get one free, half price offers and others. 3. Contented loyalty where customers have high good feelings about the brand and they keep buying depending on the brand but they do not have the willingness to expand their buying on products or services from the same company. The threats that might face this kind of loyalty are better customer services from competitors, bad product quality as well as customer services, and low interest in developing new products. 4. Committed loyalty where customers are committed to continue buying products or services from the same brand, and are will- ing to expand their buying from the same brand, and also advice other customers to try a specific brand and to be committed to it as well. The threats that might face this kind of loyalty are frequent product failures and bad customer service and new services or products from competitors that really provide obvious benefits. LOYALTY AND TRUST The relationship between trust and loyalty is obvi- ous and it has been proved by many researchers who claim that there is a positive relationship between trust and loyalty (Auh, 2005; Ballester & Aleman, 2001). Trust is imperative to build and maintain long relationships between cus- tomers and companies as well as to encourage to purchase and interact with companies especially in electronic commerce (Bernstel, 2002). (Ha, 2004) has declared that the customers which trust specific companies are loyal to it more than other customers. Trusted customers towards companies have the confidence that these companies deal with them legally and morally, and accordingly those customers will stay dealing the company which they have trusted for a long time and to which they will be loyal. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 162 Technology Fears METHOD AND PROCEDURE A mail survey was developed based on literature; content validity was established by established through individual interviews with IT profession- als in bank and financial organization experts. The survey then was developed and was pre-tested to review the survey instrument for clarity, complete- ness, and readability. A pilot test was conducted using a random sample of IT professionals. Schools are the vector for Internet adoption in Jordan (Ein-Dor et al., 1999), and since major official universities are from the very beginning have provided the pivotal nodes of network evo- lution, the ideal sample for investigating privacy issues in e-commerce use pattern in emerging Middle Eastern Internet markets might well be college students. Granted, students are convenient for such re- search, and are often considered highly desirable as a sample frame due to the beneficial effects of homogeneity of but in this case university stu- dents also represent the majority of the current consuming Internet public of study, and, as such, can support excellent levels of external validity for studies of the diffusion of ICT in Middle Eastern nations. The full survey was sent to 500 internet users were randomly selected from various education institutions in Jordan. A survey questionnaire was used to measure privacy issues perception and at- titude toward e-commerce and Internet banking. We designed questionnaire based on the research objectives discussed. From 500 questionnaire distributed only 270 were collected and usable for analysis. Available evidence suggests that despite the possible inaccuracy involved with self-reported data in an absolute sense, it is usually the best possible and most appropriate approach for investigating decisions among individuals. RESULTS AND DISCUSSION Frequency distributions were performed and found that 58% were female and 42% were male and respondent age were in range of 20-25 years (78%) followed by 25-35 years (18%) of the overall total and 68% of them use the Internet daily and 70% uses the Internet banking. Although most of the respondent believe that using the Internet banking and shopping will make their life easier and is more convenient. Half of them think that it is safe and secure. It is obvious from the above table that people resist using online banking if their privacy (per- sonal and financial information) is exposed to other parties; it explains that 70% of the respon- dents are extremely concerned and worried about their privacy and they will be more far away from online banking if they know or have doubt that their privacy will be exposed by the bank. This table shows the role of reputation in online loyalty. It shows that approximately 70% Table 1. My resistance to use online banking in- creases if my bank shares my personal information with other companies Strongly agree 35% Agree 35% Neither 15% Disagree 10% Strongly Disagree 5% Table 2. Loyalty and online loyalty cross tabulation Online Loyalty YES NO Loyalty YES 25 11 Loyalty NO 0 45 Total 25 56 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 163 Technology Fears of people are loyal to specific company; they are also loyal to it if it goes to be an online company. Hence the reputation of company is very impor- tant for maintaining and building online loyalty. Table 3 shows how customers reward the company that they are loyal to, 45% from respon- dent who are loyal to specific company reward the company through repeat buying and telling other people about it, whereas 45% reward the company through repeat buying only, and only 5% reward the company by telling other people about it without repeat buying. Table 4 shows the relationships between trust and loyalty. It illustrates that trust and loyalty are not the same, 60% of respondents who trust a specific company are not loyal to it whereas 40% say that if they trust a specific company they are loyal to it. From this result the researcher observes that trust helps in building loyalty but it does not mean that if there is trust, there is loyalty. DISCUSSION Perceived product or service quality is defined as customers’ decision about the advantage of a product or service and its form from the customers’ feelings and attitudes, resulting from evaluation of the performance (Dean, 2002; Wong & Sohal, 2003; Sivadas & Baker, 2002). Thus if custom- ers find that the quality of products or service is the same or more than they expect, they will be loyal to them. A positive relationship between the quality of products or services and the customer loyalty has proved. In addition, because in elec- tronic commerce there is no physical interaction meaning customers can not touch the products and check it physically before purchasing it they have doubts about online purchase. However if they receive their products with the high quality they will be loyal to the company and committed to them because they are not cheated by online companies where many of them are fakes. We found some customers are loyal to specific company if they have found that the company has low prices for their products and services, while another one, Also respondents who is experienced in marketing claimed that the layout of the web site does not affect the customer loyalty, as customer satisfaction comes from customer services and quality of products or services that the customer receives. The brand name affects and creates reputation. Furthermore other claims that the customers’ conveniently plays a significant part in building and maintaining customer loyalty. The way that they provide special offers is important also in retaining customer loyalty for a long time. CONCLUSION AND IMPLICATIONS There are a number of opportunities for future research. A longitudinal case study would pro- vide more conclusive evidence as to process the analysis. This analysis in no way comprises the full set of possible variables that may explain adop- tion behavior. The discussion of loyalty, privacy and trust will continue to be the focus of future research; the prevalence of the Internet will drive more technology into the banking and finance industry. The findings also have important practi- Table 3. How do you act towards companies that you are loyal to? Repeat buying 45% Repeat buying and tell other people 45% Tell other people without repeat buying 5% No further action 5% Table 4. If you trust a company does it mean that you will be loyal to it? Yes 40% No 60% EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 164 Technology Fears cal implications for IS adoption and for manager understanding of customer requirement. Such an understanding can assist system developers in the planning of intervention mechanisms. A better understanding of the technological safeguards will increase the level of trust and privacy in the technology and therefore loyalty. Furthermore, the system developers need to focus on building customer trust as the findings indicate active adopters have stronger beliefs about the reliability, competence and integrity. ACKNOWLEDGMENT The author acknowledges the Editor-in-Chief of the journal, Professor John Wang, and the anony- mous reviewers for their indispensable input that improved the paper significantly. REFERENCES Al-Jaghouob, S., & Westrup, C. (2003). Jordan and ict-led development: towards a competition state? Information Technology & People, 16(1), 93–110. doi:10.1108/09593840310463032 Ali, J. M. H. (2004). Information technology in the Middle East. Journal of Global Information Technology Management, 7(1), 1–4. Auh, S. (2005). 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Journal of Services Marketing, 17(5), 495–513. doi:10.1108/08876040310486285 This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 2, edited by John Wang, pp. 70-77, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 166 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 11 INTRODUCTION With the growing penetration of the Internet and Information and Communication Technologies (ICT) in countries around the world, and, in particular, in developing countries, it is expected that along with the benefits that accrue there will also be problems. These problems have to do with both the technology as well as the use of the technology. Criminal and mischievous elements around the world are intent on using or abusing the open facilities of the ICT technologies for their benefit or entertainment. The central problem of A. S. N. Murthy Indian Police Service, Karnataka, India Vishnuprasad Nagadevara Indian Institute of Management Bangalore, India Rahul De’ Indian Institute of Management Bangalore, India Predictive Models in Cybercrime Investigation: An Application of Data Mining Techniques ABSTRACT With increased access to computers across the world, cybercrime is becoming a major challenge to law enforcement agencies. Cybercrime investigation in India is in its infancy and there has been lim- ited success in prosecuting the offenders; therefore, a need to understand and strengthen the existing investigation methods and systems for controlling cybercrimes is greatly needed. This study identifies important factors that will enable law enforcement agencies to reach the first step in effective prosecu- tion, namely charge-sheeting of the cybercrime cases. Data on 300 cybercrime cases covering a number of demographic, technical and other variables related to cybercrime was analyzed using data mining techniques to identify and prioritize various factors leading to filing of the charge-sheet. These factors and the respective priority rankings are used to suggest various policy measures for improving the suc- cess rate of prosecution of cybercrimes. DOI: 10.4018/978-1-4666-0044-7.ch011 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 167 Predictive Models in Cybercrime Investigation law enforcement and regulations is to establish the framework within which abuses with and through the use of ICT is checked. A problem of law enforcement and regulations with regard to ICT spread is that the many features and facilities of the technologies are growing and evolving. Few still know all the possible ways in which the technologies will be used. It is clear that the Internet provides a lot of information that is beneficial, but it is not obvious as to what manner the information may be used. Law enforcement and regulatory agencies around the world are struggling to define what policies to adopt to both restrict abuse and to enhance use of ICT. In a developing country like India, the penetra- tion rates of the Internet and of ICT are low but growing. Table 1 shows some data on Internet and ICT penetration in India as compared to two developed countries – Sweden and USA. Though the numbers are low for India, for all the indicators, owing to the large population base, the problems of usage and enforcement are very high. For instance, the number of Internet subscribers in India is 10.36 million as on December 2007 and another 57.83 million have access to Internet through various other media (TRAI, 2008). The concern for monitoring and controlling crimes committed using ICT is called Cybercrime. That this is of growing importance was reflected in a recent conference (in September 2007) orga- nized by the Indian Central Bureau of Investiga- tion (CBI) in association with the software indus- try. Participants from 37 countries attended the conference. The main thrust of the conference was to have effective international cooperation in dealing with cybercrimes which covers legal standardization, standardization of procedural obligations, capacity building, and partnership with other agencies. This conference underscored the fact that cybercrime has become a major issue for law enforcement agencies in recent years. OBJECTIVES AND SCOPE The broad goal of this study is to understand and strengthen existing investigation methods, systems and practices for controlling cybercrime. A specific objective of this study is to identify the enabling factors which will facilitate charge-sheeting of cybercrime cases in India. The scope of study is limited to analyzing cybercrimes reported to law enforcement agencies in five states of India, namely Karnataka, Tamil Nadu, Andhra Pradesh, Kerala and Delhi. The rest of the paper begins with a section on the definition of cybercrime, which is followed by a review of cybercrime prevention efforts from around the world and also a review of academic literature on cybercrime. This is followed by a discussion of the methodology of data collection and analysis. In the next sections the results are presented along with an analysis of the findings. Background: What is Cybercrime? It is extremely difficult to determine when the first crime involving a computer actually occurred. In 1801 Joseph Jacquard, a textile manufacturer in France, designed the forerunner of the computer Table 1. Internet and ICT penetration in India and two developed countries. Source: UN E-Government Survey, 2008. Country Per capita income (US $)* Internet per 100 persons** PCs per 100 persons** Mobile users per 100 persons** Landline users per 100 persons** Sweden 46,060 76.97 83.49 105.92 59.52 USA 46,040 69.1 76.22 77.40 57.15 India 950 5.44 1.54 14.83 3.64 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 168 Predictive Models in Cybercrime Investigation punched card. This device allowed repetition of a series of steps in the weaving of special fabrics. So concerned were Jacquard’s employees with the threat to their traditional employment and livelihood that they resorted to sabotage in order to discourage Mr. Jacquard from further use of this technology. This could be considered as the first “computer” crime to have been committed (United Nations, 1994). Cybercrime Definition Even after many years, a global definition of com- puter crime has not been arrived at. The functional definitions have become the norm. Cybercrimes can be classified into 3 categories: • Against Individuals: These are the crimes or acts committed against a person. These crimes include harassment through e-mails, cyber-stalking, dissemination of obscene material on the Internet or intranet, defa- mation, hacking/cracking etc. In addition, these include crimes against property of an individual, computer vandalism, transmit- ting virus, Internet intrusion and unauthor- ized control over computer system. • Against Organizations: These are crimes committed against an organization in- cluding Government departments, private firms, companies, groups of individuals; possession of unauthorized information and cyber-terrorism against the government or any other organization. Distribution of pirated software could also be included in this category of cybercrimes. • Against Society at large: These are crimes that impact the society at large. Pornography is a typical example of such crimes. • Technical or non-technical: The threats to individuals from the Internet and Internet services can be grouped as “technical” and “non-technical.” The technical threats are computer virus, worms or spyware. The non-technical include theft, fraud, imper- sonation, deception, extortion, abuse, defa- mation and invasion of privacy. In India, the Information Technology Act was enacted in June 2000, to provide the legal frame work for defining cybercrime in the country. The two major objectives of the act are facilitation of e-commerce and e-governance through legal recognition of e-records and digital signatures. The act enables the CBI to be the nodal agency in India to coordinate with Interpol in regard to cooperation for investigation from other law enforcement agencies. It is interesting to note that two of the most important cybercrimes are hacking and distribut- ing obscenity that contribute to more than sixty percent of cybercrimes in India. REVIEW OF CYBERCRIME AND PREVENTION The incidence of cybercrime is a global phe- nomenon. One of the comprehensive surveys on cybercrime is the Global economic crime survey 2005, carried out by Price Waterhouse Coopers (2005). It covered 3634 respondents spread over 34 countries. One of the significant findings is that the actual cybercrime is much more than perceived. The biggest concerns for the future are asset misappropriation which is the most visible of economic crimes and cybercrimes. The survey found that a typical perpetrator of economic crime in India was a graduate male between 31-50 years. With respect to crime detection, about 7 percent could be attributed to investigation by law en- forcement agencies, 15 percent to internal audit, 22 percent to whistle blowing and 7 percent to internal tip-off to a regulatory authority. Accord- ing to the survey, economic crimes, worldwide, have a lasting impact on reputation, brand image, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 169 Predictive Models in Cybercrime Investigation share price, staff morale and business relationship of the commercial entities involved. The Computer Security Institute (CSI) survey on computer crime and security is an annual fea- ture. The 2008 survey was based on the responses from 522 computer security practitioners in vari- ous corporations, government agencies, financial institutions, medical institutions and universities (Richardson, 2008). According to the survey, the most expensive computer security incidents were those involving financial fraud with an average reported cost of close to $500,000 (for those who experienced financial fraud). The second-most expensive, on average, was dealing with “bot” computers within the organization’s network, reported to cost an average of nearly $350,000 per respondent. The overall average annual loss reported was just under $300,000. A report by McAfee (2007) points to the serious issues regarding cybercrime, and, in particular, to the threats to national security. The report high- lights the well-funded and well-organized nature of these crimes, which are committed not only for money, but also for political reasons. Espionage and social engineering techniques are used to spot weaknesses in network security and for phishing for accounts and passwords. It appears that even intelligence agencies of different countries are getting into the act of surveillance and probing for weaknesses of national networks. Experts believe that cybercrime represents the biggest security threat to nations in the future. In Australia, research has shown that the level of computer crime is not accurately measured. According to the study by the Australian Centre for Policing Research (2000), a vast majority of cases that are detected are not reported to the police. Some of the future challenges identified by the study are decoding encryption, proving identity, improving the reporting of electronic crime, and enhancing the exchange of information and intelligence. The investigations that directly followed the September 11, 2001 attacks also disclosed the use of the internet to obtain information that could be used to plan attacks or obtain materials needed to make or improvise chemical, biological or radio- logical weapons. The United Nations 11th National Congress on Cybercrime Trends asserted that the relationship between government crime control efforts and the role of private sector companies involved in the production of hardware/software and in the delivery of services continued to be a major issue. This continues to be a major issue at the policy and legislative level as well as investiga- tion and law enforcement level in many countries. Irish organizations are significantly affected by cybercrime. Irish cybercrime survey (ISSA/UCD, 2006) suggested that the basic training which is mainly awareness training is a must for every investigator without which it is very difficult to proceed with the investigation. Review of Literature on Cybercrime The research literature on cybercrime follows two broad streams. The first concerns the issues regard- ing an appropriate legal framework that can enable governments and policing and security agencies to define, investigate and prosecute cybercrime (Cangemi, 2004; Huey & Rosenberg, 2004; Pocar, 2004; Bassett et al., 2006; Lu et al., 2006; Passas & Vlassis, 2007). Researchers point to the need for international cooperation to define crimes (Pocar, 2004; Hossain & Shahidullah, 2008), determine jurisdictional issues (where the crime is committed and who has to investigate) (Pocar, 2004; Passas & Vlassis, 2007), and identify procedures to col- lect evidence that is admissible in court (Huey & Rosenberg, 2004; Bassett et al., 2006). The second stream focuses on the analysis of cybercrime data to detect patterns and evolve strategies for prevention, and investigation and prosecution. Cybercrime data is obtained from crime investigations and reports, and is available in a wide range of formats. Much of it is available over periods of time. The quality of the data is varied, often with large pieces missing. This has EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 170 Predictive Models in Cybercrime Investigation given impetus to data mining techniques that can deal with time-series data, in different formats, and of varied quality. Researchers have thus examined issues related to the tools that can be used for different types of crime data (Chen et al., 2004) and the manner in which data can be aggregated for analysis (Ritschard et al., 2008). Research also shows that a beneficial effect of cybercrime is that it forces technology to evolve, to tackle the emerging threats (Anonymous, 2006). DATA The cybercrime investigation process in India is as follows: the process is initiated with the filing of complaints by the victim. This is also referred to as filing of the “First Information Report (FIR)”. Sometimes it is possible that the concerned po- lice person may not register the complaint, but may initiate inquiry into the complaint. In such a case, the inquiry report is approved by the higher authorities and the complaint is treated as closed. On the other hand, if the FIR is registered, it may result in different outcomes. The two most desirable outcomes are (1) the investigation is completed and the case results in a charge sheet and (2) the case is investigated and proves to be a mistake of fact. The other possible outcomes are that investigation continues, or goes undetected or not investigated at all. Figure 1 presents the process and the possible outcomes. For the purpose of this study, cybercrime is taken as the crimes registered by cybercrime police stations and cyber cells in the cities of Bangalore, Hyderabad, Chennai, Thiruvanan- thapuram and Delhi. These include most of the cases registered under Information Technology Act 2000 and a few cases registered under Indian Penal code. The data pertaining to 291 cybercrime cases mostly in the form of copies of First Information Reports (FIRs) and final reports pertaining to states of Karnataka, Tamil Nadu, Andhra Pradesh, Kerala, and Delhi is used. There were 157 FIRs from Karnataka where as the remaining 134 were Figure 1. Process of cybercrime investigation in India EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 171 Predictive Models in Cybercrime Investigation from the other four states. While the FIRs are generally hand written documents without any structured format, the nature of information that is to be recorded is well defined. All the informa- tion available in the FIRs is translated into 34 variables. The details of these 34 variables are given below in Table 2: DATA ANALYSIS The data is analyzed to identify the factors that will lead to filing the charge sheet. Two different techniques, namely, classification trees and artifi- cial neural networks are used to analyze the data. Classification trees work best with nominal or binned variables; hence, the data was prepared ac- cordingly. In the case of C5.0 classification trees, the splitting of the records at each node is done based on the information gain. Entropy is used to measure the information gain at each node. This method can generate trees with variable number of branches at each node. For example, when a discrete variable is selected as an attribute for splitting, there would be one branch for each value of the attribute. C5.0 builds a tree by splitting the observations at each node based on a single attribute or variable. If no split that could significantly reduce the diversity of a given node can be found, the process of splitting is stopped and the node is labeled as a leaf node. Table 2. Data variables 1. Crime number, section and cyber police station: This is to track back a case. It is a unique identifier of the record. 2. Age of Complainant: Binned into 4 categories 3. Gender of Complainant/VICTIM 4. Nature of Victim: either an Individual, or an Organization 5. Type of Organization: Four different types were defined 6. Marital status of the Complainant 7. Type of Damage to the Victim (Copy right, Data/software/source code, Reputation, Other 8. Type of Offence: Hacking, Obscenity, Copy Right violation, Others 9. Occupation of Complainant: 10. Investigation/Enquiry time for finalizing case: binned into 4 categories 11. Arrest period: binned into 4 categories 12. Arrest Status: Arrest is not mandatory but very important to obtain vital clues 13. Case Status (Case Finalization): This is very important for knowing whether police have successfully investigated a case-charge sheeted- or not (C). If there are no clues for detecting the crime, it is reported as undetected (U). If false complaints are given to settle civil disputes between parties, after investigation, it is reported to the court as false (F). It may take several months/years to know that the case is false or can not be detected. Even after several years, some cases may be still under investigation (I) 14. Motive of Accused 15. Tool for commission of offence 16. Gender of Accused 17. Age of Accused: binned into 4 categories 18. Tenure of Employee Involved: Binned into four categories 19. Damage amount (in lakhs): binned into 5 categories (10 lakhs=1million) 20. Time Lag in Noticing or Reporting: Binned into five categories 21. Identification of the Accused 22. Co-operation of Complainant 23. Occupation of accused 24. Dominant factor in offence: Behavior, Environment, Technology 25. Number of Offenders Single, Multiple, Not known 26. Details of IP Address 27. Server log details furnished 28. Co-operation of Service Provider 29. Co-operation of other agencies involved 30. Involvement of Cyber Cafe 31. Server Location: Foreign, Indian, Not Known 32. Type of Information: Data or Voice 33. Penal Act: Information Technology Act 2000 or Indian Penal Code (IPC) 34. Network Crime or Otherwise EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 172 Predictive Models in Cybercrime Investigation When all the nodes become leaf nodes, the tree is fully grown. At the end of the construction of the tree, each and every observation has been assigned to a leaf node. Each leaf can now be assigned to a particular class and a corresponding error rate. The error rate at the leaf node is nothing but the percentage of misclassifications at the leaf node. The error rate for the entire tree is the weighted sum of the error rates of all the leaf nodes. Artificial neural networks (ANN) are generally based on the concepts of the human (or biological) neural network consisting of neurons, which are interconnected by the processing elements. ANNs are composed of two main structures namely nodes and links. Nodes correspond to the neurons and links correspond to the links between neurons. ANN ac- cepts the values of inputs into what are called input nodes. This set of nodes is also referred to as the input layer. These input values are then multiplied by a set of numbers (also called as weights) that are stored in the links. These values, after multiplica- tion, are added together to become inputs to the set of nodes that are to the right of the input nodes. This layer of nodes is usually referred to as the hidden layer. Many ANNs contain multiple hidden layers, each feeding into the next layer. Finally, the values from last hidden layer are fed into an output node, where a special mapping or thresholding function is applied and the resulting number is mapped to the prediction. ANN is created by presenting the network with inputs from many records whose outcome is already known. For example, the data on age, gender and occupation of the complainant with respect to the first record are input into the input layer. These values are fed into the hidden layer and after processing (by combining these values using appropriate weights) the prediction is made at the output layer. If the prediction made by the ANN matches with the actual known status of the cybercrime (say either charge sheeted or undetected), then the prediction is good and the ANN proceeds to the next record. If the predic- tion is wrong, then the extent of error (expressed in numerical values) is apportioned back into the links and the hidden nodes. In other words, the values of the weights at each link are modified based on the extent of error in prediction. This process is referred to as the backward propagation. Artificial neural networks are found to be effective in detecting unknown relationships. ANNs have been applied in many service industries (Wong et al., 1997), such as health to identify the length of stay and hospital expenses (Nagadevara, 2004), air lines (Faraway & Chatfield, 1998) and for predicting the categories of the members of loyalty programs (Nagadevara, 2008). Profile of Data Sample As mentioned earlier, the data for the study con- sisted of 291 cases dealing with cybercrime. About half of the complaints are made by individuals where as the remaining half or made on behalf of the complainant organization. More than 65 percent of the complainants were male. Most of the complaints deal with hacking accounting for about 49 percent. Obscenity was the second most common complaint accounting for about 26 percent. The most common nature of cases was with respect to theft of data or source code or loss of reputation because of the crime. The motive for the crime was predominantly monetary gain. Needless to say 87 percent of the crimes were committed using computers where as about 7 percent were committed using a mobile phone. In about 70 percent of the cases, the case was reported within one month. In most of the cases, the server logs were not available, nor were the IP numbers. Similarly, the details of the service provider involved in the crime were also not available. RESULTS AND DISCUSSION The entire database was divided into two subsets. The first subset contains the records of cybercrimes reported in the state of Karnataka. The second EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 173 Predictive Models in Cybercrime Investigation subset contains the cybercrimes reported in the rest of the country. The variable “Case Status” was used as the dependent variable for the purpose of building the classification trees and artificial neu- ral networks for prediction. The data is analyzed for the entire database as well as for each subset separately. Classification trees for Karnataka and the rest of the country are presented in Figure 2 and Figure 3 respectively. There are four possible values of the dependent variable namely, “Filing Charge Sheet”, “Investigation Continuing”, “False Reporting” and “Undetected”. The accuracy levels of the classification trees are fairly high with 80 percent accuracy for the State of Karnataka, 85 percent for the rest of the country and 82 percent for the entire database. Figure 2. Classification tree for cybercrimes reported in Karnataka EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 174 Predictive Models in Cybercrime Investigation In the case of crimes reported in Karnataka, the most important variables that would lead to filing of a charge sheet are cooperation of the complainant and the tenure of the employee be- tween 6 to 12 months. Similarly, there is a 60 percent chance of charge sheeting when the reputation of the complainant is at stake and the complainant is female while the gender of the accused is male. On the other hand, there is a 78 percent chance that the crime goes undetected when the crime is a network crime and there is no cooperation from the service provider. In the case of crimes reported in the rest of the country, the chances of charge sheeting are highest when there is cooperation from other agencies. The chances of the crime going unde- tected are highest when there is no cooperation from the service provider, or the complainant or other agencies. This conclusion is rather obvious. While the classification trees generate rule sets which can be used to predict the possibility of either charge sheeting or the crime remain- ing undetected, the relative importance of these variables is very difficult to gauge from the classification trees. On the other hand, artificial neural networks provide sensitivity analysis with respect to each of the variables and this sensitiv- ity analysis in turn can be used to obtain relative importance of these variables. Table 3 presents the relative importance of the top ten variables. Figure 3. Classification tree for the cybercrimes reported in rest of the country EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 175 Predictive Models in Cybercrime Investigation These are presented separately for crimes reported in Karnataka, Rest of the country as well as for the entire country. Seven variables are common across the three models namely, All India, Karnataka and Rest of the country. The age and the gender of the accused are important along with the lag in reporting. The earlier the reporting is done, the higher are the chances of charge sheeting. Similarly the em- ployee tenure and the damage amount are also important factors across all the three models. These models can be used in conjunction to identify the factors that will be helpful in address- ing cybercrime. The classification trees can help in predicting the likelihood of charge sheeting the accused. In case such chances are low for a given case, the tree can help the authorities in focusing on certain aspects of the case. For example, if the FIR is unable to specify the service provider or the server logs and it happens to be network type, then it is important to the authorities to concentrate on either getting the server logs or zero in on the service provider. Similarly it is imperative that data with respect to the cyber café, various service providers’ server logs, type damage that could result to the complainant or the victim from the crime should be collected and analyzed carefully in order to reach the stage for charge sheeting. In most cases, the cooperation of the complainant and other investigating agencies is the most im- portant determinant of the solving the crime. The focus of the investigating agencies should be on continuing cooperation from the complainants. SUMMARY AND CONCLUSION The Information Technology Act 2000 enacted by Government of India and the amendments of 2006 address various concerns of cybercrime such as Table 3. Relative importance of the top ten variables Variable Relative Importance All India Karnataka Rest of India Age of accused 0.0776 0.0835 0.0337 Lag in noticing or reporting 0.0389 0.0384 0.0319 Marital status of complainant 0.0388 0.0375 0.0319 Damage amount 0.0387 0.0322 0.0284 Employee tenure 0.0339 0.0365 0.0244 Gender of accused 0.0338 0.0504 0.0293 Offence type 0.0325 N 0.0288 accused identification 0.0332 N N cooperation of complainant 0.0322 N N Organization type 0.0311 N N Information N 0.0309 N Offenders number N 0.0395 N Age of complainant N 0.0366 N Damage to the victim N 0.0327 N Occupation of complainant N N 0.0329 penal act N N 0.0310 Occupation of accused N N 0.0262 N: Not in Top ten EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 176 Predictive Models in Cybercrime Investigation e-commerce frauds, data theft, child pornography, theft of identity documents etc. Even after the enactment of the Information Technology Act 2000 and the amendments, there are a number of uncertainties in the investigation of cybercrime. There is a need to understand and strengthen the existing investigation methods and systems as well as data collection for controlling cybercrime. This study analyzed data with respect to 291 reported cases of cybercrime. The data is divided into two different subsets, the first dealing with the crimes reported in Karnataka and the second dealing with the rest of the country. The study applied the tech- niques of classification trees and artificial neural networks to analyze the data. Different models were built to identify the important factors that will enable law enforcement agencies to reach the first step in effective prosecution, namely charge-sheeting of cybercrime cases. Through these models it is possible to identify the relative importance of different variables that could lead to charge sheeting of the accused. These models are also capable of predicting the possible outcome of the case. Depending on the prediction, and the chances of reaching the stage of charge sheeting, these models can guide the authorities in focus- ing their energies on the collection of appropriate information which will increase the chances of charge sheeting. Thus, these models can be used to improve the efficiency of the authorities in solving cybercrimes. The research reported in this paper contributes to both the stream of the literature that deals with identifying patterns of crime and reportage that can assist with prosecution. Our results clearly show what is important, in the Indian context, to file a charge sheet and prosecute a case. This research shows the possibility and value of using data mining techniques such as classification trees and artificial neural networks. The paper provides concrete evidence of the use and value of such techniques from a practical perspective. REFERENCES Anonymous,. (2006). Immunizing the Internet, or: How I learned to stop worrying and love the worm. Harvard Law Review, 119, 2442–2463. Australian Centre for Policing Research. (2000). The virtual horizon: Meeting the law enforce- ment challenges-developing an Australasian law enforcement strategy for dealing with electronic crime. Retrieved February 10, 2009, from http:// www.acpr.gov.au/pdf/ACPR134_1 Bassett, R., Bass, L., & O’Brien, P. (2006). Computer forensics: An essential ingredient of cyber security. Journal of Information Science and Technology, 3(1), 22–32. Cangemi, D. (2004). 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All use subject to https://www.ebsco.com/terms-of-use 178 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 12 Isabella Bonacci Federico II University, Italy Oscar Tamburis ICAR – CNR, Italy Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management ABSTRACT The social frame of healthcare organizations in Europe (and in particular in the Italian Public Sector), as a combination of relational, formal and informal aspects, is one of their most relevant sources of complexity, which leads to different approaches about decisional, clinical and organizational processes (Cicchetti, 2004). These issues have been enlightened as well by the increasing social incidence of chronic-degenerative pathologies, such as Diabetes Mellitus type 2. In this regard, the Italian national e-government strategy has first pointed out the need for paths of integration and interoperability among information systems to ensure a safe exchange of information (CNIPA, 2008). The activity of “inte- grated design” of information flows between doctors and patients allows the creation and development of reticular organizational forms in which many non contiguous actors work at the same time on the diagnosis and care process. This paper shows how the adoption of the Social Network Analysis (SNA), as theoretical and methodological perspective that emphasizes the social reality as reticular framework (Moreno, 1987), can provide an innovative approach for the study of the “pathology networks” and the “integrated management” of Diabetes Mellitus type 2, where ICT solutions are (or are about to be) currently involved. DOI: 10.4018/978-1-4666-0044-7.ch012 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 179 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management INTRODUCTION HealthCare Organizations (HCOs) can be de- fined as “[…] social entities guided by specific objectives and involved in the processes through which health assistance services are produced and provided to healthy (e.g., prevention) or diseased subjects” (Mapelli, 1999). Health assistance services spread over a health–disease–health continuum, since the gap between health and disease can be only reduced, so that a disease subject produces another disease subject with different needs (Ruta, 1993). Many levels of assistance complexity and intensity are so covered, comprised within a wider corpus of organizational forms that, with its many profes- sional subgroups, complex work processes and power structures, represents a fluid and dynamic context with fewer formalized control mecha- nisms (Helmreich & Merritt, 1998) and suggests indefinite possible solutions of coordination and work assigning. Issues come from the difficulties to assess the alternative organizational forms proposed for the healthcare sector, in terms of efficacy, efficiency and equity (Grandori, 1999), as well as the different methodological approaches introduced for the study of its complexity: differ- ent levels of complexity can be detected in fact, from the agreement degree (among those work- ing in the inside environment) to the uncertainty degree (how the inside environment connects to the outside environment), related in any case to three main different fields: culture and values; technological–formal issues; social legacies (Cic- chetti, 2004). In this dynamic context the emerging organisa- tional form is the network organisation: the devel- opment of a reticular organizational structure rises from the need of a higher degree of organizational analysis than what requested for a single company (Martinez, 1997), and from the importance to deal with an interconnected organizations set as a higher ranking actor (Keen, 1990; Rockart & Short, 1991; Bonacci & Tamburis, 2007). The network appears therefore as the solution to the issues of integration between separated and specialized units (Cicchetti & Mascia, 2007); nonetheless, an accomplished sharing of values, social legacies and formal languages becomes possible in particular only within an “information and communication network”, where the knowledge framework that gives origin to the government of the technologi- cal system (Cosmi, 2003) – meant as pattern of analysis and management of coded information and data flows – takes the name of Information and Communication Technology. THE IMPACT OF ICTS VS. THE LOGICS OF NETWORK After the First Stage of Discovery of the “Health ICT world” (1989-1999), the Second Stage of Acceptance (1999-2009) began with recognition that nothing was going to happen by osmosis or just because of the enthusiasm of that community alone. The challenges were evident – there was no main stream credibility for health ICT within the technology sector or indeed within healthcare itself; there was no voice for innovation and new ideas; few who were aware or listening to the health telematics community (EHTEL, 2009). Opportunities have been beginning to open up dur- ing years. New technologies have been maturing which had relevance to healthcare. The growing pressures of demography, medical advances and patient empowerment were all in sharp contrast with finite resources available to address a grow- ing demand from citizens and patients for more health attention. The impact of increasing incidence of chronic disease, evidence based medicine, and early glimpses of personalized care, information based management and control, economics of transfor- mation through technology support and develop- ment of strategic ideas from worldwide markets have been changing perceptions, priorities and the choice of health business models. In addition, EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 180 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management as opportunities emerged, stakeholders began to be more aware of the opportunities and threats associated with ongoing change. There is there- fore evidence that, when combined with proper organization, leadership and skills, innovative Information and Communication Technologies (ICTs) can help to address some of the societal challenges to (not only) Europe’s healthcare sys- tems, first of all the achievement of the logics of “healthcare network” through which realize a level of technological integration capable of increase synergies between HCOs, and between them and the patients: a network of interconnected HCOs and healthcare operators (General Practitioners, Specialists, …) can lead to access to, deliver and share new forms and channels of relations, apart from consolidating and revitalizing the already existing ones. Nevertheless, researches examin- ing organizational and socio-cultural factors have provided insight into variables which diminish or create barriers to the use of ICTs within HCOs. Recent works have paid attention to the interactive complexity of group works (Goodwin & Goodwin, 1998; Kaplan & Shaw, 2002) demonstrating the need to move outside the traditional individual decision-maker assessment and take account of the context of practice, team integration, and related cognitive as well as socio-cultural issues. Few studies (Santahanam, Guimaraes, & George, 2000; Kaplan, 2001) have traced as well the links between improvements in organizational outcome indicators and a diversity of predictive variables (technical, organizational and socio-cultural factors) within organizations as ICT were imple- mented. Another body of literature, focused on the diffusion of technological innovation (Rogers, 1995), has identified the processes by which in- novation is communicated though certain channels over time among members of a social system: neither here much attention has been paid to the consequences for workers and organizations (and HCOs among these) of adopting technological innovations (Westbrook, Braithwaite, Iedema, & Coiera, 2004). LITERATURE REVIEW Our study draws upon two main areas of research in the literature: (i) the network organizations in the healthcare sector, (ii) the Social Network Analysis as work methodology. In this section, we provide a brief survey of pertinent studies in each area from the literature. In a strictly organizational meaning, the network is defined as a set of relations between actors, and ties between subjects and/or systems of coordination and governance, converging upon the same output and/or business process (Grandori, 1999). There are two main branches of research focused on the healthcare networks: the first one aims to analyze the pattern and its strategic and organizational properties from the network nodes standpoint, paying attention on their dynamics of aggregation. Many experiences (Cicchetti, 2002; Miolo, Vitali, & Nuti, 2003; among the others) made possible to depict two main categories: the horizontally–integrated networks and the verti- cally–integrated networks. In the first case, litera- ture widely refers to the so–called “hub & spoke model”, where a medical centre of excellence able to provide high specialized performances – often because of higher resources availability – is surrounded by a number of peripheral facilities aimed to less specialized tasks (Cicchetti, 2002; Lega, 2002). In the second case, the network is related to the concept of assistance continuity (Lega, 1998), and the research focuses on the enhancement of the patient assistance path, with particular regard to the prevention performances. The other main body of literature concerns the kind of flows – meant as exchange of resources – that origin inside the network (co–ordinate mo- bilization: Warren, Stephen, & Bergunder, 1974). Researches focus on the dynamics of integration, coordination and interdependence occurring be- tween two or more organizations (Milner, 1980; Fennell & Warnecke, 1988; Kaluzny & Warnecke, 1996). Such contributes differ from the previ- ous ones because, besides drawing the network EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 181 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management organizational framework, highlight the impact on performances level by analyzing management and clinical outcomes: this leads therefore to an evaluation of the efficacy for both the whole network and the single nodes and ties (Provan & Milward, 1995). The co–ordinate mobilization is a typical form of healthcare services supplying, and is the first stage in a much longer path along which the relational tissue gets steadier thanks to informa- tion exchange and agreements settling among the actors involved (e.g., dynamics of patients exchange between HCOs) (Van de Ven, Walker, & Liston, 1979; Van de Ven & Walker, 1984). The networks studies appear as connected to other disciplines, such as sociology, and in particular with the body of literature about the social network analysis. Assuming that the relationships occur- ring between actors are held to actors’ roles inside the network (Cross & Parker, 2004; Meneguzzo & Cepiku, 2008), the whole set of nodes/actors (with their peculiar features), and the set of ties (e.g., connections, relations and/or interactions for the exchange of resources) give origin to a social network (Powell, 1990), that can be can be articulated on different levels: interpersonal (a single person belonging to an organization); intra–organizational (a specific people group within an organization); inter–organizational (a set of relations existing between organizations). Such levels concern different kind of social ties, from casual contacts, to working relationships, to family bonds (Chiesi, 1999, 2006). The Social Network Analysis (SNA) is a methodology for the analysis of social relation- ships, developed from the research of Jacob Levy Moreno (among the others), founder of sociometry (a discipline focused on the study of interpersonal relationships), that in 1934 tried for first to visualize the social interactions as reticular objects. The SNA makes a wide use of topics, concepts and instruments coming from the branch of mathematics known as “theory of graphs”, focusing especially on the possibility to analyze, interpret (and somehow foretell) the ties existing between the nodes of a network. In the healthcare sector the organizational actors are strongly interconnected each other, and then influenced by the surrounding social environment, so the SNA appears as the most suitable theoreti- cal and methodological perspective to investigate the spreading of innovations and good practices (clinical, organizational and technological) among healthcare operators, or how multidisciplinary teams for the treatment of chronic–degenerative pathologies work. The above mentioned level of analysis can be featured as follows: • Interpersonal: performance supplying, definition and development of decisional and information processes for practitioners and specialists (Coleman, 1974; Valente, 2002), operations of multifunctional teams (West, Barron, Dowsett, & Newton, 1999); • Intra–organizational: designing of HCOs, where social relations play a key role in the performance analysis of the organizational units (Lomi, 1991; Donatini et al., 2001); • Inter–organizational: designing of as- sistance networks (Agranoff & McGuire, 2001). The adoption of the SNA fits with the research objective, because of its capability to feature correctly the organizations involved, by using appropriate sets of indicators and graphic instru- ments. Within this logic, it becomes possible to investigate any kind of relationships that origin in a healthcare system, comparing therefore the “formal” and the “real” organization frameworks (Cicchetti, 2007); that makes also possible to im- prove the ability to develop evaluation models that are adaptive and sensitive to the characteristics of wicked problems and provides a strong theoretical basis from which to analyze and interpret findings (Westbrook et al., 2007). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 182 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management METHODOLOGICAL REMARKS The present work supports an explorative/descrip- tive analysis (Yin, 1993; Mari, 1994), featuring as the first step of a wider research path described in its overall in Figure 1. The two main research objectives are: • Verify if and how the SNA can address the instances of change and knowledge man- agement within a territorial context featur- ing a low use of ICTs and a limited spread- ing of information flows concerning the chronic patients’ care paths; • Verify if and how the SNA can appear as the “way” to a perspective of innovation, whereas the realization of an information framework (social healthcare network) for the circulation and the exchange of accu- rate, individual and complete clinical data, can improve the dynamics of communica- tion and interaction/integration between the subjects involved in the patients’ care paths. The concept of change means any kind of modi- fication of the organizational and technological knowledge gained from the outside environment and/or improving the use of resources extant, but not properly exploited (Corti, 2002): this de- scriptive side of the analysis is enhanced by the increasing body of literature about the network designing in the healthcare sector as well. The explorative analysis refers instead to the concept of innovation, meant as any qualitative/quantitative modification of the use of extant technologies, able to lead “somehow” to a very change, perceived as positive (Corti, 2002). The deployment of the analysis of social networks requires a methodol- ogy for the evaluation of relational data. The quantitative–relational approach provided by the SNA features as analysis units the set of relationships that the actors (nodes) involved in the care path (HCOs, GPs, patients) origin inside the network, while the relations’ proper- ties (ties) belong to couples of actors, instead of single nodes (Mazzoni, 2007; Marchi, Schifini D’Andrea, Maggino, & Mola, 2007). Strengths of the SNA are the exploitation of the Theory of Figure 1. The research path EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 183 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management Graphs to handle the relational data (the couple of actors), and the Matrix Algebra to describe the interactions framework (Scott, 2000; Wasserman & Faust, 1996): relational data are first depicted through the use of “n x n” sociometric matrixes, whose rows and columns refer to the nodes, while the cells refer to their connections. The “weight” of each connection depends on the definition of a suitable evaluation parameter adopted for draw- ing the social network. The graphs (here called “sociograms”) are bi–dimensional descriptions of the social relations, wherein the points mean the nodes and the lines mean the ties between couple of nodes. The use of sociograms makes finally possible to highlight many formal network properties (such as density, cohesion, centrality, and connectivity). The analy- sis of the problematics on a complex environment in which information & communication technolo- gies are increasingly being implemented led to recognize that there aren’t suitable evaluation frameworks yet, by which to assess their impact on clinical work and organizational outcomes. The two main challenges the research path should try to address are to conceptualize the design features of an evaluation framework and to specify what data will be gathered and how. THE EMPIRICAL VERIFICATION The empirical analysis coming from the research strategy consisted of two main steps: • The first step focused on the identifica- tion of possible areas of implementation of ICT solutions in the Districts of the Local Health Authority “Na 2 Nord” (located in the north of Naples’ province, Italy), in relation to the sustainability of pro- grammes of Integrated Management for chronic–degenerative pathologies, in par- ticular Diabetes Mellitus type 2. The quan- titative research was founded on a survey administering; • The second step aimed to elaborate the results achieved using qualitative meth- ods (participant observation, creation of a “Pathology Group”). The implementa- tion of the SNA made possible to draw a network to investigate the relations oc- curred, according to the logic of disease management. The sample group consisted of nearly 50 General Practitioners (GPs) and Specialists (in particular diabetologists), working in the Dis- tricts of the Local Health Authority Na 2 Nord; chronic–degenerative pathologies, including the Diabetes Mellitus type 2, present similar clinical courses, and their incidence on the population has been increasing mostly because of the raising of life expectancy. In Italy, surveys concerning the Diabetes incidence on national scale are not available, while there are studies performed on local areas (see: Bonora et al., 2004 (Bolzano area); Bruno et al., 2005 (Turin area); Pelella, Tamburis, & Tranfaglia, 2007; Bonacci, Pelella, & Tamburis, 2008 (Benevento area)). In addition, from ISTAT yearbook data (Zaccarin & Rivellini, 2007) emerges that 4,6% of Italians are diabetic, equal to 2,7 millions people (4,9% women and 4,4% men). The standard prevalence increased, during the last years, from 4,2% in 2002 to 4,6% in 2007. The prevalence of Diabetes Mellitus increases with the age, up to the 17,6% in the over 75 age group. In the age group from 35 to 74 years, the prevalence is greater for the men, while in the over 75 age group is greater for the women. The administered 50–item questionnaire for the data collection, mostly structured with fixed questions, was divided in three main areas: • Knowledge of the pathology: the analysis focused on the main topics concerning the handling of the diabetic patient by the GPs, in order to verify their correct behavior as EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 184 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management well as the respect of the guidelines for the treatment of the pathology; • Approach to the ICT: the first purpose was to evaluate, among the GPs, their knowl- edge and experience with information in- struments as well as with electronic data delivering and warehousing tools. The second purpose was to analyze their pro- pensity toward the adoption of Electronic Medical Record protocols; • Management of communication flows: the analysis focused on evaluation of the de- gree of interaction/integration between the subjects involved in the diabetic patient care path. The answers analysis from the sample group members led to a first “picture” of the three levels of the social network, and to the set of flows oc- curring among the actors themselves (co–ordinate mobilization). A strong dichotomy appeared be- tween their will to equip with ICT solutions, and the lack of a real sense of their use, as well as their effects on work performances, services efficiency and operators expertise. The emerging scenario showed once one how “the deployment of ICTs, either as change or innovation, is still perceived as an out–of–the–ordinary, avoidable experience: a definitely remarkable chance of improvement for the service performances supplying, but ready to turn out as negative, since cause of modification for actors’ behaviors and roles” (Corti, Iasiello, Marino, & Tamburis, 2004). THE GENERAL CARE PATH (AS IS) Figure 2 describes the General Care Path, as drawn upon the elaboration and the analysis of the questionnaires. The flow chart turned out as the best pattern to highlight the logical sequence of the episodes forming the Care Path in a territorial context, and allocate the performances delivered by the GPs, together with the diabetological team (composed by diabetologist, diabetic centre, cardi- ologist, nephrologist, optician, dietician, podiatrist and psychologist) and the territorial hospital(s), for the treatment of a particular kind of patients. The realization of the General Care Path started with the analysis of the real care path adopted by each GP (i.e., the visualization, for the diabetic patients followed, of the actual se- quence of the episodes their assistance process is made of). The best assistance path realized by each GP has been named Reference path. The synthesis of the most efficacious (from the clini- cal standpoint) and most effective (from the or- ganizational standpoint) Reference paths has originated finally the General Care Path (As Is). The relational approach overlapped to the previ- ous logical one firstly required, to draw correctly the network, the identification of the best fitting evaluation parameter to assign a weight to the connections found: that was the therapeutic con- tinuity settled between every couple of actors of the care path, expressed by a numeric value rang- ing from 1 to 7, according to the great part of literature. Such step was conducted with the help of the members of the “Pathology Group”, com- prised by those physicians and administrators belonging to the sample group, that showed higher levels of expertise and collaboration; the output was the sociometric matrix in Figure 4. Finally, dedicated software (UCINET) translated the matrix in a sociogram (see Figure 3). The analysis of the resulting network shows an ap- pearing structural equivalence between patient, GP, diabetologist and diabetic centre (e.g., a si- militude of their relational framework with the other nodes of the network). The exploitation of the UCINET software al- lows pointing out many relevant properties of sociograms, the first of which is the network cohesion, which ranges from 0 to 1. The resulting value is 0.764 (i.e., in the network are present about the 75% of all the possible connections). The density value is confirmed by the standard deviation value (0.4406) that suggests the presence EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 185 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management of a significant level of variability in the connec- tions. Such high percentage, rather than being a positive output, highlights instead a non rational (and even mostly redundant) distribution of the connections, centered among the four nodes with the highest connectivity values (e.g., the number of nodes that have to be removed in order to disconnect the network on the whole. High values for k(G) mean significant levels of connectivity in the graph/network). Figure 2. As Is care path flow chart EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 186 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management The cliques analysis gives information about the number of couple of actors sharing the same group; a clique is a high density subgroup of the network, made of three or more nodes. In this case, it was possible to recognize only four extremely similar cliques: (i) Patient – GP – Diab. – DC/ LHA – Cardiol. – Opt. – Nephrol. – Hospital, (ii) Patient – GP – Diab. – DC/LHA – Pod. – Hospital, (iii) Patient – GP – Diab. – DC/LHA – Psychol., (iv) Patient – GP – Diab. – DC/LHA – Diet (Fig- ure 5). That means the lack of an arranged set of relations. This happens because every diabetic Figure 3. Sociogram of the healthcare network originated from the As Is Care Path Figure 4. As Is Sociometric Matrix EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 187 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management patient, deprived of a real guide, can actually make different choices along the path, share single parts of the path with other patients, be stuck in a loop with the same episode, or even skip one or more episodes. There is a remarkable heteroge- neity among the care paths originally identified by the GPs involved, and in particular there is a gap between those and what recommended in the guidelines for the Integrated Management of Diabetes Mellitus type 2; the SNA provides a “photography” that enlightens the lack of a real network organization, although the number of HCOs through which, in the same territorial context, the assistance process of the diabetic patient is supposed to be set and organized: GPs have generally a very low knowledge degree of the care paths followed by their patients; the clinical data are delivered by the patient himself, that moves among the HCOs with his (papery) clinical history. The deployment of ICT solutions is very lim- ited for all three levels of study (interpersonal, intra– and inter–organizational), since exploited mainly to automate already existing operation processes (Data Resource Technology: Pontiggia, 1997). The final outcome is that the instances of change perspective and complexity management (as to culture and values, technological–formal issues and social legacies) have been addressing along an unequal development of those macro–as- sets (instruments, professional skills, organiza- tional bonds, information) on which ICTs are based on, leading so to an impossibility to come to a rational organization of the assistance sup- plying processes (Bonacci & Tamburis, 2009). NETWORK DEVELOPMENTS By exploiting the SNA to “take snapshots” of the current organization it is possible a longitudinal study of the related network, through which aims to: an efficacious path of patients’ empowerment; a more appropriate handling of the disease for the GPs; an improvement of the capabilities of the territorial care supplying facilities. Deploy- ing a sort of “evolution logic”, the mentioned instances of change and knowledge management can be interpreted, foretold, and even somehow driven: this can be called “innovation”. It takes Figure 5. As Is Cliques Diagram EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 188 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management first a passage from a “Data Resource Technol- ogy” to a “Communication Technology”, and therefore to a “Relation Technology” condition, where ICT should impact pervasively in order to redesign the value chain on the whole. It is sup- posed to happen through the implementation of an “ERP–like” integrated information framework, supporting an Electronic Health Record system. The realization of an “information connecting tissue” (middleware) can become the first step toward the achievement of an interoperating and interconnected environment, where the Care Path itself would get to the status of social healthcare network, and GPs would aim to the key role of process owner of the integrated management of the pathology, called to: • Coordinate and control the dynamics of communication and interaction/integration between the subjects involved in the dia- betic patient care path; • Promote the activation of suitable systems for the strategic planning and the perfor- mances measurement in a sort of “informa- tion virtual ward”; Such network should feature a lower density value (less connections, but better organization of the data flows) and, consequently, a higher number of subgroups, with smaller dimension but a major proximity index (that is the capacity for each node to create ties with the other nodes), thanks to a redefinition of roles and social relationships. In such new view, the strategic subject called to the government and the monitoring of the assistance processes can appear as more “expanded”, and feature as a “decision–making composite actor” (Achard, 1999). CONCLUSIONS AND FUTURE PROSPECTS The main consequences of the emerging of a new paradigm for the ICT in the healthcare sector, based upon clinical, organizational and administrative information sharing and integration among the op- erators, is depicted and summarized in Figure 6. The exploitation of social healthcare networks is meant to “compress” the lead line that links the outside environment of the HCOs (inter–organizational perspective) and their inside processes of Health- care Technology Management and, in particular, deployment of ICT solutions (intra–organizational and interpersonal perspectives), increasing the cohesion of the whole organizational tissue and featuring the SNA as “cultural bond” based upon common principles (Fontana & Lorenzoni, 2004). Figure 6. The SNA as “cultural bond” between outside environment and inside processes of the HCOs EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 189 Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management This process could help to redefine the con- nections between general management and clinical management, allowing a better handling of the main risk concerning the deployment of evolved healthcare technologies, that is an as much intrinsic as unaware dissociation of the medical act between its operative, informative and hierarchical factors. 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This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 3, edited by John Wang, pp. 13-27, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 193 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 13 DOI: 10.4018/978-1-4666-0044-7.ch013 INTRODUCTION Various studies emphasize the tendency of uni- versities referring to their students as customers (Eagle & Brennan, 2007; Comm & Mathaisel, 2005; Ho & Hung, 2008) and the increasing im- portance of comparing educational systems (Wang et al., 2009) and the impact on service providers. Michael (2004) emphasises the vital role of higher education management based on a solid under- standing of its fundamental impact on manage- ment thoughts and practices currently prevalent in higher education systems. The increased level Johan De Jager Tshwane University of Technology, South Africa Werner Soontiens Curtin University of Technology, Australia Marketing and Reputation in the Services Sector: Higher Education in South Africa and Singapore ABSTRACT Over the past few decades the tertiary sector has developed from a predominantly inward focussed industry serving public interest to an internationalised and commercially competitive industry. Resulting from this fundamental change is a drive to better understand the most prominent dimensions that impact on internationalisation, more particularly, the expectations and experiences of students. Although some of these can be argued to be country specific, and thus differentiate between markets, others are universal and impact on the overall industry. One of the latter is a pressure to consider and treat students as clients introducing all the dynamics of service delivery and management. The primary objective of this paper is to identify the most important variables related to marketing and reputation issues when selecting a university in South-Africa and compare the same for Singapore students. This study revealed that the most important consideration for the South African sample, regarding marketing and reputation related variables when choosing an institution of higher education, is the academic reputation of the institution, while the marketing activities were regarded as priority by the Singaporean sample. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 194 Marketing and Reputation in the Services Sector of competition in the education environment has led to institutions of higher education employing managerial techniques to improve the efficiency and quality of their provisions (Eagle & Brennan, 2007; Palihawadana, 1999) and a switch from a passive to a more active market approach (Ivy, 2008). Hemsley-Brown and Oplatka (2006, p. 316) emphasizes that in the context of increasing competition for home-based and overseas students, higher educational institutions now recognize the need to market themselves in a climate of international competitiveness. If universities are to satisfy student’s require- ments they should be aware of their own offerings and how these are perceived in the market place. It is important for institutional policy makers to be aware of the influential factors and the associated impact on potential students (Eagle & Brennan, 2007; Moogan & Baron, 2001, p. 197). This impact also refers to the influence of the product offer- ings on the overall reputation that an institution of higher education builds over a period of time (Gotsi & Wilson, 2001). In order to maintain students as loyal custom- ers a marketing orientation approach should be followed, implying that various aspects should be taken into consideration. This includes the satisfaction of consumers’ needs, the wellbeing of the society and achieving objects over the long term, including profit. This study will mainly investigate the level of importance of some ele- ments of the product offering of two universities, one in South Africa and one in Singapore, to their students. The influence of these elements on the overall reputation of the universities will also be investigated. MARKETING PRACTICES AND REPUTATION IN THE HIGHER EDUCATION SECTOR Flavian, Torres, and Guinaliu (2004) argue that large numbers of competitors in a global environ- ment are constantly attempting to offer something different in their services to distinguish them from competition. Da Silva and Batisda (2007) are of the opinion that relationship building with customers is crucial for commercial survival. This also includes public organisations. The author points out that the building of corporate reputa- tion has become a strategic issue for organisations that requires a series of organisation changes. The building of reputation requires a strong customer-focused orientation, better performance of an organisations day-to-day management and operating activities, more efficient and effective communication with its publics and a greater emphasis on recognition. As a result the author emphasized the importance of increasing an or- ganisations image that is transmitted to consumers. Alsop (2004) explains that the top managements own reputation affects corporate reputation and states that high profile CEO’s like Bill Gates still affects the company image and is ultimately ac- countable for reputation. Although the paper does not focus on the re- lationship between marketing and reputation per se, it may be worthwhile clarifying the anticipated relationship of a few related concepts. The image and reputation terminology are sometimes confus- ing and as a result Gotsi and Wilson (2001) attempt to define the concept of corporate reputation and identify its relationship with corporate image. Gotsi and Wilson (2001) argue that some schools of thoughts view corporate reputation as synony- mous with corporate image and further pointed out that the reason for the lack of a single common definition for corporate reputation (and image) mainly derives from the diversity of relevant studies which explore the construct from different disciplinary perspectives. Overall however there is support for a separate but interrelated view. Barich and Kotler (1991) point out that the critical role of institutional image and institutional reputation in customer buying intentions are well known in marketing. Duncan (2005) states that the differ- ence between image and reputation is sometimes EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 195 Marketing and Reputation in the Services Sector confusing because the two are somewhat related. The difference between image and reputation lays in the fact that image can be created and reputation is earned (or maintained). Both these concepts are important and are known as integrity. Raj (1985) points out that institutional image and reputation are important to develop and maintain a loyalty relationship with customers. This is reflected in the trend that students often choose to attend a university based on impressions and experiences by acquaintances. In the university environment image and reputation may also impact on student decisions to enroll or to stay for advanced studies. In other respects institutional image and reputation are considered as two distinct but strongly related social entities (Nguyen & Le Blank, 2001). Rao (1994) as cited in Nguyen and Le Blank (2001) is of the opinion that this relationship is intuitively appealing given the idea that image and reputation may share a certain number of components, while they constitute the global outcome of the process of legitimating or the credentialing mechanism (Tait, de Jager & Soontiens, 2007). Gotsi and Wilson (2001) came to the conclu- sion that a corporate reputation is a stakeholders overall evaluation of a company over time. The evaluation is based on the stakeholders’ direct experiences with the company and other forms of marketing communications and symbolism that provides information about a company’s actions and/or a comparison with the actions of other leading rivals. Ivy (2001) further states that as competition for student’s increases and funding decrease, universities need to create and maintain a distinctive image and reputation in the market place. Consequently higher education institutions are becoming increasingly aggressive in their marketing activities and need to be clear about their positioning in order to convey a favorable image and reputation to their distinctive interest groups, from students to donors (Russel, 2005; Ivy, 2001; Tait, de Jager, & Soontiens, 2007). The abovementioned clarifies the interrelation- ship between the creation and maintenance of an acceptable corporate reputation and an effective corporate marketing activities (marketing commu- nication system) with its publics. The reputation (and image) of universities is thus established and enhanced through interaction with various stake- holders, amongst which students are a prominent group, mostly through various media. Institutional reputation thus engages various media channels (marketing tools) to engage with stakeholders while stakeholders evaluate the institution against the messages. A consistent performance (i.e., service quality) may strengthen the reputation. Higher Education Institutions should under- stand their own offerings and how these are per- ceived in the market place, as these it could have important marketing and management implica- tions. Oldfield and Baron (2000) suggest that there are three underlying factors of higher education service quality that may appeal to stakeholders namely, requisite elements (encounters which are essential to enable students to fulfil their study obligations), acceptable elements (which are desir- able but not essential to students) and functional elements (which are of a practical or utilitarian nature). Al these should be communicated with the relevant stakeholders in an acceptable manner. Various factors influence the choice of potential students to study at a specific tertiary institution, including location (Ford, Joseph, & Joseph, 1999; Roberts & Allen, 1997), reputation of academic quality (V88) (Chen & Zimitat, 2006; Landrum, Turrisi, & Harless, 1998; Ivy, 2001), course specif- ics (V103), (Ford, Joseph, & Joseph, 1999), a safe environment and state of the art facilities and of- ferings (Comm & Mathaisl, 2005). A recent study (2003) by the Human Sciences Research Council (HSRC) in South Africa has found that the most important influence upon choice of institution is its reputation followed by the geographical location. Sohail et al. (2003) argues that the introduc- tion of quality control measures has mainly been focussed on non-academic matters. Although the physical environment is overall accepted to impact on the study experience there is little evidence EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 196 Marketing and Reputation in the Services Sector of the actual impact on satisfaction by students. Wakefield and Blodgett (1994) established that the utilitarian nature of facilities such as sport- ing facilities (V89) and the like does however impact the experience of students who spend a significant amount of time on campus. Oldfield and Baron (2000) found that although modern looking equipment is unimportant, students do find up to date equipment, particularly in information technology, crucial. The choice of service provider (university) is dominated by the perceived overall academic quality, the quality of academic staff (V91, 92, 93) and the rigour of the program (Soutar & Turner, 2002). From an efficiency perspective, Cloete and Bunting (2000) indicate that institutions with an above average percentage of highly qualified academic staff are generally more efficient uni- versities. A study by Ben Ami (2005) confirmed the importance of highly qualified and skilled academic staff to deliver programs. Research by Tait, Van Eeden & Tait (2002) indicates that presentation of lectures is significantly correlated to the value perception of university studies and the learning process, emphasising the crucial role of lecturing staff for learners. McElwee and Red- man (1993) emphasise undergraduate students’ lack of knowledge and experience with higher education and therefore have no comparative base or framework of reference from which to make evaluations. In order to satisfy student requirements, uni- versities must develop an awareness of perceived course offerings. In order to do this effectively institutional policy makers must be aware of the influential factors and the associated impact on potential students, (Moogan, Baron, & Bainbridge, 2001). Emphasizing the importance of identified quality directives in marketing communication (V94) Cheng and Tam (1997) argue in favour of segmenting the market by selecting a target market and positioning. Institutions operating in the international arena can strengthen their market presence through scholarships and bursaries. The Singaporean Min- istry of Education (2007) confirms that Singapore has worked towards its identity of education centre on the back of scholarships (V95) to study in commonwealth countries under the ‘education as aid’ initiative in the 1970s and 1980s. The United Kingdom and Australia established themselves as major international education providers this way. More recently, the Singaporean govern- ment impact the attraction of quality students by providing scholarships and bonds (Ministry of Education, 2000). Oldfield and Baron (2000) determined that it is also important to note that students perceive a clear distinction between academic and administrative staff roles. In the ‘pure service’ environment of higher education there is the interactive relation- ship between students which also impacts on overall expectations and satisfaction of students. Service delivery in this environment is often per- sonalised and dependent on individual technical or customer related skills and personality by for instance career advisors (V112) or other support staff. According to Boulding et al. (1993) a prime issue of poor performance in this environment is not knowing what customers expect and the absence of tangible clues. Bearing in mind all the above mentioned possible attributes that higher education can contribute to various stakeholders, Balmer and Greyser (2006) state that a key attribute of corpo- rate level-marketing is its concern with multiple exchange relationships with multiple stakeholder groups and networks. THE SINGAPOREAN TERTIARY EDUCATION ENVIRONMENT Despite historically having inherited a poorly edu- cated workforce upon independence, the Singa- pore government acknowledged and committed to the potential and development of human resources as main foundation of the economy. This translated EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 197 Marketing and Reputation in the Services Sector to an investment in education and vocational trad- ing that has consistently been expanded since the 1960s (Sanderson, 2002). Over time the focus has shifted to tertiary education with recognition that an educated and skilled workforce is imperative to meet human resource need, enforce sound moral values and align Singapore in the face of rapid progress and change (Ministry of Information and the Arts, 1998). Traditionally the Singapore government has had a high level of involvement in education driven by the strong conviction that education enhances productivity of the labour force. The Singaporean Ministry of Education (2007) reports that the return on tertiary educa- tion is higher compared to non-tertiary education. This provides a further drive to meet the shift of the Singaporean economy to higher value-added and knowledge activities. Singapore, both by necessity as a small, open economy and by design from an outcomes driven government has emerged as a unique hub of in- ternational education which is likely to challenge the traditional western models that have been dominant over the past decades (Sanderson, 2002). The emergence of Singapore as an education hub takes place against the backdrop of being con- scious to develop a system that is flexible enough to cater for different students. In view of this, the Singaporean education sector is anticipating the establishment of up to ten specialised institutions by 2010 (Li, 2006). Overall, in a globalised small and open econ- omy like Singapore, sustainable growth pivots around the growth potential of human capital. A conscious positioning in the knowledge and service based industries further enhances the role of tertiary education and subsequent interest and investment throughout Singapore (Ministry of Education, 2007). In the international education context, Singapore reflects the traditional stages of development. Under the ‘education as aid’ initiative amongst Commonwealth nations in the 1970s and 1980s Singaporean students received scholarships to study inter alia in Australia and the United Kingdom. In addition limited local capac- ity enhanced the outflow of Singaporean students (Sanderson, 2002). Over time, the trend of Singa- poreans study abroad has maintained momentum due to low capacity, high entry requirements and government restrictions. Simultaneously Singapore has developed a market for overseas institutions and foreign students to the extent that in 2002 an estimated 11,000 foreign students were enrolled in tertiary education of some sort. The attraction for foreign students is that fees are subsidised by the Singaporean government in a tuition grant that bonds students to stay and work in Singapore for three years after completing their studies (Ministry of Education, 2000). International education in Singapore is deliv- ered by local universities or foreign universities through either branch campuses or twinning programs with local institutions such as profes- sional bodies. In 2000 there were more than 50 institutions offering tertiary education of which the vast majority was UK and Australian based. Interestingly non-Singaporean universities do not require approval to operate in Singapore or to issue their qualifications. The Singaporean government does however issue licenses to local partner institutions to retain an involvement with foreign universities (Ziguras, 2003). More recently the Singapore government has targeted high end providers such as INSEAD and the Chicago School of Business to establish a local presence. In addition, Curtin University has transformed its presence from an agreement with professional bodies to a full blown presence (Curtin University of Technology, 2008). In reaction to this and in line with Singapore’s tradition of allowing market forces to dictate sectors, Singaporean institutions are corporatized and operate autonomously as not-for-profit public companies predominantly owned by the Singapore government (Li, 2006). Singapore has emerged as the most prominent education provider in Southeast Asia, both as a result of an articulated government direction and its perceived relevance to bridge Asian heritage EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 198 Marketing and Reputation in the Services Sector with Anglo education. To this extent it could be argued that South Africa and Singapore play a similar role in their respective continents and are therefore included in the study. SOUTH AFRICAN UNIVERSITIES Universities in South Africa have experienced stagnating and declining budgets and simultaneous pressures to increase enrolments (Samoff, 2001). Since the late nineties South African universities have experienced a gradual decline in student numbers translating in more choice and increased pressures on service delivery by students. Pres- sures also build up in respect of technological advances and skills with some institutions and staff delivering and using sub-standard computer technology (Miji, 2002; Zaaiman, Van der Flier, & Thijs, 1998). An assessment of the South African educa- tion system indicates that individual universities display unique sets of characteristics with regard to historical origins, faculty and departmental or- ganisation, human resources and student numbers (Cloete & Bunting, 2000). Each of these in turn contributes to the image and reputation of the university. At the same time all universities are governed by common national regulations which imply a level of homogeneity across all players. South African Universities like other universi- ties in countries such as the United Kingdom and Australia (that have similar educational systems to South Africa) has experienced a dramatic decline in government subsidies and an increase in student fees (Palihawadana, 1999; Soutar & Turner, 2002). This is due to various changes in the respective environments. In South Africa the decline in funding from subsidies is a direct consequence of the trend of falling pass rates (Naidoo, 2003) and subsequently earns less government subsidy. It appears as if tertiary institutions across the globe experiencing increasing market and financial pressures. The result has caused institutions of higher education to engage in more competitive educational practices. Given the above background, the effects of competition on institutions of higher education, especially in the South African context, can be seen as having far-reaching implications for these institutions. Traditionally, Technikons and Univer- sities have competed indirectly, whereas they now compete directly, ostensibly for the same market. The impact of technology and the demand for a technologically literate workforce has also created a third stream of private educational institutions that not only compete for school-leavers, but also on post-graduate level. Private providers meeting a specialised demand are often highly responsive and provide credentials in areas that the public sector does not (Kruss, 2002). This increased level of competition in the education environment has led to institutions of higher education employing managerial techniques to improve the efficiency and quality of services (Palihawadana, 1999) and switch from a passive to a more active market approach (Naudé & Ivy, 1999). If universities are to satisfy student requirements they must be aware of their own offerings and how these are perceived in the market place. Being aware of the influential factors and the associated impact on potential students is important for institutional policy makers (Moogan et al., 2001). PROBLEM STATEMENT Higher education is facing increasingly more challenges on the global arena. As institutions of higher education compete for human and financial capital it is equally important to understand and address the demands of students and industry. This is even more so as universities increasingly de- velop an international presence and seek to attract international students. Overall the problem is a lack of information to enable institutions of higher education to identify and adhere to students needs in order to attract them from the global market. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 199 Marketing and Reputation in the Services Sector OBJECTIVE OF THE STUDY The primary objective of this study is to identify the most important variables related to marketing and reputation issues when selecting a university in South-Africa and in Singapore as confirmed by students. A secondary objective is to determine whether there are significant differences between South-African and Singaporean students related to marketing and reputation issues when deciding on an educational service provider. RESEARCH METHODOLOGY Conceptualising the Purpose of the Investigation In order to achieve the primary objective of the research, the service quality variables related to marketing and reputation of higher education when choosing an institution of higher education is investigated. The following secondary objectives were formulated: • To evaluate the expressed levels of impor- tance of South-African and Singaporean students with regard to these selected high- er education challenges; • To determine the existence of significant differences between the South-African and Singaporean students with regard to their expressed levels of importance with these variables related to higher education. Research Hypotheses With regards to the objectives the researchers formulated the following hypotheses: • Ho: There exist no significant differences with regard to the importance of the ser- vice variables related to marketing and reputation of higher education between the South-African and the Singaporean samples. • Ha: There exist significant differences with regard to the importance of market- ing and reputation of higher education re- lated service variables between the South- African and Singaporean students. The Sample Framework A sample of 406 students at the management faculties of a university in South-Africa and a university in Singapore were selected at random after permission was granted to include pre de- termined classes/courses for the purpose of the survey. All respondents agreed to participate to the survey and were supplied with a self administra- tive questionnaire after the required process was explained to them. Consequently two hundred and twenty one of the respondents that were issued with a questionnaire were students from a large South-African University while one hundred and eighty five of the respondents were student from a University in Singapore. No questionnaire or part thereof was discarded. The sample comprised of 42% male and 58% female students. The attitudes of the two student samples were tested regarding the importance of pre-identified service quality issues related to marketing and reputation of higher education institutions when selecting a specific institution. The list of variables was based on extensive literature research and the findings of focus groups consisting of students and lecturers. A summary of the composition of the sample is provided in Table 1. The Measuring Instrument and Reliability Measures A structured questionnaire was developed to mea- sure the preferences of students when deciding on a specific institution of higher education. For the purpose of this paper only the variables related to EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 200 Marketing and Reputation in the Services Sector marketing and reputation are included in the study. The questionnaire addressed the following issues. 1. Section A: Biographical information of the students including their location and meth- ods of awareness of institutions of higher education. 2. Section B: Service quality variables related to marketing and reputation of higher educa- tion institutions were included to determine the level of importance of these aspects. Section A utilised nominal scales whilst a five- point Likert-type scale was used for Section B to measure the levels of importance with regards to various higher education related services at two institutions of higher education in South-Africa and Singapore. The scales were categorised as 1=very important, 2=important, 3=not important nor unimportant, 4=not important and 5=not important at all. The inputs for section B was gathered through an intensive literature study on the topic as well as focus group discussions with students enrolled at institutions of higher educa- tion. Only marketing and reputation related issues were selected for the purpose of this study. Data Collection and Analysis The data was gathered and captured by trained field workers over a period of six months during the second semester of 2006 and the first semes- ter of 2007. The SPSS version 16.0 statistical package was utilised to analyse the data. For this analysis the Kolmogorov-Smirnov Test was employed based on the assumption that if the significant values exceeded 0.5, normality could not be assumed and the researchers had to rely on employing non-parametric analysis techniques. As normality could not be assumed after applying the Kolmogorov-Smirnov Test the researchers employed the Kruskall Wallis test to test the null hypothesis and the alternative hypothesis that there exists no significant difference between the Table 1. Summary of sample characteristics South Africa Singapore n % n % University 221 54 185 46 Age 16-17 years 0 0 0 0 18-19 years 43 19 52 28 20-21 years 43 19 53 29 21-22 years 74 33 80 43 Over 22 years 61 28 0 0 Gender Male 77 35 93 50 Female 144 65 92 50 Current Year of Study First year 78 36 39 21 Second year 7 3 39 21 Third year 111 51 29 16 Fourth year 24 11 78 42 N = 406 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 201 Marketing and Reputation in the Services Sector levels of importance between the two groups and there exists significant differences between the groups (South-African & Singaporean students). An item analysis was carried out to test the validity and the reliability of the questionnaire and an overall Cronbach’s alpha of a 0.89 and 0.95 were obtained for the South African sample and Singaporean sample respectively. FINDINGS OF THE STUDY Table 2 and Table 3 provide interesting results about sources of information relating to institutions of higher education of the two sample groups. It is clear from the tables that the two sample groups have diverse characteristics in terms of the ques- tions asked. However there are some similarities between the groups. Both sample groups has indicated that the biggest source of information related to institu- tions of higher education is their friends. Family members are also an important source of informa- tion by the South African sample while the media and press tend to be second most important source of information for the Singaporean sample. Table 3 indicates that the majority of both sample groups has indicated that a close friend has enrolled at an institution of higher education prior to their enrolment. According to Table 4 the most important vari- able in the image and marketing category for South African respondents when choosing an educational institution was the academic reputation of the institution. This variable was rated third by the Singaporean sample. Although no significant dif- ferences between the two samples were measured, the South African sample regarded this variable as more important compared to the Singaporean sample and a higher level of consensus was also measured for the latter sample. Table 2. Methods of awareness of educational institution How did you become aware of the Educational Institution? (You may choose more than one option) South Africa Singapore Frequency % Frequency % Friends 114 51 66 35 Media, press, radio, TV 44 20 41 22 Family member 82 37 25 14 The institution it self 56 25 39 21 Teachers 53 24 21 11 Other 4 2 14 8 Table 3. Persons known that enrolled at an institution of higher education Indicate who of the following people (familiar to you) has enrolled at a Higher Education Institution. (You may choose more than one option) South Africa Singapore Frequency % Frequency % No one 19 9 56 30 Parent / Guardian 59 27 27 15 Brothers or sisters 115 52 39 21 Close friend 128 58 67 36 Other 25 11 6 3 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 202 Marketing and Reputation in the Services Sector The academic reputation of the faculty was rated as second most important variable by the South African sample and in fifth position by the Singaporean sample. Significant differences were measured between the two sample groups. The South African sample rated it significantly more important compared to their Singaporean coun- terparts. The reputation of the study program was rated third most important variable in this cate- gory by the South African sample. Although the Singaporean sample rated it second most impor- tant position, no significant differences were measured between the two sample groups. The variable that was rated in last position in terms of importance in the image and marketing category is the sport reputation of the institution. Both samples rated it in ninth position and no significant differences were measured between the two groups. CONCLUSION AND RECOMMENDATIONS It is clear from the findings that the two samples have distinctive characteristics that make it obvi- ous that different needs and expectations prevail in terms of service delivery in higher education. Fifty four percent of the respondents were from South Africa and forty six percent from Singa- pore. While the methods of becoming aware of the educational institution differ significantly, the Table 4. Level of importance of reputation and marketing when choosing an educational institution Image and marketing of institution Singapore South Africa Item Item wording Mean SD Mean SD Results of hypothesis test V88 Academic reputation of institution 1.76 3 1.98 1.54 1 0.92 df = 1 p-value = 0.1280 Conclusions: Ho accepted V89 Sport reputation of institution 3.20 9 1.32 2.83 9 1.26 df = 1 p-value = 0.0188 Conclusions: Ho rejected V91 Academic reputation of faculty 1.84 6 1.97 1.63 2 1.01 df = 1 p-value = 0.0069 Conclusions: Ho accepted V92 Reputation of lecturers at institution 1.77 4 1.87 1.74 4 0.94 df = 1 p-value = 0.9230 Conclusions: Ho accepted v93 Availability of information about faculty 1.81 5 1.74 1.77 5 1.01 df = 1 p-value = 0.1595 Conclusions: Ho accepted v94 Marketing activities of Institution 1.64 1 1.84 2.02 8 1.14 df = 1 p-value = 0.0001 Conclusions: Ho rejected v95 Scholarships available 2.39 8 1.15 1.97 7 1.22 df = 1 p-value = 0.0073 Conclusions: Ho rejected v103 Reputation of study program 1.75 2 1.72 1.73 3 0.91 df = 1 p-value = 0.8227 Conclusions: Ho accepted v112 Career Advisors (of institution) accessible and informed 2.14 7 0.82 1.89 6 1.07 df = 1 p-value = 0.0024 Conclusions: Ho accepted EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 203 Marketing and Reputation in the Services Sector majority of the respondents in both sample groups became aware of the institution through friends. This confirms that acceptable service provision to existing students is important as word of mouth is an important method of conveying a message about the institution. In terms of familiar persons that have enrolled at an institution of higher edu- cation, different results were recorded. Overall however the majority of both sample groups have indicated that a close friend has been enrolled. This confirms the previous statement that word of mouth is a significant method of conveying a positive image of an institution. It is further clear that the reputation and market- ing activities of the two respective institutions are relatively important in the reputation and market- ing category with the biggest exceptions being the sport reputation of the institution and scholarships available. The two samples showed remarkable resemblance in the way the importance of the reputation and marketing variables were ranked and can thus be treated more general. Areas where significant differences were detected in both the ranking of the importance as well as in terms of statistical significance, is the academic reputation of the faculty (which is rated significantly more important by the South African sample – second most important) and the marketing activities of the institution (that was rated significantly more important by the Singaporean sample – rated most important). The relative high level of importance that was attached to both variables (although in different order and not of equal importance by each sample), justifies a followed and response, appropriate contextual- ized to the specific country. E.g., South Africa’s Institutions of higher education should focus on the academic reputation of their respective facul- ties, while Singaporean institutions would benefit from active and visible general marketing activi- ties or campaigns directed to students. The two most important variables as identified by the two samples will consequently be discussed. Overall it is important that both institutions should pay special attention to attending to its institutional reputation (including the reputation of the study program) and establish it to an accept- able level. With respect to the various stakeholders of universities this could include involvement in a variety of community service projects and as- suring its effectiveness (reputation) in the mind of all interest groups. This may include ensuring that partnerships between the institution and the industry exist. This relationship should include responding to the training needs of the industry and offer courses in line with the needs. Institu- tional partnerships with the industry are also of importance where joint attempts are attempted to solve problems of mutual interest. Cross depart- ment integration should be facilitated in order to contribute to the enhancement of an acceptable reputation of the faculties and consequently of institution in general. Although the importance of the marketing ac- tivities applies mainly to the Singaporean sample, this could also enhance the reputation of the institu- tion. At the marketing communication and service level capabilities should be developed in order to engage in public communication opportunities and to convey messages related to improved satisfac- tion with regards to services offered. According to Da Silva and Batisda (2007, p. 604) the greatest challenge of a customer relationship management system in order to enhance a company’s reputation (through satisfied stakeholders) is the integration of technological resources across all sorts of media and channels of interaction. This should however be preceded by sound and well thought business perspectives that addresses all activities that may have an impact on overall satisfaction. Faculty related reputation challenges that include the reputation of the lecturers and the reputation of the academic programs offered were also rated relatively important providing an indica- tion that maintaining the overall reputation of the institution should be prioritised and displayed to all the key stakeholders particularly students and EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 204 Marketing and Reputation in the Services Sector end-users of graduates. The overall reputation of the institution is consequently regarded as high priority area to be addressed in the management strategy. This will ensure that the most promising students/employers are attracted. Building and maintaining a good reputation could be done by implementing high quality training of international acceptable standards. International partnerships in training should be high on the agenda and should be emphasised in internal and external communica- tions with employees and alumni. The importance and power of word of mouth communication should not be under estimated as the findings revealed that friends and family were regarded as the biggest source of academic information. Aca- demic institutions’ active involvement in research of highly acceptable standard will ensure a good national and international academic standing and hence facilitate these countries developments and competitiveness regionally and beyond. It is clear that these finding should be followed up by a study investigating the perceived perfor- mance of the institutions. The findings of such a study should be incorporated into a strategy to address issues of concern and to take corrective action in order to enhance satisfaction levels of customers (students). It is clear that friends, fam- ily and the media have been regarded as main sources of information that that needs to be taken in account when making decisions regarding corporate affairs. The recreational amenities of the institutions have been rated least important and significant differences exist between the two sample groups with Singaporeans rated it significantly less im- portant compared to the South African sample. Because a significant number of senior students were involved in the survey it may be concluded that at this phase of their academic career, it is agreed upon that academic issues are more im- portant than the extramural activities although a balance should be maintained in life in general. It is recommended to duplicate the study in other countries in order to confirm similar find- ings in other regions or to determine whether the findings are country specific. REFERENCES Alsop, R. (2004). 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Australian Educational Researcher, 30(3), 89–109. This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 3, edited by John Wang, pp. 28-41, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 208 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 14 INTRODUCTION Data mining involves searching through data- bases for potentially useful information such as: knowledge rules, patterns, regularities, and other trends hidden in the data. In order to complete these tasks the contemporary data mining pack- ages offer techniques such as neural networks, inductive learning decision trees, cluster analysis, link analysis, genetic algorithms, visualization etc. (Hand, Mannila, & Smyth, 2001; McPhail, 2008; Ranjan, 2009). In general, data mining is a data analytical technique that assists businesses in learning and understanding their customers so that Zhongxian Wang Montclair State University, USA Ruiliang Yan Indiana University Northwest, USA Qiyang Chen Montclair State University, USA Ruben Xing Montclair State University, USA Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions ABSTRACT Data mining involves searching through databases for potentially useful information, such as knowledge rules, patterns, regularities, and other trends hidden in the data. Today, data mining is more widely used than ever before, not only by businesses who seek profits but also by nonprofit organizations, government agencies, private groups and other institutions in the public sector. In this paper, the authors summarize and classify the applications of data mining in the public sector into the following possible categories: improving service or performance; helping customer relations management; analyzing scientific and research information; managing human resources; improving emergency management; detecting fraud, waste, and abuse; detecting criminal activities; and detecting terrorist activities. DOI: 10.4018/978-1-4666-0044-7.ch014 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 209 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions decisions and strategies can be implemented most accurately and effectively to maximize profitabil- ity. Data mining is not general data analysis, but a comprehensive technique that requires analytical skills, information construction, and professional knowledge. Businesses are now facing globalized competi- tion, and are being forced to deal with an enormous amount of data. The vast amounts of data and the increasing technological ability to store it also facilitated data mining. In order to gain a certain level of competitive advantage, data mining is now commonly adopted among businesses. Nowadays, data mining is more widely used than ever before; not only by businesses who seek profits, but also by nonprofit organizations, government agencies, private groups and other institutions in the public sector. Organizations use data mining as a tool to forecast customer behavior, reduce fraud and waste, and assist in medical research. BACKGROUND Data mining uses statistical analysis, artificial intelligence, and machine learning technologies to identify patterns that could not be found by manual analysis alone. The primary function of data mining has already amazed many people and is now considered one of the most critical issues towards a business’s success. However, data mining was not born all of a sudden. The earliest usage of data mining can be traced back in the World War II years. Data analytical methods such as model prediction, database segmentation, link analysis, and deviation detection, were used for military affairs and demographic purposes by the U.S. government, but data mining had not been seriously promoted until the 1990’s (Meletiou & Katsirikou, 2009). Gramatikov (2006) compared statistical methods to data mining, differentiating them by the ultimate focus of these two tools. Statistical methods use data which is collected with a pre- defined set of questions. Statisticians are looking either for describing parameters of data or making inferences through statistics within intervals. With data mining, knowledge is generated from hidden relations, rules, trends and patterns which emerge as the data are mined. The reason that data mining has been developed enormously again in the last few years is that huge amount of information was demanded by modern enterprises due to globalization. Impor- tant information regarding the markets, custom- ers, competitors, and future opportunities were collected in the form of data to the database and needed data mining to unearth useful information and knowledge. Otherwise, a huge, overloaded, and unstructured database could just make it very difficult for companies to utilize and mislead the database users. Public administration is, broadly speaking, the study and implementation of policy. The term may apply to government, private sector organiza- tions and groups, and individuals. The adjective ‘public’ often denotes government at federal, state, and local levels, although it increasingly encompasses nonprofit organizations such as those of civil society or any not specifically acting in self-interest. Then, a long list exists: colleges and universities, health care organizations, charities, as well as postal offices, libraries, prisons, etc. In the public sector, data mining initially were used as a means to detect fraud and waste, but have since grown into the use for purposes such as measuring and improving program performance. Data mining has been increasingly cited as an im- portant tool for homeland security efforts, crime prevention, medical and educational application to increase efficiency, reduce costs, and enhance research. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 210 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions BENEFITS OF DATA MINING IN PUBLIC ADMINISTRATION Data mining techniques offer public sector op- portunities to optimize decisions based on general trends extracted from historical data. With the knowledge that can be extracted from the data public organizations can level up its knowledge accumulation strategies and steps. The knowledge that can be derived with the data mining could serve first as a tool for better governance and second as a means for sustaining the organizational knowledge. Data mining technology is applied in different aspects of public administration such as healthcare, immigration, law enforcement and other public sectors to solve specific business or research problems. Examples of application areas follow. Improving Service or Performance The purpose of SBA’s (Small Business Admin- istration) lender/loan monitoring system is to improve service or performance. The system was developed by Dun & Bradstreet. SBA uses the system to identify, measure, and manage risk in its business loan programs. Its outputs include reports that identify the total amount of loans outstanding for a particular lender and estimate the likelihood of loans becoming delinquent in the future based on predefined patterns (GAO, 2005). Hospitals are currently using data mining to save money in the long-run by reducing medica- tion errors and the cost of transcribing doctors’ dictation. For example, a family practitioner at UW Health’s Meadowood clinic, uses the Epic System to order a drug, the computer automatically checks a database of potentially cross-reactions with other medications that the patient is currently taking. This system makes it easier for doctors to do their job very well, and at the same time, this system makes it easier for patients to see their in- formation and interact with doctors. Also, with the growing rate of infection epidemic in hospitals in the United States, some hospitals are adopting data mining techniques to inform doctors on problems they might miss. MedMined of Birmingham is a company that has sold its data analysis services to hospitals to help detect infection in its early stage. Hospitals transmit encrypted data from patient’s records to MedMined, which then uses its data mining algorithms to detect unusual patterns and correlations. At first only a few hospitals used this system but now it is becoming a necessity in hospitals (Lok, 2004). Cahlink (2000) reported that data mining techniques are used by health organizations and hospitals to improve upon work processes. The Center for Disease Control and Prevention Nation- al Immunization Program in Atlanta implemented data mining software to allow better tracking of reactions to vaccine. The program has a huge database of adverse reactions to vaccines reported by physicians, clinics, and hospitals, patients and pharmaceutical companies across the nation. Statisticians and federal researchers monitor the data regularly to find problems caused by a single vaccine or vaccine combinations. Through a cooperative agreement, the FDA’s Division of Drug Risk Evaluation in the Office of Drug Safety has been working for almost two years to implement a desktop data-mining software system. This data mining tool will help to evaluate the hundreds of thousands of reports submitted annually to the Adverse Events Reporting System (AERS) - a system that has become more widely available to the public (Anonymous, 2005). Delavari, Shirazi, and Beikzadeh (2004) showed that higher educational institutes use data mining models to identify which part of their processes can be improved by data mining technology and how they can achieve their goals. Data mining is used in the educational system to allocate resources and staff more efficiently, manage student relations and enhance the per- formance of the institution and its students and faculty. Databases include information on students and teachers, course schedules, academic per- EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 211 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions formance, test scores, extra-curricular activities, post-graduation activities, etc., all of which can guide an institution on how to improve. Helping Customer Relations Management (CRM) Studying consumer behavior is the primary pur- pose of data mining. Data mining has enabled businesses to provide better customer service through the use of CRM technology. Most federal agencies have different customers such as citizens, businesses, other government agencies and even offices within agencies and each customer inter- action provides extensive data which is used to develop new channels of service for customers. CRM is a conglomeration of technologies and management strategies which is used by organiza- tions to control the operational side of their busi- ness. CRM is implemented in every department that deals with customers, be it in sales, technical support, customer service or marketing. CRM combines all customer data derived from these departments into one place such that the informa- tion can be accessed anywhere. This will enable the company to see the snapshot of a customer’s history whenever a customer is contacted. According to Dean (2001), the government’s use of CRM technologies is very different from the private sectors benefits. Businesses use CRM to weed out customers that are costly to serve while the government uses CRM as a tool to help them acquire customers. All the same agencies use CRM to learn about customer habits which is used to create efficiency and cost-savings solutions. The Internal Revenue Service (IRS) uses CRM as a federal tax payment system. IRS uses this system to facilitate the collection of tax payments from corporations. Also, this system is incorporated in the IRS’s call center and it help customer service to have access to taxpayer’s data to help resolve any issues they may have with their tax payment. This system has been said to help reduce the time it takes taxpayers to phone in payments by more than 40 percent and the number of taxpayer re- quests have dropped by 90 percent. The average payment now takes just 2 minutes and 20 seconds, and it happens 100,000 times a day. CRM has helped governments and businesses to take an inventory of their customers, identify the products and services provided to customers, identify the methods of providing the products and services, and measure the effectiveness of communications with the customers through service channels. Analyzing Scientific and Research Information The increasing amount of data accumulated in the healthcare industry creates databases which can serve as basis for data mining. As the healthcare industry continues its work to enhance quality of care, promote services and reduce cost, un- discovered patterns of care will become increas- ingly transparent, first for physicians, nurses and other clinicians, and ultimately for all consumers of healthcare. Providers are now beginning to recognize the value of data mining as a tool to analyze patient care and clinical outcomes. As providers deploy advanced clinical data systems, more granular, primary data are becoming avail- able for analysis. In healthcare, increased access to data and information has facilitated the development of new drugs which seem to be produced at ever- increasing speeds, as Boire (2005) claimed. By being able to quickly analyze volumes of data from all kinds of different tests and during different time periods, data mining represents a critical cog within the drug development process. What was once a few years ago almost considered impos- sible entered the realm of the possible through access to these newfound capabilities due in large part to data mining? According to scientists, this breakthrough discovery of being able to map the DNA genome offers limitless possibilities in the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 212 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions development of new drugs now that specific genes can be isolated. Data mining gives an opportunity to analyze the actual impact of one variable on another and/or other. The analysis of data mining results enables healthcare industries to discover new approaches in care delivery that consider a multitude of data points. (Business Wire, 2005) reported, a big step forward was achieved in medical research with the help of data mining. Children’s Memorial Research Center, a leading U.S. pediatric hospital and research institute, has gained unique insights into tumor classification and treatment strategies with the help of SPSS predictive analysis. The automated extraction of information from bio- medical literature promises to play an increasingly important role in text-based knowledge discovery processes. Managing Human Resources Consistent with Ashbaugh & Miranda (2002), Human Resource Management System (HRMS) is an integral part of the digital government which streamlines government processes in account- ing, payroll and personnel administration. The underlying architecture for digital government is the Internet and integrated administrative systems commonly known as Enterprise Resource Plan- ning (ERP) systems. ERP systems are built on software that integrates information from different applications into a common database. The ERP system and HRM system are the linkage between financial and human resources application through a single database in a software application that is both rigid and flexible. The rigidity comes from the need to standardize processes and deter customers from modifying the underlying software source code. Flexibility refers to the customer’s ability to configure the software to collect specific data and other business goals. Business intelligence is a new concept in the public sector, uses advanced analyti- cal tools such as data mining to provide insights into organizations trends and patterns, and helps organizations to improve their decision-making skills. HRMS and business intelligence can be used to support personnel management decisions, including turnover analysis, recruitment, training analysis, and salary/workforce planning. US Air Force uses data mining to manage its human resources. U.S. Air Force has signed an $88.5 million, multiyear contract with the Oracle Corp., which includes a closely watched deal to build a new logistics system for the organization. The Air Force’s Expeditionary Combat Support System (ECSS) is intended to replace more than 500 legacies IT systems with one integrated, commercial supply chain management system. Oracle was competing against other enterprise resource planning vendors for the ECSS contract. Oracle uses data mining to provide information on promotions, pay grades, clearances, and other information relevant to human resources planning (Cowley, 2005). Improving Emergency Management Barnes, Fritz, and Yoo (2007) demonstrated that the σ-tree-based image information mining capa- bility was useful in disaster response planning by detecting blocked access routes and autonomously discovering candidate rescue/recovery staging areas. An image-driven data mining of high-res- olution satellite image features in nearshore areas in the aftermath of Hurricane Katrina in Gulfport, MS, were investigated for damage assessments and emergency response planning. Results showed a capability to detect hurricane debris fields and storm-impacted nearshore features and an ability to detect and classify nonimpacted features. By identifying the core patient treatments provided by the emergency department (ED) and incorporating them into a Discrete Event Simulation model, (Ceglowski, Churilov, & Was- serthiel, 2007) provided insight into the complex relationship between patient urgency, treatment and disposal, and the occurrence of queues for treatment and promoted a generally applicable EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 213 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions methodology for identifying bottlenecks in the interface between an ED and a hospital ward. Along the lines of Hecker and Bruzewicz (2008), since 1998, the US Army Corps of En- gineers (USACE) has been responsible for man- aging activities of the Civil Military Emergency Preparedness (CMEP) program, in Europe and Central Asia. CMEP supports international partner nations’ national and regional strategies related to disaster awareness and consequence manage- ment for all hazards including the development and exercise of national and regional plans. The use of available technologies including the Inter- net, remote sensing and Geographic Information Systems (GIS), and reliable civil-military plan- ning processes, are key program components. More than 55 seminars, workshops and Table Top Exercises (TTXs) have occurred since the program’s inception. In 2005, USACE developed Emergency Management International (EMI), a program designed to provide CMEP -- and a broader range of USACE expertise -- globally. The authors examined the necessary conditions for effective disaster planning, preparedness and response for large disasters requiring national and international coordination and cooperation and examples of techniques used and outcomes of CMEP activities. Also, Hesseldahl (2008) discussed Inrix, a company that analyzes data gathered from satellite navigation gear for the real time traffic informa- tion it provides, referred to as reality mining. It discussed potential applications for this data, including monitoring contact between employees, urban planning, and emergency management. Detecting Fraud, Waste, and Abuse In the government, data mining was initially used to detect financial fraud, waste and abuse. The Department of Agriculture’s Risk Manage- ment Agency (RMA) uses data mining methods to identify potential abusers, improve program policies and guidance, and improve program per- formance and data quality. RMA uses information collected from insurance applicants as well as from insurance agents and claims adjusters. The department produces several types of outputs, including lists of names of individuals whose behavior matches patterns of anomalous behavior, which are provided to program investigators and sometimes insurance agencies. In addition it also produces programmatic information, such as how a procedural change in the federal crop insurance program’s policy manual would impact the overall effectiveness of the program, and information on data quality and program performance, both of which are used by program managers (GAO, 2005). Fraud in healthcare is controlled by the use of data mining by federal agencies. The agency can compare costs charged for medical services and find health-care providers overcharging their pa- tients. Data mining is used to compare treatments for different medical conditions to determine if a patient is receiving inadequate or excessive care. Landro (2006) demonstrated that researchers are currently using data mining to review records of infants stored in the database to compare the effec- tiveness and safety of the narcotics morphine and fentanyl in easing pain. The need to mine existing data is very important in newborn intensive-care units, where different treatments can not always be studied in large scale randomized clinical trials. Instead of insurance companies continuing to rely on the medical expertise of physicians, as well as other trained clinicians, to manually review insurance claims to detect healthcare fraud and abuse, companies can now use a data min- ing framework that assesses clinical pathways to construct an adaptable and extensible detection model. As Yang and Hwang noticed (2006) that clinical pathways are driven by physician orders, as well as industry and local standards of clinical care. Pathways provide the medical community with algorithms of the decisions to be made and the care to be provided to a particular patient population. The use of clinical pathways in EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 214 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions detecting insurance fraud and abuse by service providers shows a significant promise. A care activity is highly likely to be fraudulent if it orders suspiciously. For example, a typical pattern of physicians is that of ordering noninvasive tests before ordering more invasive ones. Therefore, there is a high probability that the same set of medical activities ordered in a different order is fraudulent or abusive. Detecting Criminal Activities Data mining is also used by federal and state agencies to identify criminal activities, fraudulent misuse of governmental credit card, Medicaid and Medicare abuse. The SPSS predictive analytics software is used for crime prevention. This soft- ware’s ability to detect unusual activity patterns has aided in the detection of credit card and Medicare fraud. In Richmond, Virginia, police use data mining to help them predict where to put patrols for crime prevention. An arm of the U.S. Army’s homeland security uses the SPSS software to fight cyber crimes. The Army aims at protecting the databases of utility companies from hackers bent on shutting down these systems from performing (Van, 2005). IRS uses the system to identify financial crime, including individual and corporate tax fraud. Its outputs include reports containing names, social security numbers, addresses, and other personal information of individuals suspected of financial crime, including individual and corporate tax fraud. Reports are shared with IRS field office personnel, who conduct investigations based on the report’s results (GAO, 2005). Corresponding to Boire (2005), the murder rate of New York City was reduced from 2200 in the late 1970s to between 600-700 murders a year over time. Not undervaluing some other factors like Bill Clinton’s bill to increase the number of police officers and zero tolerance policy resulted in the full prosecution of even minor crimes such as the illegal placement of graffiti on public prop- erty, officials used technology and data mining to analyze data concerning crimes in all sectors of his city. Data mining made it possible to analyze massive amounts of data that allowed uncover- ing trends and patterns concerning future crime behavior within high risk areas. An intrusion detection problem is character- ized by huge network traffic volumes, difficult to realize decision boundaries between attacks and normal activities and highly imbalanced attack class distribution. Moreover, it demands high ac- curacy, fast processing times and adaptability to a changing environment. Shafi, Kovacs, Abbass, and Zhu (2009) introduced a better approach for handling the situation when no rules match an input on the test set. Thammaboosadee and Silparcha (2009) pro- posed a developed graphical user interface (GUI) prototype, which is supported by the framework of data mining techniques-based criminal judi- cial reasoning system. The GUI sequences of the prototype are satisfied with criminal judicial procedure in civil law system. As indicated by the authors, initially, the user must build the model by input the existing incident and specifying the detail of objects, elements of crime, charge and judgment. After enough training, the prototype will be ready to determine judgments from new occurred incidents. Detecting Terrorist Activities Following the terrorist attacks of September 11, 2001, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sec- tor data. Data mining has become one of the key features of many homeland security initiatives and its use has also expanded to other purposes. In the context of homeland security, data min- ing can be a potential means to identify terrorist activities, such as money transfers and commu- nications, and to identify and track individual terrorists themselves, such as through travel and EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 215 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions immigration records. Some of the homeland secu- rity data mining applications represent a significant expansion in the quantity and scope of data to be analyzed. Some efforts that have attracted a higher level of congressional interest include the Terrorism Information Awareness (TIA) project (now-discontinued) and the Computer-Assisted Passenger Prescreening System II (CAPPS II) project (now canceled and replaced by Secure Flight) (Seifert, 2006). Other initiatives that have been the subject of recent congressional interest include the Multi-State Anti-Terrorism Infor- mation Exchange (MATRIX), the Able Danger program and data collection and analysis projects being conducted by the National Security Agency (NSA) (News Release, 2006). Other government data-mining projects in- clude Talon, a program run by the Pentagon’s Counterintelligence Field Activity, which collects reports on demonstrators outside U.S. military bases, as maintained by Boyd (2006). Thousands of such reports are stored in a database called Cornerstone and are shared with other intelligence agencies. The Pentagon’s Advanced Research and Development Activity based at Fort Meade, Md., runs a research program whose goal is to develop better ways to mine huge databases to help the nation avoid strategic surprises such as those of September 11, 2001. In proportion to Cao, Zhao, and Zhang (2008), activity data accumulated in real life, such as terrorist activities and governmental customer contacts, present special, structural and semantic complexities. Activity data may lead to or be as- sociated with significant business impacts, and result in important actions and decision making leading to business advantage. For instance, a series of terrorist activities may trigger a disas- ter to society, and large amounts of fraudulent activities in social security programs may result in huge government customer debt. Uncovering these activities or activity sequences can greatly evidence and/or enhance corresponding actions in business decisions. Cao et al. investigated the characteristics and challenges of activity data, and the methodologies and tasks of activity min- ing based on case-study experience in the area of social security. BARRIERS OF DATA MINING IN PUBLIC ADMINISTRATION Two precursors are necessary for a successful data mining expedition: a clear formulation of the problem to be solved, and access to relevant data. Complicating the formulations of the problems to be solved and inherent in the public sectors are constraints raised by political opposition, privacy considerations, and concerns arising from the inherent limitations of the technology itself and the competency and hidden agendas of those who would implement the data mining projects and in- terpret its outputs. The most potent threat to privacy interests created by data mining technology arises from efforts to prevent terrorism in this country and overseas. As a result of anguished inquiries into the failure of the United States military and intelligence branches to detect the risk, and to intercept at least one previously identified terrorist before he boarded the airplane at Newark Airport and participated in the attacks, it became more politically acceptable for politicians and public servants to procure and develop more effective and potentially intrusive data mining techniques in the interest of public safety. Bagner, Evansburg, Watson, and Welch (2003) observed that building on the USA PATRIOT Act was the Total Information Awareness Project (TIA) developed by the Department of Defense. TIA was designed to collect information on individual’s financial transactions, travel records, medical records, and other activities from a wide variety of public and private databases. The data mined from these sources was to be used to prevent terrorism. Unlike the USA PATRIOT Act, which passed through Congress with little opposition, two bills were introduced in Congress to prevent TIA EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 216 Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions from moving forward. TIA was much broader in scope than the USA PATRIOT Act, and focused on collecting information about ordinary Americans rather than terror suspects. Because TIA was seen as a greater threat to with less return in security, Congress was widely against it. The TIA project has since been scrapped. FUTURE TRENDS AND RESEARCH DIRECTIONS The world is fast becoming a global village and with this comes the urgent need for a new gen- eration of computational tools to assist humans in extracting useful information from the rapidly growing volumes of digital data. The future of data mining lies in predictive analysis or one-click data mining, accomplished through the simplification and automation of the entire data mining process. Despite the limitations, data mining will have a tremendous impact on how business is done in the future. As a technology, data mining will become more embedded in a growing number of business applications making it more readily available to a wider market segment. The devel- opers of data mining applications therefore need to develop it into something that most users can work with and that can provide and add value to our everyday lives. Easier interfaces will allow end user analysts with limited technical skills to achieve good results Predictive Analysis Augusta (2004) suggested that predictive analysis is one of the major future trends for data mining. Rather than being just about mining large amounts of data, predictive analytics looks to actually un- derstand the data content. They hope to forecast based on the contents of the data. However, this requires complex programming and a great amount of business acumen. They are looking to do more than simply archive data, which is what data min- ing is currently known for. They want to not just process it, but understand it more clearly which will in turn allow them to make better predictions about future behavior. With predictive analytics you have the program scour the data and try to form, or help form, new hypotheses itself. This shows great promise, and would be a boon for public administration everywhere. Diversity of Application Domains Data mining and X” phenomenon, as Tuzhilin (2008) coined, where X constitutes a broad range of fields in which data mining is used for analyzing the data, which has resulted in a process of cross- fertilization of ideas generated within this diverse population of researchers interacting across the traditional boundaries of their disciplines. The next generation of data mining applications covers a large number of different fields from traditional businesses to advance scientific research. Kan- tardzic and Zurada (2005) observed that with new tools, methodologies, and infrastructure, this trend of diversification will continue each year. CONCLUSION Data mining has become an indispensable technol- ogy for businesses and researchers in many fields including public administration. Since in public sectors, organizations and decision makers, are dealing with a volume amount of information from the public, a systematic way of collecting data and reading collected data is necessary. This, not only finds the similarities from one case to another, but also identifies unique cases and ex- treme values. Decision makers, service providers, and researchers are then be able to launch the next action, based on the knowledge discovered from the database and this increases their chances of being right. 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S., & Hwang, S. Y. (2006). A process- mining framework for the detection of healthcare fraud and abuse. Expert Systems with Applications, 31(1), 56–68. doi:10.1016/j.eswa.2005.09.003 This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 3, edited by John Wang, pp. 42-52, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 219 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 15 DOI: 10.4018/978-1-4666-0044-7.ch015 Anand Parkash Bansal Indian Institute of Management Bangalore, India Vishnuprasad Nagadevara Indian Institute of Management Bangalore, India Understanding Expectations, Perceptions and Satisfaction Levels of Customers of Military Engineer Services in India ABSTRACT Customer satisfaction and client orientation concepts are needed in all service providing organisations, including those engaged in construction and infrastructure provision within the public sector where the public perception about their services is at its lowest. This study measures the expectations and percep- tions of various service elements among clients of Military Engineer Services (MES) in India. Customers’ survey mode was used to measure the expectations, perception, importance and satisfaction. The perceived quality of services provided by this department was measured with SERVQUAL instrument on selected attributes using the Gap approach for identifying priorities. Additionally, this study also examines the influence of demographic characteristics of clients on expectations and perceptions of the clients. The results can be used by similar organisations for cultural and structural change to increase accountability and performance, in which the results indicate that the three most important dimensions in the order of importance among the clients of MES are tangibles, responsiveness and reliability. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 220 Understanding Expectations, Perceptions and Satisfaction Levels of Customers INTRODUCTION Execution of public works has been an organized function of the state from the times immemorial in India and elsewhere. But, the inadequate job descriptions, low productivity, indifferent attitude among the employees of public sector organisa- tions are among few of the factors which contribute to inefficiencies in the whole system and poor service delivery to the citizens. The forces of globalisation and liberalisation and the consequent changes in the economic environment have created new challenges for the government departments the world over. Military Engineer Services (MES) and Central Public works department (CPWD) are among few large departments in Govt. of India that are engaged in the building construction and maintenance indus- try among other activities. The departments as of now enjoy near monopoly in service provision to clients in their designated jurisdiction under Gov- ernment of India. The pressure for change is being felt by the users of such organisations from the rapidly changing economic-political environment, increasing demand for better value for money, pressures for greater effectiveness, efficiency and performance, rapid technology changes and increasing awareness; all these factors leading to increasing expectations for citizen participation. The Administrative Reforms Commission (2007) in its recent report titled “Ethics in Governance” recommended for identifying areas within govern- ment where existing monopoly of functions could be tempered with competition. Customer satisfaction and customer orientation concepts are therefore, increasingly being adopted to identify and prioritise the areas for improvement in the quality of services provided by government departments. It is necessary to understand the needs and expectations of the clients and define quality standards according to their expectations. There should also be institutional mechanisms to continuously assess the quality of the service provided and to take appropriate measures to improve the service quality based on the feedback from clients. The focus of the administrators in public sector departments therefore needs change from provision of construction and maintenance services to providing these services with quality above minimum acceptable standards. These de- partments, however, do not have any arrangements for evaluation of expectations and perceptions of clients and for monitoring client satisfaction. The obvious approach to gauge the satisfaction level is to ask the clients themselves. Construction and Maintenance of buildings etc. is one of those services that are difficult to measure and monitor, with very little research on service quality in this field. The predominant amount of research on the measurement of service management quality has taken place in the fields of retail industry, health care and financial services. The little amount of research in the construction industry involving empirical surveys has focused on the quality of consultancy services (Hoxley, 1998; Love, Smith, Treloar, & Li, 2000). SERVQUAL based survey using Gap model have also been carried out for service quality in the maintenance of mechanical and engineering services (Wan, Bridge, & Skit- more, 2001). It was therefore, thought appropriate to have a systematic study and find out the extent of client satisfaction in Public Sector Construction and Maintenance Organisations and to identify the areas for improvement. Military Engineer Services (MES), which is engaged in providing construction and maintenance services for all organs of Minis- try of Defence for their infrastructure needs was selected for this study. The focus in this study was on customer satisfaction with particular emphasis on service quality in Public Sector Construction and Maintenance departments so as to provide the necessary inputs and desired impetus to the department to improve and excel in the future. The main objective of the study was to bring out the customer satisfaction gaps and analysis of these gaps. The results of the analysis are used to sug- gest ways and means to improve the delivery of EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 221 Understanding Expectations, Perceptions and Satisfaction Levels of Customers the service and in turn to improve the perception of service quality as experienced by the clients. LITERATURE REVIEW Customer / Client Satisfaction It will be useful to compare the concept of customer in a private sector setting vis-à-vis the clients in the government sector setting. What the customers are to service organisations in private sector, clients are to the government service organisations. A subtle difference may however be drawn between a customer and client. The relation between the customer and the service provider are limited in a sense that the customer purchases the goods or services and pays in return for the services s/he receives. The customer does not have any right or claim on the services provided by the organisation in the absence of a definite agreement/contract. Clients on the other hand receive the professional advice or services from an organisation. In a typi- cal government service organisation with defined geographical jurisdiction, the clients have right or claim over the services it provides. The rights of the clients on these services are however limited to the extent decided by the citizens/taxpayers who are bearers of rights and duties in a framework of community and exercise their control through elected representatives/executive appointed by them for the purpose (Figure 1 and Figure 2). With the above background the question that arises is “Are all citizens customers, and to what extent should a government treat citizens as its customers?” Customer service advocates argue that every citizen is a government’s customer. But, the government is expected to serve the larger public interest over that of individual citi- zens. According to Kettl (2000) the citizens as customers have four different perspectives. The citizens could be service recipients, partners, owners and taxpayers. As service recipients, citizens expect high quality services at low or even no cost; as partners, they are to ensure that the services are more effective and are expected to play a strong role different from the passive role as in service recipient role. Contrary to their role as service recipients, where they might expect virtually unlimited ser- vice, as taxpayers they have conflicting priorities in the form of tough management, high efficiency and minimal waste, fraud and abuse from the same government. A balance, however, need to Figure 1. Customer-service provider relationship: private sector Figure 2. Customer-service provider relationship: public sector EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 222 Understanding Expectations, Perceptions and Satisfaction Levels of Customers be struck between these two objectives (Dinsdale & Marsden, 1999). The challenge for the public sector is to balance the two distinct and often competing factors of value for money with high quality and accessible services for the client. Basic principle of customer orientation referred to in the context of private service organisations are equally relevant and applicable to government service organisations, which may be termed as citizen/ client orientation. The citizen/client orientation as a means for achieving responsive administration requires better understanding of the needs and expectations of citizens on a continuing basis. Measuring Customer Satisfaction Public sector organizations have started realizing that not only must they look after their customers but they must also learn from them in terms of customer satisfaction and customer perception of the service. According to Skelcher (1992) this signifies the rejection of the traditional model of uniform services being delivered to passive recipi- ents. “Sometimes organizations make assumptions about what is important to the customer. Once they probe, they may discover that what the customer values is quite different” (Farquhar, 1993). Results of few studies in public sector organizations in the UK indicate that managers frequently over- estimate customer expectations (Donnelly, Mike, Wisniewski, Dalrymple, & Curry, 1995). McDonnell and Gatfield (1998) argued that measures send a signal to an organisation regarding priorities, and it should be obvious that what you don’t measure, you can’t manage. Traditionally, expenditure on public services is considered as the performance measure in government organiza- tions. Whether the services and assets are actually delivered efficiently and meet the real needs of the people cannot be determined by expenditure monitoring alone (Paul, Balakrishnan, Gopalku- mar, Shekhar, & Vivekananda, 2004). These and many other measures developed internally by the staff, therefore, do not reflect the concerns and priorities of citizens. It is therefore desirable for administrators in government including those in construction sector to understand the expectations and perceptions of the people about the quality services and incorporate them in design of service delivery and frame policies to improve the quality. Service Quality and Satisfaction MES like other construction and maintenance agencies is regarded as a service agency. Services have been defined in many ways. Grönroos (1990) defines service as an activity or series of activities of intangible nature that normally takes place between the customer and the service provider. Services are characterised by their intangibility, inseparability of production and consumption, perishability and heterogeneity (Parasuraman, Zeithaml, & Berry, 1981; Parasuraman, Zeithaml, & Berry, 1988). Because of these unique characteristics, measuring service quality poses difficulties for service pro- viders (Bateson, 1995). Service quality therefore is ‘whatever a customer says it is’ and ‘whatever customer perceives it to be’ (Buzzel & Gale, 1987). Perceived service quality is therefore viewed as the degree and direction of discrepancy between customers’ perceptions and expectations (Zeithaml, Parasuraman, & Berry, 1990). It is therefore important to understand how the expectations are formed and what their impact is. The expectations are also influenced by the personal values and beliefs. In case of the public services expectations also get influenced by the reputation of the government as a whole. It has also been observed that availability of alternative service providers raises the levels of expectations of adequate service (Zeithaml, Berry, & Parasura- man, 1993). Thus in the end expectations have a central role in impacting the satisfaction. Service Quality and Its Measurement The initial research into customer satisfaction measurement involved assessing the determi- EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 223 Understanding Expectations, Perceptions and Satisfaction Levels of Customers nants of expectations and drivers of satisfaction. Grönroos (1984) identified the two variables of service quality as expected service and per- ceived service. He observed that the discrepancy between expectations and perceptions is the pri- mary determinant of customers’ service quality requirements. Parasuraman, Zeithaml, and Berry (1981) presented the most systematic research programmes in service quality and developed a conceptual model SERVQUAL by using extensive exploratory investigations of quality in variety of service businesses. This model was further refined by Parasuraman, Zeithaml, and Berry (1988) who developed a multiple item scale for measuring consumer perception of service quality with five distinct dimensions i.e., tangibles, reliability, responsiveness, assurance and empathy, after multi stage purification process. This instrument can be suitably modified to adapt to the needs and characteristics of a particular service. It also finds application in categorizing customers into several perceived-quality segments (such as high, medium or low) on the basis of their indi- vidual SERVQUAL scores. These segments can be then analysed on the basis of demographic, socio-economic and other profiles, the relative importance of the five dimensions in influencing service quality perceptions and the reasons behind the perceptions reported by them. Although SERVQUAL is used widely to measure quality, it is not without criticism. Key and Theresia (2001) questioned the assumption of linear relationship between customer satisfac- tion and service attributes’ performance. Paying more attention to a particular service attribute may not always lead to a higher customer satis- faction if there is satiation or if that attribute is taken for granted. Carman (1990) also questioned and criticised the validity of SERVQUAL on the psychometric soundness of the difference between expectations and perceptions, and on the collec- tion of expectations data. Some other researchers (Babakus & Boller, 1992) also endorsed the views and suggested that dimensionality may vary with the type of service under study. Despite these concerns, SERVQUAL questionnaire by far is the most robust instrument and has been applied in many service organisations. Gap Approach As per the extended model of Parasuraman et al. (1985) there are seven major gaps in the service quality concept, that are shown in Figure 3. The gaps on the service providers’ side include con- sumer expectations - management perceptions gap; management perceptions - service quality specifications gap; and service delivery - external communication gap among others. The consumer side gap, i.e., the gap 5 between expected service and perceived service is what determines the qual- ity that a consumer perceives. The service quality model essentially states that service quality as perceived by consumers depends on extent and direction of this gap which in turn depends on the nature of gaps on the side of service provider. Service quality gaps can be used by the man- agers to identify areas of improvement with larger gaps requiring more attention. If gap scores in some areas turn out to be positive, the manag- ers need to review if that particular service is over provided and to explore the possibility of rede- ploying the resources. The information derived from the gap analysis can be used by the service providers to evaluate the current service quality, to compare performance across different cus- tomer groups and across services, for assessment of the impact of improvement initiatives as well as for understanding internal customer. Satisfaction - Importance Matrix Approach Satisfaction-Importance matrix approach (Dutka, 1994) also known as quadrants’ approach used in various studies captures the direct comparison of the satisfaction level of the service quality attri- butes and the importance attached to it as shown in EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 224 Understanding Expectations, Perceptions and Satisfaction Levels of Customers Figure 4. Attributes where the importance is high but satisfaction level is low fall in the “priorities of improvement” quadrant and are the focuses of attention. This approach is somewhat similar to the ‘Integrated Model for Measuring Service Quality’ (IMMSQ) (Yang, 2003). It involves identification of importance of various attributes and correspond- ing satisfaction levels. Using similar concept, Yang (2003) plotted degree of importance and satisfaction level of an attributes on the horizontal and vertical dimensions as shown in Figure 5 and named it as ‘Importance- Satisfaction’ Model. CMT- Common Measurement Tool CMT (Common Measurement Tool) is a model developed by The Researchers at the Canadian Centre for Management Development to standard- ize measurement of customer satisfaction with public services (Schmidt, Faye, Strickland, & Teresa, 1998). The model combines the elements of SERVQUAL and Satisfaction-Importance models to improve the understanding of satisfaction and to highlight priorities for improvement. CMT ac- cordingly measures the expectations of the service factors, perceptions of service experience, level of importance attached to each service element and level of satisfaction with these elements. The CMT approach is therefore made up of three distinct steps. First, the measures of expec- tations and perceptions of the service experience (SERVQUAL model) allow the gap analysis approach by comparing expected service quality with experience. In the second step, the users are asked about how important each of the service elements listed are to respondents, followed in the third step by asking about levels of satisfac- tion with these service elements. This allows the Figure 3. Model of service quality gaps (source: adapted from Parasuraman, Zeithaml, and Berry (1985); Curry (1999)) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 225 Understanding Expectations, Perceptions and Satisfaction Levels of Customers comparison of importance and satisfaction as discussed in quadrants’ approach. The Common Measurement Tool was therefore considered to be highly relevant to public sector organisations and has been used in this study with suitable modifications to accommodate the requirements of a public sector construction and maintenance services organisation like MES. RESEARCH METHODOLOGY Clients’ survey mode has primarily been used in this study to measure the expectations, perceptions and satisfaction of clients about the construction and maintenance services provided by MES. The methodology used in carrying out the research include identification of important quality attri- butes, development and pre-testing of appropriate questionnaires, details of sampling plan, data collection and data analysis. Identification of Attributes and Questionnaire Development The scale items and framing of questions in SERVQUAL questionnaire to assess the expecta- tions and perceptions were adapted from Parasura- man et al. (1988) with inclusion of few attributes to suit the characteristics of services provided by MES. These attributes for the questionnaire were generated after an exploratory study that involved informal experience survey with key experienced executives and focus group interviews Figure 4. Satisfaction-importance matrix Figure 5. Importance-satisfaction model (source: adapted from Chang Chow Yang (2003)) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 226 Understanding Expectations, Perceptions and Satisfaction Levels of Customers of clients and MES supervisors. In all twenty four attributes (scale items) of the service were identified on five dimensions of service quality (including few questions related to construction quality and specifications provided in buildings). The structure of the set of questionnaires included SERQUAL questionnaire in Part I, A and B, Importance –Satisfaction Survey questionnaire (with 15 identified quality attributes) in Part II, A and B and a separate section at the end to record the socio-demographic details of the respondent. The 7-point Likert scale as recommended by Parasuraman et al. was used as a measure for the expectation and perception attributes with range from 1 (strongly disagree) to 7 (strongly agree). Similarly 5-point Likert scale with levels from 1 (extremely unimportant) to 5 (extremely important) was used for importance-satisfaction survey. Content validity was also ascertained by pre-testing the questionnaire and a review of the questionnaire by academics and practitioners in the field from MES and CPWD. An open ended question was added to capture qualitative remarks and suggestions of respondents. Sampling Plan MES provides services to various organs of Min- istry of Defense which includes services of con- struction and maintenance for their administrative, technical, other specialty buildings/structures and housing complexes. There are significant numbers of Defence units located at Bangalore with ap- prox clients’ population of 20,000. The sample profile of clients at Bangalore largely represents the configuration of clients in any peace station across the country and can be considered as a representative sample. In all, 31 units/ formations dependent on MES, both for construction and for maintenance activity, were selected from Army and Air Force units located across different parts of Bangalore. Stratified mode of sampling was adopted to have a judicious mix of respondents of various ranks from different units in proportion of their strength. In each of these units, respondents were randomly selected for the survey. Care was taken to get the feedback from the key officials (in-charge of works matters of their buildings) from each unit in addition to common users. Care was also taken to get the feedback from the troops and air warriors occupying the residential accommodation, which are maintained by MES. Collection of Data The respondents were contacted at their workplace or at their place of residence. Personal interaction mode with ‘a group of respondents’ was resorted to before seeking their individual responses. A series of qualitative questions was also asked in personal interviews with key service provider executives and with commanders from the clients’ side to reinforce the quantitative data. DATA ANALYSIS, INTERPRETATION AND FINDINGS A total of 300 responses were received, of which 262 turned out to be valid responses. The socio de- mographic profile of the respondents as observed from the data represents the general distribution of population pattern in a typical defence peace station. The results of this data can therefore be safely extended to other defence peace stations across the country. Reliability Analysis: Cronbach’s Alpha Test The data was tested for reliability using Cronbach’s alpha (Cronbach, 1951). Cronbach’s alpha is an index of reliability associated with the variation accounted for by the true score of the “underly- ing construct”. The higher the alpha is, the more reliable the test is. Though there is no generally agreed cut-off, usually 0.7 and above is accept- able (Nunnally, 1978; Streiner & Norman, 1989). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 227 Understanding Expectations, Perceptions and Satisfaction Levels of Customers The range of overall coefficient alpha recorded is 0.943 to 0.976 exceeding the suggested level of 0.70 as recommended by Nunnally (1978). Cronbach’s alpha across the five dimensions of service quality also ranged from 0.763 to 0.932 with one exception demonstrating good internal consistency and reliability of scale (Table 1). Analysis of Expectation-Perception Scores A test of significance was done on the expectation and perception scores and. The results indicate that there is significant difference in the expectations and perceptions of the clients (Table 2). The mean expectation score is seen to be 5.08 which are on lower side when compared to similar surveys in private sector service organisations. The low expectation scores also reflects on the lack of service alternative from the clients’ point of view and to some extent reflects on the reputation of the department among clients. Gap Analysis It is important to measure expectations and percep- tions of the customers to evaluate the customer satisfaction. Service quality is said to have been achieved when these expectations are met or are exceeded. Service quality fails to be achieved when expectations are not met and a service gap materialises. The gap is the difference between the perceptions and the expectations of a particular service. Larger the gap, greater is the gulf between what the customer expects and what they actually receive. It is normally not possible to exceed the expectations of the customer for variety of reasons. Thus, gaps are usually negative for most of the services, whether it is private or public sector. While scores are most often negative reflecting service shortfalls or gaps, scores less than minus ‘2’ are considered to be strong (McDonnell & Gatfield, 1998). Information on customer expec- tations can help service providers to understand what customer actually expects from the service. The SERVQUAL scores were derived from expectation and perception scores by subtract- ing expectation score from perception score. Table 1. Reliability test (Cronbach’s Alpha) statistics Reliability Statistics Scale Coefficient alpha No of Items Coefficient alpha No of Items SERVQUAL Scale Expectations (1-7) Perceptions (1-7) Tangibles 0.800 4 0.833 4 Reliability 0.894 8 0.936 8 Responsiveness 0.884 4 0.880 4 Assurance 0.912 5 0.932 5 Empathy 0.841 3 0.855 3 Overall 0.972 24 0.976 24 Tangibles 0.573 2 0.827 2 Reliability 0.841 3 0.887 3 Responsiveness 0.800 3 0.843 3 Assurance 0.828 4 0.858 4 Empathy 0.763 3 0.828 3 Overall 0.943 15 0.965 15 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 228 Understanding Expectations, Perceptions and Satisfaction Levels of Customers continues on following page Table 2. Perception-expectations gap analysis (all attributes) S. No Attributes N Means Std. Dev. Of Means Std. Errors of Means E P PE Gap E P PE Gap E P PE Gap 1 Modern and up to date equipment 262 5.52 3.22 -2.31 1.651 1.671 2.516 0.102 0.103 0.155 2 Good facilities in housing units 262 5.15 3.65 -1.50 1.732 1.693 2.179 0.107 0.105 0.135 3 Good architectural features. 262 5.33 3.69 -1.65 1.704 1.762 2.239 0.105 0.109 0.138 4 Good quality of work- manship in construc- tion and maintenance 260 5.13 3.54 -1.60 1.620 1.756 2.225 0.100 0.109 0.138 5 Quality material for construction and main- tenance 262 5.06 3.55 -1.52 1.716 1.630 2.181 0.106 0.101 0.135 6 Pleasing appearance of the service centres 260 5.00 3.56 -1.43 1.617 1.729 2.220 0.100 0.107 0.138 7 Adequate stores/spares for maintenance at service centres 261 5.00 3.31 -1.68 1.718 1.689 2.309 0.106 0.104 0.143 8 Adherence to promise to do something by a certain time 262 4.51 3.28 -1.23 1.885 1.662 2.075 0.116 0.103 0.128 9 Sincere interest in solving user’s problem 262 5.11 3.74 -1.37 1.733 1.792 2.282 0.107 0.111 0.141 10 Completion of repair/ maintenance job first time 259 4.90 3.56 -1.32 1.713 1.654 2.199 0.106 0.102 0.137 11 Performs the services at the time they prom- ise to do so 262 4.95 3.55 -1.40 1.756 1.650 2.341 0.109 0.102 0.145 12 Employees normally tell the users exactly when the services will be performed. 262 4.92 3.52 -1.41 1.718 1.699 2.381 0.106 0.105 0.147 13 Employees normally give prompt services to the user. 262 5.06 3.58 -1.48 1.659 1.661 2.133 0.102 0.103 0.132 14 Employees are never too busy to respond to user’s request. 261 5.00 3.57 -1.42 1.656 1.692 2.216 0.103 0.105 0.138 15 Employees help instil confidence in users. 262 5.08 3.74 -1.34 1.699 1.711 2.186 0.105 0.106 0.135 16 Users normally feel safe in their transac- tions 262 5.23 3.87 -1.35 1.558 1.757 2.155 0.096 0.109 0.133 17 Employees are consis- tently courteous with users. 262 4.98 3.91 -1.08 1.663 1.746 2.132 0.103 0.108 0.132 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 229 Understanding Expectations, Perceptions and Satisfaction Levels of Customers Although, the scale used is strictly ordinal, for statistical analysis purpose it was treated as inter- val scale. The perceptions, expectations and P-E gap scores for all attributes are shown in Table 2. For the purpose of gap analysis, the 24 scale items describing various services attribute were classified as per SERQUAL model on 5 dimen- sions namely tangibles, reliability, responsiveness, assurance and empathy. The gap analysis was then performed on the perception and expectation scores across these dimensions as shown in Table 3. The SERVQUAL scores were also subjected to “Sign test” to see if there is significant difference in the perceptions and expectations of the clients in MES. In the present dataset, the significance level is less than.05 indicating that there is sig- nificant difference between the perceptions and expectations of the MES users. The results also show that mostly the SERVQUAL scores are negative, indicating that the service quality falls significantly short of clients’ expectations. In the present study, SERVQUAL scores for all dimen- sions range between (-) 1.26 to (-) 1.72 which are more than (-) 2.0 and can be termed as just about satisfactory. In most organisations where SERVQUAL surveys have been conducted, reliability has consistently been shown to be the most important determinant of perceptions of service quality fol- lowed by responsiveness and empathy (Para- suraman, Zeithaml, & Berry, 1991). Reliability, responsiveness and tangibles in the order of prior- ity were the three most important service quality dimensions in case of CPWD (Joshi, 2006). However in case of MES, as can be inferred from above tables, the tangibles dimension is most significant and contributing to the dissatisfaction to a large extent, understandably so looking at the work culture of MES client organisations. The results further corroborate the findings in some S. No Attributes N Means Std. Dev. Of Means Std. Errors of Means E P PE Gap E P PE Gap E P PE Gap 18 Employees have the required knowledge to answer the user’s questions. 262 5.10 3.99 -1.11 1.564 1.777 2.262 0.097 0.110 0.140 19 Operating hours are convenient to all users 262 5.16 3.82 -1.33 1.745 1.817 2.252 0.108 0.112 0.139 20 Employees normally understand the specific needs of their users. 262 5.01 3.87 -1.13 1.675 1.769 2.196 0.103 0.109 0.136 21 Availability of required staff (electri- cian, plumber, mason etc) at the service centres 262 5.19 3.79 -1.41 1.708 1.773 2.240 0.105 0.110 0.138 22 Attention to safety at the work site 261 5.33 3.90 -1.43 1.608 1.809 2.191 0.100 0.112 0.136 23 Coordination of the internal services be- tween different wings of deptt i.e. B/R, E/M, BSO etc. 262 5.21 3.55 -1.66 1.777 1.714 2.358 0.110 0.106 0.146 24 Good specifications in construction & mainte- nance service 262 5.27 3.84 -1.42 1.676 1.707 2.331 0.104 0.105 0.144 Table 2. Continued EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 230 Understanding Expectations, Perceptions and Satisfaction Levels of Customers studies that tangibles appear to be a more impor- tant factor in the facility/equipment-based indus- tries (Lee, Lee, & Yoo, 2000). Within the tangibles the MES clients strongly perceive that the tools and equipments used by MES are outdated. The department seems to be lacking in providing adequate maintenance staff, requisite stores/spares at service centres and in ensuring pleasing ap- pearance of its service centres. Responsiveness and reliability dimensions are next in the order. The department need to improve on delivering the services in time and when promised. Co-or- dination among various wings, better facilities in housing units, the customer contact, customer relations and giving more importance to cus- tomer interaction are some other areas where improvement is required. Thus the important dimensions which impact the quality of service provided by MES in general are Tangibles, Responsiveness and Reliability. MES needs to improve on the functioning of their service centres by providing adequate manpower and stores, timely and prompt delivery of services, delivery of services as promised and doing the services right the first time. They also need to pay more attention to the internal co-ordination of different services. The gap analysis was also done separately for Air Force clients and Army clients. The results are tabulated in Table 4. The expectations of clients, in both Army and Air Force, are not very high and are at almost similar level but the perception differs signifi- cantly; Air Force clients carrying better perception about MES service quality. This provides valuable information to further analyse the reasons for better perception and to see if practices in use in Air Force could be adopted in Army. Table 4. Comparison of expectations and perceptions between air force and army Dimension Expectations Perceptions PE Gap Army Air Force Army Air Force Army Air Force Tangibles 5.24 5.09 3.29 3.78 -1.94 -1.32 Reliability 5.03 5.04 3.30 4.09 -1.74 -0.95 Responsiveness 5.08 4.99 3.26 4.07 -1.83 -0.92 Assurance 5.09 5.25 3.52 4.53 -1.57 -0.72 Empathy 5.05 5.16 3.45 4.46 -1.60 -0.71 Mean 5.10 5.11 3.36 4.18 -1.74 -0.92 Table 3. Gap analysis Dimension N Means Std. Dev. Of Means Std. Errors of Means E P PE E P PE E P PE Tangibles 262 5.18 3.47 -1.72 1.326 1.400 1.917 0.082 0.086 0.118 Reliability 262 5.04 3.58 -1.45 1.341 1.428 1.757 0.083 0.088 0.109 Responsiveness 262 5.05 3.55 -1.50 1.466 1.450 1.961 0.091 0.090 0.121 Assurance 262 5.15 3.88 -1.26 1.393 1.561 1.885 0.086 0.096 0.116 Empathy 262 5.09 3.81 -1.28 1.475 1.564 1.937 0.091 0.097 0.120 * E= Expectations, P= Perceptions, PE= PE Gap, Std. Dev= standard deviation EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 231 Understanding Expectations, Perceptions and Satisfaction Levels of Customers Influence of Demographic Characteristics on Expectations, Perceptions and P-E Gaps In addition, the customers can be categorized into several perceived-quality segments (such as high, medium or low) on the basis of their individual SERVQUAL scores. The segments so categorised can then be analysed on the basis of demographic, socio-economic and other profiles and the reasons behind the expectations and perceptions reported by them. Total of expectation scores, total percep- tion scores and total of P-E gaps of all respondents were sorted in ascending order and then grouped into quintiles in order to analyse the influence of demographic characteristics on expectations, perceptions and P-E gaps, (Table 5). The top quintile and bottom quintile were then analysed to identify if higher expectations, perceptions or wide P-E gaps are influenced by the demographic characteristics of the clients. The findings of the analysis are given below Army constitutes a high expectation, low perception group with wide PE gap among the clients. The clients living in Government pro- vided married accommodation as also the clients coming on transfer from field area though do not have very high expectations but can be categorised in the group of low perception with wide PE gap. Middle aged clients also fall into the same group. Similarly Air Force clients can be classified as low expectation, high perception group. The find- ing has significant policy implication in design of distinct service delivery systems for these groups, one, to manage the expectations by proper information dissemination and two, by improving the services. Perceived Service Quality (PSQ) Having analysed gaps, it is important to arrive at some measure for service quality as perceived by MES clients. Parasuraman et al. (1985) defined the construct of service quality as the difference between expected service and perceived service. Perceived service quality is the consumer’s judg- ment about the overall excellence or superiority of a service (Parasuraman, Zeithaml, & Bery, 1988). Researchers have also shown that perceived service quality is an antecedent of the satisfaction (Lee, Lee, & Yoo, 2000). Attempt was therefore made to arrive at the perceived service quality (PSQ) score by taking mean of PE gaps across five dimensions. The PSQ so calculated was 1.44 indicating significant gap between the expecta- tions and perceptions of the clients of MES. This again corroborates the earlier findings in case of gap analysis based on SERVQUAL scores. Analysis of Importance Scores Importance survey questionnaire was meant to understand the importance of various attributes to the clients. Importance rankings are derived by computing the mean of importance scores of the attributes (Table 6). The clients have accorded highest importance to ‘careful repairs by avoid- ing damage to the assets’. The next important ranking is given to provision of good facilities in the office units and the technical and proce- dural knowledge of the staff. The clients have also rated prompt service quite high in order of importance. Quite surprisingly and contrary to the popular understanding among the service provid- ers (as told by key service providers to authors during interviews conducted by them), ‘delivery of promise made’, ‘being kept informed of the status of their complaint’ and ‘pleasant and neat appearance of the maintenance staff’ figure low in importance ratings given by the users as seen from the data analysis. Analysis of Satisfaction Scores The satisfaction scores (Table 6) range between 3.26 being the highest for courteous behaviour and easy approachability and 3.22 for helpfulness of MES officers. The satisfaction scores indicate that EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 232 Understanding Expectations, Perceptions and Satisfaction Levels of Customers Table 5. Variation of P, E and PE Gap Vis-a-Vis Demographics Category/Group Overall % distribution within Respondents Expectations % Perceptions % PE Gap % Nos % High exp group Low exp group High percep group Low percep group High PE gap group Low PE gap group Defence Organisation Army 167 64 79 69 50 94 88 52 Air Force 95 36 21 31 50 6 12 48 Total 262 100 100 100 100 100 100 100 Rank category Officer 44 18 10 11 13 10 12 13 JCO 73 30 32 30 28 29 27 33 Other Ranks 114 47 52 57 49 61 61 49 Civilians 13 5 6 2 10 0 0 4 Total 244 100 100 100 100 100 100 100 Gender Male 248 95 94 96 96 96 94 94 Female 14 5 6 4 4 4 6 6 Total 262 100 100 100 100 100 100 100 Age Groups Young Upto 30 Yrs 28 11 8 14 15 4 4 12 Middle Aged 30-40 Yrs 116 45 44 51 29 63 59 42 Seniors 111 44 48 35 56 33 37 46 Total 255 100 100 100 100 100 100 100 Qualification Post Graduate 30 13 9 7 17 4 4 13 Graduate 88 39 28 37 39 19 24 44 10+2 72 32 40 37 29 47 48 33 Matric 38 17 23 19 15 30 24 10 Total 228 100 100 100 100 100 100 100 Background Urban 69 30 28 24 32 17 17 20 Rural 161 70 72 76 68 83 83 80 Total 230 100 100 100 100 100 100 100 Last Posting Field Area 45 26 26 33 15 42 42 20 Modified Field 20 12 8 17 12 13 8 80 Peace Station 105 62 66 50 73 45 50 - Total 170 100 100 100 100 100 100 100 Accommodation Living In Govt Married Accommodation 167 82 85 83 70 95 90 68 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 233 Understanding Expectations, Perceptions and Satisfaction Levels of Customers the clients are generally happy about approach- ability, courtesy and helping tendency of service providers and are also reasonably satisfied about technical and procedural knowledge of officers and staff of MES. The clients however are not so happy about cleaning up the site after completion of the job, disposal of waste and with the appear- ance of the maintenance staff. On the lower side 2.82 is the lowest mean score for “cleaning up after completion of job and disposal of waste”. The mean score for delivery of promise made and/ or being kept informed of the status of complaint pending arrival of stores is also very low (2.83) indicating that the clients are not very happy on these attributes. There is a need to take concrete steps to improve satisfaction on these attributes. The overall mean satisfaction score across all attributes works out to 3.047 indicating that the clients in general are just satisfied with the services being provided by the service providers. Table 6. Importance-satisfaction scores S No Importance Attribute I S 1 Pleasant and neat appearance of the maintenance staff. 3.74 2.87 2 The MES staff should show his identity to users before providing the service. 4.09 3.16 3 Promptness of the service 4.12 3.02 4 Pleasant telephone manners and timeliness of the response to telephonic complaint or messages. 4.14 3.07 5 Delivery of promise made and/or being kept informed of the status of your complaint pending ar- rival of stores. 4.03 2.83 6 Careful repairs to avoid further damage. 4.21 2.98 7 The follow through to see if you got what you needed. 4.05 2.90 8 Technical and procedural knowledge of the staff. 4.15 3.22 9 Courtesy and guidance provided by the MES officers. 4.09 3.26 10 Hours of service (e.g. maintenance) 4.03 3.09 11 Specifications of the work done 4.05 3.10 12 Facilities provided in the housing units 4.10 3.03 13 Facilities provided in the office units 4.16 3.10 14 Cleaning up after completion of job and disposal of waste. 4.00 2.82 15 The officers are easily approachable, listen to you, assess your need and are helpful. 4.12 3.26 Overall Mean 3.047 I = Mean Expectation Score, S = Mean Satisfaction Score Table 5. Continued Category/Group Overall % distribution within Respondents Expectations % Perceptions % PE Gap % Nos % High exp group Low exp group High percep group Low percep group High PE gap group Low PE gap group Rented Accommodation 6 3 2 - 2 - 2 3 Singlemen Barracks 31 15 13 17 28 5 7 29 Total 204 100 100 100 100 100 100 100 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 234 Understanding Expectations, Perceptions and Satisfaction Levels of Customers Importance-Satisfaction Scores: Quadrants’ Approach Quadrants’ approach was used to plot the above importance and satisfaction scores as shown in chart (Figure 6). The chart is divided in four quadrants with mean satisfaction and important scores lines splitting the chart into four quadrants. The two left hand quadrants in the I-S matrix (Figure 7) prepared based on above results contain factors that are considered relatively less impor- tant. The top right hand quadrant contains those factors that are considered important and which users are also relatively satisfied with. Endeavour of every service providing organisation should be to have all factors in this quadrant. The bottom right quadrant shows those factors users are less satisfied with but which are also relatively im- portant. These should be seen as the priorities of improvement. The priorities of improvement are “provision of better facilities in the housing units”, “promptness of the service” and “Careful repairs by avoiding damage to the assets”. It can be seen that these aspects are slightly low in satisfaction scores and with little effort towards improvement can yield higher satisfaction levels. These results, to some extent, corroborate the findings of the GAP analysis to some extent which has brought out that the Tangibles, Responsiveness and Reliability at- tributes of the department needs strengthening. It can also be seen that the department is relatively strong in the factors like the courtesy, technical knowledge and overall competence of the officers and to some extent in the hours of operations. The area which has little significance on the satisfac- tion levels is “pleasant and neat appearance of the maintenance staff”. “Delivery of promise made”, “being kept informed of the status of complaint pending arrival of stores”, “follow through to see if client got what s/he needed” and “cleaning up after completion of job and disposal of waste” also fall in the same quadrant, but these aspects are marginally low on importance but substantially low in satisfaction scores and require concerted efforts for improvement in order to achieve higher satisfaction levels. The areas where MES seems to have deployed more resources are the hours of service i.e., flexibility of service and the specifi- cations of the work done. The quadrant analysis thus clearly brings out the areas or the factors for improvement and MES can chalk out plan of action to improve the satisfaction and quality of the service rendered. The analysis of data to a large extent corrobo- rates the findings of gap analysis and also provides valuable inputs to formulate priorities for improve- ment and for optimum deployment of resources available with the organisation. SUMMARY OF FINDINGS The findings based on data analyses and their in- terpretations are listed below. The first observation that could be made is that the marketing concept (i.e., the philosophy that organisational goal at- tainment depends on understanding the needs and wants of the target market i.e., those of clients, and meeting those needs more efficiently and ef- fectively), as opposed to the production or product concepts, has not been embraced by MES. The clients have rated MES officials very high in their technical and procedural competence, on their ap- proachability as well as on courtesy and manners. The satisfaction levels are also significantly good in the area of specifications/facilities provided by MES in office/OTM (Other than Married) accom- modation and also about convenience of working hours of maintenance units of service provider. The strength in these areas does not however reflect in attainment of the underlying organisational goal of user satisfaction. The results of the survey indicate that service delivery is much below the clients’ expectations. Successful management of service quality requires regular feedback on what customers expect, and how clients’ perceptions of service compare with their expectations. Some of the findings based on data analysis are: EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 235 Understanding Expectations, Perceptions and Satisfaction Levels of Customers • The three service quality dimensions iden- tified for improvement in the order of pri- ority are Tangibles, Responsiveness and Reliability. • The overall mean satisfaction score works out to 3.047 (marginally higher than 3.0 on a scale of 1-5) indicating that the clients in general are just satisfied with the services provided. • Approximately 56% clients are satisfied with MES services (including 19% in highly satisfied category) • Mean Expectation score (5.08) is lower when compared to similar surveys for ser- vice industry firms in private sector. • Expectation levels of two clients groups were almost similar but the perception of service quality was significantly higher in one group. About 72% of the Air Force cli- ents are satisfied vis-à-vis only 43% in case of Army. • Satisfaction level based on P-E gap is sig- nificantly higher in young clients as well as among senior clients (those above 40 yrs) compared to the middle aged clients. • Education level seems to be influencing the satisfaction level with higher satisfac- tion levels prevailing among graduates and higher qualified clients compared to others. • Most of the clients coming from a field posting have expressed dissatisfaction with services being provided by service provider, indicating higher expectation levels after serving in field areas. • 84% of the clients residing in single ac- commodation are satisfied with the ser- vices. The satisfaction level in respect of facilities provided in OTM accommoda- tion is also higher than that with residential accommodation. • 53% of clients living in residential quarters expressed their dissatisfaction with servic- es. Coupled with the observation that most of the clients have expressed their dissat- isfaction with facilities in housing units, it translates into urgent requirement of in- Figure 7. Satisfaction-importance matrix EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 236 Understanding Expectations, Perceptions and Satisfaction Levels of Customers creased emphasis on improving specifica- tions for married quarters. • No significant difference was observed be- tween clients of different rank, gender or the background • The clients are generally happy about tech- nical and procedural knowledge, approach- ability, courtesy and helping tendency of officers from MES. • The clients however are not so happy about cleaning up the site after completion of job, disposal of waste and with the appear- ance of the maintenance staff. Incidentally these aspects have not been given high importance. • The clients give significantly high impor- tance to prompt service and most of them have expressed dissatisfaction in this re- gard. The clients also give high importance to careful repairs by tradesmen without damage to the existing assets. Whereas this sounds logical and a very genuine expec- tation, the satisfaction level is very low in this regard. CONCLUSION The analysis of the customer satisfaction data from clients of MES has thrown up very useful information for the service deliverance. The ser- vice quality dimensions which prominently run through all the departments for improvements are the Tangibles, Responsiveness and Reliability factors. The service provider was found to be short in these dimensions and therefore needs to put in more efforts and find ways and means for improving them. The improvement of these factors will therefore contribute significantly towards the satisfaction levels of the client. Overall improve- ment is required on Tangibles, Responsiveness and Reliability. The units from whom the responses were collected were broadly classified into two major groups for the purpose of data analysis depend- ing on the nature of their duties and the service requirements particular to their organisation. The survey and analysis of the responses from these different groups brought out similar level of ex- pectations but differences in level of perceptions about services. The result demonstrated that no two groups of clients could be treated in the same way when being served for their infrastructure needs. This also gives valuable inputs and insights as to why one group exhibited better perceptions compared to the other. The analysis of data also provides valuable inputs to formulate priorities for improvement and for optimum deployment of resources available with the organisation. 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This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 3, edited by John Wang, pp. 53-73, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 239 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 16 DOI: 10.4018/978-1-4666-0044-7.ch016 Luís Ferreira Pires University of Twente, The Netherlands Arjen van Oostrum University of Twente, The Netherlands Fons Wijnhoven University of Twente, The Netherlands & Wilhelms University of Muenster, Germany Service Registry Design: An Information Service Approach ABSTRACT A service registry is a Service-Oriented Architecture (SOA) component that keeps a ‘catalogue’ of available services. It stores service specifications so that these specifications can be found by potential users. Discussions on the design of service registries currently focus on technical issues, while service registries should take into consideration information needs of business domain users. In this regard, the authors consider service registries as information services and develop a comprehensive framework for designing service registries. This framework introduces aspects that determine a design space for service registries. In this design space, the authors identify views, requirements, processes, and means in the design of a service registry that supports the lifecycle information of a service. A vital part of these requirements is further implemented and demonstrated in a prototype built as a ‘proof-of-concept’ for the framework. This paper also discusses a case study used to evaluate the prototype. In this case study, a registry prototype has been populated with realistic services of a large insurance company, and 21 experienced IT and business professionals from a consultancy organization evaluated the prototype for its user satisfaction. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 240 Service Registry Design INTRODUCTION Service-Oriented Architecture (SOA) has been introduced with the promise that by offering func- tionality as services, business processes supported by these services can be more easily composed and executed (Papazoglou, 2008). However, a successful SOA implementation depends on vari- ous factors, like a structured decomposition of processes into services, appropriate management support, and SOA governance (Mahajan, 2006). SOA governance offers the measuring and steering capabilities that help organizations reach the objec- tives of their SOA implementations. A particular aspect of SOA governance involves service of- ferings, which should comply with organizational policies and norms. An overview of the services available in an organization should be in place, in order to avoid redundant offering of services with similar or identical functionality, or offering of services that are not relevant for any business process. Service lifecycle information is valuable for service developers, owners and providers and should be supported by the registry. In SOA, a service registry is an architectural component that enables a service provider to publish service descriptions and enables a service consumer to find services based on their descrip- tions (Alonso, Casati, Kuno, & Vijay, 2004). Consequently, a service registry is like a ‘Yellow Pages for services’. Service registry implementa- tions based on standards like UDDI and ebXML mainly store technical information on services by means of a flat data model with limited search capabilities (Luo, Montrose, Kim, Khashnobish, & Kang, 2006). Service registries developed according to these standards are mainly suitable for runtime service users, which are interested in interface definitions and the technologies to reach the service at runtime. However, service specifications are also supposed to be used by enterprise architects, application developers and business process engineers, amongst others (Li et al., 2009). These service registry users often need other sorts of information than runtime us- ers, such as the service goals or business value, which correspond to meta-information about the service (Ran, 2003). Furthermore, this information is meant to be understandable for (non-technical) human users, as opposed to the more technical information supported nowadays (Samavi, Yu, & Topaloglou, 2009). The work reported in this paper has been motivated by the opportunities offered by service registries with respect to SOA governance once these registries are properly designed, and the need to improve the methods available to design these registries. This paper provides a framework to design and implement service registries for storing, managing and disclosing service specifications. This requires a design that addresses both the technological and business means necessary to implement service registries that are more suitable to support SOA governance than the service registries available today. We consider a service registry as a special case of an information service, which transfers information goods from suppliers to consumers. We define a design space consisting of aspects (content, use features and revenue) and layers (design problem, business, process, infrastructure, prototyping and exploitation) that are relevant for developing effective information services (Wijnhoven & Kraaijenbrink, 2008). We consider service registries as information services in order to enhance the satisfaction of the consumers of service specifications. We test the validity of our framework by: 1. Assessing the feasibility of designing useful service registers with this framework. Other approaches could be used for designing service registers, but we believe that by considering service registries as information services we can obtain registries that offer the highest value for their users. This is because the service design theory forces the designer to systematically include the actual EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 241 Service Registry Design business requirements in the service registry design and to consider the actual value of the information goods (service specifications) that a service registry is expected to deliver to its users. 2. Assessing the relevance of this approach by solving a concrete real life problem with a service registry in a case study. This is achieved by building a service registry prototype as a proof-of-concept that supports part of the aspects covered in our framework. 3. Performing a utility test in which registry users provide feedback by scoring their user satisfaction with the service registry prototype. These steps correspond to the generate-test cycle of (Hevner, March, & Park, 2004), as shown in Figure 1. Furthermore, we evaluate our results against design science guidelines of Hevner et al. (2004), such as artifact construction (we define a design methodology and build a concrete service registry), relevance (we address real-life problems) and utility (we test our results). We also contribute to design foundations by providing design constructs for service registries as information services. This paper presents our design methodology, and illustrates the steps of this methodology, start- ing from the definition of business requirements and ending at the construction and evaluation of a service registry prototype in a case study. Therefore, the paper is further structured as follows: ‘Design Methodology’ describes our design methodology, by introducing a design space for service registries. ‘Business Require- ments’ discusses business requirements from the stakeholders of a service registry. ‘Process Requirements’ discusses process requirements of interest for actors of the service registry processes. ‘Infrastructure and Prototype Design’ introduces the overall architecture of a service registry, and discusses the choices made in our prototype design and implementation. ‘Exploitation and Evalua- tion’ discusses the results of our case study, and ‘Conclusion’ gives conclusions and suggestions for future work. DESIGN METHODOLOGY Design Space Three aspects should be considered in the design of an information service: the delivery of content to the user and all associated functions (e.g., content acquisition and aggregation), the delivery of use features for a better use and value experience of Figure 1. Our research approach in terms of design science (Adapted from Hevner et al., 2004) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 242 Service Registry Design the delivered information good, and the stream of revenues to be realized for the information service to be viable for the content owners and information service providers (Wijnhoven, 2008). In order to support these aspects, we analyze them at different layers. The top layer addresses ‘why’ the information service should be used (‘Design problem and agenda’), the subsequent layers cover ‘what’ is needed to support the information service (‘Business requirements’ and ‘Process requirements’), and the bottom layer addresses ‘how’ to design an infrastructure to support it (‘Infrastructure’). The infrastructure layer does not only comprise the design of the IT infrastructure such as databases and networking, but also the structuring of employee tasks and tools to support these tasks. However, if we apply only these layers we may obtain a working information service, but for a successful and enduring system we should also consider the construction of a prototype (‘Prototype construction’) and its exploitation and evaluation for suitability (‘Exploitation and evaluation’) as explicit design layers. Figure 2 depicts the resulting design space, which consists of the three aspects, supported by the six layers. Figure 2 shows that eighteen blocks are formed by the crossings of the six rows (lay- ers) and three colored columns (aspects), which indicate the areas that have to be addressed when designing an information service. Each design, for each type of information service and its instances, is likely to be different from others, due to its particular context. There- fore, it is difficult to prescribe any specific order in which the blocks of Figure 2 should be consid- ered. Top-down, bottom-up and middle-out strat- egies can be used, as long as the results for each block remain aligned, i.e., they do not contradict each other and the results are mutually supportive. Content The content of an information service is some information good, supplemented with some optional information (supportive information or meta-information). In general it is difficult to match these digital goods exactly with the user’s demand, since the shear volume of variation op- tions for digital information goods makes it hard to present the user with a limited number of choices. An information service has therefore the task of reducing the amount of possible information good Figure 2. Design space for information services (Adapted from Wijnhoven, 2008) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 243 Service Registry Design variations to present meaningful and intelligible information to the user. An information service may transform the in- formation good in order to meet the user’s request by delivering just what the user needs. It can do so by altering two dimensions of an information good, namely the Level of Representation (LoR, i.e., the percentage of coverage of all the data that can be delivered) and the Level of Conceptual- ization (LoC, i.e., the abstraction level of what is delivered, varying from elementary data to theoretical models). By increasing or decreasing either or both levels, the information good can be ‘customized’ to meet the user’s needs. Since we consider a service registry as an information service, the information good in this case consists of service specifications. The service specification in a service registry can be character- ized as process information, in that it can be used to compose business processes. The use of accepted standards can help achieving high quality, and is a prerequisite for exchanging process information (Van der Aalst & Kumar, 2003), which implies that service specifications should be described systematically, preferably by using generally ac- cepted rules or standards. Service specifications should contain both runtime and design-time information, with added supportive information. Not every specification detail is useful for every user, and therefore the LoR can be decreased to present the information that matches the needs of each specific user. For example, some users may only get the interface description as the result of a query. Additionally, the LoC can increase by giving users meta-information in addition to descriptions of how the service specification is used in other situations. Use Features Use features can be provided by the information service in order to increase value experience, from which user satisfaction is an important factor. Use features may consist of additional content interaction options, such as advanced search op- tions and extra information about the content. An information service can become more attractive to potential users if it provides use features. In case of competing service registries that provide the same information good, the support to use features can make a difference for the users to actually use a certain registry. In this paper, for the sake of simplicity we only consider service registries in a single organization or in a network of cooperating organizations. Use features like credibility or quality evaluations of former users can be helpful to decide whether or not to use an information service, but they are not so relevant when the users are obliged to use the service registries of their organization (or organization network), which is the situation considered in this work. However, since we have aimed to design service registries with a high end-user satisfac- tion, some use features have been considered in our framework. Examples are help functions to formulate search queries, and the delivery of alternative results, possibly ranked according to their suitability. Revenue Although the digital nature of an information good makes distribution inexpensive, costs have to be made in order to create, maintain and provide the information good. In the case of a service registry, the quality of the service specifications has been identified as a key factor, which implies that the maintenance of the service specifications requires extra (human) attention. Revenue streams have to be created to cover the costs of both the service providers and of the organization supporting the service registry. In the case of service registries, information is transparent, in the sense that ser- vice specifications should be sampled by service providers, repeatedly used by registry consum- ers, and their value can be tested once they are acquired. Furthermore, service specifications are EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 244 Service Registry Design meant to generate social benefit in the organization or organization network. According to Womack (2002), since we expect many consumers and relatively few service registries, subsidy and a non-profit organizational unit is required to cope with revenue. However, the consumers still have to pay somehow for their use of the registry in order to create a revenue source to financially support the registry. Possible payment models can be based on subscriptions or on the actual use of the service registry. Payments can be enabled by the actual consumer or sponsor. BUSINESS REQUIREMENTS The service registry, as an information service, has several stakeholders. We identified four main stakeholders in an organization with respect to the service registry: registry consumers, service providers, organization managers, and system and information maintainers. These stakeholders should have a positive attitude towards the service registry, acknowledge its added-value, and have to be aligned with the goals of the service registry. Assuming these conditions hold, in the sequel we discuss the requirements of the service registry for the business layer for each stakeholder, and we present a value exchange model that considers the contents and revenue aspects of a service registry. Consumer Consumers are the end-users of the service registry. These may be people in an organization, or an application or software agent. These users have different demands for information, and therefore we distinguish between them. First, the registry can be used at design-time, where primarily meta-information (e.g., information about the service goals and intended usage) is requested. In this case, our design approach focuses on this (human) end-user. Second, users at runtime have a demand for primarily technical data. To capture both technical and business aspects of a service from the viewpoint of the different sorts of con- sumers, we adapt the seven specification levels for business components identified in Fettke and Loos (2003), as shown in Figure 3. Figure 3 represents the information needs of the design-time service registry end-users, and since the interface level is included, also the needs of the runtime users are covered. These levels are the core information for design-time and runtime reuse of services. The terminology level describes concepts and elements that are used at all levels. The terminology level does not add any specific information to a service specification, but aims at avoiding ambiguity by defining concepts and terms in a structured and consistent way. Provider The service provider can be an organization, organizational unit, or any other entity providing some information good. Service registries provide service specifications as information goods, with the purpose of enabling the use of these services by others. Services have a lifecycle as any other IT system, and this lifecycle should be observed Figure 3. Levels of service specification (Adapted from Fettke & Loos, 2003) EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 245 Service Registry Design in order to keep the service useful and fit to the overall system architecture. Service providers have the responsibility of maintaining these services according to the service lifecycle. Figure 4 depicts a service lifecycle in which the service lifecycle descriptions of Afshar (2007) and Larsen and Wilber (2005) are combined. Each lifecycle phase consists of various activities and to perform these activities the service stakehold- ers need information from earlier activities. For example, the testing activity needs information that has been stored in the service design phase. A service registry can hold information on the status of the services with respect to their life- cycle. A service specification can be published in the registry already at the beginning of the devel- opment phase and can record all relevant informa- tion for this and the subsequent phases. Lifecycle information at this point should capture the purpose for the development of this service. The stakehold- ers involved in the service lifecycle can use the service registry to retrieve information, support- ing in this way their different information needs. Changes in business needs or technical develop- ments may cause changes in the service (Bose & Suumaran, 2006). During its lifecycle, a service may change quite often, which may improve the value of the service for its users. Before being changed, a service may be evaluated to determine whether the change effort is justifiable. The service registry can support the service lifecycle by pro- viding information not only about the status of a service, but also its change requests or historical change data (Belter, 2008). Service lifecycle management requires supportive information that is directly linked to a specific service, but does not contain any usage information. Management The management of an organization is respon- sible for positioning the service registry in the organization. Management can also take the role of a financial sponsor of the service registry, for example, when the organization elicits and charges all costs through an (internal) cost model. Analo- gously to application governance in an application portfolio, services can be governed in a service portfolio, allowing managers to measure and steer them. The knowledge on available and popular services in an organization gives the ability to minimize the costs of inefficient services usage, caused by having redundant services and services that are not used at all (Yu, Liu, Bouguettaya, & Medjahed, 2008). Ideally, all services that are bought or de- veloped should comply with standards, so that their integration in the overall architecture can be facilitated (Bose & Suumaran, 2006). Ser- vices should all be published, so that they can be readily found and made available for use. They Figure 4. Service lifecycle EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 246 Service Registry Design should be effectively used, so that no unused services are maintained, they should have no redundant functions, so that no extra costs are made to support duplicated functionality, and they should be used under optimal contracts, for example, by offering discounts on the costs per invocation to frequent users. The service registry can be the central place where the information necessary to steer the IT support is stored. This information consists of contracts, service status, service consumers and standards, to name just a few (Li et al., 2009). Along with organizational policies, the readily availability of this informa- tion is essential to optimize the service portfolio and minimize costs. The portfolio information related to a service specification is considered to be supportive information (Winkler, Cardoso, & Scheithauer, 2008). Furthermore, management is normally also interested in information about the use of the service registry itself, especially in case the users of the service registry have to pay for accessing its functionality. This usage information is not directly linked to a certain service specification and is called coordination information. It typi- cally consists of the number of users and the costs related to the use of the service registry. Maintenance Maintenance can be divided in maintenance of the service registry as an information system, and maintenance of the service specifications stored in the registry. The technical contents of the service specifications are the responsibility of the service provider, so that here we only consider generic mechanisms for enhancing the quality of these specifications. Service registry system maintenance con- cerns processes for functional, application and exploitation management of the service registry software system. The organization in which the service registry is implemented should have proper structures to perform these maintenance tasks. The service registry can be designed in a way that facilitates this work by providing relevant logs and other information about the system operation depending on the requirements set by the organi- zation (Gorbenko, Romanovsky, & Kharchenko, 2008). This information is not directly related to a service specification, and therefore should not be considered as supportive information. Maintenance of service specifications is a key factor for a successful service registry. If service specifications are not properly maintained, the consumers cannot rely on these specifications and end up distrusting the services (Al-Masri & Mahmoud, 2008). Maintenance of service specifications concerns mainly the quality of these specifications, i.e., how faithfully the actual service is represented by the service specification, which is the responsibility of the service provider. High-quality of the service specification should ensure that the consumer has correct expectations of the service, so quality is essential in the opera- tional phase in the service lifecycle. Maintenance personnel concentrate their efforts on improv- ing the supportive information relevant for the consumer and provider views. The effectiveness of the service discoveries should be monitored and analyzed in order to improve the matching of service requests to service specifications, and ultimately the services they represent. By as- sessing the way users search for information, the service specification maintenance can improve the discovery of service specifications. The terminology level presented in Figure 3 describes terms of the service specification as used at the other levels. These terms can be combined and used to create a domain ontology for service discovery. This ontology can be used for improving search and determining the relevance of a search query result (Verma et al., 2005). Value Exchange Model At the business layer we can define the values that are exchanged between stakeholders through EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 247 Service Registry Design the service registry in order to satisfy these stakeholders. The intended interactions with the service registry have been considered to gener- ate requirements for the service registry at this layer. User satisfaction should be enough for the service registry to be used even without obligatory regulations in the organization. A value exchange can refer to the content, use feature, or revenue aspects, and it specifies which values are delivered by a stakeholder in return to other values. The specific realization of these exchanges is ignored at this layer, and is considered at the process layer. Value exchanges between the stakeholders can be modeled, for example, by the e3value technique of Gordijn and Akkermans (2001). In addition to the stakeholders who are directly involved in the exchange of content, the revenue aspect imposes that some form of sponsorship is needed, so that it should also be modeled. Different alternatives can be chosen when defining value exchanges. For instance, we may have different choices for organizing sponsorship. Figure 5 shows one possible e3value model for the service registry, which consists of a high-level scenario in which the sponsor (possibly the man- agement of the organization) directly subsidizes the service registry. In a more detailed model, the value exchanges can be further specified, and internal value exchanges can also be modeled. Figure 5 shows four value exchanges sup- ported by the service registry: (i) the service provider provides a service specification to the service registry, which should pay for the speci- fication in return; (ii) a runtime user can initiate a value exchange in which (some part of) a tech- nical specification is obtained in exchange for a specification fee; (iii) an end-user can pay a specification fee and gets several value objects in return, and (iv) a sponsor can pay for (part of) the specification fee, for instance, in return for feedback and visibility, or to increase the chance that the registry is used by consumers in case these customers are reluctant to use the registry. The service registry offers various use features and search assistance to help the end-user retrieve the (design) service specification. The service regis- try then delivers a specification, which is the core value of the service registry, i.e., the task of the service registry is to deliver the specification as efficiently as possible. To deliver the specification Figure 5. High-level e3value model for a service registry EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 248 Service Registry Design and meet the expectations of its users, the speci- fication should be complete, of high quality and faithfully represent the actual service. PROCESS REQUIREMENTS At the process layer, we define the activities for delivering content, facilitating content usage, and handling usage costs and revenues, in contrast with the business layer which ignores all information service internal activities. Requirements for the process layer activities are discussed below by focusing on the interactions with the end-users. Content Delivery A service registry delivers service specifications to consumers. In order to perform this task, the service registry aggregates and stores the avail- able service specifications. In order to process a request, the service registry should not perform any interactions with the service provider or other actors. Therefore, the service registry should have stored all the content necessary to answer a request of an end-user before the request is issued. The delivery of results can be customized to meet the request of a human end-user, for instance, by altering the level of representation (LoR). In this case, the service registry does not deliver the entire available service specification, but makes a selec- tion of the available information for the end-user instead. When possible, it can also alter the level of conceptualization (LoC) by delivering fewer details and giving information at a higher abstrac- tion level, like application domain information. During publication, the information good content (service specification) is delivered by the service provider to the service registry. The end-users demand a high quality of the service specification to achieve a high end-user satisfac- tion, which is determined by how faithful the service specification represents the actual service. Therefore, before the service specification (or an updated version of this specification) is added to the content base, a series of activities have to be performed on the service specification to ensure that the content meets the quality standards set by the service registry. Use Facilitation Along with the content, use features are delivered to positively influence the factors that lead to a high end-user satisfaction. Factors that lead to end-user satisfaction are content, accuracy, format, ease of use and timeliness (Doll & Torkzadeh, 1988). The following requirements can be formulated with respect to these factors: • Content: the service registry has to deliver the precise information needed by the us- ers. Therefore, the needs of the users have to be determined, e.g., by helping the users formulate their information needs. • Accuracy: accurate delivery consists of presenting the best matching service specification(s) to the users. The service registry can increase the accuracy by pro- viding alternatives to the users. Using on- tologies, the service registry could deter- mine the relevance of the presented results and suggest other specifications which are close enough to the presented ones. • Format: the presented results should be shown in a clear and useful format. The service registry can assist in this by in- creasing usability, e.g., by providing dif- ferent formats so the user can choose the appropriate one. A possibility is to offer the same information in different formats, e.g., in documents using formats like HTML, XML, PDF, MS Excel or MS Word. • Ease of use: ease of use is increased by providing user-friendly interfaces with help functions and the use of standard in- formation presentation. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 249 Service Registry Design • Timeliness: timeliness is influenced by different issues. The technical issue de- termines the speed at which a request is processed and a response is delivered by the service registry system. The delivery speed is subject to the available process- ing power, and speed of the computing and networking system. Another issue is the freshness of the service specifications, i.e., whether specifications are still valid or are outdated. While the technical issue can be influenced in the development and deployment of the service registry system, information freshness can be preserved by applying proper maintenance procedures. For example, the service registry system can assign a time-to-live to service speci- fications, and when the time-to-live of a service specification expires, maintenance personnel can be asked to check whether the specification is still valid or should be updated or removed. By addressing some of these factors simulta- neously when the content is delivered we expect that the experienced value of the content can be enriched. Handling of Usage Costs and Revenues The way subsidy is granted, i.e., which revenue model is chosen, determines how the usage costs can be handled. The billing strategies to be used can be a flat-fee subscription or pay-per-unit. Other approaches to cover usage costs (e.g., advertise- ment, syndication, additional merchandise, pay- per-data-packet) are based upon an open market for content delivery, which is not applicable to most SOA contexts and the setting we consider in this paper. Functional requirements to handle usage costs can be to check the subscription status of the end-users before granting access to the system. Process Model Figure 6 shows a process model that incorporates the process requirements described above. It as- sumes that the maintenance of a service specifica- tion is part of the service registry unit. The actor roles that can be played by the stakeholders and that are relevant in this process have been drawn on the borders of Figure 6. The part of the model that corresponds to each role is indicated with striped lines. Dotted lines indicate a stream of information, while a solid line depicts a process step, possibly containing information elements. More detailed process steps can be drawn by zooming in on process elements. This process model only shows the delivery of content by providers and to consumers. Other processes (involving other stakeholders) could be repre- sented in a similar way. INFRASTRUCTURE AND PROTOTYPE DESIGN Figure 2 shows the infrastructure layer immedi- ately below the process requirements layer. The infrastructure layer deals with the mechanisms necessary to support the processes. Since we aim at creating an effective design for a service registry, we consider that a design is effective when it satis- fies the end-user in his/her information needs. For this we used the five factors of Doll and Torkzadeh (1988) (content, accuracy, format, ease of use and timeliness) as our main design focus. Below we discuss the means to realize the processes related to the service registry, we introduce our overall architecture, and we present our prototype. Realization Means The processes we identified for the service registry (content delivery, use facilitation and handling of usage costs) can be realized using information, technical and organizational means. These means EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 250 Service Registry Design support these processes, and can be identified by systematically investigating what is necessary for each of these processes. Processes need information to perform tasks for the service registry. Information means consist of the available and accessible data, and mechanisms to allow data to be provided, i.e., the organization of this data and resources, and the management of data freshness (Wijnhoven & Kraaijenbrink, 2008). Technological means are necessary to facilitate the activities of the service registry. Organizational means consist of lists of responsibilities, assignment of tasks and coordina- tion principles. Furthermore, an organization unit can be created to carry the responsibility for the service registry. Table 1 identifies information, technological and organizational means for each main process, without trying to be comprehensive. Prototype Construction In order to evaluate the users’ satisfaction with a service registry developed according to our framework; we developed a prototype by focusing on the functional requirements of the end-users, namely the main use case of ‘searching for service specifications’. Performance and availability re- quirements are crucial for a system to be used in production, however, are less relevant when lim- ited functionality is demonstrated in a prototype. The main goal of a service registry is to provide service specifications to human end-users. To be Figure 6. Process activities chart EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 251 Service Registry Design able to provide the specification to the user, the system first needs to know what the user is look- ing for. From interview sessions with potential service registry users we have learned that the system should be able to search for specifications in different ways, for example, based on the service name or the function provided. The prototype should also assist the user with the formulation of the search question. We built a prototype that searches available content looking for specifications that match a user query, and presents the results of the search action to the user. The user may further process the results, for example, by exploring the meaning of definitions or by retrieving extra information. The specification levels of a service are therefore presented to the user as additional information. Our prototype has a web interface that can be accessed via an ordinary web browser. Our prototype was designed by considering the information, technological and organizational means presented in Table 1. Therefore, we defined the data structures for the prototype in a class diagram (information means), the data flows re- Table 1. Information, technological and organizational means for the main processes Process Information means Technological means Organizational means Content delivery - List of available service specifica- tions - Requirements for new services - Requirements for standards to use when creating a service specification - Checklists for checking the validity of service specification - Consumers requests - Consumers authentication - List of pending specifications - Information about information consumers needs - Structured data storage and retrieval - Contracts with providers - List of providers - Knowledge about consumer usage - Data models for efficient storage and retrieval - Tool for syntax checking of service specification - Transformation tool for level of representation - Querying software - Interfaces for receiving content - Communication channel with providers and consumers - Databases to store specifications, requirements and invoices - Service registry system program- mers - Service registry system maintenance people - ICT services management to support client interactions - Providers network - End-user support - Coordinator to create/manage specification requirements - Procedures to add service specifica- tions - Archiving procedures - Librarian - Database administration Use facilita- tion - Data about consumers needs - Supportive information database - Data models for retrieval - Mapping of consumers needs onto available data - Ontology data and relations - Relevance data - Modification date of service specification - Data about preferred user interfaces and possibilities - Links to supportive information (help functions) - Direct links between service specifi- cations and supportive data - Interfaces - Interactive search determination tool - Search system - Ontology searching mechanism - Data communication network - Presentation/customization tool - Database with feature information - Hard/software platform - End-user support unit - Librarians to manage supportive information - Librarians to analyze system’s usage to improve matching - Provide search and results options to clients - Create and maintain ontological links - Client feedback collection procedure Costs and revenue man- agement - Contracts with consumers - Contracts with providers - Data delivery - Data reception - Subscription data - Billing system - Subscription system - Usage logging system - Providers (‘account management’) - Consumers - Sales administration - Contract management EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 252 Service Registry Design lating data to IT processes in a dataflow diagram (technological means) and the activities of the process for searching service specifications in an activity diagram (organizational means, especially end users support). Figure 7 shows how the interactions between the consumer and the service registry of Figure 8 for searching service specifications can be refined. At the beginning the user is expected to enter and submit a query, but can also choose to stop (arrow to the left from Activity 1.0). If the query Figure 7. Activity diagram for the process of searching for service specifications EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 253 Service Registry Design is invalid, the system ignores this query and waits for a new one. The number of returned results determines the next action of the system. If there are multiple results, the user is asked to choose from the list of result options. If there is only one result, the user does not have to choose and the system presents the result summary. If there are no results, the system returns to the initial state and waits for a new query. The search query can be adjusted in case the user is not satisfied with the returned list of results, after which the query is again checked for validity. However, when a result is chosen, the system shows simultane- ously the result summary, further inspection op- tions and alternatives. The process stops when the user is satisfied, but the user can also choose an inspection option, after which the result for that inspection is shown. This can be repeated while the alternatives and inspection options re- main displayed. Figure 8 shows a dataflow diagram that rep- resents the data stores used to produce the search results. Some activities do not require any specific data in order to be supported, such as validity checks and user input actions, which may be performed without necessarily using data stores. When a request for a search action is retrieved by the web server, the user interface for the search form is created. The search options presented to the user are derived from the appropriate data store. By configuring the data store, the service registry can adjust the options that are displayed. The user submits the search data, and the process uses different data stores to generate the search results. Initially the search data is stored for fu- ture analysis. Matching service specifications are derived from the service specifications data store, and ontology mappings are used to determine the relevance of the results and alternatives. When a choice is made from the result list, the summary result for that specification is generated from the service specifications. When the user chooses to inspect the results further (additional information), the relevant specification data is retrieved. Our prototype implements the process depicted in Figure 7 using the data stores shown in Figure 8. Due to page limitations we omit the class diagram that defines the data structures used in the proto- type, which can be found in Van Oostrum (2008). EXPLOITATION AND EVALUATION We addressed the ‘Exploitation and evaluation’ layer of Figure 2 by testing our prototype in a case study. In this case study, we exposed our service registry prototype to experienced IT and business professionals from a consultancy organization, and asked for their opinion on the use of the pro- totype. We expected that the prototype based on the design as an information service should have a higher user satisfaction than average. An average user satisfaction is defined here as a score of 3 on a five-point scale for measuring user satisfaction. Figure 8. Data Flow Diagram for the ‘Search design service specification’ process EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 254 Service Registry Design User satisfaction above average was expected because some use features are implemented in the prototype. High user satisfaction may lead to a better use of the service registry system (Ives, Olson, & Baroudi, 1983), and is a success factor for the service registry. Figure 9 gives a screenshot of our prototype implementation. Some use features are shown on the left bar (‘more information’ and ‘service suggestions’), along with the information on the service that has been found and selected (the Non-life.Endorsement service). Settings In the case study we have used descriptions of actual services implemented at the insurance company. This company primarily sells insurances via intermediaries, and has decided to create an SOA architecture to provide services that can be accessed by the intermediaries. The descriptions of these services have been adapted and stored in the prototype. The prototype could be accessed via the In- ternet. A group of 89 professionals were invited to participate in this case study. Each participant has first been asked to go to a portal web page and read a short introduction to the assignment before proceeding to the prototype. The partici- pants should perform tasks with the prototype that reflect their actual information needs concerning the search for service information, as they experi- ence in their daily work at the organization. After performing these tasks, each participant has been asked to fill out a short questionnaire to measure Figure 9. Screenshot of our service registry prototype implementation EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 255 Service Registry Design end-user satisfaction, using questions derived from the model of Doll and Torkzadeh (1988) and a 5-point rating scale. The insurance company had no service registry before, but kept the service descriptions in separate documents. We used data from these documents to populate the service registry. Tasks Each participant was asked to read an introduc- tion and then to perform two simple tasks that reflect the typical information needs of a service registry end-user, and that yield as a result at least one service specification. In this case study we considered a collection of services of an insur- ance company. The insurance company uses an authentication application that provides validation, authentication and authorization services via an ExternalService. Intermediaries use these and other services to perform various tasks regarding insurance data. These intermediaries sell insur- ance contracts (with coverage, obligations and rights, which altogether are called a policy) to consumers. The two simple tasks to be performed by the participant consisted of answering two of the following questions: • Is there a service to ‘change a consumer characteristic’? • What is sent as input to the ‘validation’ method of the ‘ExternalService’ service? • Is ‘Cancellation of the entire Policy’ one of the supported types of the ‘Endorsement’ service? • Can the ‘ContractAllGet’ service be used to retrieve ‘Coverage’ details? • What code is returned by the ‘PartyChangeV1’ service, in case it com- pletes successfully? ExternalService, Endorsement, ContractAll- Get and PartyChangeV1 are some of the services that were registered in the service registry proto- type for the purpose of our case study. After the questions were shown, the participant was instructed to follow a link to the prototype, perform the tasks and return to the screen to fill out an evaluation form. The first part of the form contained the questions derived from Doll and Torkzadeh (1988) to measure the end-user satisfaction. These questions were answered on a five point scale, ranging from 1 = ‘totally not’ to 5 = ‘absolutely yes’. Additionally, the partici- pant was inquired about his/her experience with SOA and specifically with service registries, in order to record the skills or expertise level of the participant. Furthermore, the participant was asked to rate his/her overall satisfaction with the prototype on a five point scale, consisting of 1 = ‘nonexistent’; 2 = ‘poor’; 3 = ‘fair’; 4 = ‘good’ and 5 =’excellent’. Any additional feedback could be given by the participant on a ‘remarks’ text field. Results From the 89 invitations, 21 persons have actively participated in the research. From these, 17 par- ticipants indicated that they had worked with a service registry before. The majority of the par- ticipants rated their familiarity with SOA as high (mean of 3.95 on a 5-point scale), and rated their familiarity with the concept of service registry slightly lower (mean of 3.29 on a 5-point scale). We are aware that the number of participants is too low to draw significant statistical conclusions. Therefore, we carefully use terms like ‘suggests’ and ‘indicates’ when discussing the data. Table 2 summarizes the resulting data. Table 2 shows the average of the accumulated scores and the average of the overall scores indi- cated by the participants. Scores average denotes the average score of all 12 questions by the 21 participants (so the average of 252 scores). Over- all score denotes the average of the score of the ‘overall satisfaction’ question. The overall score indicated by the participants is close to the scores EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 256 Service Registry Design average. This suggests that the questions provide a good indication of the user satisfaction. The scores above the 3-point average on a 5-point scale suggest that the participants are more than average satisfied with our prototype. Table 2 also gives the results for the questions on the factors defined in Doll and Torkzadeh (1988) (contents, accuracy, format, ease of use and timeliness), in terms of the average and standard deviation values. The relatively low standard deviation suggests that the participants rated the content and accuracy generally above 3 points. However, the prototype scores slightly above average for the format and ease of use aspects. Feedback Still in the scope of the ‘Exploitation and evalu- ation’ layer of Figure 2, we gave the participants an opportunity to give feedback concerning this research. A few participants thought the prototype gave useless details at some service specification levels, while others recognized the usefulness of the division into various information levels (shown in Figure 9 under the ‘More information’ head- ing). Some participants would like to know how the prototype would perform in case the search questions were fuzzier. Although the information in the service speci- fications was split into the various specification layers, participants still experienced information overload for the full result of a level. This calls for a further reduction of the level of representation of the content, to deliver to the end-user with as few as possible, but yet useful information. CONCLUSION The design of a service registry is a complex un- dertaking due to multiple choices that have to be made about its functionality. By properly scoping the service registry, one can identify the informa- tion needs and design requirements of the service registry. We have shown that the design method for information services is useful for developing service registries that fulfill the information needs of its various stakeholders. The design theory forces the designer to approach the service registry by considering its different stakeholders, namely the service providers, management, maintenance personnel and consumers. The design method identifies a design space consisting of layers (design problem, business, process, infrastructure, prototype and exploitation) and aspects (content, use features and revenues) that should be defined for a service registry to fulfill the requirements set by its users. We have also shown how this design theory can be applied, by means of a limited yet representative prototype. Although our case study could give a positive indication of the suitability of our approach, future research could be performed to empirically determine the appropriateness of the design theory for information services that we applied to the design of more realistic service registries, e.g., by evaluating its effectiveness for service registry development projects in product and process dimensions. The quality of the service specifications (i.e., the content) stored in the registry is quite impor- tant in our approach. Previous attempts to create a public service registry have shown that if the information cannot be trusted for its quality, the service registry is marginally used, or not used at Table 2. End user satisfaction scores of service registry users Content Accuracy Format Ease of use Timeliness Overall score Scores aver- age Average 3.52 3.71 3.29 3.36 3.64 3.38 3.50 Standard deviation 0.92 0.59 0.96 0.84 0.81 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 257 Service Registry Design all. Therefore, the organization that considers us- ing a service registry should deploy mechanisms to ensure the high quality of the information and to facilitate its usage by end-users (i.e., use features). The service registry is thus more than just a software system, and also requires aligned organizational structures. A separate organiza- tional unit can be created or some roles have to be assigned to employees in order to run and maintain the service registry. Sponsorship could be arranged in order to deal with costs of running and maintain a service registry. Our design methodology provides a structured design approach for service registries. Service specifications should be available at different levels, both to enable structured storage of service information and to facilitate the addition of use features. These specification levels cover infor- mation needs from service registry consumers, allowing end-users to choose their desired level of specification. Both technical and business users should be able to find their desired information. This paper assumed that the services are already available, and considered the service registry as a means to facilitate service governance. Equally important is to consider the granularity at which services are defined and how this granularity influences the service registry. This is surely an interesting topic to be investigated in the future. We built a prototype as a ‘proof-of-concept’ and performed a case study to assess the suitability of our approach. The case study showed a user satisfaction consistently higher than the 3-point average on a 5-point scale. However, due to the small research population size we are aware that these results should be interpreted with care. In our prototype, the service registry stores meta-information on the service specifications that we found relevant for the case study, but we have not investigated what kind of information is to be stored and what standards are to be used when specifying a service. Further research should be performed to define a domain ontology for service specifications that consists of service specification concepts and their relationships. This ontology could then be used to search for specifications, to reason on the relevance of results, and to suggest other specifications that use different names for the same concept or that use different but strongly related concepts. 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Challenges of business service monitoring in the internet of services. In Proceedings of the 10th International Conference on Information Integra- tion and Web-based Applications & Services (pp. 613-616). New York: ACM. Womack, R. (2002). Information intermediaries and optimal information distribution. Library & Information Science Research, 24, 129–155. doi:10.1016/S0740-8188(02)00109-3 Yu, Q., Liu, X., Bouguettaya, A., & Medjahed, B. (2008). Deploying and managing web services: Is- sues, solutions, and directions. The VLDB Journal, 17(3), 537–572. doi:10.1007/s00778-006-0020-3 This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 4, edited by John Wang, pp. 1-21, copyright 2010 by IGI Publishing (an imprint of IGI Global). EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 260 Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 17 INTRODUCTION The growth of health service systems in many developing countries is hindered due to wasteful planning and operations. Managing health facili- ties within limited resource and desired service quality is a big challenge for decision makers. Decision-makers need to investigate efficacy and efficiency of existing healthcare systems, and must be able to evaluate the outcomes of any changes they make to these systems (Ahmed & Alkhamis, 2009). In developing countries, proper tools and techniques, and resources for effective planning are important. In this regard, Operations Research (OR) can play an important role. Unfortunately, applications of OR techniques are not widely used by healthcare planners to solve these problems. Kamrul Ahsan Auckland University of Technology, New Zealand Abdullahil Azeem Bangladesh University of Engineering and Technology, Bangladesh Operational Performance Analysis of a Public Hospital Laboratory ABSTRACT Efficient utilization of scarce resources is an issue for any healthcare system. In developing countries, proper tools, techniques, and resources must be widely used in healthcare operational planning. Considering the necessity of effective resource planning, this study focuses on the rural healthcare system of Bangladesh and concentrates on the sub-district government hospital laboratory. The authors’ deter- mine possible ways to improve operations of laboratory facilities. To analyze existing system efficiency, sample laboratory data is fed into a simulation model. This paper identifies several possible ways for future expansion and suggests using simulation for better planning and analysis. DOI: 10.4018/978-1-4666-0044-7.ch017 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 261 Operational Performance Analysis of a Public Hospital Laboratory For healthcare programmes, OR study is es- sential and is a systematic process of identifying and solving programme problems (Fisher, Laing, Stoeckel, & Townsend, 1991). ‘The process of OR is designed to increase the efficiency, ef- fectiveness, and quality of services delivered by providers; and the availability, accessibility, and acceptability of services desired by users’ (Fisher et al., 1991). Or has been applied in the domain of healthcare for more than 40 years (Brailsford, 2007). Comparing two major developed parts of the world, healthcare OR in the United States has largely been focused on the application of ‘hard’ OR techniques (Sachdeva, Williams, & Quigley, 2007). In contrast, healthcare OR in Europe, including the UK, are focusing towards ‘soft’ OR techniques, with growing attempts to combine hard and soft OR methodologies (Le- haney, 1996; Easterby-Smith, Thorpe, & Lowe, 2002). However, OR has had limited success in the implementation of results in practice in the healthcare setting. The outcomes of the research may not be sufficient to motivate a change in practice by physicians, particularly for politically sensitive or controversial decisions (Sachdeva, Williams, & Quigley, 2007; Fone et al., 2003). In the developing world, application of OR has different meaning. Aggarwal (1994) has pointed out that the concept of OR in developing coun- tries is different from that found in the developed world. The term “OR” may not be used to describe the approach being taken. Decision-makers have different assumptions from those familiar in ‘‘traditional’’ OR methodology. Aggarwal writes: “The primary objective pursued in each case was to make the situation tolerable for as many people as possible.” There is considerable interest in the potential for using OR in developing countries. One sign of this is the formation of new societies for OR scientists in countries and regions where no such society had existed. Survey shows that out of 279 OR research studies in West Africa, 33(12%) were conducted on healthcare sector and the sector ranks within top three applications of OR (Smith, 2008). The formulation of OR models for healthcare decisions in developing countries are important, but at present formulation and solution of healthcare facilities by quantitative models is limited to developed regions only (Parker, 1990). Since 1990, there have been many improvements in using the OR tools and techniques in planning and decision making in developed world. How- ever, the gap still remains between developed and developing world in terms of OR application in healthcare planning. The formulation of ‘hard’ and ‘soft’ form of OR models for healthcare decisions in developing countries are important. In the Ministry of Health and Family Welfare (MOHFW) of Bangladesh, OR processes are not widely used by healthcare planners and service providers. Within the MOHFW there is a tendency for a biased trial and error planning process. The lack of a ‘what if?’ analysis tool makes existing studies ‘barefooted OR’ (Rahman, 1998). To improve the current situation, it is important to strengthen and institutionalise the OR process. Recommended strategies to institutionalise OR within the system are to strengthen the capacity of the organisations to conduct and use OR, to improve the methodologies used, and to assist managers to incorporate OR into routine planning and management practice (Population Council, 1998). One of the priorities of the MOHFW program is to ensure sustainability by improving efficiency through efficient use of human as well as other resources. In recent years there has been increased awareness of the potential impact of OR applica- tions in healthcare planning for Bangladesh. Stud- ies of OR have been carried out by individuals, government organizations, and non-government organizations. One of the pioneers in OR research is the International Center for Diarrhoeal Disease Research, Bangladesh (ICDDR,B). However, most studies (Ahmed, Mozumder, & Barkat- e-khuda, 1999; Barkat-e-khuda, Harbison, & Robinson, 1990; Barkat-e-khuda et al., 1994; Sarker et al., 1999; Stanton & Clemens, 1989; EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 262 Operational Performance Analysis of a Public Hospital Laboratory and other ICDDR,B OR Projects) have been conducted by following empirical research steps and few research (Ahsan & Bartlema, 2004; Ahsan & Bartlema, 2008; Khan, Ali, Ferdousy, & Al- Mamun, 2001; Rahman, 1991; Rahman & Smith, 1999) gives attention to modeling techniques of OR, which are very important in analyzing system performance. Rahman (1998) classifies OR studies within MOHFW programs into three groups: diagnostic study, field intervention, and evaluation study. These studies are of situational analysis type and lack a simulation analysis tool, which is important for a complete OR study. Khan et al. (2001) develop a general cost- minimization model of facility location decision for healthcare planning of Bangladesh. Rather than maximizing utilization or minimizing num- ber of deaths, they use a very general social-cost function that combines health outcome measures as well as various cost components. The exercise estimates the number of health centers needed in a region, level of utilization, travel cost and other opportunity costs associated with the utilization of the service by households. The model determines the geographical distance of a health center as the only factor in estimating utilization, but other social and economic factors are not considered explicitly. Rahman and Smith (2000) review the use of mathematical models of location allocation problems for health service development planning of developing nations. Objective of the location allocation problem is to find the best solution of the problems of locating new facilities for example hospitals, ambulance station. In developing coun- tries, because of poor geographical accessibility, basic healthcare facilities do not reach the majority of the population. Moreover, location allocation decisions of healthcare facilities are normally taken by government officials or locally elected leaders or by both based on pragmatic or political considerations and the results are biased and not give the best solution. Ahsan and Bartlema (2008) develop a linear programming model to determine the service mix for cost recovery programs in Bangladesh. The research identifies some areas where user fees can be charged and some cost can be recovered from the system for future functional improvement. The research also considers equity and quality of care issues. In order to have a precise idea about system performance and possible areas of improvement, it is useful to work with some replica of the system. The more realistic the model, the better it will predict the behavior of the real system. Considering the importance and necessity of effective resource planning, this study focuses on rural healthcare systems of Bangladesh and concentrates on simulation study on sub-district level government hospital diagnostic laboratory. The study is performed under the European Union (EU) sponsored Thana Functional Improvement Pilot Project (TFIPP). The objective of TFIPP is to develop an efficient operational system for health services in the country. The aim of the work is to improve the quality of existing health and family welfare services at sub-district level. The input data for the model has been col- lected from the daily operations of a Thana Health Complex (THC) laboratory. The main objective of simulation modeling of a laboratory is to obtain a better understanding of operational efficiency. From simulation study, the resources required to provide existing services and necessary resources and methods for capacity expansion have been analyzed. We further look at how to find solu- tions to eliminate or reduce constraints, a way to improve the process to provide more services, and finally we perform sensitivity analysis of changes in certain decision variables. In the following section we will give a brief idea about the THC and its laboratory operations. Further, we explain research methodology and the simulation model. We discuss simulation results with sensitivity analysis in the next section. In the EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 263 Operational Performance Analysis of a Public Hospital Laboratory last section, we conclude the paper with policy implication and recommendations. STUDY BACKGROUND Thana Health Center (THC) The background of this study is the public health- care system of Bangladesh. The national backbone of primary healthcare is operated by the MOHFW through 398 THCs. Thanas are local government units in sub-district level, which typically have a population in tens to hundreds of thousands. The health delivery system at the thana level consists of a THC organized with comparable medical equipment and personnel, with a facility of 31 beds for indoor patient department (IPD), emergency section, outdoor patient department (OPD), and laboratory or diagnostic laboratory. In Bangladesh, THCs provide healthcare support at no cost or minimum cost to patient. However, because of scarcity of resources and lack of financial support from the Government, cost-recovery issues are being considered by the Government. In search of better healthcare service quality and efficiency, the Ministry of Health and Family Welfare (MOHFW) of Bangladesh is seeking ways to generate adequate and alternative resources for the public health sector. One of the priorities of the MOHFW is to make the existing system sustainable by improving the quality of service facilities through cost recovery and ef- ficient use of human as well as other resources. Under this plan, the government aims to recover some part of the cost from patients which will contribute towards functional improvement of the system (Ahsan & Bartlema, 2008). From previous empirical studies (Stanton & Clemens, 1989; Thomas et al., 1998) it has been found that Bangladesh is a potential candidate for the institution of user fees in the healthcare sector. However, major questions arise as to public will- ingness, whom to charge, service fees, potential services to charge, introduction of cost centers, how to manage funds and lastly who will imple- ment the plan and how it will be implemented. Various studies provide strong evidence that people are willing to pay for different services. Furthermore, it has been found that at present for better service there exist an informal fee business (Killingsworth, 1999; Ruth et al., 2002) among service providers and clients. This money is off the record and taken from the government health service facilities. Even though, it is a moral issue, with the proper policy this money could be used to support the healthcare system. Typically, THCs are located in suburban areas and through the system the MOHFW provides primary healthcare facilities to 85% of the village population (Ahsan & Bartlema, 2004). There are reasons to believe that the THC in reality does not serve the entire thana, but only the popula- tion within a radius of about 10-15km (Ahsan & Bartlema, 2004, p. 470). A typical THC has 50,000 outpatient visits, 2,300 in-patient admissions, and 200 operations a year. In general, a THC has an average of five doctors, six nurses and 31 other staff members. They seem to be quite homoge- neous in their basic characteristics, reflecting the fact that they operate according to fixed norms (Rannan-Eliya & Somanathan, 2003). Demand of using THC facilities are increasing with the development of infrastructure facilities and there are pressure to increase the capacity of the facility Laboratory Operations in THC THC and the laboratory working hours are from 9:00 to 17:00. According to the source of referral, different types of patients visit the hospital labora- tory (Figure 1). Diagnostic tests are conducted on ‘first-come-first-serve’ and equity basis. Patients requiring tests come from OPD and IPD units. Some come with referral, such as local level doctors or paramedics or private clinics. Though patients come from various sources, they follow more or less the same path within laboratory op- EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 264 Operational Performance Analysis of a Public Hospital Laboratory erations. Acute IPD patients for example, do not go to the waiting room. They have test-material taken at bedside and reports are sent to the respec- tive doctor. Usually there are two technicians in the laboratory. The technician registers the test, collects samples, conducts diagnostics tests, and writes and delivers reports to patients. Generally, the laboratory performs four types of tests. On the basis of category these tests are: blood, stool, urine, and sputum. Details of the tests are shown in Appendix. Patients need a single or a combination of tests. Each test requires different treatment times, and uses different re- agents and resources. The fee paid by the patient differs according to the type of test performed. For each test, the time involved to take the sample and to conduct the test is different. There is no appointment system and patients come to the hospital in their own time. Usually they are from remote places and most patients arrive between 11:00 and 14:00. Rural road infrastruc- ture and weather affect patient arrival. Usually, there are two distinct patient arrival patterns, one for peak hours (11.00 to 13.00) and the other for usual patient flow. RESEARCH METHODS Methods of OR help with managing the important shifts in the balance of healthcare (Royston, 1998). OR methods use in healthcare are brainstorming, Delphi, nominal groups, soft system methods, cognitive mapping, morphological analysis, forecasting, scenario analysis; expert system, neural network; mathematical programming, sta- tistical modelling; simulation, system dynamics; multi-criteria decision making, data envelopment analysis, network analysis; etc. Among the above methods, simulation is one of the most commonly used OR approaches, and is regarded by many as the technique of choice in healthcare (Davies & Davies, 1994). Simulation Study in Healthcare Healthcare practitioners need to plan how health system performance can be improved and to con- sider the effects of introducing certain changes. In order to have a precise idea about these effects and to quantify them, it is useful to work in simula- tion to make a replica of the system. Models to replicate a hospital system should reflect the is- sues (Harper, 2002). The more realistic the replica is, the better it will predict the behavior of the real system. With the introduction of graphical interface computing, it is no longer necessary to use sophisticated computer languages in simula- tion. Rather, models of a system can be made by an expert and used by a practitioner, with little training in how to run the model. Application of simulation studies are increas- ing in healthcare system modeling (Sanchez, et al., 2000; Barnes & Quiason, 1997; Baldwin, Eldabi, & Paul, 2004). The technique is popular in health-care because it can handle or incorporate many important features or situations of health- Figure 1. Types of patient’s served by a typical THC laboratory EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 265 Operational Performance Analysis of a Public Hospital Laboratory care sector, such as analysis of uncertainty and variability of different situation, complexity of healthcare organizations, and helping stakehold- ers with a more realistic picture of the situation (Brailsford, 2007; Banks, 1997). The application of simulation in healthcare has become popular and numerous studies report success by using simulation with simulation packages. The technique has widely been used in healthcare capacity and operations planning, and assessment for facilities. Historical research shows that simulation studies were conducted to determine patient flow, staff sizing and planning, resource workloads and utilization, operating room efficiency, number of hospital beds, patient oc- cupancy, decision analysis of location allocation of hospitals and layout of hospital facilities. Detail review of simulation studies in healthcare can be obtained in Fon et al. (2003), Jun, Jacobson, and Swisher (1999), Brailsford (2007), and Siassiakos, Ilioudi, and Lazakidou (2008). The application of simulation modelling in the healthcare sector is not widespread when compared to other sectors such as military, manu- facturing and logistics (Eldabi, Paul, & Young, 2007; Baldwin et al., 2004; Sanchez et al., 2000; June et al., 1999). There are also concerns regard- ing application of simulation methods, simulation methods are less instrumental in addressing the multi-faceted challenges healthcare is facing at present and more importantly in the future (Kuljis, Paul, & Stergioulas, 2007). Literature shows that the application of simulation studies to analyze health facilities and resource planning in a developing country is rare. To our knowledge for Bangladesh there was no such research con- ducted earlier. Under the TFIPP project, we take the first attempt to conduct simulation application in healthcare planning and decision making for Bangladesh. The motivation behind this study is to analyze the operational performance of a THC laboratory by using a simulation tool. Simulation Packages and MedModel® Software The wide use of the object-oriented idea in simu- lation software design enables analysts to model a system without writing a single line of code. Numerous companies are developing general- purpose software packages incorporating the latest technologies. A detail survey can be obtained from OR/MS Today website (OR/MS Today, 2007). Some software packages are specifically aimed for the healthcare industry, such as ARENA, AgenaRisk, Analytica 4.0, AnyLogic, ExtendSim OR, Lean-Modeler, MedModel Optimization Suite Micro Saint Sharp, SimCad Pro, SIMUL8 and Professional (OR/MS Today, 2007; Caroll, 1996; Keller, 1994). These packages use anima- tion in simulation to present to decision-makers the actual operation of the model and system and, in essence, to sell the insights of the system. MedModel is owned by ProModel Inc. Be- ginning with inception in 1993, the software is specially designed to be simple to use and is customized to the needs of healthcare practitioners and planners (Denny, 1997). The software helps to identify new ways to improve patient care, enhance efficiency, optimize staff scheduling, design efficient facility layout, and save money. Details about MedModel can be seen from the software website, (MedModel, 2009) Data Collection With the aim of developing a simulation model for the laboratory operations of THC, data have been collected from two THCs located in Baker- gonj sub-district of Barisal district and Rajapur sub-district of Jalokati district. These hospitals are within the TFIPP project areas. It is assumed that these hospitals represent the other hospitals of the country, as all THCs are using the same service model and their facilities are very similar regard- less of the location of the THC. To collect real life operational data for the model, two monitoring EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 266 Operational Performance Analysis of a Public Hospital Laboratory assistants stayed within the THC during the proj- ect period of a couple of months. Moreover, the author visited the hospitals to observe first hand the laboratory operational processes and to assist in the data collection process. Collected opera- tional data included arrival pattern, waiting times, types of tests, duration of examinations, analysis, report writing, and handover. Over two month’s period, we have collected the data to identify the laboratory patient flow system, laboratory test sample arrival pattern, recorded the number of laboratory tests, processing time at each station. We determine an average arrival pattern and aver- age service time for different types of test. Within the three months period we have collected around 70 sample data. From collected data, we find that patients come for either a single or a combination of tests. We consider each test as an entity. Time distributions from empirical data were used as data input. Arrival pattern distributions are fitted to these data to provide parameters which can be altered in simulation. MODEL DEVELOPMENT For laboratory operations of the THC, a simula- tion model is developed by using MedModel. The laboratory is a single facility location in the model; where test order registration, waiting time, sample collection, sample preparation, analysis, and report collection tasks are conducted routinely. The tasks are consecutive activities which are modeled separately, including time to get from one to another. The ingredients of simulation exercise are time data on entries, exits, activi- ties, time spent on activities, number of patients and movements within the system. Input data is randomly distributed, so consecutive simulation runs will not give the same result. With the visual interface of MedModel the laboratory operation model is developed. In brief the operational steps of the laboratory modeled in MedModel are shown in Figure 2. Operational process steps and entity (patient, test and docu- ment) movement logic are set according to real work flow. Locations, resources, and entities are elected graphically. Process parameters include single shifts, room capacity, downtimes, and resource and equipment capacity. It is assumed that at any given moment a maximum of 10 samples can be stored for analy- sis in the location. The location states are divided into two parts. Some of them are of multiple ca- pacities, and others of single capacity. The wait- ing room, for example, can be occupied by a maximum of 5 patients, but registration takes place at the desk one-by-one. Other multiple capacity locations are sample collection and report collection. The time spent to move within the laboratory is limited. RESULTS AND ANALYSIS Simulation Run We ran the simulation model for different oper- ating periods and observed the results in terms of location, resource utilization, and by entity (type of test). Simulation results are summarized in tabular form (Table 1 and Table 2). Table 1 Figure 2. Operational steps in a laboratory EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 267 Operational Performance Analysis of a Public Hospital Laboratory gives a summary of location utilization facts for 20 replications. The second column indicates ‘capacity’ as the maximum number of entity that can be handled for a given number of working hours. In the third column, ‘total entries’ implies the average and 95% confidence interval of total served tests or results over the day for which the model was run. The fourth column shows average and confidence interval data when a location was wholly idle and there were no tasks. The ‘percent utilization’ given in the final column means the percentage of the total capacity which was oc- cupied on average during the simulation duration. On test basis, firstly the simulation model is run for an 8-hour day and found laboratory per- forms 28 tests per day. The average utilization of laboratory technicians was 85%. Since input pat- terns are random, obtained results might be for an atypical outcome. To obtain a better picture of laboratory per- formance the model is further replicated for a hypothetical month (equivalent to 20 working days). Simulation results were obtained for hu- man resources and resource working status. It was found that in a day, lab technicians were used 68 times for certain services. Each service took approximately 12 minutes. The utilization of resource persons was 84% on average. However, it was at a cost of more waiting time (see column 4 of Table 2), means more queue for the patient and sometimes the system was full and there were no room for new patient. These revels the basic concept of queuing theory that when there are high utilization rate there will be a problem of high queue length. Table 1. Location status Location name Capacity Total entries mean; (confidence interval) Full-empty or idle mean; (confidence interval) % utilization mean; (confidence interval) Waiting room 5 9.85; (5.6, 14.0) 14.91; (8.0, 21.8) 80.95; (75.2, 86.7) Registration 1 15.95; (11.3, 20.6) 16.66; (12.25, 21.0) 83.34; (78.9, 87.7) Sample collection 2 12.65; (8.4, 16.9) 36.15; (8.7, 63.6) 42.52; (17.0, 68.0) Report preparation 1 9.55; (5.7, 13.3) 90.51; (77.4, 103.6) 9.49; (0, 22.6) Analysis 10 24.9; (18.9, 30.8) 9.27; (4.4, 14.1) 72.67; (53.5, 91.8) Report collection 2 15.35; (10.0, 20.6) 64.02; (41.3, 86.8) 27.12; (8.1, 46.0) Table 2. Entity (test status) in minutes Entity name In system (mins) In move logic (mins) Wait for resources (mins) In operation (mins) Blood test – routine 101.94 22.22 19.71 60.0 Blood test- special 194.63 25.92 55.27 113.43 Stool 118.86 36.54 40.65 41.57 Sputum 193.35 20.28 65.11 107.85 Urine 155.12 27.21 44.25 83.65 Blood + Urine private 139.00 14.51 27.3 97.1 Urine-private referral 116.00 2.13 43.66 70.2 Blood-private referral 225.65 7.87 71.17 146.6 Malarial parasite 203.40 14.5 92.15 96.73 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 268 Operational Performance Analysis of a Public Hospital Laboratory The output Table 1 for 20 replications, demon- strates that 25 tests were investigated (in analyze section) on average in a month, with 95% con- fidence interval range of 19 to 31. This implies an average 73% utilization rate, with a standard deviation of 10%. At sample collection point, 13 samples are collected on an average day, with confidence interval of 8.4 to 16.9. Report col- lection takes place 15 times, and the system was empty 64% of the time. Further, Table 2 shows that most tests stay within the system for 100 to 225 minutes. The tests are processed an average 54% of the time for some value addition and the rest of the time wait for resources, and move from one place to another. The average amount of time spent for analysis of each test sample is between 20 to 30 minutes per technician. This is based on empirical data and replicates actual performance figures. On a sample basis it can be seen that a special blood test stays in the system for 194 minutes. It is in operation for about 113 minutes (58.28% time), with 55 minutes (28.2% time) of waiting for the resource, and 42 minutes (21.5% time) of movement. VALIDATION Validating a model is the process of substantiating the model within the domain of applicability, and testing whether the model is sufficiently accurate for intended application. It is important to deter- mine the degree to which a model corresponds to the real system, or at least accurately represents model specification documents. During the process of model building the model structure (i.e., the logical relationship between the processes) was kept as close to the real system as possible. Moreover, output from the model was compared to real system data to verify the model. Real system data is obtained from the real patient flow pattern within the subsystems (Table 3). The demands were found from historical data collected by monitoring assistants and the TFIPP. From the model it is found that 25 tests can be performed per day considering the system parameters used. Taking the average over all 55 THC’s of the TFIPP project area, 85% of all THC’s have daily perfor- mance levels below 25 tests (Table 4). Overall, we can conclude that the model replicates actual performance well. From historical data (Table 3) it was found that on average (in Bakergonj) a laboratory per- formed 293 tests per month. The data is on a quarterly basis and mean is arithmetic mean. The numbers of OPD visits during Jan-March quarter are almost half of other quarter data. This number does not influence the overall number of test visits. For a 20 working day month the average numbers of tests performed daily are 15, i.e., 54.55% of all THC’s have daily performance levels below 15 tests. Sensitivity Analysis We find that the system performance is usual in terms of serving the patient and resource utiliza- tion. Considering the number of served patient, the system is performing above the average. There are scopes to increase the capacity with additional demand. The laboratory is performing the tests Table 3. THC performance data for four quarters July-Sep Oct- Dec Jan-March April-June Annual Monthly (aver- age) OPD patient visits 10210 10170 5706 13730 39816 3318 IPD 488 587 468 911 2454 205 Laboratory tests 1285 497 675 1061 3518 293 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 269 Operational Performance Analysis of a Public Hospital Laboratory it is supposed to, but time is wasted by clients waiting to be served and also there is room for further improvement. These days’ public sector facilities are facing competition from private sector laboratories. If public sector facilities can offer similar or bet- ter service at less cost and with better quality, there will be more customers. A separate TFIPP survey found that a good number of patients do to come to the laboratory because of long wait- ing time and bureaucracy. They are well off and they are going to avail the private facilities and sometimes they pay unofficial fees to bypass the system complicacy. Considering the market and opportunities, several ‘what-if’ options are considered to improve efficiency of the system. Several scenarios have been analyzed and compared with the normal con- dition obtained from 20 replications. The scenarios are such as increasing one key resource (option 1), scratching off administrative tasks from the laboratory technician job (option 2), offering an option for afternoon paying patients (option 3), and a choice for morning paying patients (option 4). The model has been adjusted for the scenarios and discussed the rationales of the options. A brief comparison of the four scenarios with the normal condition can be seen from Table 5. Option 1: Increasing One More Resource Adding one laboratory technician, and introduce no further changes in the system, the number of performed tests increases to 34 per day. This is an increase of about one third per month at the cost of one laboratory technician’s salary. In terms of income, there is an increase of nearly 512 taka per day, which is considerable, since in our initial scenario, total cost recovered was 348 taka per day. Human resource efficiency remains unaltered, as percentage of utilization stays in the low eighties (82%). Under normal condition it is 84%. This implies that some improvements would be achieved if one laboratory technician were added to increase the team to 3 members. Table 4. Laboratory performance data under TFIPP Bin range (Number of tests) Test frequency Cumulative percentage 3 9 16.36 6 4 23.64 9 7 36.36 12 7 49.09 15 3 54.55 18 7 67.27 21 7 80.00 24 3 85.45 27 5 94.55 30 1 96.36 33 1 98.18 36 0 98.18 More 1 100 Table 5. Summary of resource utilization and cost recovery for different scenarios Variables Total entries at analysis Total entries at report collection % of Manpower utilization Cost-recovery (Taka) Normal condition 25 15 84.5 348 Increase one resource 34 22 82.1 512 Job contraction 29 16 83 380 Afternoon paying patients 27 18 83.8 416 Morning paying patients 24 16 90 635 EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 270 Operational Performance Analysis of a Public Hospital Laboratory Option 2: Scratching Off Administrative Tasks The strategy of job-contraction means laboratory technicians concentrate on their specialized pro- fessional work and eliminate the tasks of registra- tion and other secretarial jobs. The technicians do not focus on paperwork and these tasks are assumed to be carried out elsewhere by adminis- trative staff. Overall, this strategy increases the number of tests performed from 25 to 29. The income increases from 340 taka to 380 taka per day (s.d.60). Human resource utilization remains constant at 83%. The time gained in removing administrative work from the task description is apparently not used to improve on other perfor- mance. It is clear that the improvement achieved by scratching off administrative tasks is negligible. The administrative burden does not appear to be the main bottleneck. Option 3: Choice for Afternoon Paying Patient A TFIPP field study identifies that of the total clients, 20% are the wealthiest i.e. the most afflu- ent group. We can assume on the basis of poverty indicators that this population group will be able to pay extra for services provided. We try out the effectiveness of charging fees and offer a special time during the off-peak period which is in the afternoon (2pm to 4pm). We have them contrib- ute an amount which is double the normal price. In this fashion certain exclusivity is guaranteed. If a separate treatment period for paying patients in the afternoon can be introduced, they will receive a high quality of care, with more time dedicated to each patient. The time involved in taking the sample is unaltered, but there is no wait at registration or before the test starts. Also, report collection is done immediately, and time spent on report taking (explaining results to the patient) increases. This is based on empirical information, which shows that on average the more wealthy patients currently receive better attention. The simulation is thus following actual practice, and not introducing any extraneous change. These patients pay a standard rate twice that of morning rush hour patients. Simulation results show that without any further changes in the system, the total number of tests performed during a normal working day increases from 25 to 27, and report collection from 15 to 18. The number of private tests increases from 2 to 3 per day. Cost recovery increases to 416 taka, from the previous 348 taka per day. Of all costs recovered, 20% are from afternoon paying patients. Human resource utilization is 84%. These are worthwhile improvements without extra costs to the system and are therefore worthy of consideration. Option 4: Choice for Morning Paying Patient In order to try out one last scenario, a period for private paying patients in the morning hours (from 9:00 to 11:00) is introduced. Usually, during 9-11 AM there is less patients visit to the laboratory. In this case 24 tests are performed and 16 reports are collected. Utilization percentage remains similar to normal conditions. The generated income goes up to 635 taka per day. The human resource utili- zation increases to 90% and the number of times resource persons are used for any activity increases to 75. There is some financial gain amongst private tests. This goes against the principle of equity, but provides extra income and better utilizes human resources. Overall, the existing manpower (two resources) can handle no more than 25 to 30 tests per day. From the analysis, it can be seen that options of afternoon and morning paying patient provisions (options 3 and 4) are more attractive in terms of resource utilization, cost recovery and total number of tests performed. In terms of resource utilization, the option of morning paying patient functions near optimal conditions. EBSCOhost - printed on 10/25/2020 2:38 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 271 Operational Performance Analysis of a Public Hospital Laboratory Further, ANOVA analysis is conducted and checked whether model’s responses (resource utilization and cost recovery) are not dependent on the others across the options. Our null hypothesis is ‘across the options resource utilization does have an effect on cost recovery’. Analysis from Table 5 shows that null hypothesis is not true (test statistics: 51.45> Fcrictical: 5.31), i.e., there
are differences among resource utilization and
cost recovery across the options, and they are
not dependent on each other. Details of ANOVA
results can be seen from the Appendix III.
CONCLUSION AND POLICY
IMPLICATIONS
The simulation exercise provides a detailed un-
derstanding of laboratory operations and helps
identify limitations of the current system. The
bottleneck in improving performance is identified
as incapacity to satisfy demand. This implies that
when demand is high, patients have to either go
elsewhere or suffer long waiting times, unless
they otherwise gain priority.
The simulation has made clear that the labo-
ratory is working well as a unit. Throughput is
acceptable, human resources are utilized quite
adequately as far as time is concerned, but produc-
tivity is low since no more than 2 staff members
can treat 25-30 tests per day. The laboratory is
simply too small to satisfy demand. Under cur-
rent practice, the system is covering the demand
insufficiently. The laboratory operations need to
change the arrival pattern of patients.
There is less room for improvement unless
worker productivity can be increased. One pos-
sible option of improving worker productivity
can be training the laboratory technician. The
recommendation is to streamline operations as
much as possible, and prioritize according to
government health policy criteria. These might
be to give the poor or women and children higher
priority, or on the contrary create special services
for the more privileged. With the development of
human resources it is necessary to improve the
technical standard of the laboratory with better
equipment to speed up services. However, all sug-
gestions are related to budget availability which
is a serious constraint of any developing country
health system.
This study is an illustration of what is pos-
sible with simulation in developing country’s
healthcare planning. What has been done for the
laboratory can of course be repeated for any other
THC service? The next step can be to simulate the
entire THC, and to draw conclusions on how it is
possible to improve the functionalities as a whole.
Potentially, simulation is a useful tool for deci-
sion support. The attractive thing about simulation
is that it is intuitively easy to understand. It is
simple to apply with currently available soft-
ware, although some basic computer application
knowledge is required for data input and model
construction. In simulation the model can be
repeated many times under different conditions,
before real field trials are carried out. Expanding
the use of simulation for health system planning
in Bangladesh and other developing and emerging
economies is recommended. However, imple-
mentation depends on government decisions that
are often influenced by political considerations.
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APPENDIX
• Laboratory tests performed
• Patient test categories
• ANOVA results
I. Laboratory Tests Carried Out at THC
• Blood tests
◦ TC, DC, ESR, Hb
◦ Serum Bilirubin
◦ ASO Titre
◦ Widal Test
◦ Blood Glucose, Blood Grouping(ABO)
◦ MP
◦ VDRL
◦ Hbs Ag
◦ Serum Cholesterol
• Urine tests – Urine R/E, Urine for PT
• Sputum Tests
• Stool Tests
For practical reason these are grouped into two types, special tests and routine
Special Tests
The special tests are:
1. Urine for PT
2. For Blood
◦ Serum Bilirubin
◦ ASO Titre
◦ Widal Test
◦ Blood Glucose
◦ Blood Grouping(ABO)
◦ VDRL
◦ Hbs Ag
◦ Serum Cholesterol
Routine Tests
1. TC, DC, ESR, Hb
2. Urine R/E
3. Stool R/E
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Operational Performance Analysis of a Public Hospital Laboratory
4. MP
5. Sputum for AFB
II. Patients Test Categories
1. Client for Blood test
2. Client for Stool test
3. Client for Sputum test
4. Client for Urine test
5. Client for Blood and Stool test
6. Client for Blood and Sputum test
7. Client for Blood and Urine test
8. Client for Stool and Sputum test
9. Client for Stool and Urine test
10. Client for Sputum and Urine test
11. Client for Sputum, Stool and Urine test
12. Client for Sputum, Stool and Blood test
13. Client for Blood, Stool and Urine test
14. Client for Blood, Urine and Sputum test
15. Client for Sputum, Blood, Stool and Urine test
III. ANOVA Result Summary
This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 4,
edited by John Wang, pp. 22-38, copyright 2010 by IGI Publishing (an imprint of IGI Global).
SUMMARY
Groups Count Sum Average Variance
Utilisation 5 423.42 84.684 9.62128
Cost recovery 5 2291 458.2 13548.2
ANOVA
Source of Variation SS df MS F P-value Fcrit
Between Groups 348785.5 1 348785.5 51.45156 9.49E-5 5.317645
Within Groups 54231.29 8 6778.911
Total 403016.8 9
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277
Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 18
DOI: 10.4018/978-1-4666-0044-7.ch018
INTRODUCTION
“Only an inventor knows how to borrow,
and every man is or should be an inventor,”
Ralph Waldo Emerson.
It has long been recognized that service custom-
ers have a dual role, being both consumers and
producers (e.g., Chase, 1978; Lovelock & Young,
1979; Mills & Morris, 1986). The production
role of the service customer is often referred to
as “co-production.” Internet-based services are
no exception and often require higher levels of
Steven Walczak
University of Colorado at Denver, USA
Deborah L. Kellogg
University of Colorado at Denver, USA
Dawn G. Gregg
University of Colorado at Denver, USA
A Mashup Application to
Support Complex Decision
Making for Retail Consumers
ABSTRACT
Purchase processes often require complex decision making and consumers frequently use Web informa-
tion sources to support these decisions. However, increasing amounts of information can make finding
appropriate information problematic. This information overload, coupled with decision complexity, can
increase time required to make a decision and reduce decision quality. This creates a need for tools that
support these decision-making processes. Online tools that bring together data and partial solutions are
one option to improve decision making in complex, multi-criteria environments. An experiment using a
prototype mashup application indicates that these types of applications may significantly decrease time
spent and improve overall quality of complex retail decisions.
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278
A Mashup Application to Support Complex Decision Making for Retail Consumers
co-production than in traditional services (Xue,
Harker, & Heim, 2005). While effective IT solu-
tions clearly provide benefits to internal processes,
using IT applications in co-production activities
has the potential to provide effective and efficient
support to both the service customer and the
provider. One way to do this is to provide online
services that support decision-making needs of
consumers.
Many consumer purchases require complex
decision making and customers often use online
sources for the information needed to select the
product or service that best satisfies their needs
(Oz, 2007). This information includes product
specifications, reviews and ratings, availability,
and pricing. Some consumer purchases require
the balancing of multiple criteria and require co-
ordinating purchases from several vendors (e.g.,
purchasing an automobile may involve tradeoffs
between the cost of vehicle, fuel efficiency, ve-
hicle safety, insurance costs, financing options,
non-dealer options, such as GPS or satellite radio
add-ons, extended warranties, and maintenance
service contracts). The overload of information
available from the Web makes finding and using
reliable information for multi-criteria decision
making problematic (Selamat & Selamat, 2005).
Search engines and other Web search tech-
niques provide consumers with access to large
amounts of information; however, the sheer
volume of data available can lead to information
overload and an inability to apply the information
available to the decision-making task. Consumers
desire information access during their decision
making and such information access produces a
more satisfied consumer (Kwon, 2006). However,
simply finding appropriate information is not suf-
ficient to enable consumers to adequately evalu-
ate solutions to multi-criteria decision problems
(Spira, 2006).
One way the Web is evolving to cope with
the increased volume of information is through
the development of Web 2.0 applications (e.g.,
wikis, blogs, social bookmarks and mashups.)
Web 2.0 applications facilitate collaboration and
information sharing (O’Reilly, 2005). These new
applications are database-driven meaning they are
data intensive and the more data they contain the
more valuable they become (McFedries, 2006).
Web 2.0 applications provide a more interac-
tive web experience and allow a variety of users,
including retailers, manufacturers, consumer rat-
ing entities, industry experts, and consumers, to
share in the generation, organization, distribution,
and utilization of knowledge. These applications
have the potential to fundamentally change the
way the Internet is used, allowing for new busi-
ness models based on value-added services. These
systems can provide improved information and
decision support to enable consumers to make
well informed decisions more quickly than with
traditional information sources or older standard
Web technologies.
This research examines the use of a decision
support mashup to facilitate and enhance multi-
criteria consumer decision making. The mashup
utilizes wiki-based knowledge repositories to
improve the information content available for the
consumer decision-making process. The primary
contribution of our research is the measurement
and analysis of actual benefits provided by a
mashup. While consumer based mashup appli-
cations have increased significantly over the last
two years (Fichter & Wisniewski, 2009), these
applications are developed to satisfy situated con-
sumer needs and may evaluate perceived benefits.
Enterprises considering adopting mashup based
decision support applications need to understand
the realizable benefits to decision makers, includ-
ing any reduction in the time required to make a
decision and any resulting improvement in the
quality of the decision.
An exploratory research experiment is con-
ducted by implementing a prototype mashup
application for designing a media room. This
purchase decision involves integrating expert in-
formation, product specifications, quality ratings,
and pricing and availability of the equipment from
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A Mashup Application to Support Complex Decision Making for Retail Consumers
multiple vendors. In the experiment the media
room required a decision involving the following
criteria: budget, desired audio quality, desired
video quality, room size, anticipated audience,
viewing classification, and compatibility of the
equipment with physical requirements. The ap-
plication is evaluated in an experimental setting
utilizing a survey. The benefits of mashup decision
support application for consumers supported by
this empirical evidence are discussed.
BACKGROUND AND RESEARCH
HYPOTHESES DEVELOPMENT
Mashup Research
The concept of Web application mashups is
relatively new with only a handful of applica-
tions available as recently as 2005 (Fichter &
Wisniewski, 2009). Borrowing from the radio
and video technique of mashing together multiple
tracks to produce a new but still familiar song,
the concept is applied to the Web when multiple
information sources are “mashed” together to
enable a much more comprehensive solution to
multi-criteria decision-making problems (Oren et
al., 2007). Mashups allow end-users to combine
information, knowledge, user interface widgets,
and APIs from a variety of sources, and integrate
them into customized, goal-oriented applications
(Albinola, Baresi, Carcano, & Guinea, 2009; Bala-
subramaniam, Lewis, Simanta, & Smith, 2008).
Due to the emerging popularity of mashup
applications a great deal of research is currently
being conducted in the development of novel
applications and frameworks. For example, there
have been a number of articles examining how
to integrate heterogeneous data into a common
mashup interface (e.g., Murthey et al., 2006;
Thor, 2007). This is similar to the research done
on data integration addressed in prior IS litera-
ture (e.g., Ullman, 1997; Lenzerini, 2002) with
a focus on integrating heterogeneous XML and
SOAP resources (Balasubramaniam et al., 2008).
Other recent research examines standardized
infrastructure frameworks to enable mashup ap-
plications to integrate with existing data sources
and information flows (Loreto, Mecklin, Opsenica,
& Rissanen, 2009; Yu, Kim, Shin, & Jo, 2009).
A second area of research on mashups investi-
gates what data should be combined in a mashup
application. Much of this research is focused on
the algorithms and technologies that can be used
to locate relevant information resources for use
in a mashup application. For example, research-
ers have used artificial intelligence techniques to
locate and identify relevant information resources
to be used in mashup applications (e.g., Tatemura
et al., 2007; Blake & Nowlan, 2008). Another
example is the access and data mining of XML
databases (Sun & Li, 2009).
Many end-user mashup applications already
exist, with over 4300 reported by Programma-
bleweb (2009). Early mashup applications focused
primarily in travel and map-related applications
(mashworks.net, 2007) and this trend appears
to be continuing (Loreto et al., 2009; Yu et al.,
2009). However, research evaluating the benefits
of mashups as a multi-criteria decision-making
tool is nonexistent. This area is the focus of our
research study.
Mashup Applications and
Multi-Criteria Consumer
Decision Problems
Multi-criteria purchase decisions range from very
simple to very complex as products and services
interact with technology and begin to span different
product or service classes and range across differ-
ent businesses (Froehle & Roth, 2004). Most selec-
tion problems require satisfying multiple criteria
(Malakooti, 2000). Furthermore, multi-criteria
problems are compounded by: time pressure to
make the decision, lack of standardized data,
presence of non-monetary or intangible attributes,
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A Mashup Application to Support Complex Decision Making for Retail Consumers
and limited attention and information processing
capabilities of decision makers (Ahn, 2003).
As decision making becomes more complex,
more functionality is necessitated by decision mak-
ers and mashup applications may provide this com-
plex functionality (Obrenović, Gašević, & Eliëns,
2008). Mashup applications have the potential to
provide decision support in an integrated manner
bringing relevant information into a single loca-
tion, as opposed to the decentralized architecture
of traditional websites. Mashup applications utilize
and synthesize a variety of existing and possibly
unused information, domain models, and decision
support processes. Publicly available services may
be incorporated into mashups to extend the current
mashup’s functionality (Balasubramaniam et al.,
2008). Each of these components is integrated into
a single online location, typically accessible over
the Web or through a company portal.
In order for a mashup application to work it
must be able to locate information of interest from
relevant information resources and combine or
“mash up” that information to provide the infor-
mation in a more useful format to users. The most
common source of information for mashups comes
from the Web itself. For example, Amazon.com®
makes its catalog available via web services so that
its 800,000 marketing affiliates may more easily
sell products for Amazon (Manes, 2003). Dollar
Rent-A-Car® has exposed its reservation system to
provide external partners with information on the
availability and price of Dollar cars and to allow
them to easily rent Dollar cars (Chen, Jeng, Lee, &
Chuang, 2008). As companies make information
available on the Web there is an opportunity for
other businesses to combine that information in
innovative ways to provide value-added services
to consumers.
Early research on mashup applications has
indicated that mashups will foster business inno-
vation (Dornan, 2007), enable better response to
competition, improve customer service (Gaudin,
2007), and increase the scope and utility of
existing applications and services (Linthicum,
2007). Mashup applications are demonstrating
the efficacy of integrating organizational specific
applications with other Web resources such as a
mashup application that queries the local power
grid to determine when excessive demand is oc-
curring and automatically adjusting various energy
consuming features within a building or group of
buildings (Sinclair, 2007). The incorporation of
business logic and business specific applications
into a mashup is the most complex type of mashup
(over presentation and data mashups that simply
display data in a unified view or perform some
combination on the data prior to presentation)
(Fichter & Wisniewski, 2009).
Mashups may be combined with wiki technolo-
gies to allow information to be incorporated into an
integrated knowledge repository that may be easily
updated to respond to changes in the information
environment. Research on wikis has focused on
the use of wikis as a knowledge repository in such
domains as encyclopedias (McMullin, 2005) and
customer relationship management (Wagner &
Majchrzak, 2006). One stream of wiki research
has found that wikis are useful for question an-
swering tasks (Jijkoun et al., 2004; Lita, Hunt,
& Nyberg, 2004). This suggests that wikis might
provide an appropriate knowledge organization
for a mashup decision support service to be used
by retail consumers.
While the concept of a mashup appears to be a
promising innovation, both within the organization
and externally for consumers, no prior research
has been performed investigating the efficacy
and benefits of mashups as a decision-making
aide (Venkatesh, Morris, Davis, & Davis, 2003).
Research on the adoption of electronic tech-
nologies by consumers (Song, Koo, & Kim,
2007; Tsikriktsis, Lanzolla, & Frohlich, 2004) has
largely followed a Technology Acceptance Model
(TAM) methodology (Davis, 1989; Venkatesh et
al., 2003). TAM proposes that both the perceived
ease of use and perceived usefulness drive adop-
tion of technology. In their co-production activi-
ties consumers perform this cost (ease of use) /
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A Mashup Application to Support Complex Decision Making for Retail Consumers
benefit (usefulness) analysis. Prior research in
technology-enabled decision making focuses on
the several specific usefulness factors. Gao, Wang,
Xu, and Wang (2007), Haubl and Trifts (2000),
and Swaminathan (2003) focus on perceived
confidence in the decision, knowledge acquisition,
and quality of the decision. While not specific
to the consumer decision-making task, Seiders,
Voss, Godfrey, and Grewal’s (2007) SERVCON
model provides insight into ease of use factors
for service customers.
Research Hypotheses
A mashup application has the potential to provide
several direct benefits, including:
• Guiding exploration, discovery, refine-
ment, and articulation of decision-making
criteria.
• Facilitating solution of multi-criteria deci-
sion problems.
• Enabling knowledge acquisition by users
that may improve future decision making
and may serve to increase the perceived
trust in the developed solution.
• Providing current pricing and product
availability information without potential
bias.
Ultimately though, the actual and measurable
benefits of a mashup multi-criteria decision-mak-
ing tool are in the reduced time it takes to acquire
the knowledge necessary to make the decision and
in the resulting improved quality of the decisions
made. Both time and decision quality are direct
measures of the efficiency and effectiveness of
the co-production role of the retail consumer.
H1: Use of the mashup application will decrease
the actual time (TIME) spent completing
a multi-criteria decision-making problem.
H2: Use of the mashup application will improve
the quality (QUAL) of the final decision.
There are, however, perceptual measures of
efficiency and effectiveness. That is, the decision-
maker may believe that making a decision was
easy to make or believe that a very good decision
was made. Moreover, these perceptual factors
also help lead to adoption and continued usage
of technology (Venkatesh et al., 2003) as well
as engender customer trust and willingness to
transact with a specific service provider or vendor
(Gregg & Walczak, 2006). Among the earliest
identified benefit to technology-enabled consumer
decision making was perceived confidence in the
decision (Gao et al., 2007; Haubl & Trifts, 2000;
Swaminathan, 2003). Consumers are unlikely to
use (or re-use) a technology unless they believe
they have made good decisions.
H3: Use of the mashup application will improve
the perceived confidence (CONF) in the
final decision.
The ease of finding information has a sig-
nificant impact on user utilization (Diaz-Galiano,
Martin-Valdivia, & Ureña-López, 2009) and per-
ceptions on ease of use (Davis, 1989; Venkatesh
et al., 2003). Ease of finding information is akin
to Seiders et al.’s (2007) convenience constructs,
which are related, to re-purchase and positive
word of mouth intentions.
H4: Use of the mashup application will improve
the perceived ease of finding information
(EASE).
Prior research has evaluated similar decision-
making technology benefits, but in an isolated
manner and only for other non-mashup decision
support technologies. The research presented in
this article attempts to measure both the actual
and perceived benefits to multi-criteria decision
making from the innovative mashup technology.
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A Mashup Application to Support Complex Decision Making for Retail Consumers
RESEARCH METHODOLOGY
The present research involves the development
of a prototype mashup decision support tool tai-
lored to the decision-making task of outfitting a
media room. Figure 1 illustrates the multi-criteria
decision-making architecture used for this tool.
Specific constraints or sets of constraints will
drive the information needs and decision-making
processes for the mashup application. Following
the development of the prototype mashup tool an
exploratory experiment is conducted that com-
pares the decision-making behavior, perception,
and quality of two subject groups, one using the
mashup tool and one using a traditional web-
based search.
Mashup Prototype Development
The design of a home media room was selected
as the multi-criteria decision-making problem for
the prototype because of the numerous decisions
and criteria including: video needs (e.g., type,
quality, viewing angle and distance, etc.), audio
needs (e.g., type, quality, etc.), room utilization
(e.g., home theatre, entertainment, mixed usage,
etc.), room size and shape, budget, construction
possibilities, furniture (e.g., type, arrangement),
and ambient lighting and light control, installa-
tion, among others. There are also interactions that
must be considered such as room size affecting
the optimal size television or projection system,
creating a complex multi-criteria decision-making
problem.
The prototype mashup application used in
the experiment considers a smaller subset of the
full decision problem to enable subjects to utilize
the prototype in a timely manner and to enable a
more straightforward evaluation of the results. The
media room design mashup prototype included
selection of multiple audio and visual compo-
nents, which included the interaction between
these components, subject to budget and room
size constraints.
The goal of mash-up applications is to provide
a Web-based resource that combines existing
content, data or application functionality from
multiple sources and allow users adapt those
Figure 1. Multi-criteria decision mashup architecture
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283
A Mashup Application to Support Complex Decision Making for Retail Consumers
resources to meet their individual information
centric and situational application needs (Hoyer
& Fisher, 2008). The mashup prototype utilized
for this experiment allows users to combine do-
main specific information from journal articles,
commercial websites, third party product review
sources (1touchmovie.com, 2007; Consumer
Reports, 2007; ITU, 2006; Katzmaier, 2007), and
interviews with media room experts with current
video and audio component prices and customer
ratings extracted from three online stores – Best
Buy®, Circuit City®, and Ultimate Electronics® – to
facilitate decision making that satisfies a budget
constraint. The media room design mashup pro-
totype also combines the application functional-
ity of a wiki, used to organize data from offline
sources as well as data extracted from media room
information web sites, with a more traditional rule
based system, providing users access to decision
rules from a variety of expert sources. The abil-
ity of the media room mashup to automatically
download current inventory and prices from a
variety of retailers mimics similar capabilities in
e-commerce shopping agents (Gregg & Walczak,
2006) and may also provide a product list that is
unbiased since the mashup application is collect-
ing information for uniform presentation from a
variety of providers.
An important aspect of mashups is that they
allow users to adapt available information and
application resources to meet their individual
information centric and situational application
needs. This was enabled in the media room
mashup in a variety of ways. The media room
design mashup application does more than simply
recommend products. Profiling and preference
elicitation is used to enable subjects to discover or
refine previously unarticulated decision criteria.
The preference elicitation process allows mashup
users to select the order of information presenta-
tion as well as the types of information that is
used as a part of the decision making process.
Prior research (Malakooti, 2000) has shown that
preference elicitation is beneficial in producing
higher quality decisions in multi-criteria decision
problems. As an example of preference modeling
in the media room design mashup application, one
of the questions asked of a subject is if they feel
video or audio quality is more important, which
in turn adjusts the recommended budget expendi-
tures for the system components to enable higher
quality audio or visual components based on the
subject’s response and also impacts the types of
components recommended. This type of user
modeling has been found to be beneficial in prior
research (Xiao & Benbasat, 2007), especially when
the decision maker is less familiar with product
or service attributes.
The media room design mashup utilizes deci-
sion tree logic to determine the product charac-
teristics that best meet the subject’s needs based
on the preference elicitation and recommends
products with the appropriate characteristics. The
decision tree logic is analogous to the mashup of
business processes and business logic discussed
in Background section. Subjects may modify their
decision profiles and preferences at any time re-
flecting changes in business logic and the mashup
application will automatically adjust its reasoning
to satisfy the newly established values for the
decision-making constraints. Such modifications
may include increasing or decreasing the budget
to see a wider or narrower selection of system
components that satisfy the current constraints.
Information resources incorporated into the
mashup application are used to develop the deci-
sion rules and to provide the product options from
which subjects may choose. This same informa-
tion is also exposed to the subjects via the wiki
knowledge repository. Similar to the explanation
facility in most expert systems (Smedley & Sutton,
2007), background knowledge on audio/visual
components and media room design is linked to
the preference elicitation portion of the mashup
application. In addition to serving as a knowledge
acquisition tool for decision makers, the presence
of constraint information and reasoning may also
serve to increase the trust in any recommended
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A Mashup Application to Support Complex Decision Making for Retail Consumers
solutions to the multi-criteria decision problem
by the user (Pu & Chen, 2007).
After all constraint preference information is
collected, the subjects have the opportunity to
explore information moderating their decision
criteria. The media design mashup application
presents lists of specific components to the sub-
ject, each of which satisfies all of the specified
constraints. The components originally are rank
ordered utilizing information on reliability, qual-
ity, and customer satisfaction, but may easily be
re-ordered by the decision maker using price or
other attributes of the individual component (e.g.,
screen size for televisions). As each component
of the overall media room entertainment system
is selected, the remaining budget is automatically
adjusted to reflect the current decision and re-
allocate any additional funds to other components
appropriately.
The prototype media room design mashup
application is implemented using wiki software
written in ASP and a set of HTML/ASP forms
to support the preference elicitation and product
recommendations. (See Appendix 1 for example
screen shots of the prototype mashup tool.) Figure
1 shows the architecture of the prototype mashup.
The architecture integrates web-based information
resources with a wiki information repository, and
a product/pricing information database. These, in
turn, provide the information and supporting data
for a more traditional rule based system. The ac-
tual data specific to media room design is domain
specific. The information extraction tools, wiki
and other mashup systems are generic and could
be populated with data from any decision domain.
Survey Development
The system measured the actual time (TIME) spent
participating in the experiment and, for the mashup
subjects, the number of information sources
visited. The quality of the decision (QUAL) was
evaluated by the researchers, who independently
judged the decision of each subject. To minimize
bias, this was done in a ‘blind’ fashion in that the
researchers did not know the experimental group
of the subjects while performing the evaluation.
Factors used to evaluate decision quality included:
size and type of television, staying within budget,
number of speakers, and receiver and speaker
compatibility. Each of these factors had objective
standards upon which to assess decision quality.
For example, plasma screens are not advised at the
altitude in which the subjects reside and experts
have clear recommendations of screen size given
the size of the room.
A survey was developed to measure the per-
ceptual measures (CONF and EASE) and the
research literature was searched for previously
used and validated questionnaire items. These
were edited only to reflect the context of this
experimental study. A candidate list of potential
survey questions was identified. An expert panel,
including information and web design specialists
and decision theorists, evaluated the candidate
questions and selected the final survey questions.
Table 1 contains the survey questions with cita-
tion references. In the actual administration of
the survey, the question order was randomized.
Questions were presented to the subjects using a
7-point Likert scale, with 1 = Strongly Disagree
and 7 = Strongly Agree. Eight demographic ques-
tions and an open-ended question, asking simply
for additional comments, ended the survey.
The Experiment
The decision making of subjects using the me-
dia room design mashup service is compared
to subjects solving the same decision task us-
ing traditional web search tools. The alternate
methodology simulates the common Web-based
research methodology of many consumers (75%)
who report using the Web to research products
prior to purchase (Massey, Khatri, & Montoya-
Weiss, 2007).
Since subjects using the mashup are started on
the mashup site, subjects using traditional tools
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A Mashup Application to Support Complex Decision Making for Retail Consumers
are started on a standard Google search page list-
ing consumer electronic stores and media room
design sites. Graduate and undergraduate students
from information systems, decision sciences, and
marketing courses are the subjects. Each student is
alternately assigned to one of the two experimental
conditions based on the order in which they visited
the experiment website, thus producing a random
but even distribution of subjects. Those using the
mashup service are referred to as ‘mashup’ sub-
jects. Those using the more common Web-based
research, such as a Google search, are referred to
as ‘traditional’ subjects.
The experiment starts by providing each subject
with the conditions of the experiment; the subject
is to select new audio and video equipment for a
media room. A limited number of pre-specified
constraints are also provided, including the size
and shape of the room (16 by 18 feet), a budget
of $4,000, movie watching preference (action/ad-
venture movies over horror or comedy), and room
capacity. Relative importance of video quality and
audio quality and other criteria are left unspecified
for the subjects to use their own preferences. The
pre-specified decision constraints and the survey
questions are kept visible to the subject throughout
the experiment. The subjects are then directed to
either the mashup application or the search engine
simulator to make their decisions. To evaluate the
research hypotheses the survey is administered to
both experimental groups.
A total of 56 subjects completed the experi-
ment, 28 in each experimental group. Three addi-
tional subjects accessed the experimental website
but did not proceed beyond the introduction page.
One subject’s responses from the mashup experi-
mental group are removed as an outlier. This results
in a sample size of 27 users of the mashup tool
and 28 users who use a traditional web search.
Demographic information may be found in Table
2. Only two subjects, one in each experimental
group, reported using the Internet for less than 5
years. Ninety-six percent of subjects reported hav-
ing made 10 or more online purchases. Only one
subject, in the mashing tool experimental group,
reported never to have made an online purchase.
Five percent reported no prior familiarity with
the media room products in this study, 38% had
heard of the products but not used them, 31% used
the products but felt they didn’t know a lot about
them, and 25% reported that they both used and
knew a lot about the products.
Table 1. Evaluation constructs for mashup decision-making quality and experience
Component
Cronbach
alpha
Survey questions/ factors Sources
Confidence in the decision
(CONF)
0.900
• I made a good purchase decision.
• I am confident in the choices I made.
• I believe that the products I selected were
among the best available
• I trust the information I got.
• I am confident in the choices I made.
Haubl & Trifts (2000)
Gao, Wang, Xu, & Wang, 2007
Swaminathan (2003)
Perceived ease of finding
information (EASE)
0.866
• It was easy to find the information I needed to
make this decision.
• I was able to get to information quickly and
easily.
Davis (1989)
Seiders, Voss, Godfrey & Grewal
(2007)
Venkatesh, Morris, Davis, &
Davis (2003)
Table 2. Demographic information
All
participants
Mashing-
Tool Users
Traditional
Web Search
Percent Male 47% 56% 43%
Average Age 24 24 24
Youngest 18 18 18
Oldest 40 40 30
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A Mashup Application to Support Complex Decision Making for Retail Consumers
RESULTS AND DISCUSSION
Hypotheses Evaluation
Items for the perceptual measures used in this
research, confidence in the decision (CONF) and
ease of finding information (EASE), have been
previously used in the literature. Both Exploratory
and Confirmatory Factor Analysis were performed
to verify construct validity using PASW and
AMOS. The two-factor model was confirmed
which explained 77% of the variance. Confirma-
tory Factor Analysis also indicated an acceptable
fit (GFI = 0.931; CFI = 0.984; RMSEA = 0.047).
Scale reliabilities were also acceptable at 0.900
for the CONF construct and 0.866 for the EASE
construct (see Table 1).
The means and standard error of the mean
are presented in Table 3 for all hypothesized re-
lationships. One-tailed t-tests were performed as
follows: The TIME should be less for the mashup
subjects than for the traditional subjects, whereas
QUAL, CONF, and EASE should be greater for the
mashup subjects than for the traditional subjects.
The time (TIME) spent by mashup subjects,
as shown in Table 3, is significantly (p = 0.039)
less than the actual time used by the traditional
subjects; thus empirically supporting Hypothesis
1. In fact, the mashup subjects spent on average
less than half the time making this complex deci-
sion than the traditional group. Additionally, the
mashup subjects showed a much more consistent
use of time for performing the decision-making
task, with a standard deviation that was less than
one fourth of that for the traditional subjects.
Hypothesis 2 addressed the objective as-
sessment of decision quality. Before hypothesis
testing, inter-rater agreement was calculated as
0.870, which is significant (p < 0.000). Since this value exceeded 0.80, the reliability of the decision quality evaluation was deemed acceptable (Fleiss, 1979). The average objective quality assessment of the mashup group was greater than that of the traditional group (p = 0.025) as shown in Table 3, supporting Hypothesis 2. The survey responses summarized in Table 3 indicate the mashup subjects were not more confident in their decisions nor did they feel that the mashup application made the decision process any easier. Therefore, hypotheses 3 and 4 are not supported. Our experiment shows definite empirical support for the hypotheses addressing objective measures: Hypothesis 1 (mashup subjects used less time) and Hypothesis 2 (mashup users made better quality decisions.) There was no difference between the groups for the perceptual measures. All participants scored themselves relatively high for confidence in the decision and ease in finding the information. The lack of differences between the mashup and traditional subjects was unexpect- ed compared to previous research with decision Table 3. Evaluation component means by experimental group and actual time Component Mashup Mean (st. error-mean.) Traditional Search Mean (st. error-mean.) TIME* (minutes) 21.65 (2.58) 46.39 (10.47) QUAL** 3-point scale, 3 = high quality decision 2.23 (0.139) 1.81 (0.122) EASE 5.35 (0.25) 5.41 (0.21) CONF 5.13 (0.23) 5.29 (0.16) * Significantly different p = 0.039 – one tailed test Mashup < Traditional ** Significantly different p = 0.025 – one tailed test Mashup > Traditional
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A Mashup Application to Support Complex Decision Making for Retail Consumers
support tools and technology (Diehl, Kornish, &
Lynch, 2003; Swaminathan, 2003; Venkatesh et
al., 2003; Williams, Dennis, Stam, & Aronson,
2007). It could be that the high confidence in the
decision for the traditional group came because
of the increased expenditure of time. However, it
must be remembered that although the group be-
lieved they had purchased the best equipment, the
actual quality of their decision was lower than that
of the mashup group. The use of student subjects
participating in a simulated research problem may
have impacted the perception of benefit results.
Additionally, previous studies utilizing students
provided a chance reward of actually receiving
the products identified for purchase, giving par-
ticipants a vested interest in finding high quality
solutions. This was not possible for this research
study and may not be possible for most high-
ticket, complex purchases. Future research may
overcome this limitation by examining mashup
utilization in real-world settings as opposed to
using students in a hypothetical setting.
The experience level of the users also may
explain these results. Twenty-five percent rated
themselves as having prior experience with the
decision domain. Only one respondent had never
made an online purchase, most had made over 15.
All were experienced Web users. The traditional
method of Web browsing may be familiar, and thus
not perceived as a particularly cumbersome task.
However, imposing the structure of the mashup
on the decision process, requiring the subject to
articulate preferences, and providing information
and/or information links at key decision points,
did not degrade the experience for the subjects.
The conclusion of formal statistical analysis is
that better decisions were achieved in less time
using the mashup decision support tool. Both the
efficiency and effectiveness of the consumer were
positively affected. One can provide decision as-
sistance via a mashup application to consumers
resulting in higher quality decision in less time
without affecting perceptual factors.
Additional Results
While not part of formal hypothesis testing, some
interesting differences were observed between ex-
perimental groups. Both groups were to use a $4,000
spending limit and told there was no advantage to
under-spending and that the objective was to get the
highest quality components to meet the constraints
and their own preferences. The traditional subjects
spent on average less than the mashup subjects
($3050 versus $3293) and 5 mashup subjects over-
spent as opposed to 2 traditional subjects. Mashup
subjects were given explicit price data throughout
the experiment. The system informed them of
a relative budget breakdown, a recommended
range of how much of their budget to allot to each
component. Mashup subjects had updated budgets
displayed throughout their decision-making pro-
cess. They also were explicitly given the option to
modify their budgets. Traditional subjects did not
have this information and may have viewed the
budget as a strict constraint and therefore limited
their spending. Given that they made poorer qual-
ity decisions, they may have focused on cost to the
detriment of other criteria.
From a suppliers’ perspective, the fact that the
mashup subjects’ average spending was closer to
the allocated budget may be seen as an advantage,
as consumers may invest in higher quality products
that would leave them more satisfied with their
ultimate purchase decisions. The overspending may
also indicate that the mashup users are more will-
ing to explore options outside of their initial set of
constraints and this was facilitated by the mashup
application. Subjects could see the cost affects of
the decisions and trade-offs between decisions. This
is summarized nicely by a comment in the open
comment section of the survey from one mashup
subject: “I found that you need more money to buy
what you really want or desire.”
The experiment also allowed the information
gathering processes of mashup subjects to be as-
sessed. It tracked the pages the subjects accessed
and how long they spent reading or interacting with
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A Mashup Application to Support Complex Decision Making for Retail Consumers
the material on that page. This user interaction data
revealed that over 46% of the mashup subjects used
the links to access the wiki knowledge base to obtain
additional information on media room components
and on media room design. These subjects visited
an average of 2.33 pages each. This is consistent
with prior decision-making research which suggests
that users may be unwilling to rely on expert system
decisions without an understanding of the informa-
tion used to make the decision and the decision
process (Ye & Johnson, 1995). This is one benefit
of using a wiki-based mashup in conjunction with
expert or other decision-making aids.
The open-ended question was answered by
only a handful of respondents. Subjects from both
experimental groups left comments indicating that
they enjoyed the experience and that they had not
previously thought of making media decisions
based on the constraints specified in the experiment.
This suggests the utility of a mashup approach to
multi-criteria decision making for enabling the
ability to explore and review possible constraints
impacting the decision-making process and the
quality of the corresponding decision.
One final comment from one of the mashup
subjects was interesting and holds implications
for future mashup research. The comment was: “I
liked the site helping me shop. It actually gave me
the in-store sales person feeling. And letting me
share in the decision and not feel like I was going
at this alone was very comforting. I felt like I had
a professional A.I. machine keeping me in check.”
Though not evaluated in the research reported
in this article, the above comment indicates that
mashups may be able to adequately provide the
feel of a mentor or other professional assisting the
decision maker.
Implications for Research
and Practice
A primary cause of concern is that the subjects of
this research did not perceive more confidence nor
an ease of finding information in using the mashup
tool even though the study shows that using the
mashup application improved both decision time
and decision effectiveness. This could be because
users in the experiment were only given access
to a limited number of information resources as
a part of the mashup application. Future studies
could use adaptive information extraction agents
(e.g., Gregg & Walczak, 2007) to allow users to
add their own resources to the mashup tool and
determine if that improves user confidence with
the decisions made. Future studies should ex-
amine whether users would opt to use a mashup
tool when it is made available but not required
by the experimental design. Research should also
examine whether users think they would use a
similar tool for future decisions after completing
the experiment.
Additional research is also needed to discover
why and how users value the information made
available by mashups. The fact that nearly half of
the mashup users consulted the wiki knowledge
repository, even though this was a fictitious, ex-
perimental activity, suggests that there is value
in providing a mashup that draws from multiple
knowledge sources to enhance decision making
in complex multi-criteria scenarios. The search
for additional information by the experimental
subjects could be because it helps them feel more
in control over their decision-making activities.
Research exploring mashups in more realistic
environments, with actual customers, making
actual purchases would extend and generalize
these results. “Think aloud” research techniques
(Van Someren, Barnard, & Sanberg, 1994), where
research subjects verbalize their thought processes
while working through a cognitive exercise may
be useful to broaden understanding of how users
interact with mashup technology.
The prototype mashup used in this experiment
incorporated only rudimentary decision tree logic,
with only several criteria preferences included
(some being pre-specified) and as preferences
were entered or changed, decision options and/or
constraints were updated. Existing research has
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A Mashup Application to Support Complex Decision Making for Retail Consumers
demonstrated the utility of using more sophisti-
cated techniques for eliciting preferences (Gao
et al., 2007; van der Heijden, 2006; Westerman,
Tuck, Booth, & Khakzar, 2007) and/or utilizing
more complex multi-criteria decision techniques
such as the Analytical Hierarchy Process (Chen,
2003; Mustajoki & Hamalainen, 2007; Williams
et al., 2007). Further research should explore the
utility of incorporating mashup and wiki-based
knowledge repositories with additional decision-
making techniques. Given that this decision-
making aide was shown to improve quality and
timeliness, further work should be directed at
developing a guided approach for developing
the domain-specific parts of the system. This is
especially needed for the consumer preference
elicitation online survey.
Another limitation of the reported survey
results is the small group size of only 56 respon-
dents. Thus the results here should be viewed as
exploratory, but the selection of the population
should lead to adequate generalization for a well-
educated population of users.
Applications of a mashup aided decision tool
are ideal in situations where a consumer makes
purchase decisions from several different, yet in-
teracting, vendors. Examples include such things
as wedding and vacation planning, personal finan-
cial management, higher or continuing education,
and insurance purchases. Computer-aided decision
tools are already used in medical domains to aide
patients in making care decisions, e.g., Singh,
Cuttler, and Silvers (2004). Information from a
source such as WebMD may be combined with
decision aides to create treatment or diagnostic
mashups, perhaps with a physician and patient
sitting side-by-side enabling a truly customized
plan of treatment.
The purpose of this research is to evaluate ac-
tual and perceived benefits of utilizing a mashup
based decision support application. The results
show that real benefits occur to mashup users
even if the users do not readily perceive these
benefits. The development of enterprise mashup
applications may be able to overcome this per-
ception deficit by promoting mashup applications
and providing motivation for utilization of these
applications. As mashup application utility and
popularity continues to grow, front-end tools that
enable rapid mashup application development are
becoming available (Fichter & Wisniewski, 2009).
Once service organizations determine which
enterprise data is available for consumption by
mashup applications and develop a framework
for how the mashup applications interact with
users, then the basic framework is in place and
may be replicated with only the data sources and
possibly business rules needing to be changed to
provide a wide variety of mashup applications to
the organization.
CONCLUSION
Uncertainty in multi-criteria decision problems is
produced by lack of information and time pressure
to make a decision (Ahn, 2003). The empirical
evidence presented shows that the application of
mashup decision support overcomes both of these
decision-making roadblocks and that furthermore
the utilization of a mashup service can greatly
improve the quality of consumer decision making
in multi-criteria domains.
The design of multi-criteria decision support
mashups involves incorporating multiple knowl-
edge resources with decision-making techniques.
How to select reliable resources is an open ques-
tion, but the presented methodology recommends
using the presence of individual decision criteria
or constraints to assist in identifying needed in-
formation resources and decision processes for
inclusion in the mashup application.
The profiling and preference gathering meth-
odology of the presented media room design
mashup service may serve to help decision mak-
ers overcome concerns associated with trying to
satisfy multi-criteria, especially for consumers
unfamiliar with specific products or service at-
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tributes (Malakooti, 2000; Rathnam, 2005; Xiao
& Benbasat, 2007).
Future research is needed to further investigate
the perceived and actual benefits of mashup ser-
vice applications, specifically the perceived and
actual improvement to the quality of the decisions
made and an evaluation of the knowledge sharing
capabilities of mashup applications. As implied
by the open comment, other capabilities may be
achievable through mashup style services includ-
ing personal shoppers or business mentors to help
guide and teach users in effective multi-criteria
decision-making processes.
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APPENDIX
Figure 2. Screen shots from the media design mash-up application
This work was previously published in International Journal of Information Systems in the Service Sector, Volume 2, Issue 4,
edited by John Wang, pp. 39-56, copyright 2010 by IGI Publishing (an imprint of IGI Global).
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295
Copyright © 2012, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 19
DOI: 10.4018/978-1-4666-0044-7.ch019
María J. Martínez-Argüelles
Open University of Catalonia, Spain
José M. Castán
University of Barcelona, Spain
Angel A. Juan
Open University of Catalonia, Spain
Using the Critical Incident
Technique to Identify
Factors of Service Quality in
Online Higher Education
ABSTRACT
Information technologies are changing the way in which higher education is delivered. In this regard,
there is a necessity for developing information systems that help university managers measure the quality
of online services offered to their students. This paper discusses the importance of considering students’
perception of service quality. The authors then identify key factors of service quality, as perceived by
students, in online higher education. To this end, the Critical Incident Technique (CIT) is proposed as
an effective qualitative methodology. Some benefits of this methodology are highlighted and an explor-
atory research is carried out in a real environment to illustrate this approach. Results from this research
explain which quality dimensions are considered the most valuable to online students. Information
provided by this methodology can significantly improve strategic decision-making processes in online
universities worldwide.
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
INTRODUCTION
Higher education today is undergoing a period of
fundamental transformation, triggered particularly
by the consequences of the globalization process
and by developments in the field of information
and communication technologies (ICT). The emer-
gence of an increasingly differentiated demand for
education, the need to carry out more commercial
activities in order to tap new sources of funding,
the new entrants to the high education market
–e. g. new online universities that exploit the
possibilities offered by ICTs– and the increasing
bargaining power of suppliers and customers are
only some of the factors that are forcing universi-
ties to rethink their traditional roles, to develop
new organizational structures and to reposition
themselves through strategic direction setting
(Moratis & van Baalen, 2002).
These trends and the widespread recognition
that the university’s invisible product, knowledge,
is the most important factor in economic and social
growth are the reasons for the increasing competi-
tiveness inside the higher education market all
over the world. To survive in this environment,
universities should focus on customers’ percep-
tions of service quality –understanding ‘service’
in the broad sense, including both academic and
non academic services– since those perceptions
are a key influence on students’ decisions when
they are choosing or recommending a particular
institution.
While there is little disagreement on the impor-
tance of service quality issues in higher education,
the challenge is to identify and implement the most
appropriate measurement tools in order to gain
a better understanding of the quality issues that
impact on students’ service experiences (O’Neill
& Palmer, 2004). The problem is that much of the
research on this topic has been too highly focused
from an academic insider’s perspective, presup-
posing that the inherent knowledge base of those
involved in the business of higher education is suf-
ficient for developing student-oriented programs.
Nevertheless, research on service-related business
suggests that this ‘inside out’ decision making is
hardly ever successful, because if firms do not
know what their own customers’ desire is, it is
difficult to design programs that match customer
expectations of what constitutes a good service.
Stated simply, knowing what customers expect
is the first and possibly one of the most critical
steps in delivering quality (Zeithaml & Bitner,
2003). One of the most important customers of
any higher-education offer is the student herself.
Even so, her perceptions about the quality of the
service being offered are usually omitted in the
existing literature about online higher-education.
The purpose of the current article is to inves-
tigate how students perceive and evaluate online
higher education services. In order to find out the
aspects or characteristics that students take into
account in their evaluation of the perceived service
quality (PSQ) in online higher education environ-
ments we have carried out a qualitative analysis
using the Critical Incident Technique (CIT).
CIT is a procedure in which it is the consumers
themselves –in this case the students– who give
descriptions of their experience of the service,
whether satisfactory or unsatisfactory. After ap-
propriate analysis, these are then grouped to form
specific customer requirements or quality dimen-
sions. The results obtained are not only aimed at
clarifying the determinants of perceived service
quality in online higher education, but also show
the advantages of the Critical Incident Technique
over other exploratory inductive methods, par-
ticularly when research is conducted in online
environments, as is the case here.
SERVICE QUALITY IN
HIGHER EDUCATION
Following the general pattern set by service
industries, the issue of service quality within the
higher education sector has received increasing
attention in recent years. In particular, there is a
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
clear interest in developing information systems
for monitoring students’ and groups’ activity in
online environments, since it can contribute to
improve learning processes and, therefore, the
quality of the service being offered (Daradoumis
et al., 2010; Juan et al., 2009b). Although debate
has ranged over various issues, the most dominant
theme is the development of valid, reliable and
replicable measures of perceived service quality
(O’Neill & Palmer, 2004). In the early stages,
most models designed to evaluate PSQ focused
exclusively on teaching and learning. In the last
decade, though, several studies have approached
the evaluation of university services from a broad
perspective, considering not only the core service
(the teaching) but the peripheral or auxiliary ad-
ministrative and backup services as well (O’Neill
& Palmer, 2004; Abdullah, 2005).
This study continues this line of research by
applying a holistic conception of service quality
in online higher education. Since each and every
one of the service interactions between students
and the university impact on the overall level of
PSQ, knowing the relative importance assigned
by students to each of them is vital to be able
to pinpoint service quality failures and to direct
continuous quality improvement efforts (Aldridge
& Rowley, 1998). In this regard, like hospitals
or shopping centers, universities constitute a
good example of multi-service organization. In
organizations of this type, although the central
service –the one that defines the organization’s
mission– is the most important, complementary
services also have a decisive impact on PSQ
(Gabott & Hogg, 1996; Papa & Avgeri, 2009).
In fact, some research shows that while the basic
service may be essential to consumer satisfaction,
it is not always the only key element in the overall
perception of service quality (Bigné et al., 2003;
Levy, 2009).
The related literature describes a plethora of
measurement tools and techniques for assessing
PSQ within the higher education sector. For the
most part they are extensions or adaptations of
SERVQUAL models (Ford et al., 1993), where ser-
vice quality is the result of a comparison between
expectations and perceptions of performance;
SERVPERF (Oldfield & Baron, 2000) which mea-
sures service quality considering only consumer
perceptions; or IPA (Ford et al., 1999; Joseph et
al., 2005), which weights both the perceptions
and the importance assigned by consumers to
each of the attributes of the service. While those
models were initially designed to be applicable
across a broad spectrum of service settings, many
studies have stressed that the industry-specific
characteristics of many services mean that these
models should be adapted or supplemented to
fit the characteristics of the particular service
under analysis (Cox & Dale, 2001; Chen, 2004).
Given these considerations, the relatively large
number of articles on the subject of evaluating
PSQ in higher education is in contrast to the lack
of papers regarding higher education in online
environments. Recently, however, some authors
have considered this is an important research area
and, accordingly, some interesting papers have ap-
peared on the subject (Chen et al., 2008; Douglas
et al., 2008a; Douglas et al., 2008b; Palmer &
Holt, 2009). Following these authors, our work
aims to propose and illustrate a methodology
for identifying relevant quality dimensions to be
considered in educational information systems.
EVALUATION OF SERVICE QUALITY
IN ONLINE HIGHER EDUCATION
Probably the two most important long-trends in
the business world are the shifting of the economy
from goods to services and the rapid extension of
the information economy and electronic networks
(Jiang & Rosenbloom, 2005). Both trends con-
verge in the concept of online higher education,
which provides higher education services over
electronic networks, such as the Internet. Learning
Management Systems (LMS) are computer-based
applications comprising relatively open systems
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
that allow interaction with other students and ac-
cess to a wide set of electronic teaching resources.
However, the feature that defines LMS is the fact
that they apply information and communication
technologies to general institutional functions
such as administration, materials development
and distribution, course delivery and monitoring,
and complementary advisory and tutorial services
(Juan et al., 2009a).
The digital nature the interactions produced in
an online environment is a source of some prob-
lems for applying the classical PSQ evaluation
models. Most of the items used in these scales are
linked to the direct interpersonal interaction that
characterized ‘traditional’ services (Makarem et
al., 2009). Therefore, even those who advocate
the use of these scales in virtual environments
acknowledge that, in the absence of these tradi-
tional interactions, the scales “would have to be
reformulated before they can be meaningfully
used in an e-service context” (van Riel et al.,
2001, p. 363).
A similar situation occurs with respect to
another characteristic of LMS: the absence of
physical reference points or indicators of qual-
ity of service, such as premises, facilities, and
service staff. In the traditional university these
tangible elements make up what is known as the
‘servicescape’ which is a decisive factor in PSQ
evaluations (O’Neill & Palmer, 2004). In online
learning environments, the student does not have
at his/her disposal the conventional physical
elements that act as indicators of the quality of
service. In their place, the student can only use
other variables, such as the aesthetics and ease of
use of the online interface, referred to as ‘e-scape’
(van Riel et al., 2004).
A third element that is distinctive of online
learning environments is that students are not just
users of university services, but are the universities’
‘primary customers’. Consumers are often part of
the production and levier processes of services,
but in LMS the role of the student is even greater,
since it is essential that he/she should be the centre
of the teaching/learning process. Moreover, as the
user of a digital interface, the online student will
need a certain degree of skill and experience in
working with ICTs. Consequently, the students
themselves contribute directly to the quality of ser-
vice delivered and to his/her own (dis)satisfaction.
The aim of this work, the design of an evalua-
tion system for the quality of service, taking into
account these and other features of LMS, is –to the
best of our knowledge– quite new in the existing
literature. Although there are many models for
assessing PSQ in online environments are avail-
able: the WebQual scale (Loiacono et al., 2000),
the SITEQUAL scale (Yoo & Donthu, 2001), the
eTAilQ model (Wolfinbarger & Gilly, 2003), the
e-SQ model (Zeithaml & Bitner, 2003), or the
E-S-QUAL model (Parasuraman et al., 2005),
they have been designed exclusively to assess
service quality of web sites and, specifically, of
online shopping sites. The aforementioned were
not designed to evaluate the quality of pure and
complex services, such as the educational ones,
which do not involve just a single transaction,
but multiple interactions that take place over a
prolonged time span.
For this reason, we agree with Parasuraman
et al. (2005), that an important research priority
is to examine the scales in the context of pure
service sites to establish how the service quality
dimensions change when consumers interact with
technology in online environments. Specifically,
in the case of online higher education, important
questions, both empirical and theoretical, have
just begun to be addressed. Most of the published
studies focus on specific services –e.g., an online
university library (O’Neill, 2003)– or on particular
dimensions –as, for instance, teaching resources
or development (De Lange et al., 2003; Ellis et al.,
2009)–, but to date no holistic evaluation of PSQ,
that captures the online student’s overall service
experience in online learning environments has
been carried out. Table 1 shows a summary of the
main dimensions of perceived service quality that
have been highlighted in previous works in the
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
field of online services. Table 2 shows a similar
summary for the field of higher education.
THE CRITICAL INCIDENT
TECHNIQUE
Many studies of service quality in higher education
have overemphasized the importance of technical
–relatively quantifiable– dimensions of service
quality. The fact that technical quality is easier to
measure has given rise to “a plethora of statistics,
indices and league tables covering such issues as
student progression rates, the proportion of stu-
dents achieving higher grades and the quality of
teaching staff, as measured by their qualifications
and research performances” (O’Neill & Palmer,
2004, p. 41). However, less effort has been spent
in probing the functional aspects of quality, which
are the ones most closely related to students’
satisfaction. Functional quality, focused on the
more personal aspects of the service encounter,
is therefore, by nature, intangible, more difficult
to imitate and, as a result, may be used to create
a competitive edge.
The identification of the qualitative functional
dimensions of service quality was carried out us-
ing a qualitative method referred to as the critical
Table 1. Traditional quality dimensions for online services
Author/s Quality Dimensions
Yoo and Donthu (2001) Ease of use, aesthetic design, processing speed, security
Loiacono et al. (2002)
Informational fit to task, interactivity, trust, response time, design, intuitiveness, design appeal, in-
novativeness, flow-emotional appeal, integrated communication, business processes, substitutability
Barnes and Vidgen (2002) Usability, design, information, trust, empathy
Zeithaml et al. (2002)
Reliability, responsiveness, access, flexibility, ease of navigation, efficiency, assurance/trust, security/
privacy, price knowledge, site aesthetics, customization/personalization
Wolfinbarger and Gilly (2003) Website design, reliability/fulfillment, privacy/security, consumer service
Parasuraman et al. (2005) Efficiency, fulfillment, reliability, privacy, responsiveness, compensation, contact
Su et al. (2008)
Outcome quality, consumer service, process controllability, ease of use, information quality, website
design
Table 2. Traditional quality dimensions for higher education
Author/s Quality Dimensions
Kwan and Ng (1999) Course content, concern for student, facilities, assessment, instruction medium, social activities, people
Oldfield and Baron
(2000)
Requisite elements, acceptable elements, functional elements
O’Neill and Palmer
(2004)
Contact (responsiveness and trust), empathy and logistic (tangibles and reliability)
Lagrosen et al.
(2004)
Corporate collaboration, information and responsiveness, courses offered, internal evaluation, computer
facilities, collaboration and comparisons, library resources
Sahney et al.
(2004)
Competence, attitude, content, delivery, reliability
Marzo-Navarro et al.
(2005)
Teaching staff, enrolment and organization
Douglas et al. (2008a)
Teaching, learning and assessment environment (responsiveness, communication, functionality/usefulness)
and ancillary services (responsiveness, access, socializing)
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
incident technique (CIT). CIT was introduced in
the social sciences more than fifty years ago by
Flanagan (1954) and has been used in a variety
of contexts in recent years to explore service re-
search issues. The critical incident technique aims
to contribute to improving our understanding of
the activity or phenomenon by using an original
approach: the reporting of the events that make
up a specific experience by the person or persons
involved (Schurr, 2007).
The method follows the following steps: Using
a survey or a similar procedure, a catalogue of criti-
cal incidents is compiled and then analyzed. So the
task involves two distinct activities: a) choosing
a frame of reference for the incidents recorded,
and b) developing –by inductive mechanisms–,
a series of categories and subcategories in which
the incidents can be classified.
The inductive nature of the CIT makes it par-
ticularly appropriate as an exploratory method
to deepen our knowledge of a topic or specific
phenomenon –such as perceived service quality in
online higher education– that has not been widely
reported or when used to develop the conceptual
structure to be used and tested in subsequent re-
search (Gremler, 2004). The model is flexible and
does not have a rigid set of principles to follow,
meaning that it can be adapted to the contingen-
cies of a particular subject and makes it especially
appropriate in cases in which it is difficult or, as in
this study, impossible to determine all the variables
a priori (Sweeney & Lapp, 2004).
Furthermore, the fact that it provides informa-
tion obtained directly from the reports of service
recipients helps the researcher to record and under-
stand clearly and holistically the set of cognitive
and emotional perceptions that the informant as-
sociates with a particular service encounter. This is
fundamentally important in the context of service
delivery, since the concepts of satisfaction and
quality involve a complex psychological process
(Zeithaml & Bitner, 2003). In this way, critical
incidents highlight this psychological process –
without determining a priori what is important and/
or relevant– providing managers and researchers
with specific, relevant information that can point
to possible areas for improvement (Chell, 1998).
This technique has been widely used to assess
the underlying sources of satisfaction and dissat-
isfaction of consumers of services (Edvardsson &
Ross, 2001), but it has hardly ever been applied in
the context of e-services (Sweeney & Lapp, 2004;
Sur, 2008). In our view, it offers clear advantages
in this context over other qualitative techniques
and it is a suitable alternative to the discussion
group method habitually used in studies of this
type (Oldfield & Baron, 2000; O’Neill & Palmer,
2004; Joseph et al., 2005):
• First, since students enrolled on online
programs usually combine their studies
with their professional activity they do not
usually coincide in place and time, so it is
difficult to persuade them to participate in
synchronous discussion groups or face-to-
face interviews.
• In these conditions, furthermore, a bias
may appear in the study, as it is probable
that students with fewer outside commit-
ments and greater flexibility are likely to
participate more, though their preferences
may not be representative of the views of
the body of students as a whole.
We should also remember that ICTs allow the
application of electronic interview procedures that
are effective and cheap –for both interviewer and
interviewee– and overcome the classic limitations
of time and space associated with other procedures.
Sending a message to students’ personal mailboxes
promotes the asynchronous participation of stu-
dents, as they only have to respond at the time most
convenient for them, from wherever they chose,
and without the need of having to coincide with
the times or places convenient for other students.
Moreover, this allows for a reduction of costs for
those taking part in the study, not only in terms of
avoiding unnecessary travel but, above all, because
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
it cuts the time necessary for participating in the
research –in comparison with, for example, what
happens in online discussion groups.
Also, this method gives greater flexibility in
the design of the research, and in carrying it out,
as it encourages the participation of students
from different institutions, even if their study
and vacation times do not coincide. Similarly, the
number of participants taking part in the study can
be increased with a reduced marginal cost, as it
would only be necessary to forward messages to
the corresponding e-mail.
RESEARCH SCENARIO AND
RESEARCH METHODOLOGY
The Open University of Catalonia or UOC (http://
www.uoc.edu/portal/english) is a fully online
university with headquarters in Barcelona, Spain.
It was founded in 1995 by the Catalan Govern-
ment with the mission of “providing people with
lifelong learning and education through intensive
use of information and communication technolo-
gies”. According to official data, the UOC offers
educational services over the Internet to more than
50,000 students, distributed in several undergradu-
ate and graduate programs. UOC students belong
to different parts of the world, but they are mainly
located in Spain and South America. About 60%
of UOC undergraduate students are adult students
(over 30 years old) that typically combine their
professional activity and/or family responsibilities
with their academic duties. Educational services
are delivered by a team composed of more than
2,200 instructors –including UOC faculty and
UOC online collaborators, most of these profes-
sors from other Spanish universities– and 550
management staff. The UOC uses an asynchronous
and student-centered educational model and has
already received several international prizes, such
as the 2001 ICDE Prize for the best virtual and
distance university in the world or the 2004 OEA
Prize for educational quality.
In this scenario, the process of data collection
of the critical incidents comprises two stages.
In the first, the consumers are interviewed and
specific information about the service obtained.
In the second stage, the data are classified in
categories which are intended to represent dif-
ferent dimensions of service quality. In the first
stage of our study, an e-mail was sent to a random
sample of UOC students. The theory recommends
interviewing a minimum between 10 and 20 con-
sumers so that, if one of them provides false or
mistaken information, his/her point of view can
be compared and contrasted with the data from the
other subjects. The selected subjects are usually
asked to report between 5 and 10 positive and 5
and 10 negative examples of their experience of
the service.
We sent the message to a considerably larger
number of students, asking them to record ap-
proximately five positive and five negative critical
incidents related to the service they receive. We
did this because the response rate in online sur-
veys tends to be low –typically between 10% and
30%– and because it was simpler to interview a
larger number of subjects than to ask each student
to record a higher number of incidents. In this
way, we avoid the risk of presenting a compli-
cated and time-consuming survey, which would
have an even more negative effect on participa-
tion. The main aim of this stage was to obtain a
minimum of 200 critical incidents, a number that
is considered theoretically adequate. Eventually,
a total of 41 (21 men and 20 women) took part,
reporting 392 critical incidents, of which twelve
were rejected because they had not been correctly
formulated. The sample thus comprised 380 valid
critical incidents.
The incidents were analyzed in Table 3. First,
they were grouped according to type. For each
type a sentence was written to describe the inci-
dent; both positive and negative incidents were
included. Once all the critical incidents were
grouped together the above process was repeated,
now using the similarity between the sentences
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
describing the incidents as the criterion. We thus
obtained a hierarchical relation between critical
incidents, their aggregate descriptions and, finally,
the dimensions of quality.
The key stage in the process was the creation
of the groups. To monitor this process, responsi-
bility for the task was assigned to two different
raters: the first established the dimensions of
quality following the generalization procedure
described above and the second, using the dimen-
sions established, directly assigned each of the
critical incidents to one of these dimensions. The
accuracy of the distribution process depends on
the degree of agreement between the raters, that
is, of the percentage of incidents that both place
in the same dimension. Total agreement is repre-
sented by a score of 1. We obtained a score of
0.91, which should be considered satisfactory,
taking into account that the literature considers
an index of above 0.8 to be acceptable (Latham
et al., 1979).
Finally we checked the accuracy of the dimen-
sions in order to determine whether they were
able to define the construct of service quality in
its entirety. To do this, we randomly extracted
around 10% of the critical incidents (35) and then
regrouped and reclassified the remaining incidents
in the dimensions. We then re-assigned to these
dimensions the 35 critical incidents that we had
removed. Since we were able to place all these
incidents in the dimensions, we concluded that
they presented a reliable reflection of the construct.
EXPERIMENTAL RESULTS
The categorization process highlighted the need
to reject incidents which did not contain specific
examples or experiences of the service received
but reflected more general impressions, such as
the advantages of online learning –time saving,
availability, ease of access, the opportunity to
combine studies and work, etc.– and its drawbacks
–the feeling of isolation, the need to adapt to the
environment, etc. (Pedró, 2005; Lim et al., 2008;
Juan et al., 2008). Among these comments, the
opportunity to combine studies and family and
professional life was highly valued by a part of
the population who otherwise would not be able
to study. After this process of refinement we had
Table 3. Steps in a critical-incident analysis
Step Description Key points
1 Generation and collection of critical incidents.
• Messages are sent to students, applying for negative and positive
critical incidents.
• Collecting critical incidents: specific examples that demonstrate
the level of service quality in relation to a specific quality dimen-
sion.
2 Classification of critical incidents in groups. Grouping is based on the similarity of the incidents.
3 Creation of a meaningful definition for each group. The definitions must be specific and assertive.
4 Classification of the definitions.
• The classification should be based on the similarity of the defini-
tions.
• The definitions should describe wishes and/or needs of the cus-
tomers (each one linked to a quality dimension).
5 Checking the accuracy of the classification process.
• The classification process is carried out by two raters.
• The degree of agreement between the two raters is estimated (min.
80%).
6 Checking the relevancy of the included dimensions.
• 10% of the critical incidents are extracted before establishing the
dimensions of quality.
• Check whether these 10% can be placed in the pre-established
dimensions.
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350 critical incidents, of which 184 were positive
and 166 negative. Once the classification process
was completed, and after checking the validity of
the process, these critical incidents were finally
grouped in 12 dimensions covering 33 defini-
tions. Table 4 shows the most important features
of the various dimensions. Figure 1 summarizes
this information in a Pareto chart. Notice that all
dimensions seem to have a relative importance
(i.e., the highest percentage for any dimension is
less than 20%). Even so, four dimensions (Learn-
ing, Materials, Interface and Responsiveness)
account for about 55% of total critical impacts.
Examples of positive and negative incidents are
shown in Table 5.
The dimension Design and program focus
accounted for approximately 5% of all incidents.
This dimension covers the study paths offered by
the institution and the focus of the program and
courses. It represents 5.4% of the positive critical
incidents and 4.2% of the negative ones.
The dimension Teaching materials and re-
sources recorded 47 critical incidents (13.4%),
26 positive and 21 negative. The dimension can
be divided into three subcategories: contents
(e.g., “the materials are up-to-date”, “materials
are superficial”), format (e.g., “the materials are
available in interactive format and on paper”,
“the materials should be sent on paper”) and the
library, which the students view as particularly
important, since it elicited eight positive and eight
negative incidents.
The dimension Learning refers to aspects re-
lated to the planning of the learning process, the
workload, the usefulness of specific activities, the
feedback obtained and the guidance, follow-up
and support provided by teachers. This important
dimension accounted for almost 20% of all the
critical incidents generated (18.5% of the positive
incidents and 21.1% of the negative ones).
Assessment of learning accounted for 7.4%
of all critical incidents. The students have a high
opinion of the ‘continuous assessment system’
which helps them ‘to study and learn’ but a
negative view of the ‘excessive number of tests
in some subjects’. Since at half of the institutions
analyzed the final assessment is done on brick
and mortar campus, the arrangements made for
this assessment (“the possibility of choosing the
date for the examination among several options”
or “the need to go to a particular place to do the
examination”) was considered as a subcategory.
The dimension Sending of documentation
(fulfillment) evaluates the process of delivering
documentation to students’ homes –either materi-
als and other teaching resources, or administrative
documents such as certificates. Though the total
percentage of incidents relating to this dimension
was low (14), most of them (12) were negative
and reported delays.
Two other aspects of service that emerge as
fundamental are the Responsiveness, that is,
the speed of responses to students’ doubts and
problems, to do either with the teaching itself
or with administrative or technical issues. This
dimension accounted for 12.5% of the positive
incidents and 7.8% of the negative ones. We also
assessed the Accuracy or Appropriate response to
incidents and doubts was also assessed. Here there
were a greater percentage of negative incidents
(9.6%) than positive (5.4%), above all relating
to administrative processes. There were also a
higher percentage of negative incidents (6.6% vs.
2.7%) in the category Administrative practices
(for example, “bureaucratic problems with the
secretary’s office”).
In contrast, one of the dimensions that recorded
a higher percentage of positive incidents (9.2% vs.
2.4%) was the student-staff relations, especially
the administrative staff (5.4%). The same trend
was found (13.6% vs. 3%) in the dimension Re-
lations with other students. The students valued
very positively the chance to interact with students
“from other places”, who are “professionals”, and
the chance to “make friends” and work together
in the learning process, generating a “spirit of
solidarity”; they also valued the availability of
spaces that promote this interaction.
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
continues on following page
Table 4. Classification of the dimensions obtained
Dimensions and sub-dimensions
Critical incidents
Positive Negative Total
Number Percentage Number Percentage Number Percentage
Design and focus of the program 10 5.43% 7 4.22% 17 4.86%
Focus of the program 6 3.26% 5 3.01% 11 3.14%
Study paths 4 2.17% 2 1.20% 6 1.71%
Teaching materials and resources 26 14.13% 21 12.65% 47 13.43%
Content 14 7.61% 10 6.02% 25 7.14%
Format 4 2.17% 3 1.81% 7 2.00%
Library 8 4.35% 8 4.82% 16 4.57%
Learning 34 18.48% 35 21.08% 69 19.71%
Planning of learning 4 2.17% 3 1.81% 7 2.00%
Workload/level of dedication
required
3 1.63% 3 1.81% 6 1.71%
Guidance and follow-up of the
learning process
16 8.70% 11 6.63% 27 7.71%
Contribution of the activities to
learning
10 5.43% 3 1.81% 13 3.71%
Feedback on the activities 1 0.54% 15 9.04% 16 4.57%
Assessment of learning 12 6.52% 14 8.43% 26 7.43%
Assessment system 10 5.43% 11 6.63% 21 6.00%
Organization of face-to-face
final assessment
2 1.09% 3 1.81% 5 1.43%
Responsiveness 23 12.50% 13 7.83% 36 10.29%
Teaching staff 13 7.07% 4 2.41% 17 4.86%
Administrative staff 8 4.35% 8 4.82% 16 4.57%
Computer staff 2 1.09% 1 0.60% 3 0.86%
Accuracy of responses 10 5.43% 16 9.64% 26 7.43%
Teaching staff 5 2.72% 1 0.60% 6 1.71%
Administrative staff 4 2.17% 13 7.83% 17 4.86%
Computer staff 1 0.54% 2 1.20% 3 0.86%
Courtesy 17 9.24% 4 2.41% 21 6.00%
Teaching staff 7 3.80% 2 1.20% 9 2.57%
Administrative staff 10 5.43% 1 0.60% 11 3.14%
Computer staff 0 0.00% 1 0.60% 1 0.29%
Administrative processes 5 2.72% 11 6.63% 16 4.57%
Sending of documentation 2 1.09% 12 7.23% 14 4.00%
Teaching 1 0.54% 5 3.01% 6 1.71%
Administrative 1 0.54% 7 4.22% 8 2.29%
Relations with fellow students 25 13.59% 5 3.01% 30 8.57%
Interaction with other students 13 7.07% 3 1.81% 16 4.57%
Help with learning 4 2.17% 0 0.00% 4 1.14%
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
The category User’s interface covers the as-
pects of service relating to the ease of use and the
technical functioning of the electronic interface. It
includes the physical appearance of the interface,
the speed of the connection to the campus at any
time (connectivity), the capacity for posting and
downloading pages and files reliably (reliability)
and security. The highest percentage of positive
critical incidents in this dimension is found for
ease of browsing, that is, how simple and intuitive
the browsing is and the ease of locating informa-
Figure 1. Pareto chart for critical incidents by dimension
Table 4. Continued
Dimensions and sub-dimensions
Critical incidents
Positive Negative Total
Number Percentage Number Percentage Number Percentage
Availability of areas of interac-
tion
8 4.35% 2 1.20% 10 2.86%
User’s interface 20 10.87% 19 11.45% 39 11.14%
Attractiveness 2 1.09% 1 0.60% 3 0.86%
Easy to connect 3 1.63% 5 3.01% 8 2.29%
Easy to browse 11 5.98% 6 3.61% 17 4.86%
Reliable 3 1.63% 6 3.61% 9 2.57%
Secure 1 0.54% 1 0.60% 2 0.57%
Fees and compensations 0 0.00% 9 5.42% 9 2.57%
Fees 0 0.00% 7 4.22% 7 2.00%
Compensations 0 0.00% 2 1.20% 2 0.57%
TOTAL 184 100.00% 166 100.00% 350 100.00%
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
tion inside the campus. Some examples of critical
incidents for this dimension can be seen in Table 6.
Finally, in the category Fees and compensa-
tions only negative incidents are recorded (2.6%
of the total of incidents). Some students perceived
the courses as “expensive” and stated that they
did not receive any refunds if some part of the
service does not work.
PRACTICAL APPLICATIONS
This work reveals several important facts that
should be considered when developing informa-
tion systems for online higher-education managers.
First of all, total quality management in a university
implies to have a holistic view of the service being
offered, which includes not only the learning pro-
cess section but also other dimensions. Therefore,
some relevant quality dimensions that should be
included (and measured) in any information system
for online higher-education are: learning process,
teaching materials and resources, relations with
fellow students, instructors’ and administrative
staff’s responsiveness and user’s interface.
FUTURE WORK
It has to be noticed that the approach presented
in this paper focuses only on students’ perception
of service quality. As explained before, this is
one of the main factors to consider in any model
that aims to measure quality of service in online
Table 6. Examples of incidents relating to the user’s interface
User’s interface Positive incidents Negative incidents
Appearance “Beautiful campus” “Not very graphic or colorful”
Connectivity “Access to the campus was problem-free”
“Problems connecting with the campus, at certain
times and on certain days”
Browsing
“Browsing the virtual learning environment is very
easy ”
“Browsing the web is difficult”
Reliability
“(…) everything works well: sending files and down-
loading materials (…)”
“Errors all the time downloading materials, especially
at the start of the course and on Sunday evenings”
Security
“When I lost my access code, the staff asked me a lot
of questions to check my identity, quite rightly”
“The antivirus installed makes browsing difficult”
Table 5. Examples of incidents regarding online learning
Learning Positive incidents Negative incidents
Planning of learning
“The planning of the entire course is clear from the
beginning, there are no last-minute surprises”
“There were changes in the planning of the
course and some parts were not offered (…)”
Level of difficulty-dedication “Requires perseverance and hard work”
“The rhythm is demanding and it’s hard to
keep up when you’re working as well”
Guidance and follow-up “Excellent guidance from the instructors”
“Some of the instructors just send on the dates
of the courses and don’t do anything to encour-
age or guide the students”
Contribution of the activities “I learnt a lot from the debates”
“Some of the activities require a great deal of
work searching the Internet (…); you spend
longer looking for information than studying”
Feedback on activities “Personalized feedback on activities”
“The instructors rarely discuss or comment on
the contents of the activities”
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Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
higher education. As discussed through the paper,
we have focused in this factor because, despite
its relevance, it has been traditionally omitted in
most previous works. Nevertheless, in order to
develop a more complete model, other relevant
factors should also be accounted for, e.g., instruc-
tors’ perceptions, alumni perceptions, employers’
perceptions, etc. Accordingly, the development of
a more complete model considering these other
factors will guide our future work.
CONCLUSION
The purpose of this paper was to investigate how
students perceive online higher education services
and which quality dimensions they consider im-
portant in their evaluations of the quality of the
services they receive. Using the critical incident
technique a total of 350 valid critical incidents
were reported by 41 respondents selected at
random from a database. After a classification
process the incidents were grouped into twelve
dimensions that account for causes of perceived
high and low service quality in the context of
online higher education. Results indicated that
the learning process is undoubtedly the most
important dimension since it plays a major role
in the students’ quality of service evaluations.
Within this area, the most relevant aspect was
guidance and follow-up of the learning process by
instructors. The second area which featured most
was to do with teaching materials and resources
and, especially, with their content. These two
areas seem to make up the core service of online
higher education. The third area is directly related
to the fact that the service is offered in an online
environment, as it refers to the attributes of the
user’s interface and, in particular, to how easy it
is to surf the virtual campus. The fourth factor,
responsiveness, emphasizes the importance, in the
framework of e-services, of being able to resolve
users’ problems and queries quickly, which helps
to overcome their sensation of being alone. The
rest of the areas, ordered according to their rela-
tive importance, are the following: the learning
assessment system, the appropriateness of the
responses to the questions posed, staff-student
relations, the design and focus of the program,
the simplicity of the administrative procedures,
the efficiency of delivering documentation and,
finally, the fees.
The results of the study clarify the determi-
nants of perceptions about e-service quality in
online higher education. It seems that online
higher education services should be viewed as a
composite offer consisting of several dimensions
to which students attach different weightings in
their evaluations of quality of service. Moreover,
by using the critical incident technique, we have
confirmed that it is not only possible to capture
the full range of customer-service issues and to
identify particularly troubling perceptions before
they actually become critical, but also we have
found it to have a number of advantages over other
exploratory measurement techniques in terms of
speed, flexibility and cost. These advantages make
it especially suitable when evaluating students’
perceptions of service quality in online learning
scenarios.
ACKNOWLEDGMENT
This work has been partially supported by the
HAROSA Knowledge Community of the Internet
Interdisciplinary Institute.
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About the Contributors
John Wang is a full professor at Montclair State University. Having received a scholarship award,
he came to the USA and completed his PhD in operations research from Temple University. He has
published more than 100 refereed papers and six books. He has also developed several computer software
programs based on his research findings. He is the Editor of the Encyclopedia of Data Warehousing and
Mining, 1st and 2nd Edition. Also, he is the Editor-in-Chief of International Journal of Applied Man-
agement Science, International Journal of Information Systems and Supply Chain Management, Inter-
national Journal of Data Analysis Techniques and Strategies. He has served as a guest editor and ref-
eree for many other highly prestigious journals. His long-term research goal is on the synergy of
operations research, data mining and cybernetics.
* * *
A.S.N. Murthy is an Electronics and Communication engineer from Andhra University. He studied
Management (PGDBM) from XLRI, Jamshedpur and also from Indian Institute of Management (IIM),
Bangalore, and Law from Kuvempu University. He has done a two-year dissertation titled Predictive
models for Cyber Crime: Law enforcement perspective. He worked in MMTC (The Minerals and Metals
Trading Corporation of India), an international trading company for about seven years (1985-1992) in
several managerial positions. He joined the prestigious Indian Police Service, a Civil Service under the
Government of India, in 1993, and was allotted to work in Karnataka state. For his meritorious work,
he was awarded Police medal by the President of India on the occasion of Independence Day 2008. He
held posts of Superintendent of Police of Chitradurga, Dharwad and Koppal districts. He is presently
holding the charge of Deputy Inspector General of Police responsible for financial management of the
90,000 strong police department of Karnataka.
Abdullahil Azeem is an Associate Professor in the Department of Industrial and Production Engi-
neering in Bangladesh University of Technology, Bangladesh. He obtained his PhD degree from the
University of Western Ontario, Canada. His publications have appeared in many peer reviewed journals
such as International Journal of Production Economics, International Journal of Advanced Manufacturing
Technology, International Journal of Machine Tools and Manufacture, International Journal of Qual-
ity and Innovation. His research interests include supply chain management, health care management,
production management, and manufacturing system.
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About the Contributors
Abey Kuruvilla is an assistant professor in operations management at the University of Wisconsin-
Parkside. He has a BTech degree in mechanical engineering from University of Kerala, India, and
MS and PhD degrees in industrial engineering from the University of Louisville, KY. Dr. Kuruvilla’s
research interests are ambulance diversion in emergency medical systems, healthcare management and
operations management in the service sectors. He has also developed a research interest in the online
language learning industry.
Ahmad Al-Khasawneh (*) is a Director eLearning Centre and vice president assistant of Hashemite
University in Jordan. Dr. Khasawneh holds the Ph.D. and M.S. of Information Systems Technology,
and Computer Engineering both from Newcastle University, Australia and B.S in Computer and Auto-
matic Control Engineering, Jordan. Dr. Khasawneh has a 13-years experience in ICT field and in ICT
applications. He has been managing Galileo and Royal Jordanian Airlines R&D project since 1994,
ranging from instrumentation development, to network deployment to IT applications. Dr. Khasawneh
acts as technical advisor to the Royal Jordanian Galileo (NDC Jordan) director on issues related to the
development of travel industry and ICT strategy, and the establishment of strategic partnerships with
other airlines and international ICT vendors.
Anand Parkash Bansal, an Electrical Engineer is working as Joint Director (Planning and Services)
with Military Engineer Services at Pune, India. After graduation, he obtained specialization in Electrical
and Mechanical Engineering from College of Military Engineering, Pune, India. He has also specialized
in “Public Policy and Management” from Indian Institute of Management Bangalore and from Maxwell
School of Citizenship and Public Affairs, Syracuse University, USA. Presently a professional in the ser-
vice sector, he has held various prestigious appointments in his department and has many awards to his
credit including Prestigious “VB Tawadey Memorial Medal”. He has special interest in the field of CRM,
project management, Public Private Partnership and Automation. His case studies and research papers
have been presented and published in various international and national level conferences and seminars.
Anastasios A. Economides received the Dipl.Eng. degree in electrical engineering from the Aristotle
University of Thessaloniki, in 1984. Holding a Fulbright and a Greek State Fellowship, he received the
MSc and the PhD degrees in computer engineering from the University of Southern California, Los An-
geles, in 1987 and 1990, respectively. At graduation, he received the Outstanding Academic Achievement
Award from the University of Southern California. Currently, he is an associate professor and chairman
of the Information Systems Department at the University of Macedonia, Thessaloniki, Greece. He is
the director of CONTA (COmputer Networks and Telematics Applications) Laboratory. His research
interests include techno-economics of networks and e-services. He has published over one hundred fifty
peer-reviewed papers. He has been the plenary speaker in two international conferences. He has served
on the editorial board of several international journals, on the program committee of many international
conferences, and as a reviewer for many international journals and conferences.
Angel A. Juan is an Associate Professor of Simulation and Data Analysis in the Computer Science
Department at the Open University of Catalonia (Barcelona, Spain). He also collaborates, as a Lecturer of
Applied Statistics, with the Department of Applied Mathematics I at the Technical University of Catalonia.
He holds a Ph.D. in Applied Computational Mathematics (UNED), an M.S. in Information Technol-
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About the Contributors
ogy (Open University of Catalonia), and an M.S. in Applied Mathematics (University of Valencia). His
research interests include computer simulation, educational data analysis and mathematical e-learning.
Ángel García-Crespo is the Head of the SofLab Group at the Computer Science Department in the
Universidad Carlos III de Madrid and the Head of the Institute for promotion of Innovation Pedro Juan
de Lastanosa. He holds a PhD in Industrial Engineering from the Universidad Politécnica de Madrid
(Award from the Instituto J.A. Artigas to the best thesis) and received an Executive MBA from the In-
stituto de Empresa. Professor García-Crespo has led and actively contributed to large European Projects
of the FP V and VI, and also in many business cooperations. He is the author of more than a hundred
publications in conferences, journals and books, both Spanish and international.
Arjen van Oostrum obtained his master’s degree in Business Information Technology (BIT) from
the School of Management and Governance of the University of Twente, Enschede, the Netherlands,
in 2008. His master’s final project has been performed in the scope of an internship at Ordina System
Development and Integration B.V., the Netherlands. His main interest is the application of technological
solutions to business challenges. He currently works as a trainee for a semi-governmental organization
responsible for the storage and processing of information of all Dutch health-care organizations. He also
runs a private company that develops advanced web applications.
Brian D. Neureuther is an associate professor of operations/supply chain management at the State
University of New York at Plattsburgh. He received his PhD in production and operations management
from Texas Tech University in 1999. His research interests include simulation, quality control, supply
chain management, service operations management, and mathematical modeling. He is a member of the
Production and Operations Management Society, the Institute for Operations Research and Management
Science, and APICS. His work has appeared in journals such as the International Journal of Production
Economics, IEEE Transactions on Semiconductor Manufacturing, Production Planning and Control,
the Journal of Marketing Channels, the International Journal of Information Systems and Supply Chain
Management, and the Quality Management Journal.
Efstratios C. Emmanouilidis graduated from the Hellenic Officers Military Academy, in 1996.
In 2002, he graduated from the School of Computer Programmers of the Hellenic Army. Holding a
Hellenic Army Fellowship, he received the MSc degree in information systems from the University of
Macedonia, Thessaloniki, Greece, in 2005. In 2006, he graduated from The School of Research and
Informatics Officers of the Hellenic Army. Currently, he is a military Officer at the rank of Captain and
serves in Research and Informatics Corps of Hellenic Army. His research interests include statistics
analysis and programming.
Fernando Paniagua Martín has been a Faculty Member of the Computer Science Department at
the Carlos III Technical University of Madrid since 2005. Currently, he is completing his PhD in Com-
puter Science in the Universidad Carlos III de Madrid. He also holds a Master in Computer Science and
Technology. He has been working as software engineer and project manager in several companies. His
research interests include Software Engineering, Audio-visual accessibility on the Web, Web 2.0 and
Computer Supported Cooperative Work.
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About the Contributors
Fons Wijnhoven is Associate Professor of Knowledge Management & Information Systems at the
University of Twente since 2002, and received a PhD in MIS in 1995. He researches the development
and exploitation of information services in companies, between companies, and in networks of expertise.
Last decade over 50 of his articles appeared in academic journals, and he (co-)authored several books.
He teaches in the programs of Business Information Technology, Industrial Engineering & Management,
Business Administration, and Public Administration of the University of Twente. He is an associate of
the national research school on operations management, BETA, and member of the Center of Telematics
and Information Technology of the University of Twente. He has been affiliated to the Helsinki School
of Economics (1994), Nijenrode Business School (1998), the Finnish InfWest program (2003-2005),
and has been a guest professor in information management at the Wilhelms-University of Muenster
(Germany) in 2009.
Helmut Krcmar is a full professor of information systems and holds the chair for information
systems at the Department of Informatics, Technische Universitaet Muenchen (TUM), Germany since
2002. He worked as post doctoral fellow at the IBM Los Angeles Scientific Center, as assistant professor
of information systems at the Leonard Stern School of Business, NYU, and at Baruch College, CUNY.
From 1987 to 2002 he was chair for information systems, Hohenheim University, Stuttgart. His research
interests include information and knowledge management, IT-enabled value Webs, service management,
computer supported cooperative work, and information systems in health care and eGovernment.
Ibrahim Obeidat is the Chair of Computer Information System Department of Hashemite University
in Jordan. He has received his Bsc in electrical engineering from Jordan, his master from the New York
Institute of Technology, and his PhD from George Washington University, United States of America.
His research interests lays in Computer Science and Networking. He has experience in networking reli-
ability. Prior to joining the Hashemite University of Jordan, Dr. Obeidat held several key positions with
major international ICT and IS consultancy and solutions firms.
Isabella Bonacci is Research Professor of Corporate Organization at the Federico II University,
Naples, and at the Second University of Naples (SUN), Italy. She obtained her Ph.D in Business Econom-
ics and the degree in Economics both from Federico II University of Naples. She was visiting scholar
at the CMER, INSEAD Institute, Fontainebleau, France. Her research interests include economics of
information systems, corporate relationships and new organizational forms, strategic use of ICTs to im-
prove public corporate performances, with particular concern for the healthcare sector. She presented her
research at several national and international conferences, including the Italian Chapter of AIS (ItAIS),
the Mediterranean Conference of Information Systems (MCIS), and the International Conference of
Society for Global Business & Economic Development (SGBED). Her articles and works appeared
in Politiche Sanitarie and for the Italian Society of Health Technology Assessment (SIHTA). She also
published several book chapters.
Iyad Al Azzam is a lecturer and a faculty member at faculty of Information Technology. He has
received his Bsc in Computer Science from Jordan University of Science and Technology, Jordan, his
Master from Metropolitan University, UK. He has presented numerous articles in national and international
conferences. His research interests lays in management information systems and electronic business.
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About the Contributors
Jan Marco Leimeister is a full professor of information systems and holds the Chair for Information
Systems at Kassel University since 2008, He is furthermore a research group manager at the Computer
Science Department at Technische Universität München, Munich, Germany. He runs research groups
on virtual communities, eHealth,ubiquitous/mobile computing and manages several publicly funded
research projects. His teaching and research areas include eHealth, online communities, IT innovation
management, service science, ubiquitous and mobile computing, computer supported cooperative work,
and information management.
Johan De Jager holds a PhD degree and is Research and Innovation Professor of the Department
Marketing, Logistics and Sport management at the Tshwane University of Technology in Pretoria, South
Africa. His major areas of interest are marketing of non profit organisations and services like health
care and higher education. His major responsibilities are the supervising of post graduate students and
conducting other marketing related research projects. He represents the Faculty of Management Sciences
in a number of committees. Johan regularly acts as external examiner, locally and in various African
countries. He also serves on the executive board of three international academic conferences and acts
as referee for various scientific academic outputs.
José M. Castán is a Professor of Business Organization at the University of Barcelona (Spain). He
had been also an Associate Professor for more than a decade in the Business Organization Department at
the Technical University of Catalonia (Spain). He holds a Ph.D. in Economics and Business Administra-
tion (University of Barcelona). His research interests include logistics, quality, business organization and
strategic management. He has published several books, papers and proceedings regarding these fields.
Juan Miguel Gómez-Berbís is an Associate Professor at the Computer Science Department of the
Universidad Carlos III de Madrid. He holds a PhD in Computer Science from the Digital Enterprise
Research Institute (DERI) at the National University of Ireland, Galway and received his MSc in Tele-
communications Engineering from the Universidad Politécnica de Madrid (UPM). He was involved in
several EU FP V and VI research projects and was a member of the Semantic Web Services Initiative
(SWSI). His research interests include semantic web, semantic web services, business process model-
ling, b2b integration and, recently, bioinformatics.
Kamrul Ahsan is a senior lecturer of management in the Faculty of Business, Auckland University
of Technology, New Zealand. He holds a Ph.D. degree in industrial engineering and management from
Tokyo Institute of Technology, Japan. His current research interests include health care management,
sustainable supply chain, project performance analysis, and project contract modeling. His publications
have appeared in peer-reviewed journals such as International Journal of Project Management, Inter-
national Transactions in Operational Research, Asia Pacific Journal of Operational Research (APJOR),
Journal of Health Management, and International Journal of Industrial Engineering. He has taken part
in a number of international conferences and worked as reviewer for many international journals.
Luís Ferreira Pires is an Associate Professor at the Faculty of Electrical Engineering, Mathematics
and Computer Science of the University of Twente, Enschede, the Netherlands since 1994. He obtained
his PhD degree in 1994 from the University of Twente and his Master’s degree in 1989 from the ‘Escola
Politécnica da Universidade de São Paulo’, São Paulo, Brazil. His research interests include design
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About the Contributors
methodologies for distributed systems, architecture of distributed systems, modeling and specification
techniques, middleware platforms and distributed applications. Lately he has been working on the ap-
plication of model-driven architecture and semantic web technologies to the design of context-aware
applications and services. He published around 100 papers in international workshops, conferences and
journals. He is currently responsible for the courses ‘Programming 1 / 2’, ‘Java Middleware Technolo-
gies’ and ‘Service-oriented architecture with Web services’ at the University of Twente.
María J. Martínez-Argüelles is an Associate Professor of Economics and Business Administration
at the Open University of Catalonia (Barcelona, Spain). She holds a Ph.D. in Economics and Business
Administration (University of Barcelona), and a M.S. in Economics (Pompeu Fabra University). Her
research interests include organization management, quality and e-learning. She has published several
papers, book chapters and proceedings regarding these fields.
Marianna Sigala is Assistant Professor at the Democritus University, Greece. Before joining Dem-
ocritus University, she had been lecturing at the Universities of the Aegean (Greece) and the universities
of Strathclyde and Westminster in the UK. Her interests include productivity and service quality man-
agement, Information and Communication Technologies (ICT) applications in tourism and hospitality,
and e-learning. She has professional experience from the Greek hospitality industry and contributed to
several international research projects. Her work has been published in several academic journals and
international conferences. She is the co-chair of the Euro-CHRIE Special Interest Group (SIG) in ICT
in Hospitality and she currently serves at the Board of Directors of I-CHRIE, IFITT and HeAIS.
Michael R. Godfrey joined the Supply Chain & Operations Management faculty at the University
of Wisconsin Oshkosh in 2001. He teaches manufacturing planning & control, analytical methods, and
supply chain management at the undergraduate level and operations & process management in the MBA
program. He has published in the Journal of Business Logistics, the International Journal of Production
Economics, Six Sigma Forum Magazine, and the Journal of Network and Systems Management.
Mohammad Bsoul (PhD) is a assistant professor at Prince Al-Hussein bin Abdullah II Faculty of
Information Technology. He has received his Bsc in Computer Science from Jordan University of Sci-
ence and Technology, Jordan, his Master from University of Western Sydney, Australia and his PhD
from Loughborough University, United Kingdom. He has presented numerous articles in national and
international conferences. His research interests lays in Networking and Performance Management.
Nuri Basoglu is an associate professor in Department of Management Information Systems, Bogazici
University, Istanbul, Turkey. His research interests are socio-technical aspects of IS, customer-focused
product development, information technology adaptation and wireless service design, intelligent adaptive
human computer interfaces, information systems strategies. He has published articles in journals such as
Technology Forecasting and Social Change, Journal of High Technology Management and Technology
in Society, International Journal of Services Sciences. Dr. Basoglu received his BS in industrial engi-
neering, Bogazici University in Turkey, MS and PhD in business administration, Istanbul University.
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About the Contributors
Oscar Tamburis (*) is a Researcher at CNR (Italian Research National Council), Institute of High
Performances Networks, Naples, and Dept. of Technology Innovation, Rome, Italy. He obtained his
Ph.D degree in Management of Healthcare Organizations and the degree in Management and Industrial
Engineering both from Federico II University of Naples. His research interests include the role of ICTs
in the organisational change of public services, with particular concern for the healthcare sector. He
presented his research at several national and international conferences, including the Italian Associa-
tion for Healthcare Economics (AIES), the Italian Chapter of AIS (ItAIS), the Mediterranean Confer-
ence of Information Systems (MCIS), and the International Conference of Society for Global Business
& Economic Development (SGBED). His articles appeared in the International Journal of Electronic
Healthcare and International Journal of Healthcare Technology and Management and Hospital IT Europe.
Paul F. Schikora is associate professor of operations management in the College of Business at Indiana
State University. He earned his PhD in operations management from Indiana University’s Kelley School
of Business in 1999. He earned his MS degree in logistics management from the U. S. Air Force Institute
of Technology, and his BS degree in management from the Illinois Institute of Technology. He has 11
years experience as a United States Air Force officer in logistics and transportation management, and
currently holds a commission in the U.S. Air Force reserve. His work has been published in the Quality
Management Journal, International Journal of Production Economics, Journal of Network and Systems
Management and IEEE Transactions on Semiconductor Manufacturing. His research interests include
process simulation, quality management and improvement, manufacturing scheduling, and information
systems management. Dr. Schikora is a member of the Decision Sciences Institute, American Society
for Quality, Production and Operations Management Society, and APICS.
Qiyang Chen is a Professor of MIS in School of Business, Montclair State University. He earned
his Ph.D. in information systems from the University of Maryland, Baltimore. His research interests
are in the areas of human-computer interaction, database development, soft computing and information
resource management. His recent publications are in the International Journal of Human-Computer In-
teractions, Human System Management, Journal of Neural Network Computing and Applications, etc.
Dr. Chen has consulted with industry on various issues in information systems and regularly serves in
program committees for national and international conferences.
Rahul De’ is the Hewlett-Packard Chair Professor in ICT for Sustainable Economic Development at
IIM Bangalore. He has a B.Tech. from the Indian Institute of Technology, Delhi, an MBA University of
Delhi, and a Ph.D. from the Katz Graduate School of Business, University of Pittsburgh, U.S.A. Since
1990, he has taught Information Systems and Management Science courses in various universities in the
United States, India, France, Spain and Sweden. His research interests are in E-Governance and applica-
tions of ICT for development; and impacts of Free and Open Source software and its role in government.
He has interests in data mining, analytics and applied Artificial Intelligence. He has published over 40
articles in international journals, refereed conference proceedings and as chapters in books. In 2009, Dr
De’ was awarded the Outstanding Paper Award for Most Interdisciplinary and Innovative Research at
the 8th International Conference on Electronic Government held in Linz, Austria.
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About the Contributors
Ricardo Colomo-Palacios is an Associate Professor at the Computer Science Department of the Uni-
versidad Carlos III de Madrid. His research interests include applied research in People in IT, Software
Process Improvement, Software Project Management and Business Information Systems. He received
his PhD in Computer Science from the Universidad Politécnica of Madrid (2005). He also holds a MBA
from the Instituto de Empresa (2002). He has been working as software engineer, project manager and
software engineering consultant in several companies including Spanish IT leader INDRA.
Roslin V. Hauck is an Assistant Professor of Business Information Systems at Illinois State Univer-
sity. She received her Ph.D. from the Management Information Systems Department at the University
of Arizona. Her research interests include organizational change, technology adoption, and the use of
technology for communication and knowledge management. She has published in a number of journals
including Journal of Information Systems Education, Decision Support Systems, Journal of International
Management Studies, and Journal of the American Society for Information Science and Technology. She
teaches courses in business systems analysis and information systems in organizations and has received
numerous teaching awards at the college and university levels.
Ruben Xing received his PhD, Master of Science (M.S), and Master of Arts (M.A) in from Columbia
University, New York. Having worked for more than 15 years, Dr. Xing has held senior IT management
positions at several large financial conglomerates like Merrill Lynch, Citigroup, First-Boston/Credit
Suisse in metropolitan New York. His current research interests include Broadband and Wireless Com-
munications, the Internet transformations and security, Disaster Recover/Business Continuity Planning,
and Supply Chain Management.
Ruiliang Yan is an assistant professor of marketing at Indiana University Northwest. He received
his PhD in marketing from the University of Wisconsin, Milwaukee. He has published one book and
a number of articles in the different refereed journals. He also is serving as referee for many highly
prestigious journals. He specializes in marketing modeling, retailing and supply chain management.
Sherry M.B. Thatcher is an Associate Professor of Management at the University of Louisville.
She received her Ph.D. from the Management Department at the Wharton School of the University of
Pennsylvania. Her research revolves around teams and includes creativity, diversity faultlines, identity
recognition, the social effects of computer communication technologies, and team conflict. She has
published in a number of journals including The Academy of Management Journal, The Academy of
Management Review, Organizational Science, Journal of Management, and The International Journal
of Networking and Virtual Organizations.
Suraj Alexander is a professor in the Department of Industrial Engineering at the University of
Louisville. He has a BS degree in mechanical engineering from I.I.T, Madras, and MS and PhD degrees
in industrial engineering and operations research, from the Virginia Polytechnic Institute and State
University. Before entering academia, he worked as an equipment design engineer for Corning, Inc.
His current research interests are in the areas of quality assurance, process monitoring, diagnosis and
control, decision support systems, and logistics. Dr. Alexander is a fellow of the Institute of Industrial
Engineers and the American Society for Quality. He is a registered professional engineer in Kentucky,
and a certified quality engineer.
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About the Contributors
Suzanne Weisband is an Associate Professor in Management Information Systems at the University
of Arizona. She received her Ph.D. in Social and Decision Sciences and Policy Analysis from Carnegie
Mellon University. Her research examines the socio-technical aspects of large scale distributed col-
laboration, leadership, telemedicine services over time, work practices of system administrators, and
how interruptions affect work performance. She has published her work in leading management and
information systems journals. Her most recent book, Leadership at a Distance, was published by Psy-
chology Press in 2008. Her research has been funded by NSF and the Army Research Institute for the
Social and Behavioral Sciences.
Theon L. Danet resides in Newport News, Virginia. She received her BS from the University of
Maryland, her MBA from the Florida Institute of Technology, and her Ph.D. from Nova Southeastern
University. She has been employed with NASA Langley Research Center for the past eight years as an
Information Technology Specialist in charge of various projects. Before that, she was an Information
Technology instructor and Webmaster at the Military Traffic Management Command on Fort Eustis in
Newport News, Virginia. Dr. Danet served in the Army for six years as a Cryptographic Communication
Specialist. She lived in Germany for two years and then had an opportunity to work for General Colin
Powell’s communication team in the Pentagon for three years.
Tugrul Daim is an associate professor of engineering and technology management at Portland State
University. He is published in many journals including Technology in Society, Technology Forecast-
ing and Social Change, Int’l J of Innovation and Technology Management, Technology Analysis and
Strategic Management, and Technovation. Dr.Daim received his BS in mechanical engineering from
Bogazici University in Turkey, MS in mechanical engineering from Lehigh University in Pennsylvania,
another MS in engineering management from Portland State University and a PhD in systems science-
engineering management from Portland State University.
Umit Topacan is a MA student in the Department of Management Information Systems at Bogazici
University, Istanbul, Turkey. He received his BS in computer education and educational technologies
from the same university. His research interests include technology management, information technol-
ogy adoption, health information services and service development. He has work experiences both of
academia as a teaching and research assistantship; and private sector as IT consultant.
Uta Knebel is a full-time researcher at the chair for information systems, Technische Universitaet
Muenchen, Germany, since 2005. She works on projects related to IT-supported product-service bundles
for the sports industry and RFID. Her research interests include IT-supported health interventions, ubiqu-
itious computing, mobile commerce, IT innovation management, and adaption/diffusion of innovations.
Vishnuprasad Nagadevara is a Professor in the Quantitative Methods and Information Systems Area
at the Indian Institute of Management Bangalore. His current interests are Data Mining techniques and
applications, Application of Operations Research Techniques, Project Management, Project Evaluation
and Information Technology Applications. A graduate from Agriculture College, Bapatla, he did his Post
Graduation at GB Pant University of Agriculture and Technology and obtained his Doctorate from Iowa
State University, USA in Economics and Operations Research. He also worked at Iowa State University.
Dr. Nagadevara has published a number of articles in India and abroad on Data Mining, Application of
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About the Contributors
Statistical Methods and Operations Research Techniques. He also participated and presented papers in
national and international conferences. He was the Volume Editor for the book “Operations Research
Methods for Agricultural Decisions”, published by Iowa State University Press. He was also the Dean
of IIM Bangalore from 1997 to 2000.
Werner Soontiens is currently employed as Professor and Dean International of the Curtin Busi-
ness School overseeing the strategic intent and operational implementation of courses in commerce
in various international locations. Before this he was Head: School of Management, Curtin Business
School and Program Director: International Business. On the lecturing front he acts as unit controller for
International Management and Global Business Environment which is offered in 8 different locations
throughout Southeast Asia. In addition, he teaches International Business related content in graduate
and postgraduate courses both in Australia, Asia and China. He represents the faculty of business on a
number of university committees and was appointed as member and chair of various sub-committees.
Furthermore, Werner plays an active role in the recruitment of on-campus international students.
Yair Levy is an Associate Professor of Information Systems (IS) at the Graduate School of Com-
puter and Information Sciences at Nova Southeastern University. He is the director of the Center for
e-Learning Security Research (http://CeLSR.nova.edu/). During the mid to late 1990s, Dr. Levy helped
NASA develop e-learning platforms and manage Web infrastructures. He earned his Bachelor’s degree
in Aerospace Engineering from the Technion, Israel Institute of Technology. He received his MBA with
MIS concentration and Ph.D. in Management Information Systems from Florida International University.
His current research interests include e-learning security and users perceptions of IS. He has authored
a book and numerous research publications that appear in IS journals, conference proceedings, invited
book chapters, and encyclopedias. Dr. Levy is the editor-in-chief for the International Journal of Doctoral
Studies (IJDS) and serves on editorial board of other recognized scholarly journals. To find out more
about Dr. Levy, please visit his site: http://scis.nova.edu/~levyy/.
Zhongxian Wang is a professor at Montclair State University, New Jersey, USA. Professor Wang
teaches Operations Analysis, Production/Operations Management, Decision Support & Expert Systems,
Business Statistics, Operations Research, and Management Sciences. He is a member of Institute for
Operations Research and the Management Sciences (INFORMS), Information Resources Management
Association (IRMA), The Decision Sciences Institute (DSI), The Production and Operations Manage-
ment Society (POMS).
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Index
911 call data 1, 3, 7
911 calls 1-8
911 patients 2
A
accounting office 1-2, 10, 46-49, 54, 56, 60-61,
63-64, 217
ADSL – See Asymmetric Digital Subscriber Line.
Adverse Events Reporting System (AERS) 210
AI – See artificial intelligence.
ambulance diversion 1-4, 9-10
American Institute of Certified Public Accountants
(AICPA) 47, 64
Analytical Periodic Statement (APS) 46, 58
artificial intelligence (AI) 122, 125, 191, 209, 279
artificial neural networks (ANN) 155, 171-174, 176
Asymmetric Digital Subscriber Line (ADSL) 55, 63
B
bandwidth throttling 43
Borg scale 17, 20, 24
C
cable network 30
Central Bureau of Investigation (CBI) 167-168
centralized identification systems (CIS) 105-106,
108, 110, 113, 115
Central Public works department (CPWD) 220,
226, 229, 237
Certified Public Accountants (CPA) 47, 64
charge-sheeting 166-167, 176
Chronic Diseases’ Integrated Management 178, 189
CIS – See centralized identification systems.
CIT – See Critical Incident Technique.
Civil Military Emergency Preparedness (CMEP)
213
classification trees 166, 171, 173-176
client orientation 219, 222
cliques analysis 186
CMT – See Common Measurement Tool.
collaborative sports 12, 24
commercially competitive industry 193
Common Measurement Tool (CMT) 224-225
Community Platform Engineering Process (CoPEP)
14, 22
computerized centralized user identification 105
Computer Security Institute (CSI) 169, 177
computer self-efficacy (CSE) 95, 101, 105-111,
113-116, 118
computer use 46, 74, 91, 94-96
control systems 68, 151
CoPEP – See Community Platform Engineering
Process.
CPA – See Certified Public Accountants.
CPWD – See Central Public works department.
criminal activities 208, 214
Critical Incident Technique (CIT) 295-296, 299-
300, 307-309
CRM – See Customer Relationship Management.
Cronbach’s Alpha 105, 110-111, 201, 226-227
CSE – See computer self-efficacy.
CSI – See Computer Security Institute.
customer productivity 25, 36, 39-43
Customer Relationship Management (CRM) 58-59,
63, 116, 120, 157, 203, 205, 211, 280, 308
customer satisfaction 155, 163-165, 219-220, 222-
224, 227, 236-238, 284, 308-310
customer service 25, 27-29, 31-33, 37, 41, 43-44,
48, 160-161, 165, 211, 221, 280, 290
customer value 135-138, 140-144, 151, 153, 157
cybercrime 166-170, 172-177, 218
cyber-stalking 168
cyber-terrorism 168
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360
Index
D
data backup systems 50
dataflow diagram 252-253
data mining 30, 44, 166, 170, 176-177, 208-218,
279, 309
Data Over Cable Service Interface Specification
(DOCSIS) 30, 44
decision support 69, 78, 80, 177, 271, 277-282,
286-287, 289, 291-293
decision-support systems 295
dependent variable 109, 113, 115, 173
design science 239, 241, 258
developed countries 12, 167
dial-up modem pool (DMP) 25-33, 41, 43
diversion statistics 2
diversion status 2-3
DMP – See dial-up modem pool.
DOCSIS – See Data Over Cable Service Interface
Specification.
E
e3value technique 247
e-accounting 46, 48, 64
e-commerce 145, 158, 162, 168, 176, 283, 292-293,
308, 310
ED – See Emergency Department.
ED directors 2
ED diversion status 2
ED saturation 1
ED staff 1
ED visits 1
efficient utilization 260
e-finance 46
e-government 46-49, 63, 114, 167, 178
electronic services (e-services) 46, 48, 57, 61, 63-
64, 66, 135, 151-154, 300, 307, 310
emergency care 1-2, 8-9
Emergency Department (ED) 1-4, 9-10, 23, 44,
100, 132, 134, 155, 164-165, 177, 190-191,
205-206, 212-213, 217-218, 237, 272, 290
emergency management 1, 208, 212-213, 217-218
Emergency Medical Systems (EMS) 1-3, 6, 9
EMS – See Emergency Medical Systems.
EMS agencies 2-3, 6
Enterprise Resource Planning (ERP) 58-59, 79,
116, 188, 212
e-services – See electronic services.
European Union (EU) 48, 114, 262
F
faceted search 129-130
face-to-face support 15
first come, first served (FCFS) 28
G
GDP – See gross domestic product.
Geographic Information Systems (GIS) 120, 132-
134, 213
government agencies 105-107, 114-115, 169, 208-
209, 211
Graphical User Interfaces (GUI) 123-124, 126, 214,
218
gross domestic product (GDP) 67
H
HCO – See HealthCare Organizations.
healthcare industry 66, 211, 265, 273
healthcare operational planning 260
HealthCare Organizations (HCO) 78, 107, 178-179,
265
healthcare system 68, 180-181, 189, 260, 262-264
health expenditures 67
higher education 193-196, 198-207, 217, 295-300,
307-310
HRMS – See Human Resource Management Sys-
tem.
human-computer interface 47, 65, 133, 149
Human Resource Management System (HRMS)
212
hybrid products 11-12
I
ICDDR,B – See International Center for Diarrhoeal
Disease Research, Bangladesh.
ICT – See information and communication technol-
ogy.
ICT infrastructure 46, 48-49, 63
IMMSQ – See Integrated Model for Measuring
Service Quality
implementation success 105-110, 113-114
indoor patient department (IPD) 263-264
industry accountants 47
information and communication technology (ICT)
46-49, 52-56, 63-65, 80, 88, 133, 135-136, 138,
142-145, 150-151, 153, 155, 162, 166-167,
178-180, 183-184, 187-189, 296
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361
Index
information services 66, 72, 137-138, 141, 143-145,
151, 153, 239-242, 256, 259
information systems (IS) 1-7, 10-14, 17, 19, 21-34,
36-37, 39-50, 52, 54, 56-61, 63, 65-70, 72-77,
79-84, 86-145, 149-189, 192-199, 201-204,
207-224, 226-227, 229-231, 233-236, 238-272,
276-290, 292-303, 305-307, 309-311
Information Technology (IT) 1-5, 11-14, 16-17, 19-
22, 24, 27, 29-34, 37, 39-43, 46-50, 52, 54-55,
57-58, 60, 63, 66, 68, 71, 73-75, 78-81, 83, 87-
93, 95-100, 102-103, 106-108, 110, 113-115,
118, 121, 123-126, 128-129, 131-132, 137-139,
141-143, 145, 149-156, 158-170, 175-176, 181,
186-188, 191, 194-196, 198, 201-204, 209-217,
220-224, 227, 229, 231, 234-237, 239, 242-
244, 246-249, 252-253, 255, 257, 259, 261-
271, 277-278, 280-281, 287-288, 290-291, 293,
296-298, 300-301, 303, 305-307
Inland Revenue Services (IRS) 211, 214
integrated management 178, 183, 187-189
Integrated Model for Measuring Service Quality
(IMMSQ) 224
Integrated Services Digital Network (ISDN) 55, 63
intelligent monitoring 68
International Center for Diarrhoeal Disease Re-
search, Bangladesh (ICDDR,B) 261-262
Internet banking 78, 158, 162, 205
Internet use 49, 54, 56
IPD – See indoor patient department (IPD).
IRS – See Inland Revenue Services.
IS – See information systems.
ISDN – See Integrated Services Digital Network.
IS success model 108
ISU – See IS usage.
IS usage (ISU) 105, 108-113, 119
IT – See Information Technology.
iterative development 11, 14
IT management 66, 100
J
J2EE – See Java to Enterprise Edition.
Java software 126
Java to Enterprise Edition (J2EE) 19, 126-127
K
knowledge acquisition 126, 133, 281, 283, 292
knowledge management 88, 103, 122, 132, 134,
182, 187, 218
knowledge management systems 88
knowledge rules 208
L
LAN – See Local Area Networks.
Learning Management Systems (LMS) 297-298
Level of Conceptualization (LoC) 243, 248
Level of Representation (LoR) 243, 248, 256
LMS – See Learning Management Systems.
LoC – See Level of Conceptualization.
Local Area Networks (LAN) 47, 49-51, 63
logistic model 3-4, 6
logistic regression 1, 3, 5, 9, 112
LoR – See Level of Representation.
M
mashup application 277-290
mass customization (MC) 135-145, 149-157
MAST – See Metropolitan Ambulance Services
Trust.
MAUT – See Multi Attribute Utility Theory.
MC – See mass customization.
media rooms 277
MES – See Military Engineer Services.
Metropolitan Ambulance Services Trust (MAST) 1,
3, 8
Military Engineer Services (MES) 219-220, 222,
225-226, 229-231, 233-236
Ministry of Health and Family Welfare (MOHFW)
261-263, 273
mobile information systems 13
Mobile Sports Companion (MSC) 11, 13-15, 17,
19-22
modem-equipped computer 26
modem pool 25-26, 28, 31, 44
modem-to-modem connection 26
MOHFW – See Ministry of Health and Family
Welfare.
MSC – See Mobile Sports Companion.
Multi Attribute Utility Theory (MAUT) 125
multi-criteria decision making 264, 277-278, 281,
288
N
Natural Language Processing (NLP) 125, 131
network organizations 178, 180
neural nets 166
NLP – See Natural Language Processing.
nonprofit organizations 208-209
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362
Index
O
OECD – See Organization for Economic Co-opera-
tion and Development.
OLR – See ordinal logistic regression.
online environments 296-298, 307
online higher education 295-298, 300, 306-307
online learning 298, 302, 306-307, 309-310
online travel services 135, 144, 151
OPD – See outdoor patient department.
operational planning 260
Operations Research (OR) 1, 3-4, 7, 11-17, 19-22,
24-33, 36, 44, 47, 49-50, 52, 54-59, 66, 68-72,
74-75, 81-83, 88-94, 98-100, 106-107, 109-
110, 112-114, 118, 121-131, 136, 138, 140-145,
149-152, 155, 159-163, 166, 168-172, 174-176,
178-182, 184, 186-187, 195-197, 199, 203-204,
208-216, 221-223, 226-227, 231, 233-234, 236,
240, 242-245, 247-249, 251, 255-257, 260-271,
273-274, 277-285, 287-290, 296-298, 300-303
orbit queue 27-28, 31-32, 34
Ordered Weighted Averaging (OWA) 125, 134
ordinal logistic regression (OLR) 112-113
organizational environment 66
organizational forms 87-88, 99-100, 178-179
organizational variables 88, 101
Organization for Economic Co-operation and Devel-
opment (OECD) 48, 65
outdoor patient department (OPD) 263, 268
OWA – See Ordered Weighted Averaging.
OWL – See Web Ontology Language.
P
P2P – See Peer-to-Peer.
Partial Least Square (PLS) 105, 111-113, 116-117
pathology networks 178
PCA – See Principal Component Analysis.
Peer-to-Peer (P2P) 50, 259
Perceived Service Quality (PSQ) 222, 231, 237,
295-298, 300
personalised tourism 136
personalised travel services 136
personal training 12-13
physiological outcomes 88
PLS – See Partial Least Square.
police organization 87, 89, 94
political barriers 92
predictive model 30, 113, 166
Principal Component Analysis (PCA) 105, 110-111
private groups 208-209
private sector 169, 209, 214, 221, 227, 235, 269
product development 11-12, 136
product-service bundle 11, 13, 17
product-service packages 11-12
prototype mashup 277-278, 282, 284, 288
prototype mashup application 277-278, 282
PSQ – See Perceived Service Quality.
PSTN – See Public Switched Telephone Network.
public administration 101, 103, 189, 209-210, 215-
217, 237
public health operations 260
public sector 101, 103-104, 178, 198, 205, 208-210,
212, 219-222, 225, 227, 237, 269
Public Switched Telephone Network (PSTN) 55
Q
qualitative methodology 295
R
RDF – See Resource Description Framework.
remote medical procedures 68
research information 208, 211
Resource Description Framework (RDF) 124-127,
130, 133
resource utilization 100, 260, 266, 268-271
Retail Real Estate Agencies (RREA) 120-121, 127,
131
retrial queue 25, 27-28, 30, 33, 43-45
Risk Management Agency (RMA) 213
routinization 89-90, 94, 99, 101
RREA – See Retail Real Estate Agencies.
S
SBA – See Small Business Administration.
SEM – See structured equation modeling.
semantic annotation 123, 126-127, 131
semantic web 120-123, 126, 131-134, 292
SERREA 120-121, 123-125, 127-131
service discovery 239, 246, 257
service operations 30, 260
Service-Oriented Architecture (SOA) 239-240, 249,
254-255, 257-258, 291
service provider 20, 27, 31, 172, 174-175, 196, 199,
219, 221-223, 226, 234-236, 240, 244, 246-
248, 281
Service Quality (SERVQUAL) 66, 106, 157, 163-
165, 195, 199-200, 204-206, 219-227, 229-231,
234-238, 260, 263, 295-302, 306-311
service registry 239-241, 243-257
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363
Index
service sector 10, 23-24, 45-46, 65, 86, 100, 103-
104, 106, 114, 119, 121, 133-134, 137, 155-
157, 165, 177, 192, 207, 218, 238, 259, 276,
293-294, 309-311
SERVQUAL – See Service Quality.
shift work 87-91, 97-104
Small Business Administration (SBA) 210
smart homes 68
SNA – See Social Network Analysis.
SOA – See Service-Oriented Architecture.
SOA governance 239-240, 257
social environment 66, 181
social healthcare network 182, 188
Social Network Analysis (SNA) 178, 180-183,
187-192
social variables 88
software engineering 12, 102
structured equation modeling (SEM) 111
T
TAM – See Technology Acceptance Model.
task-technology fit (TTF) 78, 87, 89-92, 99, 102,
155
Technology Acceptance Model (TAM) 68, 75-76,
78-80, 87, 91, 98-99, 101-102, 104, 116, 140,
196, 204, 280
technology characteristics 66
technology fears 158
telecommunication systems 68
temporal boundaries 88
terrorist activities 208, 214-215
tertiary education 196-197, 205, 207
tertiary sector 193
Thana Functional Improvement Pilot Project
(TFIPP) 262, 265, 268-270
Thana Health Complex (THC) 262-266, 268, 271,
275
Theory of Planned Behavior (TPB) 68, 78, 91
Theory of Reasoned Action (TRA) 67-68, 76, 91
therapeutic continuity 184
Three-Tier-Model 12
TIA – See Total Information Awareness Project.
time limits 25, 27, 31-34, 36-44
Total Information Awareness Project (TIA) 215-216
TPB – See Theory of Planned Behavior.
TRA – See Theory of Reasoned Action.
training habits 17
TTF – See task-technology fit.
U
UI – See user involvement.
unidimensional IS usage 108
URES – See user’s resistance.
user behavior 22, 66, 77
user characteristics 66-67, 74-75, 77, 145, 149, 154
user involvement (UI) 105-111, 113-116, 118, 152
user satisfaction 65, 69, 87, 94, 103, 106, 150, 156,
234, 239, 241, 243, 247, 253-254, 256-257, 309
user’s resistance (URES) 105, 108-111, 113, 118
V
Value Aided Tax (VAT) 46, 57, 61, 63-64
Varimax rotation 105, 110
VAT – See Value Aided Tax.
Verein Deutscher Ingenieure (VDI) 12, 24
Voice over Internet Protocol (VoIP) 30, 54, 63
W
WAN – See Wide Area Networks.
Web 2.0 131, 153-154, 278, 292
Web 2.0 applications 278, 292
Web interface 15-16, 126, 251
Web Ontology Language (OWL) 125-127
weight classification 17
Wide Area Networks (WAN) 49, 220, 238
workscore 3
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Title
Copyright
Table of Contents
Detailed Table of Contents
Preface
Predicting Ambulance Diverson
Hybrid Value Creation in the Sports Industry: The Case of a Mobile Sports Companion as IT-Supported Product-Service-Bundle
Connect Time Limits and Performance Measures in a Dial-Up Modem Pool System
ICT Usage by Greek Accountants
Exploring the Adoption of Technology Driven Services in the Healthcare Industry
Temporal Aspects of Information Technology Use: Increasing Shift Work Effectiveness
Implementation Success Model in Government Agencies: A Case of a Centralized Identification System at NASA
SERREA: A Semantic Management System for Retail Real Estate Agencies
Mass Customisation Models for Travel and Tourism Information e-Services: Interrelationships Between Systems Design and Customer Value
Technology Fears: A Study of e-Commerce Loyalty Perception by Jordanian Customers
Predictive Models in Cybercrime Investigation: An Application of Data Mining Techniques
Deploying New Perspectives of Network Organizations for Chronic Diseases’ Integrated Management
Marketing and Reputation in the Services Sector: Higher Education in South Africa and Singapore
Data Mining in Nonprofit Organizations, Government Agencies, and Other Institutions
Understanding Expectations, Perceptions and Satisfaction Levels of Customers of Military Engineer Services in India
Service Registry Design: An Information Service Approach
Operational Performance Analysis of a Public Hospital Laboratory
A Mashup Application to Support Complex Decision Making for Retail Consumers
Using the Critical Incident Technique to Identify Factors of Service Quality in Online Higher Education
Compilation of References
About the Contributors
Index

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AN: 671678 ; Melo, Pedro, Machado, Carolina.; Effective Human Resources Management in Small and Medium Enterprises :
Global Perspectives
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Effective Human
Resources Management
in Small and Medium
Enterprises:
Global Perspectives
Carolina Machado
University of Minho, Portugal
Pedro Melo
University of Minho, Portugal
A volume in the Advances in
Human Resources Management and
Organizational Development (AHRMOD)
Book Series
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Titles in this Series
For a list of additional titles in this series, please visit: www.igi-global.com
Effective Human Resources Management in Small and Medium Enterprises Global Perspectives
Carolina Machado (University of Minho, Portugal) and Pedro Melo (University of Minho, Portugal)
Business Science Reference • copyright 2014 • 374pp • H/C (ISBN: 9781466647312) • US $185.00 (our price)
Strategic Approaches for Human Capital Management and Development in a Turbulent Economy
Patricia Ordóñez de Pablos (Universidad de Oviedo, Spain) and Robert D. Tennyson (University of Minnesota, USA)
Business Science Reference • copyright 2014 • 346pp • H/C (ISBN: 9781466645301) • US $185.00 (our price)
Building a Competitive Public Sector with Knowledge Management Strategy
Yousif Al-Bastaki (University of Bahrain, Bahrain) and Amani Shajera (University of Bahrain, Baharain)
Business Science Reference • copyright 2014 • 514pp • H/C (ISBN: 9781466644342) • US $185.00 (our price)
Collaborative Communication Processes and Decision Making in Organizations
Ephraim Nikoi (University of Wisconsin-Superior, USA) and Kwasi Boateng (University of Arkansas-Little Rock,
USA)
Business Science Reference • copyright 2014 • 353pp • H/C (ISBN: 9781466644786) • US $185.00 (our price)
Valuing People and Technology in the Workplace A Competitive Advantage Framework
Claretha Hughes (RHRC/COEHP, USA)
Information Science Reference • copyright 2012 • 421pp • H/C (ISBN: 9781466602403) • US $175.00 (our price)
Human Resource Management in the Digital Economy Creating Synergy between Competency Models and Information
Susana de Juana-Espinosa (Universidad de Alicante, Spain) Jose Antonio Fernandez-Sanchez (Universidad de
Alicante, Spain) Encarnacion Manresa-Marhuenda (Universidad de Alicante, Spain) and Jorge Valdes-Conca
(Universidad de Alicante, Spain)
Information Science Reference • copyright 2012 • 445pp • H/C (ISBN: 9781613502075) • US $175.00 (our price)
Distributed Team Collaboration in Organizations Emerging Tools and Practices
Kathy L. Milhauser (George Fox University, USA)
Business Science Reference • copyright 2011 • 336pp • H/C (ISBN: 9781609605339) • US $180.00 (our price)
Managing IT Human Resources Considerations for Organizations and Personnel
Jerry Luftman (Stevens Institute of Technology, USA)
Business Science Reference • copyright 2011 • 424pp • H/C (ISBN: 9781609605353) • US $180.00 (our price)
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Editorial Advisory Board
Chris Brewster, University of Reading, UK
Maria Emília Fernandes, University of Minho, Portugal
Ana Paula Ferreira, University of Minho, Portugal
Stephanie Jameson, Leeds Metropolitan University, UK
Oliver Mallett, Durham University, UK
Wayne O’Donohue, Griffith Business School, Australia
Teresa Carla Oliveira, University of Coimbra, Portugal
Cem Tanova, Eastern Mediterranean University, Turkey
Robert Wapshott, University of Sheffield, UK
Connie Zheng, Deakin University, Australia
List of Reviewers
Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Sultanate of Oman
Josh Bendickson, Louisiana State University, USA
Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia
Burcu Özge Özaslan Çalışkan, Istanbul University, Turkey
Dababrata Chowdhury, University of Suffolk, UK
Nil Selenay Erden, Turkey
Maria Emília Fernandes, University of Minho, Portugal
Ana Paula Ferreira, University of Minho, Portugal
Maria Carmen Galang, University of Victoria, Canada
Brian Harney, Dublin City University, Ireland
Stephanie Jameson, Leeds Metropolitan University, UK
Eric W. Liguori, California State University – Fresno, USA
Oliver Mallett, Durham University, UK
Olimpia Meglio, Department of Law, Economics, Management, and Quantitative
Methods (D.E.M.M.), Italy
Wayne O’Donohue, Griffith Business School, Australia
Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus
Teresa Carla Oliveira, University of Coimbra, Portugal
Pramila Rao, Marymount University, USA
Mercedes Rubio-Andrés, San Pablo CEU University, Spain
David Starr-Glass, State University of New York – Empire State College, USA
A. Suryanarayana, Osmania University, India
Cem Tanova, Eastern Mediterranean University, Turkey
Robert Wapshott, University of Sheffield, UK
Connie Zheng, Deakin University, Australia
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Table of Contents
Preface………………………………………………………………………………………………………………………………xvii
Introduction ………………………………………………………………………………………………………………………. xix
Chapter 1
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs …………….. 1
Maria Carmen Galang, University of Victoria, Canada
Intan Osman, Universiti Sains Malaysia, Malaysia
Chapter 2
Human Capital in Malaysian SMEs: HR Practices, Uniqueness, and Value …………………………………. 28
Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia
Brian Harney, Dublin City University, Ireland
Pua Eng Teck, Universiti Tun Abdul Razak, Malaysia
Chapter 3
Effective Human Resources Management Practices in Small and Medium Enterprises: Global
Perspectives of the MIST (Mexico, Indonesia, South Korea, Turkey) Economies ………………………… 44
Anil Chandrakumara, University of Wollongong, Australia
Pramila Rao, Marymount University, USA
Chapter 4
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises …….. 74
David Starr-Glass, State University of New York – Empire State College, USA
Chapter 5
Managing Human Resources in Family Businesses: A Review on the Current State of Research
and New Proposals for the Future …………………………………………………………………………………………… 96
Santiago Gutiérrez-Broncano, University of Castilla-La Mancha, Spain
Mercedes Rubio-Andrés, San Pablo CEU University, Spain
Pedro Jiménez Estévez, University of Castilla-La Mancha, Spain
Chapter 6
HRM Practices and Problems in Family-Owned SMEs …………………………………………………………… 113
Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey
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Chapter 7
Intergenerational Transition in a Small Family Business: Evidence from a Process Study …………… 131
Carlo Mari, University of Molise, Italy
Olimpia Meglio, University of Sannio, Italy
Chapter 8
The Role of Human Resources Practices in Conflict Management: Implications for Small-Medium
Enterprises …………………………………………………………………………………………………………………………. 148
Nil Selenay Erden, Istanbul University,Turkey
Chapter 9
Occupational Health and Safety in SMEs: Overview as a Part of Management System ………………. 167
Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey
Chapter 10
The Impact of the Entrepreneur’s Educational Level on the Employment Creation by New Small
and Medium Enterprises ……………………………………………………………………………………………………… 183
João Zambujal-Oliveira, Instituto Superior Técnico, Universidade de Lisboa, Portugal
Luis Contente, Instituto Superior Técnico, Universidade de Lisboa, Portugal
Chapter 11
Placing SMEs at the Forefront of SHRM Literature ……………………………………………………………….. 201
Josh Bendickson, Louisiana State University, USA
Eric W. Liguori, California State University – Fresno, USA
Jeffrey Muldoon, Louisiana State University, USA
Lindsay N. Newport, The Martin Agency, USA
K. Mark Weaver, University of South Alabama, USA
Chapter 12
How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest
of Hopeless Unemployed Youths: Case Study of Two Selected Cities in Tanzania ……………………… 222
Felix Adamu Nandonde, Aalborg University, Denmark
Pamela John Liana, Open University of Tanzania, Tanzania
Chapter 13
The Rise, Decline, and Regeneration of Industrial Districts: Enhanced HRM, SMEs, and
Location ……………………………………………………………………………………………………………………………. 238
Stuart Holland, University of Coimbra, Portugal
Teresa Carla Oliveira, University of Coimbra, Portugal
Chapter 14
Self-Managing Teams in Small and Medium Enterprises (SME) ………………………………………………. 280
Mercedes Rubio-Andrés, San Pablo CEU University, Spain
Santiago Gutiérrez-Broncano, Castilla-La Mancha University, Spain
Luis Varona-Castillo, San Pablo CEU University, Spain
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Chapter 15
Decision Making in SMEs: Insights from Business Ethics and Entrepreneurship ……………………….. 301
Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus
Chapter 16
Innovation Strategies in SME: Global Perspective ………………………………………………………………….. 315
Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Oman
Chapter 17
Hierarchies and Holdings: Implications of SME Entrepreneurship for Enhanced HRM in
Hospital Management …………………………………………………………………………………………………………. 342
Teresa Carla Oliveira, University of Coimbra, Portugal
Stuart Holland, University of Coimbra, Portugal
João Fontes da Costa, Instituto Politécnico de Coimbra, Portugal
Francisco Edinaldo Lira de Carvalho, University of Coimbra, Portugal
Chapter 18
HRM Evolution in SMEs: Recruitment and Selection Case …………………………………………………….. 377
Pedro Ribeiro Novo Melo, University of Minho, Portugal
Carolina Feliciana Machado, University of Minho, Portugal
Chapter 19
Internationalization Services for Small and Medium Enterprises: A Case Study …………………………. 393
Enrico Buggea, Politecnico di Milano, Italy
Roberto Castiglione, Politecnico di Torino, Italy
Tania Cerquitelli, Politecnico di Torino, Italy
Lorenzo Grosso, Politecnico di Torino, Italy
Giacomo Rontini, Politecnico di Milano, Italy
Arianna Scolari, Politecnico di Milano, Italy
Lei Xiang, Politecnico di Torino, Italy
Chapter 20
Entrepreneurship Readiness in Turkey: Profiles from Istanbul-Kayseri-Van Provinces ……………….. 415
Leyla Tulunay, Hacettepe University, Turkey
Semra Güney, Hacettepe University, Turkey
M. Kemal Öktem, Hacettepe University, Turkey
Compilation of References ………………………………………………………………………………………………… 427
About the Contributors …………………………………………………………………………………………………….. 493
Index ………………………………………………………………………………………………………………………………… 502
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Detailed Table of Contents
Preface………………………………………………………………………………………………………………………………xvii
Introduction ………………………………………………………………………………………………………………………. xix
Chapter 1
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs …………….. 1
Maria Carmen Galang, University of Victoria, Canada
Intan Osman, Universiti Sains Malaysia, Malaysia
From a survey of Small and Medium-Sized Enterprises (SMEs) in Malaysia and the Philippines, the
authors find that the adoption of strategic Human Resource Management (HRM) is at best at a moderate
level. The adoption of strategic HRM by SMEs in both Malaysia and the Philippines is predicted from
the positive effect of legal and regulatory requirements, the importance of business environment chal-
lenges, and the strategic role of the HR professional. Furthermore, regression analysis shows that in both
countries, SMEs with strategic human resource management have better organizational performance
in terms of human resource outcomes, operational outcomes, and financial outcomes, but the impact is
larger in the Philippine SMEs. This study adds empirical evidence currently available from a small set
of countries, mostly in North America and Europe. The authors end this chapter with implications for
policy makers and HR practitioners and provide recommendations for future research.
Chapter 2
Human Capital in Malaysian SMEs: HR Practices, Uniqueness, and Value …………………………………. 28
Kenneth Cafferkey, Universiti Tun Abdul Razak, Malaysia
Brian Harney, Dublin City University, Ireland
Pua Eng Teck, Universiti Tun Abdul Razak, Malaysia
This chapter explores Human Capital in Malaysian SMEs. Malaysia has placed significant policy emphasis
on indigenous SMEs as a basis for achieving economic growth and competitiveness. This renders the
human capital infrastructure of SMEs of critical importance. However, the reality is that there is little
information as to the nature of HR practices and their impact in Malaysian SMEs. This chapter aims
to fill this void by exploring descriptive findings from a unique sample of over 200 Malaysian SMEs.
Drawing on the work of Lepak and Snell in particular, the chapter offers insights into human capital
uniqueness and human capital value in the firms investigated. The performance and policy implications
of the research are discussed and future research avenues outlined.
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Chapter 3
Effective Human Resources Management Practices in Small and Medium Enterprises: Global
Perspectives of the MIST (Mexico, Indonesia, South Korea, Turkey) Economies ………………………… 44
Anil Chandrakumara, University of Wollongong, Australia
Pramila Rao, Marymount University, USA
This chapter explores HRM (Human Resource Management) practices in SMEs (Small and Medium
Enterprises) in the MIST (Mexico, Indonesia, South Korea, and Turkey) economies. Researchers and
consultancy firms such as Goldman Sachs have suggested that these nations will be potentially very
strong trading economies for the next decade based on economic analyses. SMEs play pivotal roles in
these nations as they contribute to a majority of their domestic employment and GDP (Gross Domestic
Product). The focus of the chapter is based on a thorough investigation of secondary sources on HRM
practices (recruitment and selection, training and development, performance management, and compen-
sation) of SMEs in the MIST nations. Institutional theory and Strategic Human Resource Management
(SHRM) perspectives are showcased in understanding these practices better. The findings of the study
suggest that HRM practices adopted in the MIST countries, both individually as well as a cluster, reflect
the aspects of universalistic, contingency, resources bases, and institutional perspectives of the Strategic
HRM (SHRM) model. The evidence also indicates the simultaneous adoption of both convergence and
divergence theories of international HRM. The chapter also presents a model of HRM practices adopted
by the SMEs in the MIST nations. Theoretical and practical implications of findings are discussed and
directions for future research are provided.
Chapter 4
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises……… 74
David Starr-Glass, State University of New York – Empire State College, USA
In large-scale operations, strategically orientated Human Resource Management generally has a structural
function. In small- and medium-sized enterprises, however, strategic intent has to be more intimately
matched to entrepreneurial behavior of core management. In these firms, HR is not an added layer but
rather a key synergistic element in their strategic configuration. Considering the economic challenges faced
by the small firm, it would seem that some form of strategically orientated HR is beneficial; however, it is
often unconsidered. Taking a resource-based view of the firm and a configurational approach to strategy,
this chapter considers the challenges to strategically orientated HR adoption in small entrepreneurial
enterprises. It examines the characteristics of entrepreneur-founders, strategic orientation, and strategic
configuration in an increasingly globalized context. Challenges to HRM adoption are identified, and a
number of possible solutions are considered.
Chapter 5
Managing Human Resources in Family Businesses: A Review on the Current State of Research
and New Proposals for the Future …………………………………………………………………………………………… 96
Santiago Gutiérrez-Broncano, University of Castilla-La Mancha, Spain
Mercedes Rubio-Andrés, San Pablo CEU University, Spain
Pedro Jiménez Estévez, University of Castilla-La Mancha, Spain
Although a lot of research has been carried out in the field of family businesses in recent years, not much
of it has focused on human resource management. After compiling the major studies, both negative
aspects (e.g. nepotism) and positive ones (e.g. employee commitment) have been identified. Therefore,
the authors propose high-performance human resources practices to reduce the negative impact of fam-
ily in business and boost the positive effects, increase their human capital, and achieve a competitive
advantage in this field. Finally, the authors provide key insights for practitioners, family business owners,
and managers, and they propose future research directions.
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Chapter 6
HRM Practices and Problems in Family-Owned SMEs …………………………………………………………… 113
Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey
In exchange for the need for more highly trained employees, there is not enough qualified labor in the
market. Small- and Medium-Sized Enterprises (SMEs) play an important role in the economies of countries
because of their characteristics about generating employment. Effective Human Resource Management
(HRM) is becoming increasingly important in the modern knowledge-based economy and vital for the
success of small- and medium-sized enterprises. However, there are few studies concerning HRM prac-
tices of SMEs. The purpose of this study is to analyze the current HRM practices of SMEs, especially
which are family businesses, and to identify HRM practices and the problems within these SMEs. With
the help of the literature review, helpful suggestions about HRM practices are developed for SMEs.
Chapter 7
Intergenerational Transition in a Small Family Business: Evidence from a Process Study …………… 131
Carlo Mari, University of Molise, Italy
Olimpia Meglio, University of Sannio, Italy
Family businesses constitute the key infrastructure of wealth creation across the globe. One of the most
important human-resource challenges they face is intergenerational transition, an issue that has received
considerable attention from scholars in various countries. Despite this great interest, academics are still
attempting to understand the phenomenon and provide effective managerial guidance on how family
businesses can make it to the second generation. This chapter seeks to contribute to family business
research by offering a more nuanced understanding of intergenerational transition that builds on a con-
ceptualization of the phenomenon as a process rather than the prevailing view of it as an instantaneous
event. In order to capture the processual nature of intergenerational transition, evidence is presented
from a field study carried out in a small Italian family business that was the arena of three different
intergenerational transitions taking place at different time periods. The evidence gathered suggests that
the process is shaped by interaction of the different parties involved, who renegotiate their roles as it
unfolds, with various factors playing a part.
Chapter 8
The Role of Human Resources Practices in Conflict Management: Implications for Small-Medium
Enterprises …………………………………………………………………………………………………………………………. 148
Nil Selenay Erden, Istanbul University,Turkey
The aim of this chapter is to provide a conceptual basis on the role of HR (Human Resources) practices
in conflict management in the context of small business. However, conflict management is not accounted
as a formal function of HRM (Human Resources Management) such as selection, performance appraisal,
or administrative services. Besides, HR functions in Small-Medium Entreprises (SMEs) are usually
carried by owners or line managers while some practices might be outsourced, as well. Consequently,
managing human resources is different in SMEs due to firm size, priorities of the owner, and informal-
ity. Therefore, the challenge is to build the link between HR functions and conflict management in the
context of small business. In this respect, the chapter emphasizes the importance of managing human
capital effectively in terms of managing conflicts.
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Chapter 9
Occupational Health and Safety in SMEs: Overview as a Part of Management System ………………. 167
Burcu Özge Özaslan Çalişkan, Istanbul University, Turkey
Employees of Small- and Medium-Sized Enterprises (SMEs) are exposed to higher risks than the em-
ployees of larger ones, and SMEs have difficulties in controlling risk. Many countries have noticed the
potential of the SMEs, and they judge employment and economic growth to a great extent based on
these enterprises. The studies regarding this subject have increased during the last decade, parallel to the
political and economic interests in occupational health and safety in SMEs. The objective of this chapter
is to reveal general conclusions on effective approaches to prevent occupational diseases and injuries
in SMEs and to gain information related to employment, welfare and health facilities, health education,
legislation, occupational health, and safety management as a part of integrated management systems and
other safety activities. The chapter also aims to facilitate developing an informative perspective about
Occupational Health and Safety Management Systems (OHSMS) in SMEs by emphasizing the drivers,
benefits, and barriers of SMEs trying to adopt these systems.
Chapter 10
The Impact of the Entrepreneur’s Educational Level on the Employment Creation by New Small
and Medium Enterprises ……………………………………………………………………………………………………… 183
João Zambujal-Oliveira, Instituto Superior Técnico, Universidade de Lisboa, Portugal
Luis Contente, Instituto Superior Técnico, Universidade de Lisboa, Portugal
This chapter examines the effects of different types of start-up rates on subsequent employment change.
Longitudinal data on start-ups and employment in Portuguese regions in the period 1996–2007 is used
for the analysis. The study addresses whether diverse types of new small- and medium-sized enterprise
formation have heterogeneous effects on regional employment generation. It is found that, for the range
considered, the seven types of start-ups led to significant and negative effects on the average variation
of regional employment. It is also observed that these effects were more negative for start-ups with at
least one business owner with higher education in engineering and for start-ups with at least one busi-
ness owner with higher education in management. The last conclusion is that the share of highly skilled
employees has a statistically significant and positive impact on the average employment change and,
therefore, on regional development.
Chapter 11
Placing SMEs at the Forefront of SHRM Literature ……………………………………………………………….. 201
Josh Bendickson, Louisiana State University, USA
Eric W. Liguori, California State University – Fresno, USA
Jeffrey Muldoon, Louisiana State University, USA
Lindsay N. Newport, The Martin Agency, USA
K. Mark Weaver, University of South Alabama, USA
High Performance Work Practices (HPWPs) provide firms with resources to improve employee- and
firm-level outcomes. While recent literature in this field begins to explore the role and benefits of HPWPs
in Small- to Medium-Sized Enterprises (SMEs), much remains unknown. To address this deficiency,
the authors explore the dominant HPWPs used by SMEs, demonstrating that in some U.S. firms SMEs
are just as human resource savvy as their larger counterparts. Ultimately, they both advance the SHRM
literature and provide a better understanding of the common HPWPs (e.g., compensation, training,
development, etc.) used by U.S. SMEs.
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Chapter 12
How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest
of Hopeless Unemployed Youths: Case Study of Two Selected Cities in Tanzania ……………………… 222
Felix Adamu Nandonde, Aalborg University, Denmark
Pamela John Liana, Open University of Tanzania, Tanzania
There is a general consensus among scholars that the HR practices by corporate companies cannot
be imitated by Small and Medium Enterprises (SMEs). Even though it is a neglected sector, SMEs in
Tanzania are considered to be a major contributor to the national economy in terms of tax payment and
job creation. Using a case study, this chapter investigates human resource practices in the recruitment
process among the SMEs in a car maintenance sub sector. The nature of doing business is more informal,
whereby a customer can bring a car to the garage and the technicians work on the car without bargain-
ing for the cot of the work. Accordingly, there have usually been complaints from customers regarding
over charging for the services offered and lack of trust among technicians, especially on matters relating
to falsification on spare parts. In addressing this problem, garage owners have to make sure that they
employ people with good character; those who cannot temper with customers’ property tarnish the im-
age and reputation of the company.
Chapter 13
The Rise, Decline, and Regeneration of Industrial Districts: Enhanced HRM, SMEs, and
Location ……………………………………………………………………………………………………………………………. 238
Stuart Holland, University of Coimbra, Portugal
Teresa Carla Oliveira, University of Coimbra, Portugal
Who does what, and how, is central to Human Resource Management (HRM). Where people do has been
central to theories of location and the clustering of firms in industrial districts. Yet there has been little
boundary spanning between HRM and location theories. This chapter seeks to redress this in relation to
the rise and decline of industrial districts of small and medium firms and to draw implications for their
potential regeneration. It relates this to cost-based models of locational and competitive advantage, theo-
ries of flexible specialisation, the “triple helix” concept of enterprise-university-government relations,
and the challenges both for entrepreneurs and for policy makers in an era in which industrial districts
are no longer only local but already have “gone global.” In forwarding the concept of “enhanced HRM,”
the chapter advocates that public policies for SMEs should encourage surfacing tacit knowledge in
new product innovation, achieving kaizen style continuous improvement, stretching core competences,
profiling and extending latent abilities and implicit skills, and boundary spanning to synergise research
with new high-tech start ups. While critical both of Michael Porter’s dismissal of tacit knowledge and
kaizen, and of European research and regional policies, the chapter gives examples of success in such
policies and how “enhanced HRM” can draw from them to regenerate industrial districts.
Chapter 14
Self-Managing Teams in Small and Medium Enterprises (SME) ………………………………………………. 280
Mercedes Rubio-Andrés, San Pablo CEU University, Spain
Santiago Gutiérrez-Broncano, Castilla-La Mancha University, Spain
Luis Varona-Castillo, San Pablo CEU University, Spain
Small and Medium Enterprises (SMEs) are looking for a sustainable and profitable business concept. They
use a human resource model according to the situation and establish a democratic system with flexible
work, focusing on responsibility and initiative and increasing the self-control of the team´s members.
Self-managing teams have been used more and more in recent years in the business environment. They
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are relatively autonomous work groups whose members share responsibility and leadership to accomplish
their independent tasks. Their objective is to develop a type of collective knowledge that requires the
pooling of individual knowledge. Their characteristics include independent, autonomous decision making,
shared responsibility, and shared leadership. Sometimes, self-managing teams are also responsible for
personnel decisions within the team, such as working hours, the selection and contracting of members,
dismissal, and even determining salaries. In sum, the authors propose self-managing teams (such as
High Performance Practices) as a good human resource management in small and medium enterprises
and show how they can help to create organizational effectiveness and competitive advantage in SMEs.
Chapter 15
Decision Making in SMEs: Insights from Business Ethics and Entrepreneurship ……………………….. 301
Gizem Öksüzoğlu-Güven, University of Mediterranean Karpasia, Northern Cyprus
This chapter explores theories and concepts of ethical decision making in SMEs and how individuality
of entrepreneurs affects their organisations. In order to investigate the entrepreneurial ethical decision-
making process, the chapter crossbreeds the concepts of greed and power, cognitive moral development,
ethical ideologies, and individual psychological characteristics as determinant of ethical decision making.
Through discussion of relevant models, the chapter presents arguments on determinants of individual
ethical decision making as well as external factors that influence the decision-making process. In doing so,
it aims to provide a distinctive perspective on understanding decision making in SMEs through forming
a bridge between individual moral psychology and entrepreneurial decision making. This understanding
enables us to have an alternative reasoning when examining employment-related issues.
Chapter 16
Innovation Strategies in SME: Global Perspective ………………………………………………………………….. 315
Neeta Baporikar, Ministry of Higher Education, CAS – Salalah, Oman
Small and Medium Enterprises (SMEs) play a vital role in a country’s economic development. The
current trend of economic growth and rapid industrial development has made many countries open up
their economies to the world. In conjunction, governments the world over are devoting and designing
SME development plans to assist the SMEs in meeting new business challenges in the competitive
global business environment. The focus of this chapter is identifying and analyzing innovation strate-
gies in SMEs, drivers of innovation in SMEs from global perspective, and understanding the need of
effective HRM to drive innovation. This will help in getting an idea about the competitiveness facing
SMEs in the global business environment since challenges of SMEs in a globalized market together
with economic turmoil is the reality. Further, two mini-cases reflecting SME innovation strategies are
provided for better understanding.
Chapter 17
Hierarchies and Holdings: Implications of SME Entrepreneurship for Enhanced HRM in Hospital
Management ………………………………………………………………………………………………………………………. 342
Teresa Carla Oliveira, University of Coimbra, Portugal
Stuart Holland, University of Coimbra, Portugal
João Fontes da Costa, Instituto Politécnico de Coimbra, Portugal
Francisco Edinaldo Lira de Carvalho, University of Coimbra, Portugal
This chapter proposes that key features of New Public Management (NPM) in complex public service
organisations, such as teaching hospitals, are less new than a reversal to Weberian hierarchy, Fordist
concern with throughput rather than quality, Taylorist standardised performance criteria, and Foucauldian
surveillance. While this judgement is severe, it illustrates that such management models combined with
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market or quasi-market criteria have been dysfunctional in the UK in near trebling administrative costs,
demotivating health professionals, and in the view of their professional associations, risk destroying the
principles of a national health service. It proposes that those concerned to counter this could draw on
more plural modes of management in public sector institutions such as holding companies as a model
for reforms in hospital organisation, which could enable a degree of relative autonomy for individual
services and units similar to that typical of small- to medium-sized firms. It distinguishes organisational
logic as the basis for economic efficiency from operational logic as the basis for social efficiency in
terms of psychological wellbeing of both health professionals and patients. It submits that doctors as
managers of staff in different services and units need relative autonomy for effective implementation
of Human Resource Management (HRM) practices at operational levels to be able to enhance purpose-
ful engagement and vocational commitment to health as public service as well to enable psychological
contracting into change. Informed by a case study within a socio-cognitive approach in a major Euro-
pean teaching hospital, it then draws implications concerning the merits of a holding company model
for hospital organisation.
Chapter 18
HRM Evolution in SMEs: Recruitment and Selection Case …………………………………………………….. 377
Pedro Ribeiro Novo Melo, University of Minho, Portugal
Carolina Feliciana Machado, University of Minho, Portugal
The enormous business competitiveness at a global scale and the constant search for sources of competi-
tive advantage have led several scholars and practitioners to implement their studies to pay attention to
the potential of HRM in the success of companies. Portugal, like others European countries, is not set
apart from the question of HRM. However, it is rare and recent to find empirical literature on practice
of HRM in Portugal, and even more scarce to find literature that focuses on SMEs. This study clarifies
the situation of SMEs in the Portuguese context, serving as a basis for discussion on HRM in SMEs in
an international context. This chapter looks to understand the role of recruitment and selection on Hu-
man Resource Management (HRM) at Small and Medium Enterprises (SMEs) in Portugal, as well as
contribute to a better knowledge of this area, still little studied. More particularly, it aims to understand
the level of implementation of recruitment and selection. Data was collected by questionnaire from 512
small and medium enterprises in Portugal, and from these, 3 hypotheses were formulated and tested
using the SPSS program. From this study, the authors conclude that HRM is not yet a reality in SMEs.
Recruitment and selection are the HRM practices more commonly used in SMEs, but in an informal way.
Chapter 19
Internationalization Services for Small and Medium Enterprises: A Case Study …………………………. 393
Enrico Buggea, Politecnico di Milano, Italy
Roberto Castiglione, Politecnico di Torino, Italy
Tania Cerquitelli, Politecnico di Torino, Italy
Lorenzo Grosso, Politecnico di Torino, Italy
Giacomo Rontini, Politecnico di Milano, Italy
Arianna Scolari, Politecnico di Milano, Italy
Lei Xiang, Politecnico di Torino, Italy
To be successful exporters, SMEs have to penetrate foreign markets rapidly, at low cost, maintaining
control of core technologies and products, while adapting product features to local customer requirements
and preferences. Entrepreneurs have to find and evaluate potential partners, overcoming differences in
business cultures and their ignorance of foreign accounting rules. Internationalization has deep and rel-
evant implications in effective human resources management. In fact, the expansion of the firms allows
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the creation of new job opportunities both in the home country and abroad. This process could be seen
as a solution, or better as mitigation, for the current problem of unemployment that our society has to
face in this period of crisis. SMEs need to be supported in their expansion abroad. In Italy, public and
private agencies provide services to achieve this. The aim of this chapter is to analyze how they operate,
what services they provide, and how much they support enterprises. As a case study, the authors examine
services provided by Chinese agencies because China is one of the most active countries in international
markets. Italian and Chinese agencies are compared focusing on the existing standard services provided
and their customization according to specific domain needs. Finally, the authors present a global view
of today’s scenario to define future directions of current internationalized services.
Chapter 20
Entrepreneurship Readiness in Turkey: Profiles from Istanbul-Kayseri-Van Provinces ……………….. 415
Leyla Tulunay, Hacettepe University, Turkey
Semra Güney, Hacettepe University, Turkey
M. Kemal Öktem, Hacettepe University, Turkey
The target group of the study is composed of the entrepreneurs having business in manufacturing and
services in Istanbul (Marmara Region), Kayseri (Central Anatolia Region), and Van (Eastern Anatolia
Region), Turkey. Istanbul is a first degree developed city, Kayseri is a second degree developed city,
and Van is a fifth degree developed city. A questionnaire having three parts was developed to collect
data for the study. The first part of the questionnaire was about the factors influencing the decisions of
establishment of a new business, the second part was about the personality characteristics, and the third
part was about the demographic features of the entrepreneurs. One-hundred-seventy-eight questionnaires
were collected from the companies in the targeted regions, and their results are analyzed statistically.
Compilation of References…………………………………………………………………………………………………..427
About the Contributors……………………………………………………………………………………………………….493
Index ………………………………………………………………………………………………………………………………… 502
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xvii
Preface
This book is dedicated to SMEs management with a special emphasis in Human Resource Management
(HRM). It provides discussion and the exchange of information on principles, strategies, models, tech-
niques, methodologies, and applications of HRM in SMEs in the field of public and private organizations.
It aims to communicate the latest developments and thinking on the management subject worldwide.
More and more, big organizations are giving place to SMEs. However, we still see that, in what
concerns SMEs, HRM strategies, policies, and practices, remain the same as those established and
implemented in big organizations. Indeed, although very different in dimension/size and philosophy, the
management developed is still the same. Drawing on the latest developments, ideas, research, and best
practice, this book intends to examine the implications of the changes taking place and how they affect
the management and motivation of human resources belonging to these organizations. It is important to
know what is happening on both national and international fronts to be able to understand and develop
effective responses to meet these new demands.
The book has a special focus in research on important issues that transcend the boundaries of single
academic subjects and managerial functions. Among others, it assists readers to develop a coherent
understanding about human resources management in SMEs and how lessons learned by the different
perspectives presented might be transferred to new contexts.
The book has 20 chapters, which present different perspectives of the importance of human resources
in these organizations and have a special focus on current and relevant issues in the field of HRM in
SMEs. Topics covered in the book include:
• Human Resources Management (HRM) in family businesses.
• Strategic HRM in SMEs.
• Intergenerational transition in SMEs.
• Conflict management.
• Occupational health and safety in SMEs.
• Entrepreneur education/employment creation.
• Politics and practices of HRM in SMEs.
• Self-managing teams in SMEs.
• Business ethics and entrepreneurship.
• Innovation strategies in SMEs.
• International perspectives of HRM in SMEs.
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xviii
The chapters do not need to be read in their given order, although it is recommended to do so. Indeed,
each of them can be read independently as they offer a complete point of view about the particular topic
on which they focus.
Today, the interest in this subject is evident not only for many important institutes and universities
but also for different professionals around the world. Identifying the theoretical as well as practical im-
plications of the work in SMEs, the book can be used by academics, researchers, managers, and other
professionals in related matters with human resources management in SMEs.
Carolina Feliciana Machado
University of Minho, Portugal
Pedro Manuel Ribeiro Novo de Melo
University of Minho, Portugal
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xix
Introduction
OBJECTIVE OF THE BOOK
The main aim of this book is to provide a channel of communication to disseminate HRM in SMEs
knowledge between academics/researchers and managers. It serves as a useful reference for academics,
researchers, managers, engineers, and other professionals in related matters with HRM in SME. Taking
into account these concerns, this book looks to:
• Find out how SMEs around the world are tackling today’s employment challenges and changes.
• Critically evaluate alternative strategies for improving working conditions and develop effective
relationships between employers and their employees in SMEs.
• Identify the effective organizational and HRM strategies in SMEs.
• Keep at the forefront of innovative theories and the latest research activity relating to HRM in
SME.
• Participate in an international, interdisciplinary exchange of information, ideas, and opinions
about SME.
• Examine best practice on HRM in SME.
• Share knowledge through debate and information exchange about the best HRM practices and
politics in SME.
• Keep up to date with current developments and emerging trends about HRM in SMEs.
Considered an important tool, both to academics and practitioners, as it contributes to a more effective
advance and tools of communication in what concerns the understanding of key issues related to HRM in
SME, this book looks to identify HRM strategies, politics, and practices necessary to develop and imple-
ment SMEs, allowing these organizations to obtain more efficient and competitive management models.
The book is written and organized in order to help readers develop a coherent understanding about
HRM in SMEs, as well as to provide readers with original and cutting-edge contributions in the HRM
and SMEs subject, allowing them to learn and transfer this new acquired knowledge to new and differ-
ent situations.
CONTRIBUTIONS
Following these main aims, the contributors look to explore the different processes, politics, practices,
and strategies of how to manage human resources in small and medium enterprises in a global perspec-
tive in order to contribute to a better understanding, as well as to improve an effective HRM in this type
of organization.
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xx
After this introductory chapter, the concerns about the antecedents and consequences of strategic
HRM in SMEs are explored in chapter 1. Here, the authors, from a survey of SMEs in Malaysia and the
Philippines, find that the adoption of a strategic HRM is at a moderate level.
Chapter 2 explores human capital in Malaysian SMEs. Given the critical importance that the human
capital infrastructure SMEs assume, this chapter, based in a sample of Malaysian SMEs, offers insights
into human capital uniqueness and human capital value in these firms.
Effective human resources management practices in SMEs is the subject that follows. Focusing on
the MIST countries (Mexico, Indonesia, South Korea, and Turkey), the findings of this study suggest
that HRM practices adopted both individually and as a cluster reflect the components of universalistic,
contingency, resources bases, and institutional perspectives of the strategic HRM model. A model of
HRM practices adopted by SMEs in the MIST economies is also presented.
In Chapter 4, the synergistic potential of HRM in SMEs is explored. Considering HR as a key syner-
gistic element in SMEs strategic configuration, this chapter examines the characteristics of entrepreneur-
founders, strategic orientation, and strategic configuration in a globalized world.
Considered a specified type of SMEs, family business is also a relevant topic of study in what concerns
the HRM subject. This is what happens in chapters 5, 6, and 7. Focusing on HRM in family business,
chapter 5 makes a review on the current state of research, at the same time it presents new proposals
for the future.
Chapter 6 studies the HRM practices and problems in family-owned SMEs. It looks to analyze the cur-
rent HRM practices in this kind of organization, as well as to identify the existent practices and problems.
The intergenerational transition in a small family business is addressed in chapter 7. In order to
analyze the processual nature of intergenerational transition, the authors have implemented a study in a
small Italian family business seen as an interesting example of three different intergenerational transi-
tions taking place at different time periods.
The next chapter attempts to develop an analysis about the implications for SMEs resulting from the
role of HR in conflict management. Looking to provide a conceptual basis on the role of HR practices
in conflict management in SMEs, this chapter emphasizes the importance of managing human capital
effectively in terms of managing conflits.
Chapter 9 focuses on the role of occupational health and safety in SMEs. It aims to facilitate the
development of an informative perspective about occupational health and safety management systems in
these organizations by emphasizing the drivers, benefits, and barriers of SMEs that are trying to adopt
that system.
The entrepreneur’s educational level and its impact on the employment creation by new SMEs is
the subject of chapter 10. In order to study the effects of different types of start-up rates on subsequent
employment change, the authors have used longitudinal data on start-ups and employment in different
Portuguese regions in a period of 11 years.
Chapter 11 looks to place SMEs at the forefront of strategic HRM literature. Advancing the strate-
gic HRM literature, the authors provide a better understanding of the common high performance work
practices used by U.S. SMEs.
Questions related to HR recruitment are explored in chapter 12. Based in a case study of two selected
cities in Tanzania, this chapter studies HRM practices in the recruitment process among the SMEs in a
car maintenance sub sector.
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xxi
Considering that there has been little boundary-spanning between HRM and location theories, in
chapter 13, the authors seek to redress this in relation to the rise and decline of industrial districts of
SMEs, as well as to draw implications for their potential regeneration.
Self-managing teams in SMEs is the focus of the next chapter. The authors propose self-managing
teams as a good way to manage HR in SMEs, looking to explore how they can help to create organiza-
tional effectiveness and, consequently, competitive advantages in SMEs.
Chapter 15 deals with the decision-making process, taking some insights from business ethics and
entrepreneurship. The author looks to provide a different perspective about the understanding of the
decision-making process in SMEs through the development of a bridge between individual moral psy-
chology and the entrepreneurial decision-making process.
In a world characterized by changes and high complexity and diversity, the questions related with
innovation are a challenge to organizations, namely SMEs. Taking into account this reality, chapter 16
looks to give us a global perspective of the innovation strategies in SMEs. In other words, it looks to
identify and analyze the innovation strategies and drivers of innovation in SMEs from a global perspec-
tive, and to nderstand the need for effective HRM to drive innovation.
Taking back the subject of entrepreneurship, chapter 17 evaluates the implications of SME entrepre-
neurship for enhanced HRM in hospital management.
Chapter 18 addresses its attention to the study of recruitment and selection in SMEs. It looks to un-
derstand the role of recruitment and selection on HRM at SMEs in Portugal, as well as be a contribution
to a better knowledge of this area, still briefly studied in this country.
Giving a special focus to the future directions of the current internationalized services, the following
chapter addresses its attention to the analysis of the SMEs internationalization process, with a special
attention to the services that are provided, as well as the support given by private and public agencies
to international SMEs.
Finally, the concluding chapter explores the relationship between the entrepreneurship and entrepre-
neur’s characteristics, as well as the factors that influence the entrepreneurial decision in a particular
country, namely Turkey.
Giving a global perspective of effective HRM in SMEs, the chapters presented in this book are a
very important tool and can be very useful for academics, researchers, managers, engineers, and other
professionals that are involved in different matters related with HRM, with a special emphasis in SMEs,
both in private and public sectors.
The professional and scientific interest in this book and subject is evident for many universities/schools
in the world with courses (graduate and undergraduate) in HRM, Management, Business Management,
International Business, Production Engineering, among others.
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1
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 1
DOI: 10.4018/978-1-4666-4731-2.ch001
The Antecedents and
Consequences of Strategic
HRM in Malaysian and
Philippine SMEs
ABSTRACT
From a survey of Small and Medium-Sized Enterprises (SMEs) in Malaysia and the Philippines, the
authors find that the adoption of strategic Human Resource Management (HRM) is at best at a moderate
level. The adoption of strategic HRM by SMEs in both Malaysia and the Philippines is predicted from
the positive effect of legal and regulatory requirements, the importance of business environment chal-
lenges, and the strategic role of the HR professional. Furthermore, regression analysis shows that in both
countries, SMEs with strategic human resource management have better organizational performance
in terms of human resource outcomes, operational outcomes, and financial outcomes, but the impact is
larger in the Philippine SMEs. This study adds empirical evidence currently available from a small set
of countries, mostly in North America and Europe. The authors end this chapter with implications for
policy makers and HR practitioners and provide recommendations for future research.
INTRODUCTION
In the past decade, empirical research of Human
Resources Management (HRM) in small and
medium-sized enterprises (SMEs) has stepped
up; 75% of the 120 studies we found in an on-line
search of databases were published since 2002.
As well, the countries covered have expanded.
Prior to 2002, 87% of studies were in developed
countries in North America and Europe, mainly
of the United States and the United Kingdom.
Since 2002, only 56% were from this same group
of countries, studies in Asia and Africa increased
from just two in the previous period to 24, and
the Asian continent accounted for 21%, with most
studies done on China.
Maria Carmen Galang
University of Victoria, Canada
Intan Osman
Universiti Sains Malaysia, Malaysia
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
While these numbers are encouraging, there
is still much research that needs to be done (Cas-
sell, Nadin, Gray & Clegg, 2002; Katz, Aldrich,
Welbourne & Williams, 2000). Mayson and Bar-
rett (2006) for instance note that not only is there
very little research on HRM in small and entre-
preneurial firms, but that theory is also lacking
that could explain how important HRM is for such
organizations. Marlow (2006) echoes the lack of
theorizing as an impediment in our understanding.
Cardon and Stevens (2004) found 37 articles on
small and emerging firms but noted that close to
half (n=16) do not distinguish between emerging
and small ventures, “failing to clarify the differ-
ent HR challenges resulting from newness and
smallness and how they are overcome. Twenty-
three of the articles confound small and medium
enterprises, and less than half of them are based
on empirical data” (p. 299). They note that more
empirical research and theorizing is still needed
specifically in training, performance manage-
ment, organizational change and labor relations
in small firms, as well as understanding retention
of employees, integration and interactions of HR
practices and the evolution of HR practices within
the context of small firms.
As well, we find that some countries have not
been studied, especially those from developing
countries with a different cultural, institutional,
or economic context from the U.S. and the U.K.
By having studies of SMEs in a wider range of
countries, we could begin to determine the in-
fluences that underlie any observed differences
and similarities of HRM. We can also begin to
understand whether the impact of HRM is the
same or different, depending on the country con-
text (e.g., Cunningham, 2010; Innes & Wiesner,
2012). Thus, we can become more confident of
our recommendations to a sector that is recognized
to be of economic importance to many countries.
In this chapter we offer empirical evidence
from two Asian countries that have not been
studied extensively, namely Malaysia and the
Philippines. We found only three HRM studies of
SMEs in Malaysia and none on the Philippines.
Yet, in these countries SMEs comprised around
99% of the total establishments, employed 56%
and 70% of the total workforce in Malaysia and
the Philippines respectively, and contributed 32%
to the country’s GDP (Osman, Ho & Galang,
2011). The governments of both countries have
also recognized the importance of this sector by
implementing laws, policies and regulations that
specifically are aimed at ensuring SMEs are com-
petitive in a more global environment (Habaradas,
1009). Based on data from a survey that was
conducted among HR managers, our study has
three purposes. The first addresses the question
of whether or not SMEs in these countries have
adopted a more formal and strategic approach to
managing employees. As a comparison, we will
utilize survey data that we also collected from HR
managers of SMEs in the U.S., a country that has
a different economic, institutional and cultural
context than Malaysia and the Philippines. The
concept of HRM is argued to have originated
from the U.S. Nonetheless, Mayson and Barrett
(2006) observed that HRM in small firms in the
U.S., as well as Europe and Australia, is largely
ad hoc and informal.
The second purpose is to determine whether the
adoption of a more formal and strategic approach
to managing employees provides these SMEs with
a competitive advantage. There have been many
studies in the past decade linking strategic HRM
with organizational performance of SMEs, again
mostly in developed countries in North America
and Europe. Those in developing Asian coun-
tries are limited: two in China (Zheng, Morrison
& O’Neill, 2006; Zheng, O’Neill & Morrison,
2009), two in Vietnam (King-Kauanui, Ngoc &
Ashley-Cotleur, 2006; Nguyen & Bryant, 2004)
and one in Korea (Seong, 2011).
Our third purpose is examine some antecedents
to the adoption by SMEs of a more formal and
strategic approach to managing employees. It
has been argued that because SMEs are resource
poor, they are limited in their ability to adopt
strategic HRM practices, most of which would
require money, time and expertise which are not
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
present in the organization (Cassell et al., 2002;
Çetinel, Yolal & Emeksiz, 2009; Harney & Dun-
don, 2006; Hooi, 2006). As well, because of their
size, SMEs do not have the economies of scale
that larger organizations have that would justify
the investment in these practices. Some have
also noted that informality is further argued to
be more appropriate to small firms; for instance,
that informality is their advantage since it allows
them the flexibility to change (e.g., Beaver &
Harris, 1995; de Kok & Uhlaner, 2001; Mayson
& Barrett, 2006). In addition, because of the size
of the organization, the owner/manager is very
much directly involved in running the organiza-
tion, oftentimes preferring a more ad hoc approach
(e.g., Jack, Hyman & Osborne, 2006; Tocher &
Rutherford, 2009). Nonetheless, there are studies
showing that there are SMEs that have adopted a
more formal and strategic approach, perhaps not
in terms of all but certainly some HRM practices
(Bacon & Hoque, 2005; Cassell et al., 2002; de
Kok & Uhlaner, 2001; Harney & Dundon, 2006;
Henry & Temtime, 2010).
In line with the extant literature, we argue
that the adoption of a more formal and strategic
approach to managing employees is a conscious
response to environmental pressures (Beaver
& Hutchings, 2005; Debrah & Mmieh, 2009;
Lacoursière, Fabi & Raymond, 2008; Miles, Co-
vin & Heeley, 2000), such as legal and regulatory
requirements (Rantaša, 2004; Sheehan, 2013), and
increasing competition from other organizations
(Altinay, Altinay & Gannon, 2008; Debrah &
Mmieh, 2009; Hayton, 2003). The effect of these
environmental pressures on HRM is further aided
by the importance of its human resources relative
to other resources of the organization (Bacon
& Hoque, 2005; Brand & Bax, 2002), and the
presence of an HR person or unit with a strategic
inclination (Innes & Wiesner, 2012; Kerr, Way &
Thacker, 2007; Osman et al., 2011). Finally, we
argue that SMEs faced with such environmental
pressures benefit more from a formal and stra-
tegic approach to managing employees, which
otherwise might be detrimental to resource-poor
smaller organizations (Chadwick, Way, Kerr &
Thacker, 2010).
Our chapter is organized as follows: We will
start with reviewing the literature on strategic
HRM in SMEs, specifically in so far as its adoption
is concerned, the empirical evidence that has been
gathered linking strategic HRM to organizational
performance, and the various theoretical and
empirical studies on the contextual influences to
the adoption of formal and strategic approaches
to managing human resources in SMEs. We also
present information on contextual factors that are
particularly salient for Malaysia and the Philip-
pines. We end our literature review by stating the
hypotheses we are testing in addressing our three
main purposes. Following the literature review,
we will describe our research methodology, in-
cluding the operationalization of the variables
we have chosen and the statistical analyses we
utilized to test our hypotheses. We then present
our results, including our interpretation of these
results. Finally, we present some recommendations
for policy, practice, and research.
BACKGROUND: REVIEW
OF THE LITERATURE
Defining Strategic Human
Resource Management (SHRM)
In a review of empirical studies of HRM-per-
formance link, Boselie, Dietz and Boon (2005)
observed that there is no consensus on the con-
ceptualization and operationalization of Strategic
Human Resource Management (SHRM). There
are three definitions that convey our own con-
ceptualization:
• The pattern of planned human resource
deployments and activities intended to en-
able the firm to achieve its goals (Wright &
McMahan, 1992, p. 298).
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
• An integrated and coherent “bundle” of
mutually reinforcing practices (Boselie et
al., 2005, p. 73).
• A set of distinct but interrelated HRM
practices that together select, develop, re-
tain, and motivate a workforce: (1) that
possesses superior abilities (i.e., superior
[a broad repertoire of] skills and behav-
ior scripts); (2) that applies their abilities
in their work-related activities; (3) whose
work-related activities (i.e., actual employ-
ee behaviors/output) result in these firms
achieving superior intermediate indicators
of firm performance (i.e., those indicators
over which the workforce has direct con-
trol) and sustainable competitive advan-
tage (Way, 2002, p. 765-766).
These definitions indicate that ensuring the
coherence among several HRM practices targeted
at developing the performance of the firm’s work-
force towards desired organizational outcomes
entails planning and execution with purpose and
careful deliberation. Thus in our view, “strategic”
necessarily embodies a formal rather than an ad
hoc approach. However, formalization does not
necessarily mean strategic, as the formalized prac-
tice may not explicitly consider the organizational
goals and the requisite workforce performance. For
instance, de Kok and Uhlander (2001) stated that:
formalization has been variously referred to as: 1)
the extent to which a rule or procedure is written
down (e.g., as in written job descriptions); 2) the
degree to which a procedure is regularly applied
within the organization (e.g., as in the regularity
of performance appraisals); and/or 3) the degree
to which the employer (vs. the employee) has as-
sured that an activity should take place (e.g., as
in employer sponsored training programs). (de
Kok & Uhlander, 2001, p.274)
There is also no consensus on the compo-
nents or specific practices to include in the set
or bundle of practices. However, consistent with
Way’s (2002) definition above and the dominant
AMO (Ability-Motivation-Opportunity) theory
(Boselie et al., 2005), the set or bundle should
include a broad enough range of HRM practices.
It should cover at least the traditional HRM func-
tions or domains of recruitment, selection, job/
work design, training, performance evaluation
and compensation, as together they would result
in the requisite ability, motivation and opportunity
for employees to work towards organizational
goals. Nonetheless, there is agreement that SHRM
is considered as a set or bundle of practices, as
bundling has the advantage of synergy that is
not provided in considering practices separately
(Becker, Huselid, Pickus & Spratt, 1997). Thus,
SHRM needs to be measured or represented as a
unitary index. How that unitary index is derived
however is still debated.
Adoption of Strategic Human
Resource Management
(SHRM) in SMEs
Given our conceptualization, there are not many
empirical studies of SHRM in SMEs, even with
SHRM operationalized in different ways and cov-
ering different HRM practices. We found two on
Australian SMEs (Innes & Wiesner, 2012; Teo,
LeClerc & Galang, 2011); one Belgium (Sels et
al., 2006); four Canada (Chadwick et al., 2010;
Fabi, Raymond & Lacoursière, 2007; Kerr et al.,
2007; Lacoursière et al., 2008); one China (Zheng
et al., 2009); two France (Aїt Razouk, 2011; Aїt
Razouk & Bayad, 2009); one Korea (Seong,
2011); one Netherlands (Brand & Croonen, 2010);
one Spain (Elorza, Aritzeta & Ayestarán, 2011);
three U.S. (Hayton, 2003; Kaman, McCarthy,
Gulbro & Tucker, 2001; Way, 2002); and three
U.K. (Drummond & Stone, 2007; Sheehan, 2013;
Storey et al., 2010).
It should be noted that these studies have also
used different terms for SHRM, such as high per-
formance work systems, HRM intensity, human
capital enhancing HRM systems, high investment
HR systems, HR formality, but what they have
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5
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
in common is that their analysis is based on a
set of HRM practices, and not on separate HRM
practices. The measure of a set of HRM practices
also varies, from simple additive indices to one
of clustering. Nonetheless, of these studies, five
empirical studies have specifically commented on
the level or extent of adoption of the HRM system,
even when this was not the primary purpose of
the study. Kaman et al. (2001) did focus on the
extent of use among U.S. SMEs, distinguishing
two types of HRM systems: bureaucratic and high
commitment. Their observation is that the high
commitment practices were used more, with a
mean of 4.36 vs. 3.80 out of a scale of 6 points.
Sels et al. (2006) found Belgian SMEs averaged
7.21 practices out of a maximum 18 practices.
Sheehan (2013) indicated that the use of formal
human resource practices (measured as an index
averaging across 17 practices) is quite common
in SMEs in the U.K. Teo et al. (2011) noted that
Australian SMEs adopted human capital enhanc-
ing HRM systems only to a moderate extent, with
a mean of 4.30 out of a scale of 7 points. Way
(2002) found the mean for high performance work
systems among U.S. SMEs was at 2.61 practices
out of a possible maximum of 7. He also found
that this level of adoption is not significantly
different compared to larger firms (100 or more
employees).
There are other studies that, while not making
any explicit statement regarding level of adoption,
provided some data to enable some conclusions
about the level of adoption. For instance, Brand
and Coonen (2010) reported the mean of HR in-
tensity in their Dutch sample to be at 3.02. The HR
intensity was a five-point scale; thus, one could
say that with this sample, the level of HR intensity
is at a moderate extent. Aїt Razouk and Bayad
2009 reported that 42% of their French SMEs had
implemented strategic HRM, while 45.4% were in
a hybrid state, between administrative HRM and
strategic HRM. Lacoursière et al. (2008) found
only 17% of their Canadian sample were classified
as having strategic high involvement HR prac-
tices. Storey et al. (2010) however found higher
percentages in their U.K. sample: the percentage
of firms with HR formality ranged from 51% for
single-site workplaces of 5-49 employees to 89%
for workplace size between 250-499 employees in
multi-site firms. Nonetheless, they also provided
information to compare the small workplace sites
with large firms, with the latter having a higher
HR formality.
Overall, except for Sheehan (2013) in the U.K.,
these empirical studies on SHRM in SMEs show
at most a moderate level of adoption in various
countries.
Linkage of SHRM and Organizational
Performance in SMEs
In trying to systematize our understanding of
the field, Wright and Boswell (2002) suggested
a typology of HRM research and reviewed the
major developments in each of the four types or
areas. These areas are defined by whether a single
HRM practice or multiple practices are studied
simultaneously, and whether the analysis of the
outcome is at the individual or organization level.
Studies examining the effects of a single HRM
practice on individuals (i.e., employees) is the
traditional area of HRM research and numerous
studies have been conducted especially in the area
of selection, training, recruitment, compensation,
performance management and participation or
work design (Wright & Boswell, 2002). The
seminal study by Huselid (1995) spurred many
empirical studies linking multiple HRM practices
to organizational performance. This area continues
to grow, especially outside of the U.S. (Wright &
Boswell, 2002). The study reported in this chapter
is classified within this area. While debates con-
tinue on what HRM practices to include, how to
measure these practices, and how to conceptualize
a system of practices, Wright and Boswell (2002)
noted that the studies in this area are supportive
of the HRM-firm performance link. Fewer studies
were noted in the other two areas. While Wright
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
and Boswell (2002) suggest that examining the
impact of a system of multiple HRM practices on
individuals presents “a ripe opportunity for future
research,” they were discouraging of studies that
focus on the organizational impact of a single
HRM practice, as these studies ignore the possible
synergy (or contradictions) from a combination of
practices that organizations in reality implement
(Becker et al., 1997).
Boselie et al. (2005) reviewed 104 articles
linking HRM practices and organizational per-
formance that were published in major journals
between 1994 and 2003. The top four practices
included in these studies, in this order, were
training, contingent pay and reward, performance
management, and recruitment and selection. Most
of these studies (n=58) also approached HRM
practices as separate practices rather than as a
system. Neither of these reviews however reported
results specifically for SMEs. Boselie et al. (2005)
did note however that organization size was often
considered as a control variable (64 studies).
In our search for studies linking HRM practices
and performance of SMEs, we found 13 empirical
studies (Altinay et al., 2008; Carlson, Upton & Sea-
man, 2006; Cassell et al., 2002; Castrogiovanni,
Urbano & Loras, 2011; Chi, Wu & Lin, 2008; De
Grip & Sieben, 2005; Faems, Sels, De Winn &
Maes, 2005; King-Kauanui et al., 2006; Newman
& Sheikh, 2012; Saá-Pérez, Díaz-Díaz & Balles-
teros-Rodríguez, 2012; Schmelter, Mauer, Börsch
& Brettel, 2010; Storey et al., 2010; Zheng et al.,
2006). A wide range of performance variables were
considered, such as sales growth, productivity,
voluntary turnover, innovative capacity, entre-
preneurial behavior, corporate entrepreneurship,
employee commitment and employee job quality.
The HRM practices examined were training (9
studies), compensation and rewards (9), recruit-
ment and selection (7), performance appraisal
(6), and employee participation/empowerment,
which includes communication, grievance and
dispute resolution (4), HR planning (1). Most of
these studies found a positive relationship between
the HRM practice and the performance variable.
In this section, we focus only on empirical
studies on SHRM as a set or bundle of practices,
in accordance with the definition above, and not on
studies linking separate HRM practices or domains
to organizational performance. Furthermore, as
organizational performance has been defined and
measured in various ways, we considered all pos-
sible measures of organizational performance that
Dyer and Reeves (1995) outlined as four possible
types of measurement: (1) human resource out-
comes (e.g., absenteeism, turnover, individual or
group performance), (2) organizational outcomes
(e.g., productivity, quality, service), (3) financial
or accounting outcomes (e.g., return on assets,
return on invested capital), and (4) market out-
comes (e.g., stock value or shareholder return).
We highlight eleven studies, of which seven
found a positive SHRM-performance relationship
for all the performance measures used. Kaman et al.
(2001) found that high commitment practices had
the most positive impact than bureaucratic prac-
tices on U.S. small service firm’s ability to attract
and motivate employees, turnover, absenteeism,
and number of employment litigations experienced
by the firm. Kerr et al. (2007) found a positive
relationship between a high-performance work
system of Canadian small entrepreneurial firms
and a perceptual composite measure of over-all
organizational performance, which included sales
level, sales growth rate, cash flow, gross profit
margin, net profit from operations, profit-to-sales
ratio, ability to fund business growth from cash
flow, return on investment, and change in the
value of the firm for private firms or share price
for publicly-traded firms. Sheehan (2013) found
positive associations between an HRM index and
profitability, innovation and lower labour turnover
in SMEs in the U.K. Teo et al. (2011) found a posi-
tive relationship between human capital enhancing
HRM system and manufacturing performance and
employee performance in Australian manufactur-
ing SMEs. Aït Razouk (2011) also found a posi-
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
tive relationship between high performance work
systems and French SMEs’ profitability, quality
of social climate and innovation. Among Asian
studies, Seong (2011) found a positive relation-
ship between high performance work systems and
financial outcomes of profitability and return on
assets in Korean SMEs. Zheng et al. (2009) found
that Chinese SMEs with innovative HR practices
had better HR outcomes (staff turnover, congru-
ency, competency and commitment), sales, market
share and growth potential.
However, there are studies that found a nega-
tive impact on SMEs. For instance, while greater
use of high performance work practices (HPWP)
by Belgian SMEs was correlated with increased
productivity, Sels et al. (2006) noted that the impact
was offset by increased labour costs. Nonetheless,
they did find an overall positive effect on firm
profitability. Way (2002) likewise found a posi-
tive association between high performance work
systems and employee turnover, but not labour
productivity, concluding that “the outcomes pro-
duced by HPWS do not exceed (nor do they fail
to meet) the labor costs associated with the use
of these systems” (p. 778). Brand and Croonen
(2010) found that franchised units, as opposed
to company-owned ones, of a large Dutch retail
organization had relatively low HRM intensity but
better HR performance in terms of absenteeism
and share of wages in the unit’s sales turnover.
Chadwick et al. (2010) also found a negative re-
lationship between high investment HR systems
(HIHRS) and labour productivity in Canadian
small firms. They did point out however that this
relationship is moderated by the firm’s business
strategy, capital intensity, age and the industry in
which they operate.
In summary, so far the empirical studies link-
ing SHRM with organizational performance of
SMEs do not all show a positive effect, and that
the positive impact may be dependent on contex-
tual factors, and which aspect of organizational
performance is being measured.
Contextual Factors Influencing
Adoption of SHRM in SMEs
Dyer and Reeves noted back in 1995 that the emer-
gence of Strategic Human Resource Management
(SHRM) among both scholars and practitioners
around the world was mainly attributed to “in-
creasingly intense global competition and the
corresponding search for sources of sustainable
competitive advantage” (p. 656). Many other
factors influencing the adoption of HRM have
also been pointed out, and these can be broadly
classified into external and internal context
(Duberley & Walley, 1995; Harney & Dundon,
2006; Lacoursière et al., 2008; Tsai, 2010). Har-
ney and Dundon (2006) proposed a conceptual
framework, based on institutional theory and
resource dependency and supported by the extant
literature, which identify the salient external and
internal influences on HRM of SMEs. Among
the external influences are the product/market
structure, HR supply, industry sector, value chain,
technology and employment legislation. For the
internal influences, Harney and Dundon (2006)
listed ownership, management style/ideology,
trade union presence, size and employees.
Lacoursière et al. (2008) noted that of the 45
empirical studies they found examining the con-
textual factors influencing the adoption of HRM
systems or practices in both SMEs and large en-
terprises, the most common factors were organiza-
tional size (23 studies), business strategy (16) and
presence of a labour union (12). Less frequently
studied were characteristics of the owner-manager,
customer power, the firm’s stage of development
and technology, labour force characteristics and
the presence of an HR professional.
We focus on empirical studies of SHRM in
SMEs. Of the seven we found, the factors that have
been supported are type of industry, especially
those exposed to world competition (Aït Razouk
& Bayad, 2009); national cultural values of indi-
vidualism vs. equity and justice (Aït Razouk &
Bayad, 2009); organizational culture (Drummond
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
& Stone, 2007); presence of an HR professional
or department (Kerr et al., 2007; Teo et al., 2011);
customer requirements (Kinnie et al., 1999); own-
ership characteristic, such as whether collectively
owned, state owned, domestic privately owned, or
joint venture (Zheng et al., 2009); the organiza-
tion’s strategic orientation (Teo et al., 2011) and
firm age (Zheng et al., 2009). Lacoursière et al.
(2008) also tested a modified Harney and Dundon
framework on 176 Canadian SMEs, and found sig-
nificant differences in seven contextual variables
out of fourteen between SMEs with the traditional
low-involvement HR system and those with a stra-
tegic high-involvement HR system: development
of networks (a product/market structure character-
istic); technological intensity (an industry sector
characteristic); presence of quality standards,
planning and logistics applications of advanced
manufacturing process technology; and internal
factors such as the chief executive’s educational
level, the presence of a board of directors, and the
presence of an HR manager. Among the external
variables that were not significantly different were
commercial dependency, product development,
market development (characteristics of firm’s
product/market structure); product design as part
of their manufacturing technology; and among the
internal variables, the level of experience of the
CEO and the presence of a labour union.
While much of the existing literature has not
focused on the legal and regulatory context, in
both Malaysia and the Philippines, this factor is
especially salient. There are numerous govern-
ment policies and programs aimed specifically
towards developing the SME sector, as the sector
is primarily seen as a means to alleviate poverty
(Harabadas, 2009). However, in the Philippines,
the SME-related policies and programs are more
extensive than in Malaysia, with the country even
having special laws for SMEs: the Magna Carta
for Micro, Small, and Medium Enterprises, and
the Barangay Micro Business Enterprises Act
of 2002 (Habaradas, 2009). Nonetheless, other
laws and regulations exist that are not necessarily
targeted at, but may have an effect on, SMEs. For
instance, Beaver and Harris (1995), Harvey and
Dundon (2008), and Rantaša (2004) identified
employment legislation as one such law that have
a detrimental effect on SMEs. So it is the overall
legal and regulatory context within which the SME
operates that needs to be considered.
As well, like many developing nations that were
once colonies of Western nations, both countries
have embraced trade liberalization (Athukorala &
Menon, 1999; Tongzon, 2005). While trade liberal-
ization opens up opportunities for the economy, it
could also present challenges, making the business
environment more complex and competitive. As
Dyer and Reeves (1995) pointed out, one of the
basic arguments for the focus on HRM is that of
“increasingly intense global competition”.
HYPOTHESES
Given the above literature review and in view of
the three purposes of our study, we test the fol-
lowing hypotheses.
Our first hypothesis is to establish the level
of adoption of SHRM in SMEs. We suggest that
given the origins of SHRM, U.S. SMEs would
have higher levels of SHRM than either Malaysia
or the Philippines. However, we do not hypoth-
esize the level of SHRM adoption in Malaysian
SMEs would be higher or lower than that of the
Philippine SMEs. Thus,
H1: There will be differences in the adoption of
SHRM in SMEs across the three countries,
with the level of adoption in the U.S. higher
than in Malaysian or Philippine SMEs.
We test the next set of hypotheses separately for
Malaysia and the Philippines, which allows us to
compare whether the influences and outcomes of
strategic HRM are different for each country. In a
broad sense, we consider both external and internal
influences. External influences would capture
country differences. Thus, from the perspective
of a comparative study such as ours, among the
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
external influences, we chose legal and regula-
tory environment, and business environment, as
these two factors are especially salient for the two
countries. Thus,
H2: The adoption of SHRM is predicted from
external influences of (a) legal and regulatory
requirements, and (b) business environment
challenges.
Internal influences enable the comparison
of SMEs from within the same country. We ar-
gue that one of the most salient internal factors
related to a firm’s adoption of HRM practice is
the relative importance of human resources as
compared to other organizational resources such
as financial, material or technological resources.
This is akin to perceived acute HRM problems
that Tocher and Rutherford (2009) referred to;
they found that higher-performing firms in the
U.S. were less likely to perceive such problems.
Barrett and Meyer (2010) also tested this notion
in small Australian firms with the purpose of
identifying the types of firms that would benefit
from more assistance in implementing HRM. As
well, while the presence of a HR professional in
the firm has been supported by previous studies,
the HR professional can take on various roles in
the organization, such as that of a strategic busi-
ness partner, change agent, employee champion
or administrative expert (Conner & Ulrich, 1996).
Hence, we are suggesting that it is not merely the
presence of a HR professional that is important, but
what role does he/she play in the organization. As
a strategic business partner, the HR professional is
more likely to influence the adoption of strategic
human resource management. Thus,
H3: The adoption of SHRM is predicted from in-
ternal influences of (a) strategic partner role
of the HR professional in the organization,
and (b) the importance of human resources
relative to other resources utilized by the
organization.
Boselie et al., (2005) noted the possible causal
distance of various organizational outcomes that
Dyer and Reeves (1995) listed. SHRM would have
more impact on the proximal human resource
outcomes, than the more distal one of financial
or economic outcomes. It is prudent therefore to
examine different organizational performance
variables. Thus,
H4: SHRM is positively correlated to different as-
pects of organizational performance, namely
(a) people performance, (b) operational
performance, and (c) economic performance.
Finally, in as much as organizations experience
different external and internal influences, and
various studies have indicated that the impact of
SHRM on organizational outcomes is affected by
situational factors, we test:
H5: The external influences of the (a) legal and
regulatory requirements and (b) business
environment challenges, and internal influ-
ences of the (a) strategic partner role of the
HR professional and (b) relative importance
of human resources moderate the link of
SHRM to (a) people performance, (b) eco-
nomic performance, and (c) operational
performance.
RESEARCH METHODOLOGY
Variables
The list of items that make up the different scales
measuring our variables of interest can be found
in the Appendix.
Strategic Human Resource Management
(SHRM): A composite index of seven sub-scales
covering practices in six functional domains of
HR planning, staffing, job design, training, per-
formance appraisal and compensation, mostly
adopted from Geringer, Frayne and Milliman
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10
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
(2002). Each of these sub-scales covered from 3-5
different HRM practices. On a scale of five, the
respondent was asked the extent that the statement
describes their current practice, with 1=Not at all
and 5=Very large extent. Each of these sub-scales
was determined to have good internal reliabilities
ranging from Cronbach α of 0.71 to 0.94, and
loading on only one factor. Following Aït Razouk
(2011), we averaged across all seven sub-scales
to compute for the SHRM index.
Legal and Regulatory Requirements: A scale
consisting of six items taken from Khandwalla
(1977). The respondent was asked to rate the effect
of the listed government legislation or regulation
on their organization, with 1=very negative effect
and 5=very positive effect. Likewise, Business
environment challenges is a scale of 10 items
taken from Khandwalla (1977), with 1=of little
importance, and 5=of extreme importance. Cron-
bach α for these scales range from 0.88 to 0.94,
and also loaded on only one factor.
Strategic Partner Role of the HR Professional:
A measure of the extent that the HR professional
in their organization performs activities identified
by Conner and Ulrich (1996) as that of a strategic
business partner. The HR professional referred to
in the survey is any person who is responsible,
whether full-time or part-time, for the human
resources management function. Our sample in
Malaysia had 32.1% SMEs without an HR de-
partment, while that in the Philippines only had
3.9% without an HR department. Nonetheless, all
respondents indicated that there was someone in
the organization who was tasked with the HRM
function. The respondent was asked the extent
that the statement describes their current prac-
tice with respect to the role of the person or unit
responsible for the HRM function, with 1=Not at
all and 5=Very large extent. Cronbach α for this
scale range from 0.87 to 0.91, and also loaded on
only one factor.
Relative Importance of Human Resources: A
scale taken from Martell and Carroll (1995). The
respondent was asked the extent that obtaining and
preserving the listed resource was more important
than obtaining and preserving human resources,
with 1=Strongly disagree and 5=Strongly agree.
Likewise, internal reliability of this scale is good
with Cronbach α ranging from 0.86 and 0.95. Fac-
tor analyses also showed only one factor.
Organizational performance is measured by
three scales: People Performance, Operational
Performance and Economic Performance. The
respondent was asked to compare their organi-
zation’s performance with their industry average
or other comparable organizations in the past
three years. Measured on a five-point scale, with
1=Much lower and 5=Much higher, the items were
taken from Geringer et al. (2002) and Khandwalla
(1977). Cronbach α for these scales range from
0.86 to 0.97, and also loaded on only one factor.
Sample
The sample used for this chapter is a subset of
a larger study. Collection of survey data varied
according to location. In Malaysia, the organiza-
tions were selected from the 2007 Directory of
the Federation of Malaysia Manufacturers, and
a list of HR workshop participants conducted
by two consulting and training firms. Question-
naires were either administered face-to-face, or
collected on-line or by mail. In the Philippines,
the data were collected through an on-line panel
of a commercial survey organization. The U.S.
data we used for comparing the levels of adoption
of SHRM were also collected through an on-line
panel of another commercial survey organization.
In each country, for-profit organizations with
employment size of 5 to 500 were selected for
this study. Responses were obtained from 134
SMEs in Malaysia, and 153 in the Philippines.
The average size is 109 employees for Malaysia,
and 182 for the Philippines. The US data set has
responses from 103 SMEs, with an average size of
142. Most of the organizations in Malaysia were
either in manufacturing (23.1%) or information
and communications (16.4%), while in the Phil-
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11
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
ippines, most were in administrative and support
services (28.1%) or manufacturing (19.6%). The
U.S. sample had 18.4% in manufacturing, 13.6% in
human health and social work, 10.7% in education
and 9.7% in information and communications.
As indicated earlier, not all the organizations
have an HR department or a full-time HR per-
son, but there was an individual who was mainly
responsible for the HRM function. Most of the
respondents were the most senior person respon-
sible for the HRM function, 60.4% and 66.7% for
Malaysia and the Philippines, respectively, and
they had been in their current jobs for an average
of 6.8 years and 4.7 years respectively for Malay-
sia and the Philippines. Most are female, 59% for
Malaysia and 68.6% for the Philippines, and most
had at least a four-year educational degree, 58.2%
for Malaysia and 77.8% for the Philippines. For
the U.S. sample, most of the respondents were
also the most senior person responsible for the
HRM function (61.2%) having been on the job
for an average of 7.0 years, are female (68%), had
at least a four-year educational degree (82.4%).
Statistical Analyses
Analysis of variance was utilized for Hypothesis
1. Regression analysis was done separately for
each country to test the rest of the hypotheses.
RESULTS AND DISCUSSION
The means and standard deviations of all variables
are shown in Table 4 (see Appendix).
Adoption of SHRM
One advantage we have in this study is the use of
the same instrument which allows us to directly
compare across samples. The mean levels of
SHRM in Malaysia and the Philippines respec-
tively are 3.20 and 3.85. In comparison the mean
level of SHRM in the U.S. is 3.51. One-way
ANOVA shows that the difference among the
three countries is highly significant (F=30.14,
p<.0001). However, the Philippine SMEs had a significantly higher level of adoption than U.S. SMEs. Hypothesis 1 is thus partly supported. It is possible that given the colonial experience under the U.S., the managers and owners in the Philippines still emulate the model provided by U.S. management practices that may be seen to account for the business and economic success of the U.S. On the other hand, Malaysia tends to be influenced by the systems and regulations left over by the British colonization during the nineteenth century as legacies of western influ- ences in indigenous HR practices (Chew, 2005). Malaysian HR practices can be characterized into two mainstreams, namely British oriented value and ethnic oriented values (Hirano, 1991 as cited by Chew, 2005). The difference could also be attributed to the difference in the profile of the sample. The Philippine SMEs mostly had an HR department (96%) with the U.S. coming second at 85% and Malaysia at 67%. The Philippine sample also had more respondents who had a four-year educational degree. Educational systems are often the means for diffusing knowledge about business and management practices from the developed to the developing nations. Despite the moderate level of adoption of SHRM in Malaysia and the Philippines in general, it does indicate that SHRM is also applicable in these Asian countries, such as Zheng et al. (2009) had found for China, and Seong (2011) for Korea. Predictors of SHRM Regression analyses show that Business envi- ronment challenges and Strategic partner role of the HR professional as significant predictors of SHRM for SMEs in both Malaysia and the Philippines. In addition, Relative importance of human resources was also a significant predic- tor for Malaysian SMEs, albeit in the opposite direction hypothesized. Nevertheless, collinearity EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 12 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs diagnostics indicated a slight multicollinearity problem with respect to the four predictors. Thus, regression analyses using instead the factor scores representing the standard scores for the four pre- dictors were conducted. All factor scores were significant predictors of SHRM in both Malaysia and the Philippines, and accounted for 50% and 74% of the variance in SHRM for Malaysia and the Philippines respectively. Table 5 in the Ap- pendix shows the β coefficients of each factor and the factor component and loading. With each of the four factors composed of the standard scores for the four predictors, hypotheses 2 and 3 are supported. Interestingly however, for Malaysia, the less important human resources are compared to other resources, the higher SHRM is. The dif- ference could be the industry sector profile of the country samples: while both have manufac- turing SMEs, Malaysia has more of information and communications, and the Philippines has more administrative and services. As well, the manufacturing sector is a broad category, and sub-sectors may also play a role in the findings. Another possibility is that, in Malaysia overall, other resources are indeed much more difficult to obtain than human resources, while in the Philip- pines, human resources may be more difficult to obtain than other resources, a reflection of the countries’ respective labor markets. SHRM-Performance Link Moderated hierarchical regression analyses of SHRM on the three organizational performance variables were conducted. In both countries, re- sults show that SHRM is a significant predictor of organizational performance of SMEs (see Table 1, Table 2, and Table 3). Hypothesis 4 is thus supported. However, the variance accounted for is larger for the Philippine SMEs, ranging from 46 to 54%, while in Malaysian SMEs, the range is from 16 to 29%. The causal distance suggested by Boselie et al. (2005) was not supported by the data from Malaysia, as the largest impact of SHRM seems to be in terms of economic performance. The data from the Philippines is in accordance with such a causal distance, where the largest impact is with respect to people performance, followed by operational performance, and then economic performance. Interaction terms were added in step 2 of the regression analysis. Not many of these interaction terms are significant. For the Malaysian case, only two of the interaction terms were significant, and only for economic performance. For the Philippine case, only one interaction term was significant with respect to economic performance; for people performance, two interaction terms were found to be significant. Hypothesis 5 is thus not fully supported. In terms of the ultimate test of business success, the impact of SHRM on economic performance is influenced by different situational factors in the two countries. In the Philippines, the economic gain from SHRM depends on the legal and regula- tory requirements: SHRM would have a greater impact if the legal and regulatory requirements have a positive effect on the organization. Thus, in this case, the legal and regulatory environment not only does not seem to pose a constraint on SMEs, but is facilitative of getting the most out of utilizing strategic human resource management. For Malaysian SMEs, the impact of SHRM on economic performance is greater under two types of situations: the first, is also when the legal and regulatory requirements are deemed to have a posi- tive effect on the organization, but combined with a situation when other organizational resources are more important than human resources; the second is when the situation is such that the busi- ness environment challenges faced by the SME are important and human resources are more important than other organizational resources. Alternatively, the difference in the results of the influence of the context might be a reflection of the difference between the two country samples, particularly in terms of the industry sector. The Malaysia sample has more manufacturing and information and communications SMEs while the Philippines has more SMEs in the administrative EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 13 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs and support services, followed by manufacturing. Industries, as well as sub-sectors in those indus- tries, might be affected differently by the same country context in terms of legal and regulatory requirements, business environment competitive- ness, availability of human resources with the relevant abilities and skills for the industry. CONCLUSION: SUMMARY OF FINDINGS AND IMPLICATIONS The study presented provides more evidence that strategic human resource management (SHRM) is applicable in small and medium-sized enterprises (SMEs) in two more Asian countries, Malaysia and the Philippines, particularly when the legal and regulatory environment and business environment are conducive, that is, if the legal and regulatory requirements are seen to have a positive effect on the organization, and when the business environ- ment is seen to be challenging. This is further aided by the presence of an HR professional taking on the role of a strategic business partner. It should be noted that empirical evidence currently avail- able comes from a small set of countries, mostly in North America and Europe. As well, only a few factors influencing the adoption of a more strategic approach to managing employees have so far been examined. As far as we have gathered from our literature review, our study is one of few that have incorporated in the analysis the legal and regulatory environment as well as business environment. Table 1. Moderated regression analysis of SHRM on people performance Variables MALAYSIA PHILIPPINES β Coefficient t β Coefficient t Step 1. SHRM .460 3.786*** .545 5.438*** Adj R2 change .220 F = 31.111*** .540 F = 173.314*** Step 2. SHRM x Legal Requirements -.064 -.304 .103 .967 SHRM x Business Environment Challenges .089 .541 .096 .841 SHRM x Role of HR -.036 -.204 -.459 -3.282** SHRM x HR Importance -.042 -.280 .000 .003 SHRM x Legal Requirements x Role of HR .036 .179 .019 .152 SHRM x Legal Requirements x HR Importance .096 .407 -.141 -.967 SHRM x Business Environment Challenges x Role of HR .026 .113 .388 1.893 SHRM x Business Environment Challenges x HR Importance .077 .385 .180 1.179 SHRM x Legal Requirements x Business Environment Challenges x Role of HR .179 .728 .222 1.164 SHRM x Legal Requirements x Business Environment Challenges x HR Importance .216 .876 .312 1.699 SHRM x Legal Requirements x Role of HR x HR Importance .147 .444 -.031 -.237 SHRM x Business Environment Challenges x Role of HR x HR Importance .024 .092 -.499 -3.230** Adj R2 .213 F = 3.223*** .577 F = 16.445*** *p < .05, **p < .01, ***p < .001 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 14 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs The study also provides additional evidence that SMEs can benefit from SHRM, in terms of human resource outcomes, operational perfor- mance and financial performance. As we have included three different types of organizational outcomes, we were also able to test the notion of causal distance of impact of human resource management suggested by Boselie et al. (2005), which has not been done explicitly by the few studies on linking SHRM and organizational per- formance in SMEs. The evidence in the literature thus far has shown that the impact of SHRM is not always positive, and some studies indicate that the impact may be dependent not only on which aspect of organizational performance is being studied, but also on contextual factors. Our study has incorporated some interaction terms, and has found that only a few contextual factors have a significant moderating influence, and not for all types of organizational outcomes. It is of course not easy to adopt SHRM; if it were easy to imitate, then it would not be a source of competitive advantage (Barney, 1991). Regardless, for policy makers, our study suggests making the legal and regulatory environment more conducive to the uptake of SHRM by SMEs, recognizing, too, the differential impact laws and regulations may have on different industries. By removing potential hindrances to SMEs, then SME owners and managers can focus on their internal capability to adopt more effective HRM practices. Policy makers should also then pro- Table 2. Moderated regression analysis of SHRM on operational performance Variables MALAYSIA PHILIPPINES β Coefficient t β Coefficient t Step 1. SHRM .342 2.796** .581 5.244*** Adj R2 change .164*** F = 20.976*** .480 F = 136.677*** Step 2. SHRM x Legal Requirements .063 .305 .100 .847 SHRM x Business Environment Challenges -.027 -.164 .134 1.060 SHRM x Role of HR -.044 -.254 -.087 -.558 SHRM x HR Importance -.131 -.819 .088 .704 SHRM x Legal Requirements x Role of HR -.065 -.279 .162 1.147 SHRM x Legal Requirements x HR Importance .110 .402 -.217 -1.338 SHRM x Business Environment Challenges x Role of HR .255 .968 .133 .587 SHRM x Business Environment Challenges x HR Importance .122 .462 .281 1.662 SHRM x Legal Requirements x Business Environment Challenges x Role of HR .208 .696 -.116 -.549 SHRM x Legal Requirements x Business Environment Challenges x HR Importance .073 .265 .241 1.188 SHRM x Legal Requirements x Role of HR x HR Importance .421 1.206 -.178 -1.246 SHRM x Business Environment Challenges x Role of HR x HR Importance -.072 -.193 -.107 -.627 Adj R2 .217 F = 3.168** .482 F = 11.540*** *p < .05, **p < .01, ***p < .001 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 15 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs vide more training in terms of HR management, which resource-limited SMEs may not be able to do themselves. The presence of qualified labor seems to be a potential constraint for SMEs, as the study suggests may be the situation for Malaysia, in which case, governments must invest more in educating their populations along the areas that SMEs require the most. Habaradas (2009) did note that skills shortages were particularly strong in Malaysia as compared to the Philippines. However, the issue may not be an absolute labor shortage but a relative one, in that potential employees are reluctant to be employed in SMEs as their pay and benefits may not be comparable to the package offered by larger organizations, especially if they are multinationals as well. As well, the challenging business environment needs to be parsed out as this variable in the study covered many aspects including competition for purchases of inputs such as raw materials, parts or equipment; competition in promotions, advertis- ing, selling, distribution; rates of obsolescence of products, services or processes; and rate of innova- tion. These are all aspects in which governments can intervene in order to remove, or minimize these challenges for SMEs. For SME owners and managers, the findings from this study suggest that HRM is indeed a source of competitive advantage, and is an internal capability that they can and must attend to. How- ever, to optimize the use of this source depends on three areas that are necessary; the first two areas Table 3. Moderated regression analysis of SHRM on economic performance Variables MALAYSIA PHILIPPINES β Coefficient t β Coefficient t Step 1 SHRM .465 4.193*** .468 4.285*** Adj R2 change .291 F = 43.610** .463 F = 127.671*** Step 2 SHRM x Legal Requirements -.155 -.781 .247 2.129* SHRM x Business Environment Challenges -.058 -.374 .031 .246 SHRM x Role of HR .201 1.274 -.025 -.162 SHRM x HR Importance -.142 -1.004 .111 .902 SHRM x Legal Requirements x Role of HR .096 .508 .126 .906 SHRM x Legal Requirements x HR Importance .547 2.486* -.081 -.507 SHRM x Business Environment Challenges x Role of HR -.007 -.032 .094 .420 SHRM x Business Environment Challenges x HR Importance -.374 -2.016* -.072 -.435 SHRM x Legal Requirements x Business Environment Challenges x Role of HR .261 1.136 -.056 -.271 SHRM x Legal Requirements x Business Environment Challenges x HR Importance -.011 -.046 .283 1.416 SHRM x Legal Requirements x Role of HR x HR Importance .187 .599 -.175 -1.243 SHRM x Business Environment Challenges x Role of HR x HR Importance .324 1.384 -.201 -1.194 Adj R2 .344 F = 5.200*** .498 F = 12.218*** *p < .05, **p < .01, ***p < .001 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 16 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs are largely within the control or discretion of the owner and managers. First, the HRM practices that are implemented in the organization need to cover the full range of managing employees, from job design, recruitment and selection, training, performance appraisal and compensation. SMEs must understand the nature of the jobs and detail precisely the duties and responsibilities entailed. Information about these jobs needs to be updated regularly, as that would be helpful in their hiring and training efforts. Recruitment and selection should focus on ensuring the basis for hiring and promotion is that of the individual’s ability that is related to the job and the organizational context. Training should still be provided to ensure that the employees continue to have the necessary knowledge and skills for the performance of their jobs. Evaluating their performance should be done more formally, and the information gathered from this process be utilized for training, promotion and compensation. Compensation is another key area and should depend on both the importance of the job to the organization, and on performance of the employee and of the organization. Second, the person in charge of the HRM function must be allowed to have a strategic role in the organi- zation, by being involved in decisions regarding the business strategy, and having leeway to decide on the HRM policies and procedures that he/she sees as the best fit for the organization’s strategy. A third area addresses the external environment that to a large extent is outside of the control of SMEs. Nonetheless, for many countries, SMEs are an important sector that would help the economy develop, but it may be necessary to promote the sec- tor in order for governments to allocate resources to support its development. To be highlighted is the sector’s contribution to employment and the country’s gross domestic product. SMEs usually are a large number that could be organized, if not already happening, into a group that can lobby the government to implement laws that are conducive to their development, and to provide the resources needed for training, marketing, and research and development. This organization can be a stand- alone or a sub-group within the umbrella of existing chambers of commerce, industry associations, or HR professional associations. These organizations can also provide support for their members in implementing some HRM programs that might be too expensive if undertaken by one small firm. For instance, the provision of employee benefits through group insurance would reduce the costs of premiums if there were more employees from different SMEs enrolled in it. The per-employee costs of using selection tools in the hiring process may also be decreased if the selection tool is shared among different SMEs. Overall, we have addressed our three stated purposes: (1) determine whether or not SMEs in Malaysia and the Philippines have adopted a more strategic approach to managing employees; (2) determine whether the adoption of this approach provides the SMEs with competitive advantage; and (3) examine some antecedents, external and internal to the organization, to the adoption of a more strategic approach to managing employees. We acknowledge that our sample sizes are small, as well as there can be no claims in terms of representativeness. We also did not differentiate these firms in terms of whether they are micro, small or medium, nor their life cycle stage, as the studies of Storey et al. (2010) and Kotey and Slade (2005) had pointed out are characteristics that would differentiate the uptake of HRM. There are other methodological issues that our readers must bear in mind. The data came from self- reports of those who are responsible for HRM. Thus, the respondents could be subjected to social desirability effects, answering more positively or in accordance with what they think the research- ers would like to hear, even if the on-line survey was anonymous. Nonetheless, reports of HRM practices and organizational performance seem to be lower in Malaysia where the possibility of identifying respondents and organizations is higher, given the data collection method involved. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 17 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs As well, the perceptions of the HR person could be different from those who are the recipients of HRM practices, i.e., the employees (Paauwe, 2009). Others (e.g., Boselie et al., 2005) have also pointed out that the quality of implementation is an element that needs to be taken into consider- ation, and measured more directly. The questions pertaining to organizational performance in this study are retrospective, and recall can be inac- curate in either direction (i.e., better or worse). As this study is not longitudinal, the order of causality between HRM and performance cannot be definitively claimed (Paauwe, 2009). However, Sheehan’s (2013) longitudinal study concluded that reverse causality (where organizational per- formance influences HRM) is not the case for U.K. SMEs: HRM practices in 2007 continued to have a positive effect on productivity, innovation, lower labour turnover in 2011, albeit a decline in significance level was noted for productivity, and an increase for labour turnover. However, in recognizing the challenges in- volved in conducting international research, Leung and van de Vijver (2008) suggested a consilience approach to address the limitations of a single study. The approach takes the findings from several studies that use different samples, such as multiple respondents from each organization, or sources of data, such as secondary sources or different listings of organizations, and research methodologies, such as in-depth interviews rather than survey questionnaires that could provide more insight on the processes involved in the adoption of HRM; together, these studies can provide the evidence in addressing the same questions. Thus, despite the methodological issues, our study is one we hope can add to a collective of such studies. FUTURE RESEARCH DIRECTIONS While we have addressed our three stated purposes, there are still questions that should be pursued in order to have a better understanding or knowledge base to guide SME owners and managers, and policy-makers. For instance, given the findings in our study, the importance of human resources relative to other organizational resources should be investigated further. As suggested, the nature of the industry may play a role, the organization’s life cycle stage, characteristics of the owner and managers (Barrett & Myer, 2010; Tocher & Rutherford, 2009), or it may be due to the labor market in the country. At the organizational-level of factors influencing the adoption of SHRM and its impact on organizational performance, whether the SME is domestically or internation- ally oriented, or affiliated with larger organiza- tions through subcontracting networks (Tecson, 2004) are questions that governments would be keen to have answered in their quest to facilitate the development of the SME sector. In this light, future research should also address whether the success factors such as adopting SHRM make a difference between SMEs who are domestically focused as opposed to those who are international. For instance, Rowley and Abdul-Rahman (2007) noted that locally-owned companies in Malaysia do not place priority on HRM unlike the multi- nationals operating in Malaysia. Finally, in both the countries studied, SMEs are considered to be a way to address poverty often due to unemploy- ment. This aspect then might a critical distinction between SMEs in developing and developed countries. It is also an aspect that policy-makers in developing countries need to address if SMEs truly have a more important role in economic development, other than a temporary refuge for the unemployed. Our study only focused on the legal and regula- tory environment and the economic environment of the country, and did not include the socio-cultural environment, an important country difference (Aït Razouk & Bayad, 2009; Cunningham, 2010; Saini & Budhwar, 2008; Wang & Qiao, 2007). While our comparative study implicitly recognized socio- cultural differences, a more direct and explicit measure of the socio-cultural environment needs EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 18 The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs to be included in future research; using “country” as a proxy variable for culture is not sufficient to understand the impact of culture (Schaffer & Riordan, 2003). With this approach as well comes the recognition that there may be culture-specific human resource management practices that may be unique and more significant (Schaffer & Riordan, 2003; Tsui, 2004). While using the same measure of SHRM has its advantages in comparative stud- ies, the drawback is that of missing these prac- tices that Tsui (2004) had pointed out would be valuable contributions to our global knowledge. In this regard, the emic-etic approach suggested by Schaffer and Riordan (2003) should be incor- porated in future international research. 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KEY TERMS AND DEFINITIONS
Strategic Human Resource Management: A
set of interrelated human resource management
practices that together select, develop, retain and
motivate the firm’s workforce towards the achieve-
ment of the firm’s goals.
Malaysia: A country located in South East
Asia.
Philippines: A country located in South East
Asia.
Organizational Performance: Economic,
financial, operational or employee performance
of an organization.
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APPENDIX
LIST OF VARIABLES
Strategic Human Resource Management
Planning
1. HR programs and activities are determined by explicit, formal planning procedures.
2. Long-term prospects influence our HR planning.
3. The HR function is involved in major strategic decisions made in our organization.
4. HR planning is linked to business planning.
5. HR practices and policies are in harmony with each other.
6. HR programs and activities are evaluated on a regular basis.
Staffing
1. Employees are hired or promoted on the basis of their job knowledge and experience.
2. Employees are hired or promoted on the basis of their ability to collaborate and work with others.
3. Employees are hired or promoted on the basis of their potential to learn.
4. Employees are hired or promoted on the basis of their fit with the organization’s culture.
5. In hiring or promoting, employees are assessed against criteria set by the organization, rather than
on the manager’s personal preference.
Job Design
1. The duties and responsibilities of jobs are detailed precisely.
2. Analysis of jobs is undertaken regularly and job descriptions updated.
3. Job descriptions allow the use of a broad range of the employee’s skills and abilities.
Training
1. There are formal training programs to teach new employees the skills they need to perform their
jobs.
2. Formal training programs are offered to increase employees’ promotability in this organization.
3. Training programs are developed on the basis of assessed training needs of the organization.
4. The effectiveness of training programs is monitored regularly.
Performance Appraisal
1. Performance appraisals are based on input from multiple sources.
2. The performance appraisal process is standardized and documented.
3. The performance appraisal is used to determine an employee’s pay.
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4. The performance appraisal is used to determine an employee’s promotability.
5. The performance appraisal is used to determine an employee’s training needs.
Compensation
1. Incentives and bonuses are given on the basis of the individual’s job performance.
2. Incentives and bonuses are given on the basis of how well our organization performs.
3. An employee’s base pay depends on the importance of his or her job to the organization.
HR Professional’s Role
1. HR works to align HR strategies and business strategy.
2. HR participates in the process of defining business strategies.
3. HR develops processes and programs to link HR strategies to accomplish business strategy.
4. HR spends time on strategic issues.
Importance of Human Resources
1. Obtaining and preserving the necessary FINANCIAL RESOURCES is much more important.
2. Obtaining and preserving the necessary TECHNOLOGICAL RESOURCES is much more important.
3. Obtaining and preserving the necessary MARKETING RESOURCES is much more important.
4. Obtaining and preserving the necessary MATERIAL RESOURCES is much more important.
5. Obtaining and preserving the necessary INFORMATIONAL RESOURCES is much more important.
Legal and Regulatory Requirements
1. Tariffs on imports/exports
2. Antitrust or anti-monopoly regulations
3. Regulations for protecting the environment from industrial wastes
4. Special regulatory bodies or legislation for industry
5. Labor legislation and legislation covering working conditions
6. Advertising and promotion regulation
Business Environment Challenges
1. Competition for purchases or inputs (such as raw materials, parts, equipment)
2. Competition for technical manpower
3. Rate at which products or services are getting obsolete in the industry
4. Competition in promotions, advertising, selling, distribution
5. Rate of innovation of new or better operating processes used in industry
6. Competition in the quality and variety of products or services
7. Competition in price of products or services
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8. Rate of innovation of new or better products or services
9. Competition in delivery and after sales services
10. Rate of increase of labor productivity in recent years
People Performance
1. Ability to attract essential employees
2. Ability to retain essential employees
3. Employee morale and job satisfaction
4. Employee commitment to organizational objectives
Operational Performance
1. Public image and goodwill
2. Productivity
3. Development of new products/services
4. Quality of products/services
5. Customer satisfaction
6. Market share
Economic Performance
1. Long-term level of profitability
2. Growth rate of sales or revenues
3. Financial strength (liquidity and ability to raise financial resources)
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The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
Table 4. Means and standard deviations
VARIABLE COUNTRY MEAN STANDARD
DEVIATION
SHRM Malaysia 3.20 .70
Philippines 3.85 .69
Legal Requirements Malaysia 3.10 .78
Philippines 3.77 .65
Business Environment Challenges Malaysia 3.28 .93
Philippines 3.98 .67
Role of HR Malaysia 3.00 .97
Philippines 3.83 .85
HR Importance Malaysia 3.54 .72
Philippines 1.91 .84
People Performance Malaysia 3.26 .71
Philippines 3.86 .73
Operational Performance Malaysia 3.42 .64
Philippines 3.97 .63
Economic Performance Malaysia 3.29 .71
Philippines 3.88 .75
Table 5. Beta coefficients of factor scores predicting SHRM and factor components and loading
BETA COEFFICIENT t COMPONENT FACTOR
LOADING
MALAYSIA
Factor 1 .173 2.524* Legal Requirements 0.958
Factor 2 .584 8.556*** Role of HR Role 0.980
Factor 3 .209 3.056** HR Importance 0.992
Factor 4 .316 4.627*** Business Environment Challenges 0.944
Adj. R2 .502***
PHILIPPINES
Factor 1 -.211 -5.044*** HR Importance 0.952
Factor 2 .605 14.493*** Role of HR 0.912
Factor 3 .477 11.431*** Business Environment Challenges 0.896
Factor 4 .336 8.044*** Legal Requirements 0.877
Adj. R2 .744***
*p < .05, **p < .01, ***p < .001 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 28 Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 2 Human Capital in Malaysian SMEs: HR Practices, Uniqueness, and Value ABSTRACT This chapter explores Human Capital in Malaysian SMEs. Malaysia has placed significant policy em- phasis on indigenous SMEs as a basis for achieving economic growth and competitiveness. This renders the human capital infrastructure of SMEs of critical importance. However, the reality is that there is little information as to the nature of HR practices and their impact in Malaysian SMEs. This chapter aims to fill this void by exploring descriptive findings from a unique sample of over 200 Malaysian SMEs. Drawing on the work of Lepak and Snell in particular, the chapter offers insights into human capital uniqueness and human capital value in the firms investigated. The performance and policy implications of the research are discussed and future research avenues outlined. INTRODUCTION The significance of SMEs to economic develop- ment cannot be understated. Irrespective of the definition that is applied, smaller firms dominate the industrial landscape contributing to over 55% of GDP and 65% of total employment in high- income countries (OECD, 2005). This significance is not adequately reflected in mainstream HRM literature which has tended to either ignore SMEs, or automatically assume them to be deficient if they do not adhere to normative ideals (Marlow, 2006). As an example, a browse through the Oxford University Press Handbook of Human Resource Management (Boxall et al., 2007) reveals a diverse range of chapters on HRM in various Kenneth Cafferkey Universiti Tun Abdul Razak, Malaysia Brian Harney Dublin City University, Ireland Pua Eng Teck Universiti Tun Abdul Razak, Malaysia DOI: 10.4018/978-1-4666-4731-2.ch002 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 29 Human Capital in Malaysian SMEs contexts (e.g. manufacturing, public sector, multi- national firms), while small firms, SMEs or firm size barely make the index. This makes it easy to understand why Gilman and Edwards (2008: 533) bemoan the ‘acute shortage’ of research exploring Human Resource (HR) practices in SMEs. This neglect is all the more surprising considering the human capital intensive nature of SMEs where the additional value added by each individual employee is more transparent and telling. Indeed, sound management of employees can be a critical factor determining the survival and growth of smaller firms (Barrett and Mayson, 2008). Equally, the ‘resource poverty’ inherent to smaller firms means that they are likely to be especially dependent upon their human resources (Marlow and Patton, 1993). In those economies seeking indigenous growth policy attention has increasingly turned to SMEs and by consequence their infrastructure for man- aging and developing human capital. The objec- tive of this chapter is to explore this tendency in the context of Malaysia. The chapter begins by providing a background overview of SMEs in Malaysia and current government policy to en- courage SME growth. We then review some of the key theoretical lenses for examining human capital in SMEs, and provide an overview of the limited Malaysian research in this area. The latter half of the chapter opens an empirical window by documenting descriptive survey results examining human capital value and uniqueness in over 200 Malaysians SMEs. The chapter closes by explor- ing key implications of the analysis and pathways for future research. BACKGROUND: THE MALAYSIAN CONTEXT Government Policy The Malaysian government has a long history of planned economic development, namely through three critical policy plans; the New Economic Policy (NEP), National Development Policy (NDP), and National Vision Policy (NVP) (Ong et al., 2010). The present conceptualisation for economic development is contained in the recent ‘SME Master Plan’ (2012-2020). As a conse- quence of the Asian financial crisis of 1997, the Malaysian government has changed focus and recognised the value of the SME sector as a key means to insulate the economy from its previous vulnerability to external global shocks, in particu- lar by reducing an overreliance on foreign direct investment (Ong et al., 2010; Ahmed et al., 2011). Allied to this, in aspiring to achieve a ‘developed nation’ standing by, or before, 2020 the Malaysian government has also refocused attention on the human capital requirements of the nation (Hashim et al., 2005). The SME Master Plan sets out six specific growth areas for SME development and performance improvement, one of which centres upon human capital development. The plan notes that the Malaysian workforce typically lacks job readiness, has low utilization of existing training, and typically receive non-competitive rewards and benefits. The government’s intention is to increase human capital levels and intensity across the SME sector to enable innovation as a key driver of enhanced economic growth across the economy. At a macro-level the government objective is to broaden the employment base and increase aver- age per capital income in an attempt to achieve the status of a high income economy. At a more micro-level, however, very little is known about the actual in-firm processes which can potentially drive economic growth in Malaysia (Hashim et al. 2005). Similarly there is limited knowledge of the existing human capital levels or requirements of SMEs and how they may potentially help or hin- der this objective (Garengo and Bernardi, 2007). SMEs in Malaysia In most economies, including those in the Asia- Pacific region, SMEs dominate the industrial landscape (Abe et al., 2012). This is certainly true of Malaysia where, according to the SME Master EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 30 Human Capital in Malaysian SMEs Plan (2012), SMEs constitute 99.2 percent of all business organisations. In terms of relative impact, the SME sector accounts for 32 percent of national GDP, 19 percent of all exports while providing nearly two-thirds of total employment. These figures suggest that the impact and relevance of the SME sector in Malaysia cannot be understated. Nonetheless, providing a rigorous definition of what actually lies behind the label SME is not without difficulty (Abe et al., 2012). In Malaysia the National SME Development Council defines an SME using both sales turnover and the number of employees, while also providing an additional distinction according to industry type (see Table 1) This approach to defining SMEs based on their line of business is also utilised in the context of economies such as India, Japan and the Taiwan Province of China (Abe et al., 2012). This type of definition also echoes early attempts in the UK to utilise an aggregate statistical definition which allows for variance by sector (e.g. Bolton Report, 1971). Yet while such an approach does favour local, intra-industry distinctions it does so at the expense of facilitating broader systematic com- parisons and considering a larger number of firms (Forth et al., 2006: 5). The response to such dif- ficulties has typically been recourse to numbers employed as the ‘most relevant measure of size’ (Kalleberg and Van Buren, 1996). However, it must be acknowledged that problems remain with employment-based, numerical definitions as the actual categories used to distinguish between large and small firms can be somewhat arbitrary. More- over, numbers also take on a different meaning contingent on national context; US studies can take small as meaning less than 500 employees (Klaas et al., 2012), while the EU offers a more generous definition with medium sized firms seen as those employing 50-250 and small constituting those with more than 10 but less than 50 employ- ees. More rigorous definitions also deploy eligi- bility dimensions concerning annual turnover and ownership which ensure the status of firms as non-subsidiary and independent is also invoked. Complexities of definition duly acknowledged, going forward the Malaysian government plans strategic investment in SMEs which is envisaged to raise the contribution of SMEs to some 41 percent of national GDP and 25 percent share of all exports. This suggests productivity and ef- ficiency gains brought about by better utilisation of human capital. Already the Human Resource Development Fund (HDRF) has shown a general positive impact on investment, capital intensity and productivity. Nonetheless, the core issue of talent management in terms of human capital is an extremely underdeveloped area in Malaysia, with little, if any, analysis conducted in the SME sector. The SME Master plan (2012) highlights the significant potential for intervention in this Table 1. Malaysian SME definitions Primary Agriculture Manufacturing (Including Agro-Based) and Manufacturing-Related Services (MRS) Services Sector (including ICT) Micro Less than 5 employees or sales turnover less than RM 200,000 Less than 5 employees or sales turnover less than RM 250,000 Less than 5 employees or sales turnover of less than RM 200,000 Small Between 5 & 19 employees or sales turnover between RM200,000 and less than RM1 million Between 5 & 50 employees or sales turnover between RM250,000 and less than RM10 million Between 5 & 19 employees or sales turnover between RM200,000 and less than RM1 million Medium Between 20 & 50 employees or sales turnover between RM1 million to less than RM5 million Between 51 & 150 employees or sales turnover between RM10 million to less than RM25 million Between 20 & 50 employees or sales turnover between RM1 million to less than RM5 million Source: Ong et al. (2010: 41) and SME Masterplan EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 31 Human Capital in Malaysian SMEs domain; the Malaysian SME landscape is charac- terised by low productivity where the value added of per employee is estimated to have averaged at RM 47,000 (approximately $15,500), one third that of the value added by employees in larger organisations. Overall, the significance placed on SMEs in Malaysia highlights the importance of beginning to chart and better understand human capital interventions in this context. HUMAN CAPITAL IN SMES: OVERVIEW AND PROSPECTS It has long been stated that the role and impact of HRM in SMEs has not received adequate attention. This point finds even more force in the context of transition economies (Nguyen and Bryant, 2004). In order to explore Human Capital in Malaysian SMEs it is first necessary to examine relevant theory and research. A broad distinction can be drawn here between a line of argument that is supportive of universalistic reasoning and one that holds a more contextual bent. Universalistic theory suggests that SMEs are likely to benefit from the same type of HRM practices as applied in large firms irrespective of organisational context. By contrast, more contextual based theory considers the specific characteristics of SMEs and moves to better accommodate the institutional and cultural context in which they are embedded. We will consider each of these approaches in turn before highlighting how our research into Malaysian SMEs attempts to draw on insights from both of these perspectives. In terms of the universalistic argument, US studies have largely advocated the role of HRM and its prospective impact on performance re- gardless of firm size (Huselid, 1995; Way, 2002). Following this logic Kaman and colleagues conclude from their research that “small firms can no longer be considered unsophisticated practitioners of human resource management” (2001: 43). Likewise, small firms are found to be ‘innovative in HRM’ (Dex and Scheibl, 2001) and have largely similar HR practices to their large firm counterparts (Golhar and Deshpande, 1997). Hayton’s (2003) examination of strategic human capital management practices found a positive effect on entrepreneurial performance measured as the degree to which the small firms examined pursue innovation and accepted risk and uncer- tainty. Sheehan (2013) deployed a longitudinal methodology examining the relationship between sophisticated HRM practices and organisational performance in SMEs over two time periods. Her results find that HRM practices were seen to have a beneficial impact over time thereby discount- ing arguments concerning reverse causality (i.e. that those better performing SMEs subsequently introduce more sophisticated HRM practices). Nonetheless, the treatment of firm size in some of this research in problematic. Hayton defined the small firm as having an upper parameter of 500 employees while excluding firms with less than 100 employees from the sample ‘due to the expectation that formal HRM practices would be limited for these firms’ (2003: 381). The subse- quent result of a positive impact of human capital management in small firms therefore needs some qualification. Another study exploring the factors motivating the adoption of ‘high involvement practices (HIPs)’ similarly omits organisations with less than 100 employees from its sampling frame, but is nonetheless able to conclude that “the adoption of HIPs is likely to vary neither on the size nor on the age of the firm. This may confirm the fact that the new trends in managing HR are not limited exclusively to large companies” (Ordiz-Fuertes and Esteban, 2003: 522). Others more cautiously highlight the merits of investment in HRM in specific circumstances e.g. in facilitat- ing growth trajectories (Kotey and Slade, 2005). In many cases, however, arguments concerning the financial costs of introducing HRM practices (e.g. sophisticated recruitment practices) and their pragmatic viability (e.g. formal communication mechanisms) in the SME context are neglected. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 32 Human Capital in Malaysian SMEs A second stream of research has urged for caution against normative prescriptions and sim- plistic transposition of large firm HRM practice to the SME context (Harney and Dundon, 2006). Analysis of the UK Work Employment Relations Surveys (WERs) data indicates that the expected relationships between the presence of a HR spe- cialist and the adoption of HRM practices, and the associations between formal HR practices and employee satisfaction, are absent (Bacon and Hoque, 2005; Forth et al., 2006). Indeed, research has found that small, growth oriented firms may actually not benefit from having senior HRM executives (Welbourne and Cyr, 1999). Making sense of such contradictory evidence mandates approaches which are more sensitive to context and can offer explanatory accounts of the key contingencies influencing the type and form of HRM evidenced in SMEs. One key factor which complicates analysis of SMEs is the prevalence of informality in this context. Informal practice cannot be automatically read as deficient but in- stead operates in a dynamic fashion (Ram et al., 2001). A good example comes from Drummond and Stone’s (2007) research into High Performance Work Practices at the Sunday Times ‘50 best small companies to work’. Here they found little that matched what might be prescribed by universal- istic theory but instead that each firm “adopted a distinct bundle of workforce related practices, based upon its own perceived needs and priorities” (2007: 196). Similarly in their research on small firms in the road haulage sector Marchington et al., (2003: 20) note that firms utilise a range of ‘intelligent’ formal and informal methods specific to their context. Characteristics specific to smaller firms such as their ‘hierarchically contracted’ nature also mitigates against typically cited best practice such as internal promotion and formal communication channels. In attempting to cap- ture this internal dynamic Harney and Dundon (2006) outline an open systems theory of HRM. This also moves to accommodate the proximity of SMEs to their external environment. Indeed, the extent of formality in place is likely to be heavily shaped by the broader institutional environment in which firms are operating in. In their study of SMEs in Vietnam Nguyen and Bryant (2004) found unique features impacting upon the extent of formality to include the collective value of the family, customer and supplier expectations coupled with pressures from banks to formalise HR practices in order to qualify for loans. They concluded that decisions on the level of HR in- formality “are actually influenced by a complex set of cultural, economic and institutional factors” (2004: 596). Other research by contrast advocates a more culturally neutral impact for HRM across similar contexts (Bae et al., 2003). The distinction between universalistic and more contextual theories holds relevance for research into Malaysian SMEs. In terms of univer- salistic theory, research exploring the adoption of sophisticated HRM practices in Malaysia is largely underdeveloped (Osman and Galang, 2011). Of the research that is available there is a suggestion of an underutilisation of HR practices amongst Malaysian organizations (Caspersz, 2006), with multinationals likely to exhibit more sophisticated practices (Hassan, 2010). A recent CIPD (2012) study of over 100 Malaysian firms finds that there is some engagement with sophisticated HR although it is not obvious whether the findings hold relevance for the activities and effective- ness of SMEs. It is therefore important to draw on existing research (Klaas et al., 2012; Sheehan, 2013) to understand the extent of diffusion of sophisticated HRM practices in Malaysian SMEs. By contrast, from the perspective of contex- tual theory, it is understood that comparison with the ideals of best practice HRM should form the beginning rather than the end of analysis. This highlights the importance of deciphering the Malaysian specific explanations for the HRM practices in place in Malaysian SMEs. In terms of institutional and cultural issues the CIPD (2012) research suggests that the issue of communication is likely to be a significant issue in Malaysian firms. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 33 Human Capital in Malaysian SMEs Drawing on Lepak and Snell’s (2002) distinction between human capital uniqueness and human capital value is one way to examine the merits and potential of the government focus on human capital and the specific implications this may hold for SMEs. Such understanding is important as the Malaysian government has committed to enhanc- ing the human capital infrastructure of SMEs through some 32 vocational training programs at an expense of RM124.3 million (SME Annual Report 2009-2010). It is important that such policy initiatives draw upon a strong empirical foundation rather than automatically assuming SMEs to be small big businesses. This is especially the case as economic development is likely to occur in the SME rich domains of tourism and knowledge based enterprises. METHODOLOGY In order to shed some empirical light on HRM practice in Malaysian SMEs this chapter draws on original survey evidence. The survey approach enables a broad understanding of the nature of HRM practices in place, although its limitations in capturing the dynamics of informality and realities of day to day practice are acknowledged (Sheehan, 2013). The research was conducted in conjunction with the Malaysian SME Corporation. Surveys were randomly distributed to 500 members in September 2012 and, after follow-up letters, 202 completed surveys were returned representing a response rate of over 40 percent. The first section of the survey was designed to examine existing HRM practice and perceived effectiveness. HRM practices were measured using an adapted mea- sure from Klaas et al. (2012). Through extensive piloting Klaas and colleagues devised a measure which was deemed to capture the nature of High Performance Work Systems measured by the likes of Huselid (1995) in an SME context. An early version of this measure was piloted with 10 Malaysian SME owner managers. Based on subse- quent feedback and concerns that the narrowness or breadth of HRM practice might not be captured the Klaas approach of exploring the proportion of workforce covered by each practice was amended to a likert scale (ranging from strongly disagree to strongly agree) to better assess the existence of practices. This measure goes someway in address- ing concerns surrounding simple yes/no, formal/ informal responses concerning the existence of practice (Sheehan, 2013). Human resource ef- fectiveness was measured using the Klaas et al. (2012) measure based on a five point likert scale from very dissatisfied to very satisfied. The second section of the survey moved to better explore the internal dynamics of human capital management within SMEs. In particular, this section drew on the well-established work of Lepak and Snell (2002). Underpinned by the logic of transaction cost economics and the resource based view of the firm the survey measured hu- man capital value and human capital uniqueness respectively, deploying a likert scale ranging from strongly disagree to strongly agree. Finally, following Delaney and Huselid (1996), overall organisational performance was measured on a subjective basis as respondents were asked to com- pare performance relative to that of competitors. This relative measure is particularly appropriate in an SME context where the basis of threshold performance and the desire for profit maximisa- tion may not be directly comparable with that of larger firms (Gimeno et al., 1997). The empirical findings are discussed in two key sections; one related to HR practices and HR effectiveness and a second addressing human capital value and hu- man capital uniqueness. However, in order to set the context, it is first necessary to explore some demographics and broad findings concerning hu- man capital development in the respondent SMEs. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 34 Human Capital in Malaysian SMEs DEMOGRAPHICS AND HUMAN CAPITAL DEVELOPMENT The surveys were administered to those people with responsible for HR activities in the SME organisations. In terms of the individual position or title of those who completed the survey (after omitting missing respondents), 46.4 percent were the Chief Executive Officer/ Managing Direc- tors, 24.5 percent were the Executive Director and 29.1 percent were the General Manager. In contrast to international findings which suggests that a dedicated HR position is unlikely to be found in the majority of SMEs (Sheehan, 2013; Forth et al., 2006), 54.8 percent of organisations had a specific person with the designated sole responsibility for HR activities. This pro-activity may reflect the reality that the sample has close association with the Malaysian SME Corporation. Table 2 presents the organisational characteristics for the 202 SMEs that participated in the survey. In relation to organisational size, over 40 percent of respondents had 10 or less employees, with 72 percent having 50 or less employees. In general this reflects the Malaysian definition of SMEs as largely constituting those firms with less than 100 employees (Ong et al. 2010: 41), some 86.55 percent of the current sample. With respect to the sectoral breakdown- services was the largest industry sector (55.7 percent of respondents), followed by manufacturing (28.9 percent), con- struction (8 percent) and finally agriculture with 7.5 percent. The overwhelming majority of SME were Malaysian owned (93.1 percent). Concern- ing the length of time organisations had been in existence, 12.9 percent were in operation for 2 years or less, 20.3 percent were in the 2-5 years range, 26.7 percent in the 6-10 years range, 27.2 percent in the 11-20 years bracket, and 12.9 percent in the 20+ years range. Importantly this means the focus of the current research is very much on existing firms and ‘smallness’ rather than new or emerging ventures which face different, very specific issues associated with ‘newness’ (Cardon and Stevens, 2004). To get a sense of the nature of human capital and human capital requirements within the SMEs we can note that 78.4 percent of organisations have labour costs of less than 50 percent. Of these responents, 42.7 percent indicated that labour costs were less than 25 percent of total costs. At the higher end of the scale 5.5 percent of respon- dents indicated that labour costs were in excess of 75 percent of total costs. Findings in relation to human capital development requirements are presented in Figure 1. This clearly suggests a degree of immediacy and urgency associated with human capital needs. Specifically, with regard to current employees 62.4 percent of respondents indicated that they would immediately consider investing time, resources and effort in developing these employees, while another 27.2 percent said they would willing to do so within the next two years. In terms of core staff (exceptional employ- ees who critical for the organisations competitive advantage), 65.8 percent were willing to invest Table 2. Characteristics of respondent organisa- tions Variable Percent Size: 1-10 11-50 51-100 100-250 250+ 40.5 31.5 14.5 11 2.5 Industry Sector: Construction Agriculture Manufacturing Services 8 7.5 28.9 55.7 Ownership: Malaysian Asian (Non-Malaysian) Other 93.1 6.4 .5 Age: 0-2 years 2-5 years 6-10 years 11-20 years 20+ years 12.9 20.3 26. 27.2 712.9 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 35 Human Capital in Malaysian SMEs immediately, while 24.8 percent planned to do so with the next two years. Most interesting is that less than 9 and 8 percent of respondents respec- tively stated that it was not their intention to invest any time, resources and effort in developing em- ployees. This indicates that SMEs in Malaysia are open to opportunities to, and see the benefit of, investing in both core talent and employees gen- erally. This also echoes the CIPD findings where Malaysian firms were much more likely to place an emphasis on raising skill levels. The results indicate that organisations are marginally more receptive to investing in core talent over all em- ployees. Encouragingly, this suggests a clear degree of consistency between government poli- cy and emphasis in relation to human capital and the specific challenges identified by Malaysian SMEs. HR PRACTICE AND HR EFFECTIVENESS This section moves to examine the nature and extent of HR practices in Malaysian SMEs. This is one of the first studies to open an empirical window on this topic (Osman, and Galang, 2011). Participants were asked to assess the importance of 13 various HR activities on a scale of 1-5 from strongly disagree to strongly agree. Rather than simply assessing the diffusion of a list of practices, this approach enables a richer assessment of key priorities and HR issues confronting Malaysian SMEs. The responses are presented in Table 3. Overall, there appears to be a consensus that HR issues are of significant importance to Malaysian SMEs evidenced by the concentration of answers in the agree/strongly agree categories. The high- est mean score was for the use of recognition and reward practices (Mean= 4.14, SD= .635) closely followed by the use of bonuses and incentives (Mean= 4.13, SD= .616). Reflecting the earlier discussion on the importance of human capital development the provision of formal training also ranked as highly important (Mean= 4.03, SD=.744). At the opposite end of the spectrum practices that were seen as least important included the provision of retirement options (Mean= 3.60, SD= .752) and the use of formal procedures to set pay levels (Mean= 3.75, SD=.684). These may reflect the demographical and institutional backdrop respectively. In common with the CIPD Figure 1. Human capital development EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 36 Human Capital in Malaysian SMEs (2012) study communication and feedback in the form of performance appraisals, regular updates about business development, and the seeking input on how to improve the company also ranked highly. Overall, the findings counter the view of an SME sector which fails to appreciate the role of HRM activities. That said, the measures deployed examined perceptions of the importance of prac- tices which cannot be automatically equated with diffusion into practice. One way to begin to ad- dress this is to assess perceptions of the effective- ness of current HRM practices in place in SMEs (cf Klaas et al., 2012). Table 4 captures Human resource effectiveness amongst the Malaysian SMEs studied. Specifically, it assesses the impact that current HR initiatives have in terms of at- tracting the right employees, employee turnover and absenteeism, motivation, performance and improvements in skill levels. The majority of respondents indicated that they were satisfied with the impact of current practices, with the exception of the level of employee turnover where 46.9 percent respondents were neither satisfied nor dissatisfied. The overall mean for perceived ef- fectiveness of HR across the six areas examined was 3.42 (SD= .8). In the main participants could be described as exhibiting general satisfaction with the effectiveness of current HR systems. The highest level of satisfaction was for levels of ab- senteeism (Mean =3.55, SD=.753). This compares favourably with Klaas et al., (2012: 499) who reported a perceived effectiveness mean of 3.8 Table 3. Human resource practice In your Organisation it is Important to Strongly Disagree % Disagree % Neutral % Agree % Strongly Agree % Mean Std. Deviation Provide formal performance evaluations. 20.1 61.3 18.6 3.98 .623 Provide frequent performance feedback. 4 24.1 53.3 18.6 3.86 .756 Provide regular updates regarding developments in the business. 2 16.6 60.8 20.6 3.98 .717 Provide formal training programs. 3 16.8 53.8 26.4 4.03 .744 Use incentives and bonuses. 1 10.2 63.5 25.4 4.13 .616 Use recognition and reward programs. 13.8 57.7 28.6 4.14 .635 Seek input on how to improve the company. 19.5 54.5 26 4.06 .673 Provide health insurance plans. 1.5 21.2 58.6 18.7 3.94 .677 Provide retirement plan options. 0.5 4.5 39.4 45.5 10.1 3.60 .752 Use selection tests or other formal screening methods when hiring. 1 30.2 50.8 18.1 3.85 .710 Use background screening for job candidates. 9.1 28.4 48.7 13.7 3.67 .825 Use written guidelines when dealing with an employee that doesn’t meet expectations. 4.5 28.6 52.3 14.6 3.76 .749 Use formal procedures to set pay levels. 3 29.3 56.6 11.1 3.75 .684 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 37 Human Capital in Malaysian SMEs (SD= .8) in the US SMEs that they studied. No- tably both samples draw from firms engaged with SME agencies. Nonetheless, the results also in- dicate the scope for improvement in order for SMEs to feel that they are exceling with respect to these important HR outcomes. Attention now terms to further examine the nature of human capital deployed in SMEs with respect to its per- ceived value and uniqueness. HUMAN CAPITAL VALUE AND UNIQUENESS Lepak and Snell (2002) have drawn on two im- portant theories of the firm to better understand prospects and implications for HRM practices. Drawing on the logic of transaction cost eco- nomics Human Capital value refers to “the ratio of strategic benefits to customers derived from skills relative to the costs incurred” (Lepak and Snell, 1999: 35). Human Capital value is mani- fest in factors such as organisational efficiency, innovation, value added, customer services and satisfaction associated with human resource driven skill sets. In essence the measure of human capital value stems from the extent to which it is core or peripheral to the value added embedded in the firm’s final output- be they products or services. Overall, despite the varying levels of labour expenses reported earlier, the majority of firms indicated that their human capital was valuable to the activities of the firm (see Table 5). This was especially the case with respect to the skill sets required to maintain high quality products and services (Mean= 4.12, SD= .649). At the opposite end of the spectrum value added was lowest for skill sets that allows the organisation to offer low prices (Mean = 3.61, SD= .829). A preliminary reading of the role of human capital value might therefore suggest that it is related to the strategy of the firm- finding more importance in the context of a differentiation strategy based on quality, innovation and creativity and less so in relation to those domains aligned with a more low cost value proposition (Guthrie et al., 2002). While human capital value is important, it can be purchased on the open market or brought into the firm through partnership arrangements as necessary. An important complimentary consid- eration following the logic of the resource based view is therefore to examine the extent to which human capital is rare and unique and thereby of- fers skills sets and values that are idiosyncratic to the firm (Wright et al., 2001). Arguably, holding human capital which is unique to the firm and not Table 4. Human resource effectiveness Very Dissatisfied Dissatisfied Neutral Satisfied Very Satisfied Mean Std. Deviation Your firm’s ability to attract new employees. 1.5 12.6 32.3 52.5 0.5 3.36 .787 The level of employee turnover in your firm. 2.6 12.9 46.9 34 3.6 3.23 .816 Skill levels among your employees. 1 10.3 35.6 48.5 4.6 3.45 .782 The motivation and morale among your employees. 4.1 11.3 31.3 45.1 8.2 3.42 .940 Overall employee performance in your firm. 6.7 37.9 50.8 4.6 3.53 .690 The level of absenteeism in your firm. 1.5 7.2 32.8 52.8 5.6 3.55 .753 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 38 Human Capital in Malaysian SMEs readily available on the open market affords SMEs a strong basis for advantage and opportunity for developing a viable and sustainable value propo- sition. As noted by Lepak and Snell (1999: 36) “the degree to which assets are unique directly impacts their potential to serve as a source of competitive advantage”. Table 6 documents the findings concerning the degree to which indi- viduals in an SME provide a unique skill set. Questions here concerned issues such as the avail- ability of employees, difficulty in terms of replac- ing, and the degree to which employees are best in the industry and serve to distinguish the SME from its competitors. The majority of respondents placed a degree of emphasis on the uniqueness of the human capital available at their respective organisations. Almost all questions resulted in a positive response with the exception of statements relating to unique employees skills not being available to competitors (58 percent were in dis- agreement or neutral) and that staff skills at the respondents respective organisations are consid- ered the best in the industry (55.1 percent were in disagreement or neutral). The response with the greatest level of agreement indicated that skills are developed through on the job experiences (Mean= 3.78, SD=.635), while the lowest was for skills that were not available to competitors (Mean= 3.30, SD= .792). Overall, Table 6 would suggest that participants recognised the impor- tance human resources plays in developing a unique configuration of skills that are not available to competitors. In contrast to the CIPD (2012) findings there seems to be significant recognition (nearly 70% in agreement) of the importance of skills that are customised to the SME’s particular needs. Table 5. Human capital value Individuals in your Organisation Have Skills Sets that… Strongly Disagree Disagree Neutral Agree Strongly Agree Mean Std. Deviation Are instrumental for creating innovations. 2 14.3 68.4 15.3 3.96 .615 Create customer value. 2 19.9 64.8 13.3 3.89 .635 Help minimise costs of production, service, or delivery. 2.1 18.5 64.6 14.9 3.92 .641 Enable our firm to provide exceptional customer service. 1.5 30.8 55.9 11.8 3.77 .663 Contribute to the development of new market/ product/ service opportunities. 2 20.9 59.7 17.3 3.92 .678 Develop products/services that are considered the best in our industry. 2.6 19.4 55.6 22.4 3.97 .722 Directly affect organisational efficiency and productivity. 0.5 15.8 64.8 18.9 4.02 .607 Enable our firm to respond to new or changing customer demands. 0.5 14.4 68 17 4.01 .580 Allow our firm to offer low prices. 1 8.2 30.1 49.5 11.2 3.61 .829 Directly affect customer satisfaction. 0.5 17.3 61.2 20.9 4.02 .635 Are needed to maintain high quality products/services. 10.8 64.1 25.1 4.12 .649 Are instrumental for making process improvements. 2 17.3 56.1 23.5 4.03 .708 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 39 Human Capital in Malaysian SMEs CONCLUSION This chapter has offered some important insights into a previously unchartered domain, the nature of human capital management in Malaysian SMEs. Recent government policy in Malaysia has placed significant emphasis on the role of SMEs as a pathway for future economic prosperity. This is evidenced by the policy document the SME Masterplan. The CIPD (2012) survey provided anecdotal evidence that a high proportion of Malaysian organisations are actively trying to raise skill levels. This finding was mirrored in the current research- with a significant propor- tion of SMES indicating intent to address human capital developments as an immediate require- ment (see Figure 1). Consequently, government rhetoric concerning human capital and the need for development and enhancement would seem to match SMEs realities. This sets Malaysian SMEs apart from others in Asia and the Pacific where the necessity of investing in core talent to ensure enhanced innovation capabilities is not as widely recognised (Abe et al., 2012). The current research offers some encourag- ing findings with respect to the perceptions of human resource value (Mean= 3.93), human resource practices (M= 3.90) and human resource uniqueness (M= 3.54) within Malaysian SMEs. While human capital is noted as valuable, the general findings suggested that SMEs were less likely to feel their individual employees offered a skill set that was unique, especially relative to competition and in terms of being leading in the industry. This has direct implications for the likely sustainability of any advantage achieved. The less unique employee contributions and skills sets the more likely that these will either be replicated, or indeed, poached by the competition. Perhaps, directly reflecting this issue- the CIPD (2012) report found that organisations in Malaysia were the most likely across all the countries researched to feel that Malaysia will be a net exporter of talent in five years’ time, with 75 percent of organisa- tions feeling this will be the case. Table 6. Human resource uniqueness Individuals in your Organisation Have Skills Strongly Disagree Disagree Neutral Agree Strongly Agree Mean Std. Deviation Are not widely available in the labour market. 12.9 34 45.4 7.7 3.47 .840 Would be very difficult to replace. 14.4 37.6 41.8 6.2 3.40 .804 Are not available to our competitors. 0.5 15 42.5 37.8 4.1 3.30 .792 Are widely considered the best in our industry. 0.5 6.7 47.9 37.1 7.7 3.44 .754 Are developed through on the job experiences. 3.1 23.6 64.6 8.7 3.78 .635 Are unique to our organisation. 6.2 36.6 50.5 6.7 3.57 .710 Are difficult for our competitors to imitate or duplicate. 0.5 9.8 37.3 45.1 7.3 3.48 .791 Are customised to our particular needs. 2.6 28.4 61.9 7.2 3.73 .625 Distinguish us from our competition. 3.6 29.5 55.4 11.4 3.74 .701 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 40 Human Capital in Malaysian SMEs In terms of performance, at the organisational level the respondent SMEs indicating perceived high levels of performance relative to their industry (M= 3.93). However, the current findings suggest some scope for improvement with respect to satis- faction with current HR effectiveness (composite of existing skill levels, employee turnover and motivation and morale of the workforce) scoring a mean of 3.42. The stated intent of the Malaysian government is to enhance the productivity levels of SMEs. The SME Masterplan indicates that this productivity boost will come from more effective use of the existing human capital base rather than from additional workers. This suggests improv- ing performance in SMEs in Malaysia may be less about implementing new HR practices, but rather ensuring that those HR practices in place are affording employees the necessary autonomy, motivation and discretionary effort to enhance organisational performance. One solution to enhance the issue of human capital uniqueness and HR effectiveness would be addressing the training issue identified by SMEs. This would include both formal targeted training interventions, but also firm specific mentoring, development and the creation of career paths and sharing of tacit knowledge. It has been noted that human capital and skill are the more prominent mediators between HRM and performance, while of all the available human capital interventions, training is most likely to be associated with mea- sures of future performance in the SME context (Sheehan, 2013). Another important intervention may be to create a network infrastructure for SMEs to exchange knowledge and ideas and of- fer targeted advice. In the context of SMEs it has been noted that a deficient networking structure “hinders effective deployment of technology and business development services as well as collabo- ration with other firms” (Ravi Ratnayake cited in Abe et al., 2012). The survey approach taken in this chapter has been an important first step, but it is not one without limitation. Survey research is useful in offering breath and providing statistics to inform policy, however it comes at the expenses of depth of understanding. Going forward research could pursue a more qualitative case based analysis to ex- amine the meaning of Human Capital Management for specific SMEs and to better understand how practices are cascaded from perceptions (intended practice) to day to day implementation (enacted practice). Incorporation of employee perspectives also offers a useful complement to managerial perceptions, and is likely to open up a rich basis for understanding the issues of uniqueness and productivity gains. Moreover, only through such an approach can the critical role of the family, community and the informal undertone prevalent in the SME context be adequately surfaced and accommodated. This will also allow a rounded assessment of local conditions and institutional context to aid targeted policy reform and interven- tion (Abe et al., 2012: 4). Overall, it is clear that the neglect of SMEs is not exclusively an Anglo-Saxon phenomenon. Many countries experiencing rapid economic growth also risk downplaying the prospective role of SMEs. Malaysian policy, by contrast, has been pro-active in understanding the significance of SMEs and human capital development therein. An understanding of the practices of SMEs offers the potential to explore key challenges and therefore to offer evidenced based policy advice, as opposed to advice driven largely by a big business agenda. In Malaysia, as elsewhere, it is clearly the case that small business is big business and therefore warrants due consideration in policy discussions and interventions in order to provide for balanced and sustainable economic and social development. The image on the cover of the SME Masterplan depicts precious gems. These are said to signify the high impact programmes proposed, but also the highly valuable indigenous Malaysian SME sector. 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Human resource manage- ment and performance: Evidence from small and medium-sized firms. International Small Business Journal. doi:10.1177/0266242612465454. Way, S. (2002). High performance work systems and intermediate indicators of firm performance within the US small business sector. Journal of Management, 28, 765–785. Welbourne, & Cyr, L. A. (1999). The human re- source executive effect in initial public offerings. Academy of Management Journal, 42(6), 616-629. Wright, P. M., Dunford, B. B., & Snell, S. (2001). Human resources and the resource based view of the firm. Journal of Management, 27(6), 701. doi:10.1177/014920630102700607. KEY TERMS AND DEFINITIONS Contextual Theory: A theoretical approach which recognises the key contextual and insti- tutional contexts in which firms are embedded. Human Capital Value: Refers to the ratio of strategic benefits to customers derived from skills relative to the costs incurred. Human Capital Uniqueness: Denotes the degree to which assets are unique with this in turn impacting their potential to serve as a source of competitive advantage. Resource Poverty: Captures a condition that usually characteristics SMEs whereby they have resource deficiencies in terms of finance, resources and managerial capability. Resource Based View: A theoretical viewpoint which stresses that the competitive advantage of a firm resides in its internal resources and capabilities. ‘SME Master Plan’: Malaysian government policy document outlining key initiatives to foster and develop the indigenous SME population. Universalistic Theory: A theoretical approach which suggests that SMEs are likely to benefit from the same type of HRM practices as applied in large firms irrespective of organisational context. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 44 Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 3 Effective Human Resources Management Practices in Small and Medium Enterprises: Global Perspectives of the MIST (Mexico, Indonesia, South Korea, Turkey) Economies ABSTRACT This chapter explores HRM (Human Resource Management) practices in SMEs (Small and Medium Enterprises) in the MIST (Mexico, Indonesia, South Korea, and Turkey) economies. Researchers and consultancy firms such as Goldman Sachs have suggested that these nations will be potentially very strong trading economies for the next decade based on economic analyses. SMEs play pivotal roles in these nations as they contribute to a majority of their domestic employment and GDP (Gross Domestic Product). The focus of the chapter is based on a thorough investigation of secondary sources on HRM practices (recruitment and selection, training and development, performance management, and compen- sation) of SMEs in the MIST nations. Institutional theory and Strategic Human Resource Management (SHRM) perspectives are showcased in understanding these practices better. The findings of the study suggest that HRM practices adopted in the MIST countries, both individually as well as a cluster, reflect the aspects of universalistic, contingency, resources bases, and institutional perspectives of the Strategic HRM (SHRM) model. The evidence also indicates the simultaneous adoption of both convergence and divergence theories of international HRM. The chapter also presents a model of HRM practices adopted by the SMEs in the MIST nations. Theoretical and practical implications of findings are discussed and directions for future research are provided. Anil Chandrakumara University of Wollongong, Australia Pramila Rao Marymount University, USA DOI: 10.4018/978-1-4666-4731-2.ch003 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 45 Effective Human Resources Management Practices in Small and Medium Enterprises INTRODUCTION This chapter explores HRM practices (recruit- ment and selection, training and development, performance appraisal and compensation) in SMEs (small and medium enterprises) in the MIST (Mexico, Indonesia, South Korea, and Turkey) economies. These four nations have been identi- fied as important global business participants for the next decade (Brent, 2009: Aycan, 2006; Leal, 2006). Based on economic analyses, Goldman Sachs, a global consulting company, has identified this list of emerging economies (MIST) as showing a lot of economic and trade prospects in the next decade. In 2001, Goldman Sachs identified the BRIC (Brazil, Russia, India and China) nations as having lots of potential to dominate the global business market. The MIST economies are considered vibrant markets with increased potential for consumer buying. Mexico, with its geographical proximity to the US, is considered a strategic leader in the global export market. The government is also hoping to deregulate some of its state industries creating opportunities for international investors. Indonesia has abundant skilled and non-skilled em- ployees attracting multinationals to invest in both off-shoring and outsourcing facilities. South Korea has opened its doors to foreign direct investment after its financial crisis in 1997. It has experienced tremendous growth in several industries especially in its automobile and consumer industries. Turkey has demonstrated consistent fiscal growth since 2003 and is attracting foreign direct investment to develop it domestic market (Myles, 2012; Kapadia, 2012; Gupta, 2011; Brent, 2009). Scholars suggest that most of the academic re- search tends to focus on large or “best” companies leaving the understanding of management prac- tices in SMEs largely unexplored. For example, out of 207 articles published in top tier journals, only 7 articles identified HRM practices of small and medium companies (Cassell, Nadin, Gray & Clegg, 2002). This is in spite of the fact that most countries rely on SMEs for the majority of their business and trade prospects (Kishore et al, 2012; De Clercq, & Rius, 2007; Cassell, Nadin, Gray & Clegg, 2002). In a study of 156 entrepreneurs at SMEs, it was demonstrated that HRM practices was the most strategic concern for the management of these firms (Heneman, Tansky, & Camp, 2000). Strategic human resource management (SHRM) presumes that much of the variation in HR practices across organizations should be explained by the organizations’ strategies. Also, firms demonstrating greater congruence between HR practices and strategies should enjoy superior performance (Delery and Doty, 1996; Arthur, 1992; Schuler and Jackson, 1987). The SHRM literature draws on a number of models, which includes universalistic, contingency, configura- tional, and resource- based perspectives (Rhodes, et al., 2008; Aycan, 2005; Bowen et al., 2002; Delery and Doty, 1996). The contingency perspective of SHRM pre- sumes that the impact of HRM practices or systems depends on contextual variables (Hofstede & Minkov, 2010; Aycan, 2005; Bowen et al., 2002) such as strategy, structure, process, employee behavior, culture, institutional frameworks, and industry trends. Schuler and Florkowski (1996) have stressed the need to examine fit of HRM activities with competitive strategy, national cul- ture, and organizational life cycle. In this chapter, particular attention is given to examine whether there is any variation of HRM practices of SMEs in different countries that is associated with different cultural orientations (individualism/collectivism, power distance, masculinity/femininity, uncer- tainty avoidance, long/short term orientation). Indeed, if the same set of HRM practices is used across all the four countries, regardless of strategy, culture etc, then there is support for universalistic rather than contingency perspective of SHRM. It is also important to note that the relevancy of convergence (universalistic, best practices, high performing work practices) and divergence (cul- ture- bound and context specific practices) debate EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 46 Effective Human Resources Management Practices in Small and Medium Enterprises on these perspectives of SHRM. While the HRM practices used in different countries are inching towards global convergence, national culture and contingency factors such as institutional frame- work, business strategy continue to affect HRM practices in SMEs of MIST countries. Therefore, this chapter addresses an important dearth identified in the literature associated with SHRM practices in SMEs of MIST economies by providing a global perspective. The section will begin with a theoretical framework and its relevance to SMEs. This chapter will then detail the following themes in the MIST economies; 1) Introduction to each country, 2) Role of national cultures, 3) Recruitment and Selection practices, 4) Training and Development practices, 5) Perfor- mance Management practices, 6) Compensation and Benefits practices. The chapter will conclude with a model of HRM practices of MIST countries and direction for future research. Theoretical Framework Given the above backdrop, this section will focus on institutional theory to better understand the management practices of SMEs. Institutional theory suggests that organizations operate under an umbrella of both formal and informal practices. Formal practices are usually established by insti- tutions that help or hinder organizations operate their businesses. For example, local governments may actively promote training initiatives for small and medium organizations. Informal practices are established cultural or societal rules that become naturally embedded as organizational practices. For instance, several cultures adopt personal refer- rals as their predominant recruiting method as their culture favors helping in-group members (family, neighborhood, church etc) (Hessels, & Terjesen, 2010; Roxas, Lindsay, Ashill, & Victoria, 2008). A number of researchers (such as Hofstede, Hofstede & Minkov, 2010; Easterby-Smith et al., 1995; Sparrow, 1995) have explained the influence of national culture on HRM practices. Although the definition and the scope of the concept of culture is debatable (Tayeb, 1995; Hofstede, Hof- stede & Minkov, 2010), studies suggest the most important processes or influence mechanisms can be attributed to national cultures (Budhwar and Sparrow, 2002). They are socialization processes through which managers operate (Hofstede, Hof- stede & Minkov, 2010; Hofstede, 1983, Schein, 1995), basic assumptions which shape managers’ behaviors (Hofstede, Hofstede & Minkov, 2010; Hofstede, 1983; Schein, 1995), value orientations and norms of behaviors (Hofstede, Hofstede & Minkov, 2010; Hofstede, 1983, Tayeb, 1995) and idiosyncratic cultural practices (Sparrow & Hil- trop, 1997; Hofstede, Hofstede & Minkov, 2010). Comparative researchers also question as to how HRM is structured in different countries, what strategies are put into practice, what are some similarities and differences, and the role of institutional factors such as government poli- cies and educational systems (Clark at al.,1999; Brewster et al., 1996). Current debate in the area of cross-cultural/ national HRM perspective suggests that both ‘culture bound’ and ‘culture free’ factors are im- portant determinants of HRM (Hofstede, Hofstede & Minkov, 2010; Rhodes et al., 2008; Rowley et al., 2004; Budhwar and Sparrow, 2002; Jackson and Schuler, 1995). Thus, culture and institutional frameworks have become very important elements of the contingency perspective of SHRM model at the organizational level. Institutional theory experts suggest that organizations may experience changes in their adoption of formal and informal practices. Po- litical and economic changes can cause major transformations to local organizational practices. The former Soviet Union is a classic example of governance changing as organizations moved from a government-dominated approach to that of a market-centric. Multinationals are also considered change agents of formal or informal practices as such firms frequently introduce progressive practices in their subsidiaries overseas (Danis, EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 47 Effective Human Resources Management Practices in Small and Medium Enterprises Chiaburu & Lyles, 2010). For example, Indian organizations are slowly adapting to egalitarian practices (Lunch/Coffee with executives) in an effort to keep abreast with the forward practices of local multinationals (Rao, 2012). SMEs form the backbone of most emerging economies’ exports and imports. They are very dependent on exogenous factors and are easily affected by any institutional (either formal or informal) changes in their environments. The following sections on the MIST nations describe how the institutional theory plays a strong role in the development of the HRM practices in these nations. MEXICO Introduction Mexico is becoming a regional business leader in the Latin American market. A 2012 World Bank study on 183 economies provides important busi- ness indicators (such as ease of doing business, starting a business etc) indicates that Mexico is slowly inching its way to becoming prominent as it has the following scores; ease of doing business (Mexico 53), protecting investors (Mexico: 46), and trading across borders (Mexico: 59). Its geographical proximity to the US and Latin America has allowed it to attract strategic busi- nesses as it ranked 8th globally for the maximum number of foreign direct investments. Mexico changed its trade policy slowly from import- substitution to export strategy creating a robust local economy (Cantu de la Torre & Cantu-Licón, 2009; Kohout, 2008). Over the decades, Mexico has gradually enhanced its international presence through various trade agreements in diverse con- tinents. Mexico is a member of eleven FTAs (Free Trade Agreements) which include both bilateral and multilateral agreements. It has FTAs with about 41 different countries. In 1986, Mexico be- came a member of the GATT (General Agreement on Tariffs and Trade) in its initial step to become a member of the world trading community. In 1992, it became a member of the North American Free Trade (NAFTA) making significant inroads into the North American business market. The NAFTA has created an unified trading market making Mexico a leading exporter and importer in North America (Echeverri-Carroll, 2009). The Mexican labor practices are dictated by the Ley Federal de Trabajo (Federal Labor Law or FLL). The FLL was introduced in the Mexican constitution in 1931 and has been modified sev- eral times to capture current employment trends. For instance, the 1931 labor laws were revised in 1970s and in 1990 to include areas on health and safety of the employees, labor unions, collective bargaining among others. The labor practices in Mexico are completely mandated by the federal laws and unlike other countries (such as the US) Mexican state laws do not implement any labor laws (Posthuma et al., 2000; McGuinness, 19980). SMEs in Mexico are organizations that have 500 employees or less and usually are predomi- nantly family-owned (De Clercq, & Rius, 2007; Leal, 2006). Small organizations are defined as those that have employee between 30-100 em- ployees and medium firms usually have between 101-500 employees. In Mexico, it is common for different industry sectors (manufacturing, service, etc) to adopt their own specific definitions of SMEs within these general guidelines (less than 500) also. SMEs provide for more than 75% of the jobs demonstrating their pivotal role in the local economy (Leal, 2006). The Mexican government provides substantial economic support to SMEs to ensure they are competitive in both their domestic and global markets (Echeverri-Carroll, 2008; De Clercq, & Rius, 2007). Some industry sectors take advantage of the federal support by deliberately developing SMEs. Successful local IT (information technol- ogy) firms seem to follow such a business model. IT organizations receive funds from PROSOFT, a specific federal initiatives to augment technology companies. Softteck is an example of a successful Mexican IT company today which was established EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 48 Effective Human Resources Management Practices in Small and Medium Enterprises in 1982 as a SME. Currently the organization has around 10,000 employees and competes with global technology firms (Echeverri-Carroll, 2008). The Role of National Culture on HRM Practices Hofstede, Hofstede & Minkov (2010) identi- fied national cultural dimension indexes for 107 countries making their study comprehensive and topical. This data comprises of the original IBM research of Hofstede’s and also has included other studies that replicated Hofstede’s surveys in coun- tries not included in the original IBM research. This study has further added a new dimension, indulgent versus restraint, augmenting the body of knowledge on cultural dimensions. Mexico has the following indexes for power distance (81), individualism (48), masculinity (70), uncertainty-avoidance (82), long-term orientation (24), and indulgent versus restraint (97). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010). Mexico’s high score on power distance and masculinity indicates an autocratic management style that has strongly been influenced by its historical and local rulers. Machisimo, or exag- gerated masculinity has also contributed to the concept of hierarchy and power in organizations (Gannon & Pillai, 2010). Its low score on indi- vidualism indicates a culture that is characterized by a very tight collectivist framework where members distinguish in-group (family, close friends, church members) from out-group (ca- sual acquaintances, professional contacts) mem- bers. Such distinctions are demonstrated strongly in employment also as in-group members get preferential treatment in recruitment, training etc (Davila & Elvira, 2005). The high scores on un- certainty-avoidance reflect a national culture that has experienced a lot of insecurity through decades of Spanish domination and erratic political gov- ernance. Therefore Mexicans prefer organiza- tional policies that minimize any unpredictabil- ity or ambiguity in the process (Howell et al, 2007). Mexico’s low score for future orientation suggests that on an average Mexicans do not to plan strategically ahead. This may be because that the Mexican culture is accustomed to live very much in the present and manana (tomorrow) is another day (Gannon & Pillai, 2010; Gannon, 2004). It very high score on indulgent versus restraint suggest that the local people seem to enjoy and pursue leisure completely. Their col- lectivist affinity combined with their hedonistic tendencies make the culture replete with fiestas (festivals) and celebrations. For instance, Mexi- cans celebrate approximately 600 fiestas annu- ally that could be religious, communal or tradi- tional (Gannon & Pillai, 2010; Gannon, 2004; Gannon, 2001). Table 1. Cultural Profile of MIST economies- Index* (Rank) Countries Power Distance Individualism Masculinity Uncertainty- Avoidance Long-term Orientation Indulgent Vs Restraint Mexico 81 (10-11) 48 (30) 70 (8) 82(26-27) 24 (74-76) 97 (2) Indonesia 78 (17-18) 14 (70-71) 46 (41-42) 48 (62-63) 62 (26-27) 38 (55-56) South Korea 60 (43-44) 18 (66) 39 (59) 85(23-25) 100 (1) 29(67-69) Turkey 66 (32-33) 37 (43) 45(43-45) 85(23-25) 47 (46) 37-38 (49) * A score of 100 on the index indicates maximum points Source: Hofstede,G., Hofstede, G. J, Minkov, M. (2010). Cultures and organizations. Software of the mind. Intercultural cooperation and its importance for survival. New York. McGrawHill. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 49 Effective Human Resources Management Practices in Small and Medium Enterprises Recruitment and Selection Practices In a study of 321 SMEs, it was identified since SMEs were predominantly family-owned busi- nesses. The recruitment and selection usually involved selection of family members for vari- ous roles within the organizations. If the family members are not able to participate in the busi- ness operations, personal referrals were used as primary methods of recruitment (Moheno & Calzada, 2008). In another qualitative study of 7 SMEs in Mexico and US, it was also identified that new employees were primarily recruited through informal methods of personal referrals. The main reason employers recruited in such a manner was attributed to the trust such applicants bring to the workplace. These new recruits are usually known to the employers through prior family or social connections making them very trustworthy (Martinez, 2005). The use of personal referrals as a predominant source of recruitment method is emphasized in the Mexican HRM literature (Schuler et al, 1996; De Forest, 1998; Davila and Elvira, 2005). This recruitment method helps Mexicans promote their inner circle of family or friends which is very congruent with their strong collectivist orientation that emphasizes helping their kith and kin (Davila & Elvira, 2005). For instance, some universities in Mexico, despite having formal promotion systems, promote junior professors who know their superiors very well instead of promoting employees based on their performances (Elvira & Davila, 2005). Training and Development Practices In a study of 321 SMEs, it was identified a third of the companies offered some form of training and development to their employees. However employers were reluctant to invest generously in their employees as usually the turnover in SMEs is quite high. Employers are thus cautious to make such financial investments (Moheno & Calzada, 2008). In another qualitative study of 7 SMEs in Mexico and the US, it was identified that employers offered training and development opportunities to employees who demonstrated dedication and com- mitment (Martinez, 2005). SMEs predominantly follow informal training approaches for new em- ployees such as job- shadowing current employees or having informal discussions. Such methods are considered not only very cost-effective but also helpful for rich contextual learning (De la Torre & Licón, 2009). In Mexico, a tremendous advantage SMEs have is that training and development initiatives are significantly supported by federal government programs. A specific initiative known as PAC (Programa de apoya a la capacitacion) offers subsidized training and technical guidance to SMEs. The government program also arranges for SMEs to participate in business fairs and re- search grants. The Mexican government invested approximately $13 billion for almost 4 million SMEs over a period of five years (in the early 200s). They have realized that the majority of the domestic employment is provided by SMEs and thus their support will only enhance the local economy (Acevado & Bravo, 2005). The federal project of PAC, formerly known as CIMO, (Programa de Calidad Integral y Modern- ización), was established in 1987 when Mexico joined the GATT community. The government became cognizant that the local KSAs should be comparable to global standards and invested in schemes and programs for the local workforces to enhance their KSAs (knowledge, skills and abili- ties) (Tan & Acevado, 2005). Further, the local educational system does not prepare Mexicans sufficiently to make effective transitions to their work environments. This puts a heavy burden on the local government to play the surrogate role for new applicants entering the workforce (Arias- Garcia, 2005). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 50 Effective Human Resources Management Practices in Small and Medium Enterprises Performance Management Practices Although there is moderate literature on perfor- mance management practices in large Mexican organizations (Davila & Elvira, 2007; Davila & Elvira, 2005) there is a scarcity of research on appraisal practices in SMEs. The majority of the SMEs in Mexico are family-owned comprising of employees who share common cultures and similar backgrounds (Gomez et al., 2012; Artistain & Rajagopal 2010; De Clercq, & Rius, 2007; Leal, 2006). Employees usually have their own family members or close relatives as their superiors mak- ing any formal evaluation process quite futile. Loy- alty, dependability, and trustworthiness become more valuable employment characteristics than formal practices of any performance management processes. Informal practices may include casual conversations and suggested corrective actions between superiors and subordinates. However, no formal punitive consequences are generally followed (Davila & Elvira, 2007; Davila & El- vira, 2005). Scholars also suggest the informality in performance management practices could be one of reasons that SMEs perform mediocre as employees are not held accountable for their work (Artistain & Rajagopal, 2010). Davila & Elvira (2007) refer to the performance management process in Mexico as an “emotional agreement “between superiors and subordinates. Therefore in such a context the employment relationship becomes more important than any formalized practices in evaluating performances. These relationships become even more prominent in family-owned businesses like SMEs where employers and employees consider themselves as a part of a huge family. Further the collectivist Mexican culture en- courages a paternalistic style of management that includes authority towards and nurturing of their employees. The superiors demonstrate complete control over their subordinates but also care genu- inely about their welfare (Martinez, 2005; Davila & Elvira, 2007). The paternalistic method has its origins in the organizational approach of the early hacienda or large estates. Employers in these huge agricultural estates created the beginnings of an informal performance management system. Em- ployers looked after their employees’ needs and interests beyond the requirements of the job by providing lodging and food supplies. Employees were rewarded simply for their reliability and fidelity (Davila & Elvira, 2007; Martinez, 2005). This system of informality in the appraisal process continued to be adapted by organizations even after much modernization. Compensation and Benefits Practices In a study of 384 employees who were owners or employees of SMEs, it was identified that base salaries accounted for more than 50%, variable pay represented about 14%, and employee benefits made up the rest of their compensation packages. The Mexican law mandates that several benefits are offered to employees (Gomez et al., 2012; Posthuma et al., 2000). The federal government requires employers offer several benefits that are considered unique to the Mexican culture. Employers provide their employees annual bonuses or aguinaldo before the end of the year (during December). The aguinaldo is approximately two weeks salary of an employee’s base pay (Arias-Galicia, 2005). Organizations have to also provide an annual profit distribution bonus which is usually 10% of their gross profits (before the payment of taxes) (Castellanos, Garcia-Verdu, & Kaplan, 2004; Posthuma et al, 2000). Apart from the mandated benefits, Mexican employers act as patrons (father-figures) and pro- vide several benefits to ensure both the employees and their families are nurtured well (Davila & Elvira, 2005). The most common fringe benefits offered are saving plans, consumer credit funds, grocery coupons, subsidized cafeteria plans, housing credit payments (Davila & Elvira, 2005). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 51 Effective Human Resources Management Practices in Small and Medium Enterprises Employees who work for minimum-wages are paid based on the location of their SMEs. The National Commission Minimum Wages (includes employ- ers, employees, and government representatives) has identified three geographical zones (A, B, and C) that pay different minimum wages. The owners of any SME have to be cognizant where to establish their operations as labor costs definitely vary (Castellanos, Garcia-Verdu, & Kaplan, 2004). INDONESIA Introduction Indonesia is the fourth most populous country in the world after China, India, and the USA with a population of 234.6 million. The size of the labor force is approximately 108.2 million. It consists of almost 17508 islands and islets making it a large archipelago. The surrounding waters have a total area of about 10 million kilometers which is roughly about the size of a large country, such as the United States (Prijadi & Rachmawathi, 2002). Until recently, Indonesia was one of the least known countries in the business and manage- ment literature (Rhodes et al., 2008; Bennington and Habir, 2003; Bressnan, 1993), but since about 1997, the country has made the news for its continuous political, social, and economic crisis. Prior to the crisis, Indonesia had an annual GDP growth of 7% per annum (Liong, 1999). Reduced poverty and improvements in social indicators such as literacy levels and life expectancy has seen Indonesia become one of Asia’s newly industrial- izing countries (Bennington and Habir, 2003). Despite major issues facing this country and significant international concerns about its future, reports on its HRM are limited mostly to labor economics and macro- level human resource de- velopments (Bennington and Habir, 2003). Hess (1995) also suggested that the extent of knowl- edge on HRM practices in Indonesia is limited. This paucity in the literature is important as it highlights the significance and contribution of this chapter. It also showcases HRM in the fourth most populous country in the world. It contrib- utes to cross- cultural HRM knowledge as there is increased awareness for HRM researchers to take context more seriously (Chandrakumara & Sparrow, 2004; Jackson & Schuler, 1995). There are several definitions of SMEs in Indo- nesia depending on which local agency provides the definition. The Central Statistical Agency (BPS) uses the number of workers as the basis for determining the size of an enterprise. Ac- cordingly, small enterprises (SE) and medium enterprises (ME) are business units with 5-19 and 20-99 workers respectively. The State Ministry of Corporative defines a small enterprise (SE) as a business unit with total initial assets of up to Rp (Indonesian currency) 200 million (about US$ 20,000), which does not include any lands or buildings. A SE is also defined as an organization with annual sales of Rp 1 billion (US$100,000). A medium enterprise (ME) is defined as a business unit with annual sales of more than Rp 1 billion but less than Rp 50 billion. In general, an SME in Indonesia is referred to as a business unit employ- ing less than 100 workers (Mukhamad, 2001). SMEs have historically been the main players in the Indonesian economy especially as a large provider of employment opportunities, sources of economic growth, and foreign currency earn- ings. Typically, Indonesian SMEs account for more than 90% of all firms (Table 2) and thus provide livelihood for over 90% of the country’s workforce (Tambunan, 2008). The three sectors which employs most of the workforce are agro- based industries (38.8 million 43.75 workers), trading and hotels (22.2 million or 25% work- ers), and service (9.4 million or 10.55% workers) (Ministry of Public Welfare, 2007). According to BPS data, SEs in 1997 accounted for more than 39.7 million units, or about 99.8 percent of the total numbers of enterprises in the country in that year. This has increased to more than 48 million units in 2006. In terms of output, the performance EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 52 Effective Human Resources Management Practices in Small and Medium Enterprises of SMEs is relatively good as its growth. The growth of SEs and MEs was 3.96% and 4.59% respectively in 2001. This increased to 5.38% and 5.44%respectively in 2006. In terms of GDP, SMEs performances accounted for more than 53% percent in 2007 (Table 2). The Role of National Culture on HRM Practices The main language of Indonesian people is Bahasa, but there are 250 other regional languages and dialects (Bishop & McNamara, 1997). Muslims constitute the majority and represent 87% of the population. The rest of the population has the fol- lowing demographics: Protestants (6%), Roman Catholics (3%), Hindus (2%), and Buddhists (1%). The Indonesian population comprises of many ethnic groups such as indigenous Indonesians (pribumis), Chinese, Arabs, Indians and many others. The Chinese ethnic minority represent approximately around 5% of total population. This ethnic group dominates the Indonesian economy especially in the medium and large scale enterprise category. Next to the Chinese, the Arab com- munity, whose community is much smaller than the Chinese, is considered very successful. The indigenous group is generally the bottom in terms of having successful enterprises (Tarmidi, 1999). Indonesia has the following indexes for power distance (78), individualism (14), masculinity (46), uncertainty-avoidance (48), long-term orientation (62), and indulgent versus restraint (38). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010). Indonesia’s high score on power-distance indicates a work culture that is dictated by clear organizational hierarchies. A low score on indi- vidualism suggests a very collective society and the importance of in-group members (such as families and friends) to employees. The culture is leaning towards masculinity implying that there is a predominance of males in upper-level management positions and also possible gender discrimination in the workplace. The uncertainty-avoidance index indicates that the society is anxious about uncertain or ambiguous events making the local workforce prefer structured practices at the workplace. The high score on long-term orientation shows the culture prefers to plan strategically ahead and may not like to improvise. The low scores on in- dulgent versus restraint indicates that the culture demonstrates considerable restraint in the pursuit of pleasure (Hofstede, Hofstede, & Minkov, 2010). Cultural influences on HRM is widely recog- nized by both scholars and practitioners. Despite Table 2. SMEs contribution to Employment, GDP and Export Employment 2004 2005 2006 2007 Micro &v Small Enterprises Medium Enterprises Large enterprises 91.4 4.8 3.7 91.3 4.9 3.7 92.4 4.9 2.6 92.3 5.0 2.67 GDP Micro &v Small Enterprises Medium Enterprises Large enterprises 39.2 16.6 44.6 37.8 15.7 46.6 37.5 15.9 46.5 37.8 15.7 46.4 Export Micro &v Small Enterprises Medium Enterprises Large enterprises 5.8 15.1 79.1 5.1 15.1 79.7 5.0 15.1 79.8 4.98 15.0 79.9 Source: Sembiring 2008 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 53 Effective Human Resources Management Practices in Small and Medium Enterprises Indonesia being the fourth most populous country in the world, little attention has been given to its human resource management (HRM) (Man- ning, 1998). Ahmad and Asti (1999) suggest that HRM has historically not had an important role in Indonesian management context. Hess (1995) also suggests that the extent of adopting HRM in Indonesia is quite limited. In the context of globalization, more attention is being paid to the need for effective HRM practices in Indonesia. This chapter explores a number of HRM practices adopted by SMEs in Indonesia including their legal requirements. The Indonesian law mandates that the mini- mum age for employment is 15 years and the maximum work period is 7 hours per day or 40 hours per week. Working hours may be extended to nine hours a day or 54 hours a week with over- time pay. It is standard procedures for employers to have their new employees (who are permanent) undergo a three-month probationary period. The dismissal of any permanent employee requires the permission from the committee for settlement of labor dispute of the Department of Manpower. There are generally 13 public holidays, 12 days of paid annual leave, and 3 months of paid ma- ternity leave. The minimum wage is generally set by provincial and district authorities in Indonesia. Recruitment and Selection Practices Talent Management is an important concern for any organization regardless of its location. Tradi- tionally family connections were widely used by local private organizations as a means of recruit- ment. However, since early 1990s, there has been a change in recruitment practices and candidates’ qualifications are increasingly being considered instead of references from family and relatives (Prijadi & Rachmawathi, 2002). Current states of practices indicate the use of multiple recruitment methods by firms (e.g. word-of-mouth, print ad- vertisements, newspapers, magazines, commercial broadcasts, recruitment consultants, internet). For blue-collar workers, the most common recruitment method used is word-of-mouth. For this category, usually labor supply always exceeds demand and there is no complicated selection process. Huo, Huang, and Napie (2002) studied selec- tion practices across ten countries which includes small, medium, and large scale companies in In- donesia. The findings are largely relevant to SMEs because the SMEs in Indonesia constituted more than 90 percent of total number of establishments. This study revealed three top ranking employee selection practices adopted by organizations in Indonesia; 1) A person’s ability to perform the technical requirements of the job, 2) A personal interview, and 3) An employment test in which the person need to demonstrate the skills. Huo et al.,(2002) also indicated other characteristics that are important qualities to get hired in Indonesia. These were a person’s ability to get along well with others already working there, how well the person will fit the company’s values and ways of doing things, a person’s potential to do a good job even if the person is not that good when they first start. According to the findings of Galang (1999), it was also revealed that SMEs and large enterprises do not differ significantly except in one practices (“beliefs that person will stay with the company” as hiring criteria”). His comparative study also found that the ability to perform technical job requirements and the ability to get along well with others as important hiring criteria used in SMEs in Indonesia. In a comparative study of SMEs management practices between Indonesia and Malaysia, Rosli et al (2012) reported that priority for skilled workers is given in new recruitments. Huo et al’s(2002) study suggests that Indonesian respondents have indicated a desire to see employ- ment tests play a large role in the future. Training and Development Practices Having planned to establish an industrial society, Indonesian government has increased investment in primary and secondary education and vari- EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 54 Effective Human Resources Management Practices in Small and Medium Enterprises ous forms of vocational and on-the- job training programs. Thus nine years of education has been made compulsory for every Indonesian citizen since 1998 (Prijadi & Rachmawathi, 2002). Skill training is now available through vocational se- nior secondary schools (which account for more than 1.3 million of senior secondary enrolments), 153 public training centers, (which offer short, specialized courses), and numerous privately run programs. A comparative study by Rosli et al., (2012) revealed that SMEs in Indonesia provide in-house training for employees and encourage them to attend external skill training programs usually provided by the government agencies. Dros et al., (2002) studied training and development practices in ten countries which included Indonesian small, medium and large scale companies. Among the countries surveyed, Indonesia scored the lowest in current training investment for improvement of technical skills. The employees did show a high level of interest in enhancing the investment in training for the future. Similar to organizations in China and Taiwan, Indonesia uses training as a means of reward to employees. According to the findings of Galang’s (1999) comparative study, it was also revealed that SMEs and large enter- prises do not differ significantly and that training to improve technical job abilities and training to help employees to understand the business were among common practices of SMEs in Indonesia. In the utilization of training, Indonesia ranked very low in the area of improving interpersonal skills. However, Indonesia ranked high for provid- ing training for improvement of poor employee performance. Compensation and Benefits Practices There is a little transparency in the compensation systems that apply in both public and private sec- tors in Indonesia (Bennington & Habir, 2003). For white-collar workers and managers, pay and benefits are an important consideration in decid- ing whether to work for a particular enterprise. Blue-collar workers do not have as many options to choose. Since labor supply always exceeds de- mand, it makes it hard for those workers to exercise bargaining power over wages. Even though the government has established regional minimum wages, blue-collar workers are often unable to turn down work at rates even below the minimum (Prijadi & Rachmawathi, 2002). It is very obvious in Indonesia that there is an enormous difference between the lowest and highest paid employees. For example, this difference ranges from 1:7 in the civil services (Rohdewohld, 1995) to 1: 20 – 1:15 in the private sectors (Bennington & Habir, 2003). In a ten-country comparative study, Lowe et al (2002) reported the use of job performance as the basis for pay raises and pay incentives (bonus or profit sharing) are relatively low in Indonesia. Despite the fact that Indonesia being one of the highest ranked collectivistic countries in Asia, the degree to which pay is contingent on group performance is also relatively low. An employee’s seniority and benefits forms an important part of the total pay package in Indonesia. However, there is relatively low level of recognition of long term results and futuristic orientation in their pay poli- cies. However, a comparative study by Rosli et al., (2012) revealed that performance- based reward and recognition systems are being emphasized in SMEs in Indonesia. Over the past 20 years, the employee social security system (Jamsostek) has been remarkably successful. Specifically, there are four kinds of pro- tection covered by Jamsostek: health protection, working accident, old-age, and death. A challenge for Jamsostek is how to protect employees work- ing for smaller organizations. The aim of the law is to extend coverage of membership to smaller firms including family businesses. However, this has proven problematic in Indonesia because of employers’ lack of finances coupled with the goal of operating a minimal payroll (Prijadi & Rach- mawathi, 2002). For effective HRM practices, it EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 55 Effective Human Resources Management Practices in Small and Medium Enterprises is important to consider employees’ expectations, among other factors, with regard to compensation practices. Lowe et al.,(2002) revealed that employ- ees expect relatively high level of pay incentives, futuristic orientation, seniority, long-term results, job performance in the determination of total compensation package. Performance Management Practices Performance appraisal systems vary across or- ganizations from management- by- objectives (MBO) approach to upward and 360-degree feedback. However, views on whether the MBO, upward, or 360 degree feedback actually works in Indonesian culture (multitudes of cultures) is quite clear because directing rather than delegating is the most preferred style by most managers in Indonesia (Bennington & Habir, 2003). Milliman et al.(2002) observed performance appraisal practices of 10 countries including Indo- nesian small, medium and large scale companies. They surveyed four main purposes of performance appraisal: documentation, development, adminis- tration, and subordinate expression. Appraisal as a process of documentation was rated as low by respondents in Indonesia. Respondents from other Asian countries including Indonesia indicated a moderate desire to see appraisals being used as development tool. Countries such as Indonesia, US, Canada, China, and Mexico rate appraisals as currently being used solely for promotion ap- plication. Indonesia scored a low to moderate for allowing subordinates to express their concerns in the appraisal process. In a comparative study by Galang (1999), it was revealed that appraisals in Indonesia usually recognize good performance, identify develop- ment activities, and allow subordinates to express their perspectives feelings. The main areas of concern in Indonesian organizations are produc- tivity and quality. For example, Report A (1997), Bennington & Habir (2003) report that “output per worker in Indonesia is about one quarter that of Korea and one tenth that of the United States. However, it acknowledges that this data fails to take into account unit labor cost, which results in an Indonesian worker being seen as three times more productive than an American worker and twice as productive as a Korean worker”(Bennington & Habir, 2003;p.385). SOUTH KOREA Introduction Over the past four decades, South Korea has demonstrated incredible growth and global in- tegration to become a high-tech industrialized economy. South Korea has adopted various economic reforms following the financial crisis including greater openness to foreign investment and imports. The country’s growth averaged about 4-5% annually between 2003 and 2007 and was estimated to be 3.9% in 2011(CIA World Factbook, 2013). Korea is the world’s largest manufacturer of DRAMS (Direct Random Access Memory chips), the world’s second largest manufacturer in ship-building, and is the fourth largest elec- tronic industry (Gross, 2007). The population is approximately 42 million. Approximately, 80 percent of the population live in urban areas. The capital, Seoul, consists of over 10 million people and represents the commercial and political hub of the country. South Korea is approximately 996 kilometers long and 217 kilometers wide covering a land mass of 99117 square kilometers. Thus the country is about the same size of the state of Indiana in the United States (CIA World Factbook, 2013). SMEs in Korea include organizations that have 1-299 employees. The government began to pay increasing attention to the development of SMEs in 1990s. The Small and Medium Business Administration (SMBA) was established in 1995 in order to assist this process (KFSB, 2011). The SMEs in Korea have been playing a vital role in job creation, generating income, technological EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 56 Effective Human Resources Management Practices in Small and Medium Enterprises innovations, and improved product quality. In the manufacturing sector, SMEs comprises 99.7% and provides 74.3%of the total manufacturing employment . They are considered the backbone of the economy (Gregory et al, 2002). Accord- ing to Korean Federation of Small Business, the total number of SMEs was 3, 066, 484, which is 99.9 percent of total establishments in 2009. The total number of employees in SMEs was 11,751,022, representing 88 percent of employees of the country in 2009. As vertically integrated organizations, many Korean SMEs have become subcontracting companies for large conglomerates (Kong, 2000). South Korean SMEs can be classi- fied as either ordinary or venture. The differences in these two types are in their management and strategic priorities. Venture SMEs are defined as a “technology-intensive enterprise” or ‘an enterprise based on a highly advanced technology’ (Gregory et al., 2002, p.75). The Role of National Culture on HRM Practices South Korea has the following indexes for power distance (60), individualism (18), masculinity (39), uncertainty-avoidance (85), long-term orientation (100), and indulgent versus restraint (29). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, & Minkov, 2010). The South Korean work culture has a high score in power distance emphasizing clear differentiation between superiors and subordinates. The culture is low on individualism implying a collective spirit and the importance of harmony at the workplace. The culture is considered feminine as men and women’s roles generally overlap and the society tends to be nurturing and modest. The culture has a high uncertainty-avoidance suggesting organiza- tions implement structured employment-related practices. South Korea has the highest score on long-term orientation clearly implying a society that perseveres, plans, and promotes work prac- tices that create such discipline. The culture has a low score on indulgent versus restraint indicating that priorities such as leisure and relaxation are not important for the local workforce (Hofstede, Hofstede, & Minkov, 2010). While traditional Confucian values character- ize much of the HRM practices in Korea, current practices have a nice blend of contemporary or modern values (Koch, Nam, and Steers, 1995). Confucianism is a code of ethical behavior devel- oped by a philosopher who lived in China around 500 B.C. The foundations of Confucianists beliefs are contained within the so-called five cardinal virtues: filial piety and respect, subservience of women to men, strict seniority, mutual truth between friends, and absolute loyalty to one’s legitimate superiors. Ancestor worship and the importance of family are some other aspects of Confucianism. Several aspects of Korean workers behavior are related to this Confucian tradition. For example, the long working hours, dedication to hard work, saving for the future, emphasis on learning and education, and self- improvement (Koch, Nam, and Steers, 1995). In absence of distinct natural resources, Korea’s strong labor force has served as the foundation of its modern economic development. 98 percent of South Koreans can read and write; 80% graduate from high school, and the majority of high school graduates get some sort of college or vocational training after high school (Kearney, 1991). The Korean HRM practices have resulted largely from two forces. The most pronounced influence emerges from the Confucian tradition (as briefly noted above). Accordingly, top-down decision making, flexible life time employment, high mobility of workers, paternalistic leader- ship, loyalty, compensation based on seniority and merit rating, bureaucratic conflict resolution, close government-business relationships can be commonly observed in the Korean style of man- agement. The second and more recent influence is the push to utilize modern or western approaches EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 57 Effective Human Resources Management Practices in Small and Medium Enterprises to HRM (Koch, Nam & Steers, 1995). In addition, the industrial landscape of Korea is changing at a rapid pace due to globalization and technology. This section reviews the general trends in HRM policies and practices in South Korea, which includes: 1) Recruitment and selection; Training and development; 3). Compensation and benefits; 4). Performance appraisal. Recruitment and Selection Practices Recruitment methods of Korean firms vary con- siderably according to factors such as industry, size of the company, positions applied, among others. For example, smaller companies tend to rely less on external recruitment and testing and more on personnel connections in recruiting blue- collar employees. This is also true of companies located in more rural areas of Korea. About 10 percent of blue-collar hires come from vocational school placements (Koch, Nam & Steers, 1995). One common method of recruitment in Korea is based on relationships and networking. Family members, relatives, friends and alumni are often good sources for referrals and recruitment (Gross, 2007). This practice is particularly relevant for recruiting blue-collar workers (Koach et al., 1995). In 2006, women constituted 42% of the workforce. Huo et al., (2002) did a study of selection practices across ten countries that consisted of mix of SMEs and large manufacturing sectors in South Korea. As noted above, SMEs in South Korea represents about 99 percent total establish- ments. The findings of this study revealed the three top ranking employee selection practices in South Korea as: 1). An employment test in which the person need sto demonstrate the skills, 2) A personal interview, and 3) A person’s ability to perform the technical requirements of the job. Huo et al.,(2002) found in their study on Korean respondents from multiple levels of organizations that a person’s ability to perform the technical requirements of the job, a person’s ability to get along well with his or her colleagues, and a person’s potential to do a good job, (even if the person is not that good when they first start) are among the top ranked preferred selection practices. This study reports that the gaps between current and expected practices are relatively large in South Korea and deserve attention as they may lead to the likely direction of changes for effective HRM. Galang’s (1999) study also found that the ability to get along well with others as a hiring criteria common to SMEs and large enterprises in South Korea. In a survey of 1760 SME managers by Gregory et al., (2002), it was revealed that about quarter of the sample saw the need to improve the recruitment function as a prioritized area for enhancing the export readiness of Koreas SMEs. With regard to the differences between ordinary SMEs and venture SMEs, Gregory et al., (2002) study revealed a little discrepancy of managerial planning inr recruitment between these two kinds of SMEs. Venture SMEs’ priority for recruitment practices was lower (9.9 percent) than that of ordinary SMEs (11.5 percent). This may be due to the fact that venture SMEs are more technol- ogy oriented than ordinary SMEs and hence pay relatively less attention to HRM practices. Training and Development Practices Korean organizations consider human resources to be the central building blocks for long-term corporate success and therefore a considerable effort goes into the development of employees at all levels (Bae et al., 2003). At blue collar levels, the primary instructional methods involve on- the-job training aimed at improving job-related skills and appropriate corporate behavior. As these employees gain experiences, the focus of training shifts to the development of future supervisory jobs (Koch, Nam & Steers, 1995). A popular way to improve job-related skills and knowledge was ‘job-rotation’, although neither this method nor the multi-skill training were systematically ap- plied and also varied among industries (Rowley at al., 2004). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 58 Effective Human Resources Management Practices in Small and Medium Enterprises Drost et al., (2002) studied training and devel- opment practices in ten countries, which consisted of Korean small, medium and large scale compa- nies. Among the countries surveyed, Korea scored the second lowest for training in interpersonal skills and the highest for training for improving technical skills. The orientation towards work, helping understanding businesses, and teaching employees about company values are important training criteria in Korean SMEs. Galang’s (1999) comparative study also observed that training to improve technical job abilities and initial training for new employees as common practices across SMEs and large enterprises in South Korea. This study identified improving technical abilities, helping understand the businesses, and building team work are among the three top-ranked ex- pectations of training programs in Korean SMEs. Compensation and Benefits Practices Employee compensation has always been a dif- ficult HR function to examine mainly because of the confidentiality nature of this topic. Starting salaries are usually determined by one’s educa- tional level and entry positions and annual salary increases are largely determined by seniority and to a lesser extent on merit. As a result, employ- ees’ salaries tend to progress as employees move upwards in the corporate ladder (Koch, Nam & Steers, 1995). Galang’s (1999) comparative study found that incentives form a significant part of total earning of employees in SMEs as well as large enterprises in South Korea. While local companies typically provide profit-sharing indiscriminately to every employee at an average rate of 100 to 300 percent of the employees’ monthly salary, foreign companies usually base compensation more on individual performances. These different bonus programs reflect the emphasis Western and Korean cultures place on the concept of individual versus the group. In a ten-country comparative study, Lowe et al.,(2002) found that incentives, seniority and job performance are among the top three component of current compensation system in SMEs in South Korea. Interestingly, futuristic pay orientation, incentives, and seniority are among the most important factors in employee’s expectations of SMEs in South Korea. According to Korean labor standards act, em- ployers are required to pay one-and-one- half-times regular pay for each additional hour work beyond the eight hours mandated per day. Female employ- ees are entitled to one day’s paid leave per month and sixty days paid leave for pregnancy. Comple- menting societal and organization-wide changes were shift in employment practices by many or- ganizations to encourage high level of employee performance and employment flexibility (Bae et al.,(2003). Therefore, two radically changed fundamental dimensions of Korean HRM systems are: 1). Evaluation and remuneration which have moved from seniority-based to competence-based performance; and 2) employment flexibility which has changed from long-term attachment and high job security towards numerical flexibility. Performance Management Practices Many smaller firms use some form of an annual performance appraisal systems. At the blue collar and lower managerial levels, the primary emphasis in such evaluation is on employee development since promotion is largely based on seniority. Milliman et al.(2002) observed performance appraisal practices of 10 countries, which included South Korean SMEs . They examined four main purposes of performance appraisal: documenta- tion, development, administration, and subordi- nate expression. Korean respondents ranked the process of their appraisals being developmental and towards promotion as high, while documen- tation and subordinate expression were ranked low. Korea, Canada, US, and Australia were in a cluster that rated the current purposes of their per- EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 59 Effective Human Resources Management Practices in Small and Medium Enterprises formance appraisal systems. The study also found appraisal for recognizing subordinates, planning and development, evaluating goal achievement and determining promotability as four “should be practices’ rated by Korean respondents. Galang’s (1999) comparative study also found appraisal to determine subordinate’s promotability as a com- mon practices among SMEs and large enterprises in South Korea. TURKEY Introduction Turkey joined the European Union (EU) in 1999 signaling its interest to be a member of the Euro- pean community to enhance its trade prominence in the region. Until the 1980s, Turkey followed a very insular policy focusing predominantly on a self-sustaining agricultural economy (Karadeniz, & Gocer, 2007; Tanova & Nadiri, 2005). Today it is largely a service-based market with a strong focus on developing its human resource management (HRM) practices. The domestic IT and finance industries are considered robust with well devel- oped management practices (Aycan, 2006; Aycan, 2001). In 2009, Turkey was ranked 17th globally for its growth in GDP (gross domestic product) suggesting an optimistic economy (Koyuncu et al., 2011). SMEs in Turkey play a strong role in the local economy providing almost three-fourths of the domestic employment. Approximately 95% of the companies in Turkey are SMEs. In Turkey, small organizations have approximately 10-49 employees and medium-size organizations have approximately 50-250 employees (Koyuncu et al., 201; Bozbura, 2007; Tanova & Nadiri, 2005). The textile industries have the majority of the SMEs followed by the automobile components and the iron and steel industries. The products and services of SMEs are not only consumed by local consum- ers but also by domestic large organizations. Most of the SMEs are family-owned allowing only key members of the family hold important posi- tions (Koyuncu et al., 2011; Karadeniz & Gocer, 2007;Ozcelik, & Aydınlı, 2005). The EU policies encourage its participating member countries to promote SMEs as it generates adequate trade and employment. EU regulations provide guidelines and support any cross-cultural alliances among the SMEs of EU nations (Tanova & Nadiri, 2005). The Turkish government also provides various initiatives to bolster the activi- ties of its SMEs. For instance, the employees of 500 SMEs were trained by the International Trade Center to understand the how to conduct business efficiently in other countries. These training programs included specific case studies and also industry-specific examples as to how to conduct business overseas. The management of the SMEs was also trained on “best practices” in other countries so that Turkish SMEs can compete efficiently globally (Gillies, 2004). In addition, the World Bank has provided financial support to Turkish SMEs realizing they form the backbone of the country’s economy (Koyuncu et al., 2011). A new employment law was established in 2003 replacing the earlier regulations of 1970. The gov- ernment wanted to establish Turkey’s labor laws to be on par with those of the European Union. This law for the first time offered protection to employees suggesting that organizations develop job descriptions, establish rigorous staffing, pro- vide elaborate training, and record employees’ performance. The focus of this new law is to have well-established HRM practices that can be systematically evaluated. Historically, organiza- tions in Turkey rely on paternalistic management making personal relationships between employers and employees the most significant predictor in the practicing of employment practices (Aycan, 2006; Ozcelik, & Aydınlı, 2005). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 60 Effective Human Resources Management Practices in Small and Medium Enterprises The Role of National Culture on HRM Practices Turkey has the following indexes for uncertainty- avoidance (85), power distance (66), long-term orientation (47), masculinity (45), individualism (37), and indulgent versus restraint (37). (Please refer Table 1 that provides national cultural indexes and ranks on these six dimensions). A score of 100 is the maximum points that can be scored for each index (Hofstede, Hofstede, Minkov, 2010). Turkey has a high score on uncertainty- avoidance suggesting a very strong preference for corporate procedures and policies. They also have a low tolerance for ambiguity and prefer structured work environments. Its score on power distance is moderately high demonstrating its well-defined hierarchical culture. Subordinates from such cul- tures are trained to act deferential and submissive to their superiors. Its scores on long-term orienta- tion indicate employees might not pursue strategic planning as a cultural norm. Individuals in such cultures look for instant gratification and might not invest in policies or practices that might lead to employment development in the future (such as succession planning). Its score on masculinity is moderately high suggesting assertive management styles as the preferred model. In such cultures, men and women may pursue different professional careers based on gender discrimination. Typically in Turkish organizations women are not provided leadership positions and are also not delegated jobs that require frequent travel. Women are primarily considered as homemakers and their jobs are only secondary to those of their homes (Aycan, 2001; Aycan, 2006). Its low scores on individualism suggest that Turkish people tend to be more collectivist. Indi- viduals from such cultures are strongly nurtured to help their family and friends in personal and professional interactions. Turkey’s score on indul- gent versus restraint suggest that on an average local people seem to be restricted in the way they enjoy and pursue leisure. Further, the culture is very fatalistic implying that individuals perceive their general disposition and well-being are not under their personal control (Collings et al., 2010; Hofstede, Hofstede, Minkov, 2010). Recruitment and Selection Practices Informal recruiting methods are very common in SMEs as they do not have the resources for established staffing methods. Hence such firms will adopt recruitment and selection practices that are cost-effective, reactive, and timely. Informal recruiting methods, such as word-of-mouth, also provide employers a pool of applicants who tend to be more loyal to the firm as the applicants usually know the employers through prior social interactions. These applicants also have realistic expectations of their jobs as the employers provide practical and matter-of-fact information about the jobs. Most of the times, applicants recruited through informal methods may not possess the KSAs (knowledge, skills and abilities) required for the jobs, yet they are recruited because of their personal connections in the organizations. In collectivist cultures, the organizational connec- tions applicants have are more important than the applicants’ KSAs (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005; Aycan, 2001). Informal practices, such as word-of-mouth, are extremely effective recruitment tools in collectivist cultures, such as Turkey, that believe in promoting in-group members. In-group members belong to the similar social and economic structures such as neighborhoods, families, religious groups, among others (Aycan, 2001). In a study of 347 Turkish SMEs, it was iden- tified that staffing approach was very reactive. Organizations recruited employees only when there was a need for new applicants. There was no strategic planning or proactive initiatives for planning the workforces. The three predominant recruitment methods was word-of mouth, lo- cal newspapers sources, and occupational high schools. The least preferred methods of recruit- EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 61 Effective Human Resources Management Practices in Small and Medium Enterprises ing were internet and employment agencies. The selection methods predominantly used were interviews and employment testing. The final hir- ing decision was usually based on the decision of one person- the hiring manager or the owner of the organization (Cetinel, Yolal, Emekiz, 2009). In another empirical study of 64 Turkish SMEs, it was observed 54.3% of these organiza- tions adopted employment agencies to recruit managerial talent and employment advertisements to hire non-managerial employees. Employment agencies offer the right talent as it is able to tap in a huge database of qualified applicants. This trend to adopt employment agencies in staffing for SMES might to be more relevant as they in- creasingly engage in trade and business with their global counterparts in the EU. SMEs in EU nations generally adopt the services of employment agen- cies to hire managerial talent with France using these services the most (Tanova & Nadiri, 2005). In both these studies, it was demonstrated the final hiring decision was usually based on the decision of one person- the hiring manager or the owner of the organization. In small organiza- tions, it is not common to have various employees perform different human resource management functions (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). In another study of 172 Turkish SMEs, it was identified, that more than 50% of the firms did not have a formal HRM department and the hiring managers or owners performed the different HRM functions in the organizations (Koyuncu et al., 2011). Training and Development Practices SMEs usually lack the adequate institutional resources to invest in elaborate structured train- ing programs. Thus in training and development having new employees observe current employees perform their roles seems the most economical training method.. Further, these organizations are also reluctant to invest in formal employee development programs as generally employees in SMEs do not remain for long in these organizations (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). Training opportunities in SMEs are not proactive and are usually provided to employees only when organizations receive customers’ com- plaints or if employees are not performing up to the organizational expectations. Most often the managers or the owners of the SMEs provide the training to the new employees (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). In an empirical study of SMEs in Turkey, it was concluded employees in these firms prefer to adopt on- the-job and informal methods of train- ing as it allows firms to follow a cost-effective approach in developing their employees’ KSAs (Cetinel, Yolal, Emekiz, 2009). In another study of 64 SMEs, it was concluded that almost 60% of the organizations indicated they had established some kind of formal training policies for their employees. The results of this study indicate that some of these organizations do invest in initial- izing structured training programs. For instance, the SMEs in this study adopted external vendors (47%) and computer-based training (61%) apart from following informal training methods. It could also be that SMEs have started adopting formal training methods as these organizations have become more engaged with their European counterparts and would like to showcase a com- petent workforce (Tanova & Nadiri, 2005). Bozbura (2007) demonstrated in a study of 76 SMEs that training and mentoring employees are important initiatives for these organizations. For instance, employers indicated that formal training for employees to enhance their understanding of their jobs is very important for organizations to provide. Further these companies also believed it was vital for organizations to support continuing education of their employees via tuition reimburse- ments. These organizations also perceived mentor- ing and apprentice opportunities as important skills that organizations should offer their employees. In another study of 172 SMEs, it was demon- strated that informal methods of on-the job learning EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 62 Effective Human Resources Management Practices in Small and Medium Enterprises or learning from experienced managers was the most common method of training. Further, dis- cussing with other employees/managers in similar SMEs was helpful in understanding how to per- form operational duties better (Koyuncu, Burke, Acar, Wolphin, 2011). SMEs realize to compete in their regional global market their employees have to demonstrate the required KSAs. Such skills can be obtained only with organizational initiatives that allow for professional development and cross-cultural competence (Cetinel, Yolal, Emekiz, 2009; Tanova & Nadiri, 2005). Performance Management Practices Performance management is a very sensitive topic as Turkish employees are generally not used to receiving any negative feedback. The collectivist culture also makes any objective evaluations dif- ficult as employers and employees become very close bonds making unbiased evaluations difficult. These paternalistic relationships do not allow pro- viding fair evaluations that will help employees sincerely improve their performances. Many times the superiors inflate the performance ratings of their subordinates so that there is no disharmony in the workplace. The collectivist attitude also does not prefer nominating employees for any performance awards that might distinguish them from their colleagues (Aycan, 2001; Collings et al, 2010). In a study of SMEs, almost 70% of the firms indicated they have established performance management policies. However, employers con- ducted appraisals only when required, such as if employees do not perform well or customers’ complaints increases. SMEs did not follow any standard time-frames or procedures in the imple- mentation of performance evaluations. Employ- ers in such organizations also feel that the small size of their organizations allow them to observe their employees informally without any formal mechanisms. Thus they can immediately identify any lapses in performances and take corrective actions (Cetinel et al, 2009). In a study of 340 that included large and small firms, it was identified that employees did positively perceive performance appraisals based clearly on job-related competencies. These types of appraisals allow employees to enhance their KSAs and thus job motivation. While there may be some preferences towards western practices, the cultural norm is more towards subjective evaluations that allow the superiors to provide their assessments based on their relationships with their subordinates (Collings et al, 2010). In many Turkish organizations, the norm is not to discuss the performance evaluations with employees as such discussion becomes very con- tentious. In a study of 25 tourist establishments (large, midsize, and small), it was identified when performance appraisals are conducted, the evalua- tions of the employees are kept very confidential. Employees do not receive any formal commu- nication regarding how they have performed. A majority of the managers surveyed in this study recognized the method as flawed as the system does not serve its intended purpose- employees do not know how to improve their performances as feedback is not provided. Managers suggested providing written feedback as a way of minimiz- ing possible controversial outcomes during the appraisal process (Ozgen, Baser, Mimroglu, 2011). Compensation and Benefits Practices Employees’ salaries are usually based on orga- nizational tenure, negotiating skills, and social connections in the organizations. The high power- distance of the Turkish culture endorses clear status differentials in pay and benefits between white and blue- collar employees. White-collar employees usually receive cafeteria allowances, company automobiles, cell phones, house allowances, educational expenses for employees’ children, and private health insurances. Blue-collar employees EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 63 Effective Human Resources Management Practices in Small and Medium Enterprises receive transportation allowances, bonuses for reli- gious celebrations, and expenses for miscellaneous family issues. Superiors in collectivist cultures like to look after their employees like they belong to a large family. Usually benefits comprise almost two-thirds of an employee’s pay package (Aycan, 2006; Aycan, 2001; Jackson, 1991). In a study of 98 respondents, it was identified that Turkish employees prefer seniority to merit- based pay. This characteristic is in congruence with the collectivist dimension as employees become very loyal to their in-group members (such as or- ganizations) and thus value organizational tenure. Employees therefore expect to be rewarded for their allegiance making seniority a very impor- tant criterion in pay practices. Employees prefer to be rewarded based on the collective achieve- ment of the group (organization) rather than on individual achievements per se. Seniority-based pay is further preferred by their high-uncertainty- avoidance culture which makes employees averse to practices that do not demonstrate uniformity in implementation (Goktan & Saatcioglu, 2011). There are several benefits employees receive that are mandated by the law. A joint contribution for social security by both employers and employ- ees is compulsory for organizations in all sectors except for those in the agriculture and domestic. There is also a house savings and employee savings plans that organizations are required to provide (Jackson, 1991). The next four sections summarize the findings of this cross-national study in discussion, impli- cations, future trends, and conclusion sections. DISCUSSION The objective of this chapter was to explore HRM practices in SMEs in MIST economies using existing theories and empirical evidence. These four nations have been identified as important global business participants for the next decade (Brent, 2009; Aycan, 2006; Leal, 2006; Galang, 1999). SMEs play an extremely important role in all these nations by providing the majority of the local employment and serving as a pivotal hub in their economies. The findings provide evidence for cross national variations in HRM practices across the four different countries. In Mexico, the recruitment culture largely works on personal referrals as the collectivist culture likes to promote in-group members. One might argue that the use of such practices as personnel referrals in the selection process is an aspect of the selection process in a wide variety of countries (convergence). Training and devel- opment is informal but the Mexican laws help SMEs compete well domestically and globally by providing subsidized training programs and professional guidance. Performance appraisal is informal and developmental as such organizations usually comprise of several family members. Com- pensation practices are established by the owners who usually provide some form of variable pay to motivate their employees. The Mexican law mandates several benefits that might not be the norm in other cultures (Arias-Galicia, 2005; Davila & Elvira, 2005; Jackson & Schuler, 1995). It is therefore evident that the HRM practices adopted in SMES in Mexico are largely influenced by national culture, formal institutional frameworks, and strategic orientations. As such, HRM practices adopted in SMEs in Mexico is more consistent with the contingency perspectives than the univer- salistic perspective of SHRM model (e.g. Bowen et al., 2002; Schuler and Florkowski, 1996). The relevancy of culture and institutional framework in HRM is also emphasized in the debate of di- vergence theorists (e.g. Brewester at al., 2004). In Indonesia, employment testing and in- terviews seem to be the predominant method of hiring employees. It is interesting to notice that selection practices in Indonesian SMEs is more relevant to universalistic or best practices approach than contingency approach to SHRM. While Rhodes et al., (2008) emphasized the transferability of high performance of work practices in Indonesian context, Rowley et al., (2004) found that convergence is taking place in EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 64 Effective Human Resources Management Practices in Small and Medium Enterprises Asia-Pacific region. The training culture focuses on both in-house and external, which might be a different feature, as usually SMEs do not have the resources to provide in such investment. As revealed in Rosli et al., (2012) comparative study, outside skill training program in Indonesia are usually provided by government agencies. This shows that institutional impact of contingency approach is more relevant to training practices in Indonesia than resources based perspective of SHRM. Performance evaluation in Indonesia tends to be developmental and informal while compensation practices focus on seniority-based pay. The developmental and informal aspects of performance evaluation systems are in consistent with resource based view and cultural impact on HRM practices. The practice of seniority-based pay is also a reflection of collective cultural values. In brief, HRM practices adopted in SMEs in Indonesia provide evidence to the use of a real mix of differ- ent SHRM models, supporting both convergence and divergence hypotheses. Glinow et al., (2002) also found some significant global or converging trends in HRM practices across cultures, industries and organizations. Indonesia thus presents a real case for an integrative model of universalistic, contingency, resource- based and institutional based view of SHRM model (e.g. Budwar & Sparrow, 2002; Schuler and Florkowski, 1996). In South Korea, employment testing, inter- views, and personal networking are the dominant staffing practices. This is a reflection both uni- versalistic and culture bound selection practices in Korean SMEs. It is interesting to observe that employment testing is an important method of hiring in both in South Korea and Indonesia, placing a lot of emphasis on learning and educa- tion (Gannon, 2004: Huo et al, 2002; Galang, 1999; Kearney, 1991). Job-rotation and on-the job training are the most common training practices in South Korea. It seems that many aspects of selection and training and development practices in South Koreas represents high performance or best practice arguments of SHRM. For example, Bae et al., (2003) also found that many compa- nies in Korea are experimenting with features of American style high performance work practices. Performance evaluations in Korea tend to be devel- opmental and informal. As we argued above in the case of Indonesia, the developmental and informal aspects of performance evaluation systems are in consistent with resource based view and cultural impact on HRM practices. Total compensation is based on both seniority and performance in SMEs in South Korea. This trend is totally in agreement with the initial expectation relevant to simultane- ous use of both global convergence trends and adaptation to cultural and national differences (e.g. Huo et al., 2002). In Turkey, recruitment and selection practices are informal with word-of mouth and unstructured interviews being predominant methods. As these organizations are getting more sophisticated, they adopt professional search agencies to hire their managerial talent. This reflects simultaneous adoption of both convergence and divergence perspectives of SHRM models (e.g. Huo et al., 2002). Training and development practice was found to be following cost-effective approaches of on-the job training and personal coaching. This is in line with the arguments of business strategy-HRM practices link (e.g. Schuler and Jackson, 1987) and of the contingency perspec- tive of SHRM model. Performance evaluations are very subjective and it is not even the norm in the Turkish work culture. The whole process of performance management in Turkey needs to be significantly changed to reach global standards. Compensation practices favor organizational tenure over employee performance as employees liked to be rewarded for their loyalty to the orga- nizations (Bozbura, 2007; Aycan, 2006; Aycan, 2001). In brief, the Turkish experience is not far different from what is observed in Indonesia and South Korea, which reflect the elements of uni- versalistic, contingency, culture and institutional based theories of SHRM. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 65 Effective Human Resources Management Practices in Small and Medium Enterprises SCHOLARLY AND PRACTICAL IMPLICATIONS There are number of implications provided by this chapter. First, our findings contributes to SHRM literature and HRM practices in SMEs by providing evidence in relation to adoption of both universalistic and national culture specific HRM practices in the context of MIST countries. The findings supports both convergence and di- vergence hypotheses as we found simultaneous adoption high performing work practices and culturally relevant HRM practices across all the four countries (Budwar & Sparrow, 2002; Schuler and Florkowski, 1996). Second, the chapter provides an important contribution to the international SHRM literature by providing a model of HRM practices that are being adopted by the SMEs in MIST countries. (Please refer to Table 3). Third, our findings are equally important for both researchers and practitioners. As we have discussed our findings in relation to existing models and theories of SHRM, future researchers of MSEs in MIST countries may use our argu- ments and findings as preposition for furthered empirical testing. This is particularly important as we used existing data and information for our exploration. It is also important for MNCs, entre- preneurs and practitioners to understand the HRM practices adopted in SMEs in various countries as these organizations seem to the backbones of their respective nations. Fourth, the chapter also showcases the latest cultural scores of Hofstede et al (2010) for these four nations. It also introduces his latest cultural dimension (indulgent versus restraint) and its implication on work-related practices. It discusses the consequences of each of these cultural dimen- sions for HRM practices in each of these nations. Multinational practitioners will benefit from knowing the local and cultural values to augment their understanding of doing business with the local SMEs (Hofstede et al, 2010). FUTURE DIRECTIONS Future research should specifically focus on HRM practices in SMEs in emerging and new economies as there is a dearth of research in this specific literature. The research should also consider key organizational, institutional, societal, and cultural variables that may influence HRM practices in SMEs. These might vary largely among nations and their understanding might help multinationals create a better understanding of their operations. For instance, the local governments support SMEs operations immensely in both Mexico and Turkey (Bozbura, 2007;Aycan, 2006). Table 3. A Conceptual Model of HRM Practices of SMEs in MIST Economies HRM Practices Mexico Indonesia South Korea Turkey Recruitment and Selection • Personal Referrals • Interviews • Personal Tests • Employment Tests • Personal Networking • Interviews • Word-of mouth • Newspaper advertise- ments • Employment Agencies Training and Development • On-the job training • In-house training • External Training • On-the job training • Job Rotation • On-the job training • Computer-based training • External vendors Performance Ap- praisal • Informal Evaluations • Informal evaluations • Developmental • Informal Evaluations • Developmental • Informal evaluations • Evaluations kept confi- dential Compensation • Individual bonuses • Benefits • Seniority-based pay • Seniority-based pay • Incentives • Seniority-based • Group bonuses EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 66 Effective Human Resources Management Practices in Small and Medium Enterprises Potential research topics could also include coping mechanisms for SMEs as they interact with multinationals from various nations. How will they become more adaptive in their own practices? They need to change traditional practices so that they can learn and grow from the latest trends in their industries. Collaborative partnerships between academics from different countries as well as between academics and practitioners may largely promote to develop the nascent research agendas for SMEs in emerging economies (Brent, 2009; Aycan, 2001). CONCLUSION This chapter has been concerned with exploring HRM practices of SMEs in Mexico, Indonesia, South Korea, and Turkey. Existing literature on theoretical frameworks and empirical research findings was used in the analysis and discussion. The findings provide evidence for cross national variations in HRM practices of SMEs across the four countries. These variations support evidence for both convergence and divergence debate. HRM practices such as selection and training and development adopted in SMEs in Mexico are largely influenced by culture and institutional framework. Performance appraisal and compensa- tions practices reflect both cultural and strategic aspects of HRM systems. As such, HRM practices adopted in SMEs in Mexico is more consistent with contingency perspectives than universalistic perspective of SHRM model. Indonesia pres- ents a case for adopting a real mix of different SHRM models, supporting both convergence and divergence hypotheses with an integration of universalistic, contingency, resource based and institutional based views of SHRM model. In the case of South Korea, we found a picture similar to Indonesia as it also presents a case of an integrative model which consists of universal- istic, contingency, resource based and institutional based view of SHRM model. The slight difference we found between the two countries is that South Korea tends to adopts ‘best practices’ approach more than it does in Indonesia. Our finding in Turkey is not far different from the situations in Indonesia and South Korea, as it reflects the ele- ments of universalistic, contingency, culture and institutional based theories of SHRM. As we expected at the beginning, HRM prac- tices used in different countries are inching towards global convergence, while national culture and contingency factors such as institutional frame- work and business strategies continued to be af- fecting HRM practices in SMEs of MIST countries (e.g. Huo et al., 2002). 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KEY TERMS AND DEFINITIONS
Aguinaldo: Christmas bonus in Mexico.
Individualistic Orientation: The degree to
which individuals in societies reflect individual-
istic or collectivist behavior.
Indulgent versus Restrain: The degree to
which individuals pursue activities to enjoy
themselves.
Long Term Orientation: The degree to which
individuals in organizations or societies plan for
the future.
Masculinity: The degree to which organiza-
tions or society promote gender equality.
Power Distance: The degree to which orga-
nizations and societies accept and share power.
Uncertainty-Avoidance: The degree to which
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establishing practices and procedures.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 4
The Synergistic Potential
of Human Resource
Management in Small and
Medium Enterprises
ABSTRACT
In large-scale operations, strategically orientated Human Resource Management generally has a
structural function. In small- and medium-sized enterprises, however, strategic intent has to be more
intimately matched to entrepreneurial behavior of core management. In these firms, HR is not an added
layer but rather a key synergistic element in their strategic configuration. Considering the economic
challenges faced by the small firm, it would seem that some form of strategically orientated HR is ben-
eficial; however, it is often unconsidered. Taking a resource-based view of the firm and a configurational
approach to strategy, this chapter considers the challenges to strategically orientated HR adoption in
small entrepreneurial enterprises. It examines the characteristics of entrepreneur-founders, strategic
orientation, and strategic configuration in an increasingly globalized context. Challenges to HRM adop-
tion are identified, and a number of possible solutions are considered.
INTRODUCTION
Guest and King (2001) asked a simple but pro-
vocative question: “If good people management
is self-evidently beneficial to organizations, why
do not more of them adopt it?” (p. 11). In a later
publication they returned to this question, noting
that while the rhetoric surrounding the importance
of people management was generally accepted and
while the notion that people as “key assets in the
fight for competitive advantage has taken hold
… and while it is no longer quite right to claim
that in the absence of a crisis HR is inevitably a
low priority… neither is it a priority” (Guest &
King, 2004, p. 421).
The apparent paradox of recognizing people
problems, but not adopting good people manage-
ment, can be seen in the continuing reluctance of
many large-scale organizations to adopt Human
Resource Management (HRM); however, the total
absence, or low priority, of HR perspectives is
even more apparent in small- and medium-sized
David Starr-Glass
State University of New York – Empire State College, USA
DOI: 10.4018/978-1-4666-4731-2.ch004
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75
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
enterprises (SMEs). In a review of the extent to
which HRM practice was adopted in U.K. manu-
facturing SMEs, it has been noted that “very few
of the organizations adopted a strategic approach
towards HRM…. the dominant approach seemed
to be one of reactive, opportunistic pragmatism,
showing little development from the standard
modern approach identified as most common in
the early 1980s” (Duberley & Walley, 1995, p.
981). Harney and Dundon (2006), in a study of
small-sized business enterprises in Ireland, recog-
nized that these firms operated “in a contextually
plural world” and that HR prescriptions should not
be considered a miraculous “seamless garment,”
but rather “a quilt composed of a distinct mix
of policies and practices, in some cases uneven
and contradictory, imbued with varying levels of
formality and informality” (p. 69). Nevertheless,
most of these firms did not examine the richness
of the HR quilt, select appropriate scraps, or stich
them into their own workplaces. When small- and
medium-size firms do adopt a strategically orien-
tated HR approach they expect pragmatic results,
requiring their HR managers and consultants to
“move beyond ‘talking’ about bridging research
and practice and really work to help line managers
use the knowledge…they want people problems
solved… they may be searching elsewhere for
their answers” (Welbourne, 2007, p. 469).
If SMEs are indeed searching for the answers to
their people problems in places other than HRM, is
that really unexpected or unreasonable? The newly
created SME has little connection with the poten-
tial of HR approaches, but the HRM community
of practice seems to have even less connection
with small- and medium-sized firms. Despite the
prevalence of SMEs and their significant contribu-
tion to most economies, Heneman, Tansky, and
Camp (2000) in reviewing the literature found it
“disheartening to note that scant attention in the
SME research literature is given to the study of
human resource management practices” (p. 11).
When attention was shown the outcome often
“appears to be rich in prescriptions, limited in
sound descriptive surveys, and sparse in analyti-
cal research” (p. 20). Three years later, some of
these authors woefully acknowledged that small
and medium-sized enterprises “have been treated
as second-class citizens by authors in the human
resource management literature for far too long”
(Tansky & Heneman, 2003, p. 299).
This chapter explores the adoption of HRM
in small- and medium enterprises. In doing so,
it argues that two considerations are relevant.
First, the unique dynamics of the small firm
need to be appreciated in considering the level
and quality of HR approaches proposed. That
appreciation should center on an open-system and
resource-based consideration of the enterprise
and de-emphasize the large-scale paradigms and
“best practices” often reflexively suggested by
HR practitioners. Resource-based views of the
firm recognize the contributory value of human
assets and human capital, linking human resources
more tentatively to strategic performance (Way &
Johnson, 2005; Wright, Dunford, & Snell, 2001).
From this perspective, HRM is re-orientated away
from a structural function to an active dynamic that
is more relevant for the complexity of the SME.
Synergism – the catalytic enabling produced by
the strategic alignment of people and resources
– seems more appropriate than the HR functional-
ism often associated with large-scale enterprises.
Second, whether the small firm recognizes,
considers, or implements strategic HR depends
primarily on the attitudes and propensities of
the firm’s founder-entrepreneur. To the extent
that decision-making is a rational process, the
challenge for the HR community – whether as
participants in small firms or as consultants to
these enterprises – is to provide considered and
credible approaches that recognize the founder-
entrepreneur’s vision. Rather than offer a one-
size-fits-all seamless garment, the HR practitioner
should appreciate the unique complexity of the
firm’s context, the possible ambivalence of the
founder-entrepreneur’s attitude, and the inherent
patch-like nature of strategic HR approaches. This
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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
requires sensitivity to the founder-entrepreneur’s
traits and characteristics, but it also requires aware-
ness of the broader social and cultural matrix.
Although entrepreneurial leaders are often char-
acterized by individualism and purposefulness,
their predispositions and enactments are medi-
ated by social and cultural factors, particularly
national culture. In an increasingly globalized
world, the ways in which different national-culture
environments shape entrepreneurial behavior
and entrepreneur-founder perceptions of HRM
is significant (Soriano, Dobón, & Tansky, 2010).
Certainly, at a country-level, HRM has been
increasingly challenged to respond differently to
different business cultures, whether in Central
and Eastern Europe (Brewster & Bennett, 2010;
Horwitz, 2011), or in China and South East Asia
(Cunningham & Rowley, 2010; Li & Nesbit, 2012;
Zakaria, Zainal, & Nasurdin, 2012).
The first section of this chapter provides a
background of relevant HR issues that require
consideration, particularly from a resource-based
view of the firm. Using a configurational ap-
proach, the second section examines a model for
possible consideration and adoption of strategic
HRM. It considers the characteristics of the entre-
preneurial-founder, cultural and national-culture
factors, strategic orientation, and the identifica-
tion of elements in the strategic configuration.
The following section then examines anticipated
difficulties in adopting a HR approach that might
work synergistically in the SME environment.
The concluding sections suggest future research
directions and offer overall conclusions.
BACKGROUND
Although naturally grouped by size, SMEs are a
complex and heterogeneous group of entities: “not
all small firm owners are entrepreneurs and not
all small firms are entrepreneurial… many small
firms are not the site for innovation while many
small firm owners do not have business growth
as a goal” (Barrett & Mayson, 2006, p. 444).
The SME can be focused on modest risk-taking,
low growth, and non-entrepreneurial activities:
owned or directed by an individual, or family,
and primarily interested in income-seeking and
income-maintenance. In these firms issues of
growth and strategic development are not pressing,
whereas concerns about stability and maintenance
are. In other economies, market sectors, and cul-
tural environments the firm’s emphasis may be
on consolidation or expansion. In some contexts,
the small firm may face labor-relations tensions
or human resource scarcity in the labor force
(Marchington, Carroll, & Boxall, 2003). Small-
and medium-sized enterprises have to contend
with a complex diversity of issues and it would
be disingenuous to consider them a homogenous
group defined only by the attribute of size.
This chapter focuses on the smaller firm that is
entrepreneurially engaged. It may be operating in
a business sector such as knowledge-production,
information technology, or innovation. Entre-
preneurial SMEs are marked by their orientation
towards the markets in which they operate. They
recognize the potential, and also the volatility, of
these markets and they deploy core competen-
cies, strive for innovative products and services,
maintain competitive advantages, and seek to
access expanding social capital networks (Felicio,
Couto, & Caiado, 2012). To be implemented,
strategic possibilities first have to be considered
and then selected. In some market sectors, such
as information technology and high-tech, it is
common for the firm to be team-managed; how-
ever, most SMEs are created and directed by a
single entrepreneur-founder (Carland & Carland,
2012). It is the entrepreneur-founder who has
to commit to a strategic orientation, which may
ultimately adopt strategically-orientated HRM.
The entrepreneur-founder is therefore a critical
gatekeeper for HRM introduction.
Entrepreneur-founders may consider an entre-
preneurial utilization of their assets, striving “to
orchestrate activities and resources/assets within
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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
the system of global specialization and co-spe-
cialization… create/shape the market in ways that
enable value to be created and captured… main-
tain a good fit with (and sometimes to transform)
the ecosystem and markets” (Katkalo, Pitelis, &
Teece, 2010, p. 1179). Entrepreneurial utilization
may be spontaneous and intuitive; it may also be
considered and learned. Entrepreneurial utilization
may become more than a personal disposition and
develop into a consistent style of management that
permeates and guides the firm (Fabi, Lacoursière,
Raymond, & St-Pierre, 2010).
Enactments of entrepreneurial management
ensure that the SME has an appropriate fit in its
strategic landscape. This begins with recognizing
the firm’s internal/ endogenous assets and ap-
preciating the challenges and opportunities posed
by external/ exogenous environmental forces.
Strategic awareness requires evaluating products
and services, assessing knowledge-capital and
human-capital, understanding consumer markets
and their dynamics, recognizing rivals and com-
petitive advantage, and making judgments about
the macroeconomic climate. Strategy determina-
tion is the beginning of the process of alignment
through which strategic assets are deployed to
produce maximum advantage, albeit in a climate
of risk and uncertainty. Strategic determination
may – or may not – also include “good people
management.”
Strategic determination can be daunting for
the SME; however, it can also be exhilarating.
Different perspectives have to be considered, but
there is usually a lack of specialized analysts and
growing complexity. A configurational approach
is one way of dealing with this complexity. Con-
figurational approaches embrace the totality of the
strategic analysis, regarding it as a unified problem
rather than a series of isolated and disconnected
parts. Made famous by Miles and Snow (2003),
configurational approaches accept complexity
as an inevitable and normal business condition.
They also recognize that inevitably there will be
a number of quite different pathways to approach
what seem to be very similar strategic objectives.
Configurational approaches may be adopted
on the recommendation of consultants; however,
they may be adopted intuitively by entrepreneur-
founders who are facing the natural complexity
of the strategic scene (Hienerth & Kessler, 2006;
Pittino & Visintin, 2009). Some researchers, for ex-
ample, have found that strategic decision-making
in Australian micro-firms is “remarkably intuitive
and heuristic, suggesting that micro-firms might
be a unique kind of firms that use nonrational
mechanisms to make their strategic decisions…
the [data] search is passive, by means of informal
sources… idiosyncratic characteristics impregnate
the decision-making” (Liberman-Yaconi, Hooper,
& Hutchings, 2010, p.89). Other researchers,
while noting the heuristic nature of the process,
have found that the SME decision-making is more
complex and nuanced (Gibcus, Vermeulen, & de
Jong, 2006).
In trying to understand how strategic align-
ment decisions are arrived at in the SME, a
configurational approach provides a template
against to assess outcomes. Such an analysis it is
not used prescriptively to arrive at a priori con-
figurational recommendations; rather, it is used
descriptively to identify a posteriori clusters of
attributes that have been recognized as salient in
the firm’s strategic determination (Miller, 1981).
The overall vision of challenge and solution – the
gestalt – will obviously be seen differently by dif-
ferent entrepreneur-founders; however, it seems
that the initial process of assembling the pieces
of the jigsaw puzzle is remarkably similar.
STRATEGIC CONFIGURATION
AND HRM INCLUSION
Configuration approaches recognize the complex-
ity of the operating environment, strategic assets
deployment, and their interconnectedness and of-
fer “a systemic and holistic view of organizations
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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
where patterns or profiles rather than individual
independent variables are related to an outcome
such as performance” (Fiss, 2007, p.1180). Strate-
gic configuration recognizes a systems approach,
in which elements are regarded as co-dependent
and where changing one of them will inevitably
lead to changes in the others. Although a strategic
configuration may select specific elements from
within the system, it also considers the integrity and
holistic nature of the element cluster from which
the element was taken. Strategic configuration is
not designed to provide a universal “best prac-
tice” solution to problems encountered; instead,
it recognizes an integrated pattern (gestalt) that
suggests multiple patterns and solutions, all of
which may apply to the uniqueness of the context
encountered (Delery & Doty, 1996).
Using a configurational approach, Raymond,
St-Pierre, Fabi, and Lacoursière (2010) identi-
fied differing strategy considerations employed
by small firms in Canada and France. In using
this approach model to better understand stra-
tegic formulation, they assumed four connected
component: (1) the entrepreneur-founder’s char-
acteristics; (2) his or her strategic orientation;
(3) the firm’s strategic configuration; and, (4) a
set of controlling variables. The entrepreneur’s
personal characteristics (personal disposition,
competence, and motivation) are fundamental in
shaping and mediating his or her strategic orien-
tation. The entrepreneur’s strategic orientation
is then enacted through the specific selection of
assets – such as networks, technology, products,
markets, and perhaps HRM – that are considered
appropriate in the firm’s strategic configuration.
Once the strategic configuration is decided and
deployed, it is subject to a cluster of controlling
variables – such as size and age of firm, industrial
or service sector, power of consumers – that medi-
ate and moderate its effectiveness. To understand
whether HRM is included or even considered in
the strategic configuration, it is useful to explore
the links in this chain: founder characteristics,
strategic orientation, and strategic configuration.
Characteristics of the
Entrepreneur-Founder
The influence of the entrepreneur-founder plays
a pivotal role in the firm’s direction and strategy
selection. The entrepreneur-founder has a strong
identification with the firm, and also possesses
a unique set of personality traits, experience, so-
cial networks, organizational competencies, and
propensities for risk and growth (Baum & Locke,
2004; Wiklund, Davidsson, & Delmar, 2003;
Wincent & Westerberg, 2005). Early work on
the psychological characteristics of entrepreneur-
founders was often inconclusive, or contradictory,
prompting some to suggest that this avenue of
inquiry was either closed or at least a dead-end
(Gartner, 1988; Low & MacMillan, 1988). More
recent meta-analytical reviews, however, suggest
that recurring psychological attributes are associ-
ated with entrepreneurial engagement and success
(Shane, Locke, & Collins, 2003). Psychological
characteristics cannot be isolated from the constel-
lation of economic, social, and cultural variables
associated with entrepreneurial behavior, nor
can they alone predict success: neither can they
be neglected. Entrepreneur-founders and their
character traits are intimately identified with the
firm: their attitudes are part of its culture; their
behavior is dominant in its operations (Leppard
& McDonald, 1991).
• Achievement Motivation: The motiva-
tion drive to accomplish something con-
sidered personally significant was original
proposed by David McClelland (1961;
1990). Collins, Hanges, and Locke (2004)
found a significant correlation between
achievement motivation and entrepre-
neurial performance. In a meta-analysis,
Stewart and Roth (2007) also found that
motivational levels were significantly
higher in those who founded new business
ventures (growth-focused) compared with
non-entrepreneurial managers (income-
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79
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
focused). Achievement-need has a central
role in the entrepreneur-founder’s creation
and management of a SME; however, na-
tional culture also plays a part in manner in
which this need is expressed. For example
it has been suggested that the entrepreneur
descendants of Latin-Americans in Japan
realize their need for achievement by im-
proving existing business systems with
“courage and determination”; whereas,
indigenous Japanese entrepreneurs tend to
seek achievement though confronting the
“lofty challenges” of new business creation
(Rahman & Rahman, 2011, p. 110).
• Locus of Control: Some individuals per-
ceive present conditions and future out-
comes as the result of their personal effort:
control over events is an internal dispo-
sition. Others attribute what happens to
them as the result of external forces that
are beyond personal control (Rotter, 1966).
In Western entrepreneurs, a number of
studies suggest a positive correlation be-
tween a high internal locus of control and
performance, both anticipated and actual
(Boone & DeBrabander, 1993; Boone,
DeBrabander, & Van Witteloostuijn,
1996). Although locus of control is gener-
ally considered a psychological character-
istic, it may also be moderated by social
and national cultures dimensions. Western
European national cultures tend to have
high individualism and low uncertainty
avoidance dimensions; whereas, in coun-
tries such as China low individualism and
high uncertainty avoidance may resonate
with a lower internal locus and even with
a Confucian heritage (Fuller, Spears, &
Parker, 2010). Although internal locus of
control has a robust association with en-
trepreneurial behavior, it alone is a poor
predictor of entrepreneurial success (Lii &
Wong, 2008).
• Tolerance for Ambiguity: Life situa-
tions, and certainly business environment,
are rarely clearly defined and sharply fo-
cused. Our knowledge of them is usually
incomplete and tentative, and we may ac-
knowledge that what is confronted is am-
biguous and open to different interpreta-
tions. Confronted with overly-complex or
ambiguous situations, some individuals
see them as essentially challenging while
others consider them unsettling and threat-
ening (Budner, 1962). Studies have sug-
gested that an entrepreneurial disposition
is associated with a greater tolerance for
ambiguity, which might be expressed in a
greater propensity for innovation and cre-
ativity (Carland, Carland, & Aby, 1989;
Tegano, 1990). Research findings, mostly
from Europe, also show that high toler-
ance for ambiguity and high internal locus
of control seem paired and that both con-
structs correlate positively with entrepre-
neurial behavior (Cools & Van den Broeck,
2007). There is undoubtedly a national cul-
ture dimension that has to be considered:
although trait theory can shed light on the
likelihood of entrepreneurial engagement,
entrepreneurial behavior is expressed
within a context of a supportive culture,
society, and economy (Okhomina, 2010).
Strategic Orientation of the
Entrepreneur-Founder
The dynamics of entrepreneurial SMEs have
been attributed to entrepreneurial orientation:
a propensity for innovation, pro-activeness, and
risk-taking (Covin & Slevin, 1991; Miller, 1983).
Lumkin and Dess (1996) also recognized these
three dimensions, but added two more: autonomy
and competitive aggressiveness. All of these be-
haviors are expressions of the personal attributes
and orientations of their entrepreneur-founders,
representing the extent to which these individuals
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80
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
are “inclined to take business-related risks, to favor
change and innovation in order to obtain a com-
petitive advantage for their firm, and to compete
aggressively with other firms” (Covin & Slevin,
1988, p. 218). Attitudes towards risk-taking, pro-
activity, and environmental hostility are all located
in the entrepreneur-founder’s personal predispo-
sition; however, as has already been mentioned,
it is important to appreciate that these attitudes
are significantly shaped by the local and national
culture within which the SME operates (Kreiser,
Marino, Dickson, & Weaver, 2010; Razak, 2011;
Tang & Hull, 2012).
Individual dimensions of entrepreneurial ori-
entation are not directly linked to specific strategic
adoptions. Entrepreneurial orientation is also not
reliably linked to firm growth; although, it seems
to play an antecedent role. For growth of the firm
to take place, it seems that a general entrepreneur-
ial orientation needs to be purposefully deployed
through the choice and use of specific strategies.
This may not result in the growth of the firm,
because the strategies employed are subject to
controlling variables in the internal and external
environments (Moreno & Casillas, 2008; Wiklund
& Shepherd, 2005).
Entrepreneurial orientation is a general pre-
disposition towards behaviors; strategic orienta-
tion realigns these behaviors in specific strategic
approaches. Venkatraman (1989), for example,
saw strategic orientation expressed in approaches
such as aggressiveness, analysis, defensiveness,
futurity, pro-activeness, and riskiness. Successful
entrepreneurs develop a strategic orientation that
is sometimes recognized and articulated, but it
may also remain intuitive and spontaneous. Once
formulated – or intuitively sensed – the basic
strategic orientation is express in a specific stra-
tegic configuration. The strategic configuration
identifies and makes salient the assets that have
been considered and the ways in which they will
strategically complement one another. Typically,
assets include the firm’s propensity for innovation;
its research and development capability (Thornhill,
2006); the firm’s social and operating alliances
and networks (Watson, 2007); and – importantly
for this discussion – the firm’s appreciation of the
synergistic role of HRM (Kotey & Sheridan, 2004).
Strategic Configuration and
the Inclusion of HRM
Potentially, HRM can provide more than a reac-
tive power or pragmatic solution; however, to do
more than this it must first be recognized and
then recruited into pro-active strategies (Shanks,
Seddon, & Wilcocks, 2003). It is important for
the founder-entrepreneur, or the HR practitioner
working with the firm, to appreciate that config-
uring HRM as a strategic element provides “the
opportunity to focus on adding strategic value, thus
transforming the HR role from one of administra-
tor to a strategic partner” (Dery & Wailes, 2005,
p. 266). It challenges HR practitioners to develop
a sense of strategic vision, to acquire the com-
petencies to implement that vision in a complex
environment, and to communicate these potential
with the entrepreneur-founder. Optimally, the HR
practitioner should be sensitive to the founder’s
characteristics and personal strategic orientation,
understanding how they have developed and why
they may act as barriers – or gateways – to HRM
inclusion in the firm’s strategic configuration.
In the process of inclusion within the small
firm, HRM is challenged by its changing function
and remembered past: a move towards strategic
orientation, clouded by persistent memories of
its administrative legacy. Raymond Caldwell
(2003), recalling these old ambiguities and new
uncertainties, cautioned that the HR manager
must “develop an acceptable, if necessarily shift-
ing modus operandi between competing ideals,
rationales, and conflicting roles, each with their
own logic and justifications…. [proving] they
are the undisputed champions at surviving the
challenges of role change” (p. 1003). In shifting
the modus operandi of HR there are a number
of actors that may have a significant role in the
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81
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
firm: administrative experts, employee champi-
ons, senior partners, and change agents (Ulrich,
1997a; 1998). If HRM is to assume a pro-active
strategic partnership a great deal depends on the
entrepreneur-founder understanding of its poten-
tial, the ability of the external HR practitioners to
bring about change, or the presence of resident
“HR champions” in the decision-making process
of the firm (Cassell, Nadin, Gray, & Clegg, 2002;
Urbano & Yordanova, 2008).
When HRM has been adopted in the small-
sized firm, there is a growing record of its ability
to add strategic value: delivering higher-quality
intake to the human resource base (Williamson,
Cable, & Aldrich, 2002); contributing to labor
productivity (Patel & Cardon, 2010); augmenting
human relational capital (Welbourne & Pardo-del-
Val, 2009); developing core competencies (Sund-
berg, 2001); enabling increased productivity (Fabi
et al., 2010; Raymond et al., 2010); and providing
a unique competitive advantage that is difficult
for competitors to replicate (Chow, Huang, & Liu,
2008). All of these potential advantages require HR
practitioners to be accepted as part of the change
process and strategic partners in the firm’s future;
however, HRM repositioning is not untroubled and
sometimes HR practitioners experiences difficulty
in their new roles (Chiu & Selmer, 2011; Yusoff,
2012). Katrina Pritchard (2010).
Challenges to HRM Inclusion in
SME Strategic Configuration
Studies consistently demonstrate that HRM can
enhance entrepreneurial culture and organizational
commitment, especially in high-value knowledge
sectors (Giauque, Resenterra, & Siggen, 2010;
Schmelter, Mauer, Börsch, & Brettel, 2010).
Strategically aligned HR practice can positively
impact growth and performance of the small- and
medium-sized enterprise by producing higher
profits, despite the additional costs associated
with HR personnel and policies (De Kok & Den
Hartog, 2006; Sels et al., 2006; Zheng, Morrision,
& O’Neill, 2006). Commenting on the introduction
of high-involvement practices and work processes,
Mark Ciavarella (2003) noted that “whatever the
reason entrepreneurs have for not [implementing
these] initiatives from the start, the outcome is clear
– it will take many more resources to initiate the
practices later in the organization’s development
than implementing them at the very creation of
the firm” (p. 353). Others have also been blunt
about the impact and rational adoption of HRM
in the SME: “HR practices seem to matter; logic
says it is so; survey findings confirm it” (Ulrich,
1997b, p. 304).
Yet – despite the evidence of empirical stud-
ies, the increased profitability, and the apparent
logic of good people management – HRM is often
neither considered nor included in SME strategic
formulation. What are the challenges that block
its wider adoption?
• Entrepreneur-Founder Characteristics:
HRM adoption can be blocked, delayed,
or promoted by the psychological perspec-
tives of the entrepreneur-founder. A strong
personal achievement-need motivation
may inhibit the entrepreneur from seeking
external alternatives or relying on outside
alliances. Adding players to the firm’s op-
erational landscape can challenge the en-
trepreneur-founder’s locus of control and
contribute to higher degrees of perceived
ambiguity: even in large-scale firms the
introduction of formalized HRM has been
viewed by incumbents as a disruptive in-
trusion (Van De Woestyne, Dewettinck,
& Van Bruystegem, 2010). The entrepre-
neurial-founder has constantly to decide
on issues about which he or she has little
experience, or limited understanding, and
it would be disingenuous to believe that the
“logic” of HR utilization is compelling. If
strategic HR implementation is introduced
successful, there may be an eventual sense
of satisfaction for the entrepreneur-found-
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82
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
er; however, even considering the issue
may just as likely result in personal con-
flict, doubt, and avoidance (van Gelderen,
van der Sluis, & Jansen, 2005). Projections
of leadership style are important and the
entrepreneur-founder may have adopted
an inward-looking egocentric style, cen-
tered on private agendas and short-term
goals. Alternatively, the style might be
outward-looking, focused on the develop-
ing collective that constitutes the firm. A
more collaborative style may favor HR in-
clusion, because the leader sees the firm’s
success as a joint endeavor involving em-
ployee participation As Todorovic and
Schlosser (2007) observed: “a charismatic
leadership style (with resulting organiza-
tional citizenship behaviour by the follow-
ers) will amplify the EO [entrepreneurial
orientation]-performance relationship,
while the Machiavellian leadership style
(with corresponding follower behaviour)
will reduce the EO-Performance relation-
ship” (p. 304).
• Entrepreneur-Founder’s Strategic
Orientation: A critical aspect of strate-
gic orientation is the entrepreneur-found-
er’s attitude towards growth. Hamel and
Prahadal (1989) identified a construct that
they termed “strategic intent,” in which
value is placed on growth-related out-
comes and in particular the internal, or or-
ganic, growth of the firm. Strategic vision
depends on orientation and intent. Through
exploring, articulating, and sharing strate-
gic intent, entrepreneur-founders can col-
laboratively include other senior players in
developing a strategic vision for the firm;
however, articulating strategic intent may
be difficult (Ice, 2007; Prahadal & Hamel,
1990; Verma, 2009). They may recognize
their own entrepreneurial dispositions, but
at the same time confuse them with stra-
tegic intent, which is a more thoughtful
and considered “quest for new opportuni-
ties and thereby a means of identifying a
misfit between current resources and aspi-
rations” (Døving & Gooderham, 2008, p.
848). There is also a connection between
the intensity of the entrepreneur’s feelings
towards products, technology, and con-
sumers and the subsequent construction of
strategic intent (Choi & Shepherd, 2004);
however, its construction might also be in
conflict with deep-seated personal senti-
ments and attitudes. Formalized strategic
planning tends to subordinate personal sen-
timents and attitudes; however, in small-
and medium-size firm strategic planning is
generally not formalized and the entrepre-
neur-founder’s personal sentiments play a
much more dominant and determining role
in the process (Miller & Cardinal, 1994;
Wang, Walker, & Redmond, 2007).
• Strategic Inclusion of Human Resource
Management: The strategic orientation is
often expressed in preferences for produc-
tion, marketing, or customers and these are
reflected in the firm’s strategic configura-
tion (Blois, 2001; Enright, 2001; Noble,
Sinha, & Kumar, 2002). HRM can con-
tribute to these preferred approaches, but
does so by addressing antecedent factors
such as richer and more flexible human
capital. HRM can be a significant com-
ponent of the strategic mix, but because
of its indirect contribution it may be seen
as distant and not considered as a pro-ac-
tive component of strategic configuration.
Strategic configuration also depends heav-
ily on personal knowledge, prior experi-
ence, and knowledge-exchange through
social networks. In the early stages of the
firm, networks usually link those who
have similar backgrounds and common
values. Later, founder-entrepreneurs may
develop more extensive networks and ac-
cess diverse perspectives and experiences,
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83
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
whether in recruiting staff or in awareness
of HRM potentials (Leung, 2003). In a
study of American micro-enterprises (10
or less employees), Barczyk, Husain, and
Green (2007) found that owners relied on
prior personal experience to administer tra-
ditional HRM functions in-house, believ-
ing they had sufficient knowledge to do so.
They may have possessed such knowledge;
however, it is unclear whether they were
experienced in strategic HRM approaches
or had the networking richness to investi-
gate such approaches.
Solutions and Recommendations
Utilizing the synergist potential of HRM in
the SME can only take place if the founder-
entrepreneur considers it relevant to the firm’s
strategy. In reviewing the absence of a strategic
HR approach, several barriers to its inclusion
have been suggested. These barriers can also be
understood as challenges. The challenge is for
the SME to have an understanding of how HRM
might be beneficial. It may well be that HRM
is considered and rejected, and it may be that a
rejection is appropriate; however, the possibility
still exists that HRM was never considered in the
first instance.
HRM may not appear in the firm’s strategic
configuration because of the entrepreneur-
founder’s attitudes towards growth, autonomy,
or ambiguity. These may be amenable to change,
but it has to be kept in mind that the inclusion of
strategic HR can only add value if they resonate
with the culture, values, and vision of the firm
that has been created by the entrepreneur-founder.
Should the founder seek other perspectives, it is
critical that the firm’s HR champions, or exter-
nal change-orientated HR consultants, address
the complexity of the organization, recognize
the importance of the entrepreneur-founder, and
identify attitudes that block HRM inclusion in
strategic configuration.
With entrepreneur-founders, it is critical that
HR knowledge and benefits address real problems
and inspire realistic adoption. That requires insight,
vision, and confidence on the part of HR practi-
tioners. Raymond Caldwell (2003) saw HRM as
caught between an administrative past and “and
a future HR self-image that may ultimately be
beyond their reach… [they] may be unable or
unwilling to embark on the daunting journey of
reinvention that might finally assure them of their
professional status, power or value creating role”
(p.1003). Confidence becomes reified in actions
and results. As Caldwell (2004) later conceded:
“If we recognise these persistent gaps, and judge
them realistically… then it is clear that personnel
and HR practitioners may have to embrace a self-
fulfilling prophecy of practice, driven more by the
incrementalism of action rather the reassurances
of facts” (p. 213).
More diffuse initiatives might also impact the
adoption of strategically orientated HR practice in
SMEs. In higher education, business administra-
tion courses and programs traditional emphasize
large-scale enterprises. When included at all,
the SME is portrayed as an exotic and peripheral
creature from which larger and more interesting
firms may emerge. Given the increasing economic
and social importance of the SME, time should be
given to the complexities and vitality of the SME
in taught courses, internship programs, and under-
graduate research. In many countries, particularly
North America, the increasing professionalization
of HRM has distanced it from the involved people
management that its own rhetoric advocates. This
outcome is common in the professionalization of
many people-centered activities, not just HRM.
A better connection with the complexities,
challenges, and realities of the SME – gained
through focused HRM education and appropriate
internships – might be productive for all involved.
Within higher education, more extensive engage-
ment with surrounding SME communities is
particularly valuable. Business Administration
departments can add value to themselves and the
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84
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
communities in which they are embedded by mov-
ing beyond the campus: initiating collaborative
programs, disseminating knowledge, providing
training, supporting research and development,
offering consultation, and creating knowledge-
centers that incubate innovative ideas and ap-
proaches (Karlsson, Booth, & Odenrick, 2007;
Pecas & Henriques, 2006; Pickernell, Clifton, &
Senyard, 2009).
At a regional and national level many contend
that market forces shape behavior more profoundly
than policy initiatives. This is partially true; how-
ever, the positive impact of regional and national
policy for SMEs and entrepreneurial enterprises
is well-documented for the Netherlands, the E.U.,
North America, and Asia over the last ten years
(Bakkenes, Schouwstra, & Snijders, 2009). Given
the economic importance of SMEs, the challenges
they face, and their contribution to employment
and society, local and national government has a
vested interest in improving SME practices and
performances. An OECD (2002) report considered
small- and medium-size firms in Canada, Finland,
Germany, Japan, and the UK. It concluded that
managerial weakness lay at the heart of many
business failures, recommended governmental
initiatives in areas such as training. The long-term
viability and the success of SMEs can benefit
from similar attention being paid to strategic
HRM knowledge and practice. Responsive local
policies and initiative might provide coaching
and mentoring.
FUTURE RESEARCH DIRECTIONS
A persistent problem is defining the small-and
medium-size entity. Statistical generalities (num-
bers of employees, asset base, and revenue) do
little to express the diversity, uniqueness, and
dynamism of the small firm in different locations
and in different market sectors. Indeed, size cri-
teria and statistical approaches contribute to the
homogenization of the small- and medium sized
firm, obscuring their differences. This chapter has
focused on an entrepreneurial intent of those who
lead SMEs, usually the dominant entrepreneur-
founder; however, it is recognized that many SMEs
are not inherently entrepreneurial. Typographies
are useful, but research is required to provide a
more effective distinction and classification of
small firms that does not obscure the richness and
diversity of differently-orientated firms operating
in different market sectors.
Ethnographic research might explore individ-
ual motivations, concerns, and pathways of those
who start SMEs. Further research on individual
diversity could provide a clearer typography and
a sharper focus on the motivation, intent, prior
experience, and present social networks of those
who create SMEs (Roberts, Klepper, & Hayward,
2011; Sullivan & Marvel, 2011). Further research
is also required to understand the decision-making
processes in the SME, particularly in terms of
strategic alignment and configuration. These areas
remain fragmented, partial, and under-researched.
Research might further explore national cul-
ture difference, which is particularly relevant for
SME success is an increasingly globalized world
with many emerging and transitional economies.
HR practice is not a set of universal prescriptions
that can be exported or advocated; instead, HR is
concerned with people embedded in social and cul-
ture realities that need to be recognized. Research
in newly developing and transitional economies
might clarify the challenges and opportunities for
crafting HR practices that effectively responds to
these differences (Cunningham, 2010; Psychogois
& Wood, 2010).
Case studies are needed to explore how strate-
gically orientated HR practices shape the actual
performance of SMEs. “Best-fit,” as opposed to
“best-practice,” is commonly advocated; however,
research is needed to identify specific contexts,
problems, and solutions. This might provide bet-
ter answers to questions about the circumstances
under which strategically aligned HRM is ef-
fective. Research might focus on the individual
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85
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
and collective experience within the SME, in an
attempt to unravel questions about the ways in
which different work place constituents recognize
HRM success.
Most research on SMEs is cross-sectional,
looking at a specific moment in time. This has
the advantage of being convenient and timely;
however, longitudinal studies would better inform
the community of HR practice about how HRM
becomes involved in strategic development, how
problems are recognized and defined, how solu-
tions are considered and implemented, and the
degree to which these solutions are ultimately
successful. Research initiatives might consider the
qualitative changes that result within the culture
and visions of the SME, as well as the quantitative
impact of HR involvement.
CONCLUSION
HRM has evolved to resolve problems in the
workforce and in the relationship between em-
ployees, employers, and the world beyond. As
an evolving discipline it has retained its original
administrative and functional concerns, but it has
also moved towards a more all-inclusive consid-
eration of strategic challenges. As such, HRM is
neither a simple set of procedures and practices
nor a simplistic body of knowledge and practice.
Increasingly, it is called upon to add value to the
strategic orientation and the development of the
firm in “contextually plural world.”
Small- and medium-size enterprises are best
understood as inhabiting worlds of contextual plu-
rality. HRM does not offer a miraculous “seamless
garment,” but it does provide a “quilt of distinct
policies and practices” that can contribute to the
SME’s strategic formulation. HRM, strategically
applied, has a track record of adding value to
SME strategic assets and growth, yet it is often
not adopted by entrepreneur-founders. Looking
at strategic formulation from a configurational
perspective, there is a sequence of steps leading
to the recognition of a strategic vision: competen-
cies and characteristics of entrepreneur-founders,
their strategic orientation, and the firm’s strategic
configuration.
Potentially, HRM can be considered as a
catalyst for enhancing performance: a synergistic
element for future development. Sometimes, its
inclusion comes from the dominant influence and
perspective of the entrepreneur-founder; some-
times, it comes from a resident HR champion.
Sometimes, HRM inclusion comes about through
the advice of external consultants and advisors.
Sometimes, strategic HR approaches are consid-
ered and then rejected; sometimes, however, they
are never considered at all.
The small- and medium-size firm can consider
and reject HRM for pragmatic reasons: added cost
versus anticipated benefit, firm size and a low num-
ber of employees. These are rational objections
that can be empirically evaluated, and it may be
that strategic HR approaches neither add sufficient
value nor provide desired outcomes. However,
there are other scenarios. Strategic HR approaches
are unknown, or known but misunderstood; they
are not thought of as solutions because they did not
suggest themselves as answers to the entrepreneur-
founder’s questions. In these scenarios, resident
HR practitioners or external consultants can at
least provide reasoned arguments as to why HR
pathways might have a synergistic impact on strat-
egy. HRM is not an inevitable constituent of the
strategic configuration, but it has made valuable
contributions to the success of some small firms.
HRM provides a synergistic potential; however, it
can only provide this if it is first considered and
then included in the SME’s strategy. The challenge
for HR practitioners is to make that consideration
and inclusion happen.
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The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
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KEY TERMS AND DEFINITIONS
Entrepreneur-Founder: The creator of a firm,
who remains dominant and pervasively involved
with its growth and development, and who is
focused on entrepreneurial engagement rather
than income-maintaining security.
Entrepreneurial Orientation: Personal out-
looks or proclivities of the firm’s leader that are
intuitively considered when competing with other
players in a marketplace. They include aggressive-
ness, risk-taking, and innovation. To potentially
secure competitive advantage, or reduce risk, the
personal dispositions of entrepreneurial orienta-
tion must be translated into actions and activities
through strategic orientation.
Human Resource Management (HRM): The
managerial process of recruitment, maintenance,
and improvement of the human assets of a firm
to provide a workforce that is sufficiently fit and
flexible to deal with current operations, ongoing
changes, and strategic positioning.
Small- and Medium-Sized Enterprise
(SME): A firm with limited financial capital,
unique human capital, and a leader motivated
to create and exploit entrepreneurial niches in a
given market or economy.
Strategic Configuration: An enactment, in
which the firm’s resources are identified, selected,
and aligned in anticipation of implementing a
course of action to address a specific threat or
opportunity. The configuration includes resources
such as innovation potential, R&D, networks,
and HRM.
Strategic Orientation: Personal characteris-
tics considered and purposefully brought to bear
on situations identified as posing threats or op-
portunities for the firm. Characteristics include
aggressiveness, analytical scrutiny, defensiveness,
a concern for the future, pro-activeness, and a
propensity for risk-taking.
Synergism: A context in which one element
exerts a contributing influence on others and
thereby significantly augments their combined
effectiveness. While it might be unclear how the
synergism works, the result is to produce a com-
bined output greater than the anticipated sum of
the individual constituents.
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Chapter 5
Managing Human Resources
in Family Businesses:
A Review on the Current State of Research
and New Proposals for the Future
ABSTRACT
Although a lot of research has been carried out in the field of family businesses in recent years, not much
of it has focused on human resource management. After compiling the major studies, both negative as-
pects (e.g. nepotism) and positive ones (e.g. employee commitment) have been identified. Therefore, the
authors propose high-performance human resources practices to reduce the negative impact of family
in business and boost the positive effects, increase their human capital, and achieve a competitive ad-
vantage in this field. Finally, the authors provide key insights for practitioners, family business owners,
and managers, and they propose future research directions.
INTRODUCTION
Family businesses play a significant role in global
economy, employment creation, technological in-
novation and economic progress (Dawson, 2012;
Zahra, 2005; Zahra, Hayton, Neubaum, Dibrell and
Craig, 2004). It is estimated that family businesses
are responsible for 70% to 90% of global GDP
annually (Family Firm Institute, 2012). This has
encouraged the increase in research in this topic
and family business research is growing more and
more, becoming the only area of research that has
experienced exponential growth in the last years
(Zellweger, Eddleston and Kellermanns, 2010).
This positive development is mirrored by the
three annual conferences exclusively oriented to
family business research: Family Enterprise Re-
search Conference (FERC), International Family
Santiago Gutiérrez-Broncano
University of Castilla-La Mancha, Spain
Mercedes Rubio-Andrés
San Pablo CEU University, Spain
Pedro Jiménez Estévez
University of Castilla-La Mancha, Spain
DOI: 10.4018/978-1-4666-4731-2.ch005
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Managing Human Resources in Family Businesses
Enterprise Research Academy (IFERA) and EIAS
Workshop on Family Firm Management Research.
Furthermore, two specific international journals
rank very near the top – Family Business Review
and Journal of Family Business Strategy.
Traditionally, research has focused on two
distinct aspects: differences between family and
non-family business, and variations in behaviour
among family firms. But nowadays, we find stud-
ies that have examined the link between family
business resources/capabilities and its competitive
advantage (e.g. Zellweger et al., 2010). Recently,
Danes, Stafford, Haynes and Amarapurkar, (2009)
have explored how human capital, social capital,
financial capital and management structure con-
tribute to family business performance.
Despite all this, family business literature has
not devoted special attention to human capital
(Dawson, 2012) and it suggests that family busi-
nesses have difficulties managing their human
resources, especially when it concerns family
members or the transition from the founder to the
successor (King, Solomon and Fernald, 2001). In
a review of family business literature, Desman
and Brush (1991) reported that only 4% of 202
citations reviewed, dealt with human resource
management.
In this situation, family businesses need to de-
velop new human capital that can take them beyond
established routines and embedded relationships
(Wright and Kellermanns, 2011). Human capital,
according to the resource-based view (RBV) is
the most valuable and difficult type of resource to
imitate because it is to a large degree, the product
of complex social structures that have been built
over time (Barney, 1991). While tangible assets
are typically imitated and thus unlikely to be a
source of sustainable competitive advantage (Bar-
ney, 1991), human assets are often hard to imitate
(Gottschalg and Zollo, 2007). Recent research
has empirically shown the positive relationship
between human resource management practices
and important organizational outcomes such as
productivity, turnover, and firm performance
(Delaney and Huselid 1996; Huselid 1995; Arthur
1994), but this relationship has been analysed less
often in the family business context.
In this chapter, we start with a review of the
main characteristics of family businesses, we
analyse the effects of family businesses on aspects
of human resource management and we review
the main studies on human resource practices in
family businesses. Then, we focus on high perfor-
mance work practices (HPWP) as the best way to
manage human resources in family business and to
reach a higher commitment from both family and
non-family members in this type of companies.
Finally, we provide some practical suggestions and
examples for research opportunities and research
questions based on this chapter.
THE IMPORTANCE OF HUMAN
CAPITAL IN FAMILY BUSINESS
The theoretical definition of the term “family
business” is still open to debate (Chrisman et al,
2005). Traditionally, scholars have understood the
family business is a mix of two systems: family
and business. The definition has focused on a
combination of the four components involved in
the family’s involvement in the business, namely
ownership, governance, management and trans-
generational succession (Chua, et al, 1999). If we
are looking for a theoretical definition, we can
understand the family business as the family’s
influence over the strategic direction of a firm
(Davis and Tagiuri, 1989), or as the intention of
the family to keep control (Liz, 1995), or maybe
as one with the unique, inseparable, synergetic
resources and capabilities arising from family in-
volvement and interactions (Habberson, Williams
and MacMillan, 2003). In a recent study, Klein
et al. (2005) developed and validated a scale to
measure how the family’s involvement is used to
influence the business. In this way, this involve-
ment is showed as a continuous variable rather
than as a dichotomous one.
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Managing Human Resources in Family Businesses
Quite often, family involvement makes it
possible for these businesses to have unique
characteristics and resources which give them an
advantage over non-family business. Among these,
Zahra et al. (2008) cite the following: reduced
agency costs through owner control, longer-term
investment horizons, increased commitment to
intergenerational wealth, lower transaction costs
due to a higher level of trust, and a less formal
or more flexible organizational structure (Geer-
aerts, 1984). All these resources and capabilities
related to family involvement and interactions are
denominated “familiness”. Familiness is defined
as the idiosyncratic bundle of resources and ca-
pabilities resulting from the interaction between
the family and business systems (Zahra, 2005,
Habberson et al., 2003).
With this potential source of advantages,
some studies show how family businesses have
achieved and sustained superior levels of finan-
cial performance along the time (Anderson and
Reeb, 2003; Mishra, Randoy and Jenssen, 2001).
Familiness is considered so important because it
reflects the positive aspects of the overlapping
subsystems of family and business (Habbershon
et al, 2003), and is often used as a unique ele-
ment that can differentiate family and non-family
firms (Pearson, Carr and Shaw, 2008). But these
interactions between family and business are not
always positive. Recent research shows that family
influences can have negative effects on the family
business too (e.g. Kellermanns, Eddelston, Sarathy
and Murphy, 2012).
Pieper (2010) supports the view that a greater
use of psychological theories in family business
research, will improve the understanding of it.
Concepts such as motivation, power and author-
ity, obedience, group thinking, group cohesion,
leadership or commitment are required to be taken
into account when implementing a human resource
policy adapted to family business.
In the same direction, human resource manage-
ment literature is based on the premise that human
resources are vital to an organization’s strategy
because, through their behaviour individuals have
the potential for the formulation and implementa-
tion of the strategy (Colbert, 2004). In this way, it
is agreed that the individuals’ knowledge, skills
and abilities are not sufficient to create value for
an organization, unless they are used in a coor-
dinated and organized way (Colvin and Boswell,
2007; Wright et al 1994). In this work we are
accepting that it is the individuals, and not the
firm, who own the human capital, and we claim
that while family businesses need a high level of
knowledge, skills and abilities a better alignment
between the individuals and the organization is
essential too (Wright et al 2001) in order to achieve
a competitive advantage. Family businesses need
to gain an alignment of interests, in order to create
a committed workforce (Boxall, 1996).Thus, if
family businesses do not possess a superior pool
of human capital, in terms of knowledge, skills
and abilities, they should reach a competitive
advantage, through a better alignment between
the human capital pool and the strategic goals of
the firm (Gottschalg and Zollo, 2007; Wright et
al, 2001).
Astrachan and Kolenko (1996) argue that inap-
propriate human resource management is often the
main cause of the high failure rate in this type of
companies. The traditional key to develop human
capital in family businesses has been separating
family and business because sometimes family
businesses have been regarded as less profitable
than non-family ones (Dawson, 2012). Human
capital has included knowledge, skills and abilities,
but recently Hoy and Sharma (2009) include an
intellectual and psychological dimension. In the
context of family firms, human capital includes
factors such as commitment or emotions, as well
as integrity, compassion and forgiveness of family
members (Dawson, 2012, Puhhakka, 2002) and
all these factors are denominated “family human
capital”.
In literature family human capital is consid-
ered one of the most important resources for
family businesses (Sirmon and Hitt, 2003), and
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Managing Human Resources in Family Businesses
represents a potential strategic resource for the
firm (Sorenson and Bierman, 2009), because it
is considered one of the most valuable resources
that family businesses have.
In this way, we will try to propose an expla-
nation of how the family can contribute to firm
success. Some scholars have used the term “family
human capital”, referring to knowledge, skills
and abilities of family members (Danes et al,
2009; Salvatto and Melin, 2008; Carney, 2005,
Simon and Hitt, 2003) but including factors such
as commitment, alignment of interests, sense of
responsibility, etc.
HUMAN RESOURCE MANAGEMENT
PRACTICES IN FAMILY BUSINESSES
The literature in the field of human resource man-
agement in family businesses shows that family
influences can have both positive and negative
effects on the family business (Kellermanns et
al, 2012). Sometimes, these businesses have been
criticised for nepotism when the founder favours
relatives. Traditionally, it has been thought that
it was extremely difficult for a CEO who is the
father, mother or uncle to manage human re-
sources objectively with family members (Reid
and Adams, 2001).
Astrachan and Kolenko (1994) suggest that
this special relation between family and business
creates a volatile situation concerning tasks such
as employee selection, compensation, appraisal
and personal development, which are more dif-
ficult in family businesses. In a study carried out
analysing 219 family and non-family small and
medium enterprises in Northern Ireland, Reid
and Adams (2001) found that only 28% of family
businesses reported using a formal performance
system to assess family members and of that 28%,
only 38% report that the remuneration the family
members received was based on that formal system
of assessment. However, in other cases, founders
tend to under-reward their relatives working in the
firm and this “may lead to a situation in which
incompetent family employees are retained while
competent family employees are driven to seek
employment elsewhere” (Lansberg, 1983: 42). If
remuneration packages are not based on perfor-
mance in family business, it can only create dif-
ficulties within the business for other non-family
management members.
The principal reason for this is that families
are guided by implicit affective principles such as
personal needs and long-term well-being, whereas
businesses follow economic principles. The norm
of fairness between parents and their children is
similar to needs; while among siblings, equality
is the dominant fairness norm. On the other hand,
in the business context, fairness is based on the
concept of merit (Lansberg, 1983).
Another problem is the relation between
the human resource management systems with
regard to selection and retention of employees.
Stalk and Foley (2012: 26) claimed that “a job
with the company shouldn’t be an entitlement.
Family members deserve no special accommoda-
tion”. Family firms’ owners are often criticized
for employing family members who are less able
than non-family members (Chrisman, Chua and
Litz, 2004). But a company that selects incom-
petent individuals (whether they are “family” or
not) can put the firm’s survival at serious risk
(Dunn, 1995) and qualified managers may avoid
family businesses due to the exclusive succession
system, limited potential for professional growth,
lack of perceived professionalism and limitations
on wealth transfer (Covin, 1994a; 1994b; Horton,
1986; Burack and Calero 1981). This situation is
responsible for family businesses often lacking
heterogeneity and professionalism in their man-
agement teams (Sirmon and Hitt, 2003).
Something similar happens with the appraisal
system. The standing of an individual in a family is
determined more by “who the individual is” than
by “what the individual does” (Lansberg, 1983).
Family businesses have to know who contributes
the most to the achievement of organizational
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Managing Human Resources in Family Businesses
goals and who the least. In the same way, Reid and
Adams (2001) find a higher number of non-family
businesses using appraisal clearly-defined systems
for staff assessment than family businesses and
suggest separating ownership and management
as the solution to this problem.
Finally, training and development, is another
area in which we found different points of view.
For the family, training should focus on “whatever
is best for him or her”, while for a business, train-
ing should focus on developing the abilities and
capabilities that will increase the achievement of
organizational goals (Lansberg, 1983). Training
and development are referred to as the most im-
portant human resource practices in family and
non-family enterprises but if you ask about invest-
ment on training, it is a different thing (Reid and
Adams, 2001). These authors suggest that a higher
number of non-family enterprises systematically
provide their employees with training based on
their needs than is the case of family businesses.
This causes workplace deviance that violates sig-
nificantly organizational norms and, in so doing,
threatens the well-being of the organizational and/
or its members (Robbinson and Bennett, 1997).
It can include lying, insubordination, abuse of
privileges, lack of regard for cost control, produc-
tivity losses, loss of reputation, and much more
(Eddelston and Kidwell, 2012). In many cases it is
frequent to find family businesses having trouble
attracting and retaining highly qualified managers
because they think that their professional growth
will be limited, or that they will be dismissed
from succession (Covin, 1994a, 1994b; Burack
and Calero, 1981).
Nevertheless positive effects can indeed be
found in human resource management in family
businesses. In fact, long-term orientation is of spe-
cial relevance in the context of family businesses
(Sieger, Bernhard and Frey, 2011). Thus, they
have a stronger tendency to keep their employees
even in times of economic recession (Lee, 2006),
and this is likely to lead to increased trust, feel-
ing of job security and a higher level of affective
commitment (Le Breton-Miller and Miller, 2006;
Astrachan and Kolenko, 1994; Horton, 1986).
Other positive attributes of family businesses in
human capital include, as we have mentioned
above, better interest alignment, identification
with the organization, warm, friendly and intimate
relationships and the potential tacit knowledge
of the family members (Horton, 1986; Donelly,
1964). In a recent study, Dawson (2012) claims
that family businesses are more likely than non-
family businesses to be characterized by superior
alignment of interests between their human capital
and organizational goals due to higher external
rewards, more flexible job design and stronger
socialization systems.
For all these reasons (see Table 1), scholars
note that the creation of a family business does
not per se guarantee the advantages we have just
listed. These will only be reached so long as the
concept of “familiness” is developed (Sorenson,
Goodpaster, Hedberg and Yu, 2009: 250). They
distinguish between when the family is a substan-
tive part of the firm, versus merely a symbolic or
supportive element that is not integrated into firm
behaviour or the organization’s culture (Zellweger
et al, 2010).
Some researchers suggest that effective man-
agement in family businesses requires the estab-
lishment of structures and processes which link
management and ownership (Ward, 1987; Lans-
berg, 1983). This can be especially helpful in the
area of human resource management to improve
the practices of selection, compensation and eq-
uity, appraisal, training and development and
promotion (Reid and Adams, 2001). Literature
has indicated that family businesses are slower
adopting formal human resource practices when
they are compared to their non-family counterparts
(Kidwell and Fish, 2007).
Kidwell and Fish (2007), focusing on the wine
industry in Australian family businesses, found
that establishing formal human resource systems,
particularly linked to employee involvement and
motivation, was positively related to perceived
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101
Managing Human Resources in Family Businesses
effectiveness of a company´s human resources
function, leadership, strategic alignment and
profitability.
Another research carried out in Northern
Ireland indicated that family businesses lagged
behind non-family businesses in implementing
human resource management policies and prac-
tices but found indications that new generations of
family ownership would likely transition toward
more formal human resource policies (Reid and
Adams, 2001; Reid, Morrow, Kelly, Adams and
McCartan, 2000).
Furthermore, when family businesses change
ownership (i.e. from owner to sibling partnership
or from sibling partnership to cousin consortium)
a flexible structure and defined processes are
found to be more necessary. Transitions are often
periods of uncertainty when the decision makers
feel most anxious and vulnerable, and in this
moment we need generate high commitment to
the new structure (Gersick, Lansberg, Desjardins
and Dunn, 1999).
Moreover, an integrated model of human re-
source management that contributes to develop
family human capital (Reay, 2009; Shepherd and
Haynie, 2009), doesn’t make differences between
family and non-family members, helps in creating
an organizational identity and builds up commit-
ment based on the employees’ perceptions of how
they are treated within their family business and
that they are treated equally (Van Dick, Christ,
Stellmacher, Wagner, Ahlswede, Grubba et al.,
2004). All of these features will help to develop
working environments in which non-family-
member employees feel as though they were “one
of the family” and not as an entirely separate group
(Carmon, Miller, Raile and Roers, 2010).
Something similar happens with family mem-
bers. For instance, cousin consortiums are more
complex involving many more individuals, three
or more participating family generations, with
a large number of in-laws and cousins who are
often strangers to each other (Gersick et al, 1999).
All this affects the effective commitment of fam-
ily members because it is not the same family
commitment as when the founder first set up the
business. Mintzberg and Waters (1990) suggest
that formalization is an inevitable result of growth.
Table 1. Strengths and weaknesses of family business
Strengths Authors Weaknesses Authors
Long-term orientation. Sieger et al, 2011 Nepotism in the decision
Making.
Astrachan and Kolenko,
1994
Tendency to keep the employees in
times of crisis.
Lee, 2006 Lack of formal performance
systems.
Reid and Adams, 2001
High level of trust and commitment
among employees.
Le Breton-Miller and Miller,
2006; Astrachan and Kolenko,
1994; Horton, 1986
Remuneration not based
on appraisals.
Reid and Adams, 2001
Better interest alignment and
higher identification with business.
Dawson, 2012 Tendency to under reward
their relatives.
Landsberg, 1983
More potential tacit knowledge. Horton, 1986; Donelly, 1964 Employ family members
less able than non-family
members.
Chrisman et al., 2004
More flexible job design. Dawson, 2012 Lower training and
development system.
Reid and Adamas, 2001
Stronger socialization systems. Dawson, 2012 Abuse of privileges. Eddelston and Kidwell, 2012
New generations are more likely to
set formal human resource policies.
Reid and Adams, 2001;
Reid et al., 2000
Less use of formal human
resource practices.
Kidwell and Fish, 2007
Source: the authors of this paper based on the authors cited.
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102
Managing Human Resources in Family Businesses
And the stage of evolution of the family business
is thought to be of highly significant influence
(Reid and Adams, 2001).
Therefore, a formal model of human resource
management based on commitment from both
family and non-family employees is necessary to
improve the human capital in family businesses.
HIGH PERFORMANCE WORK
PRACTICES (HPWP) IN
FAMILY BUSINESSES
In recent years scholars have selected a number
of human resource practices which truly bring a
competitive advantage to a company and generate
benefits. In the beginning, practices concerning
information, training, remuneration and empower-
ment (Leane and Florkowski, 1992; Lawler, 1986)
were selected as the best practices to improve
organizational performance. Then, other scholars
added more practices such as extensive training
and high salaries (Arthur, 1994) or selective
recruitment, appraisals systems and job security
(Wood and De Menezes, 1998).
Nowadays, although there is little consensus
among researchers regarding the specific policies
to be included in the configuration of high per-
formance human resource practices (Collins and
Smith, 2006; Datta, Guthrie and Wright, 2005;
Delery and Shaw, 2001; Ferris, Arthur, Berkson,
Harrel-Cook and Fink, 1998; Becker and Gerhart,
1996; Delaney and Huselid, 1996), we have found
various studies which indicate that this system
includes rigorous selection procedures, internal
merit-based promotions, cross-trained teams, high
levels of training, information sharing, skill-based
pay and group-based rewards (Quiao et al., 2009;
Sun, Aryee and Law, 2007; Gutrie, 2001, Levine,
1995; Arthur, 1994). Thus, high performance hu-
man resource practices consist in gathering intel-
ligence, ideas and motivation from all workers as
well as having all the employees’ efforts geared
towards the firm’s goals (Guerrero and Barraud-
Didier, 2004). This set of practices has been named
“high performance work practices” (Delany and
Huselid, 1996, Huselid, 1995), “strategic human
resource practices” (Hiltrop, 1999, Huselid et
al., 1997), “high involvement practices” (Lawler,
1986) or “high commitment practices” (Kwon et
al, 2010; Meyer and Smith, 2000).
Literature in HPWP shows considerable
evidence that these practices are associated with
organizational performance (Wright, Gardner,
Moynihan and Allen, 2005; Bartel, 2004; Batt,
2002; Gutrie, 2001; Appelbaum, Bailey, Berg
and Kalleberg, 2000; Bae and Lawer, 2000;
Huselid, 1995; MacDuffie, 1995; Arthur, 1994)
because they render higher levels of motivation,
satisfaction, commitment, and production in the
employees and promote a more effective firm
(Ostroff and Bowen, 2000).
HPWPs signal an organization’s intention to
establish a long-term exchange relationship with its
employees and most of them are related with high
organizational commitment (Smeenk, Eisinga,
Teelken and Doorewaard, 2006). Practices such
as decentralization, participation, employment
security, social interaction, management style,
communication and performance appraisal, have
been associated with high organizational commit-
ment (Meyer and Smith, 2000).
As we saw before, the overlap between family
and business systems can often benefit in their first
year, when the informal nature of family relations
doesn’t normally require a formal human resources
model because the identification with the founder’s
dream and the employees’ commitment is higher
(Lansberg, 1983). The problems appear when the
business grows and begins to generate conflicts
in the organization, when non-family members
and new family members are incorporated to the
firm. Although different configurations of human
resource management are suited for organizations
with different identities (Smeenk et al., 2006), in
family businesses, HPWP could help to reduce
the negative effects of family on aspects of hu-
man resources, as outlined above, improve the
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103
Managing Human Resources in Family Businesses
level of commitment in family and non-family
members of the company and gain a sustainable
competitive advantage.
A research study of small family businesses
in Australia, found that the adoption of formal
human resources practices focused on employee
involvement and motivation systems, was posi-
tively related to perceived effectiveness of a firm´s
human resource management systems, strategic
alignment and profitability (Kidwell and Fish,
2007). In the same direction, recent research
shows how commitment systems aim to increase
effectiveness and productivity and to encourage
employees to identify with goals of the organiza-
tion and to work hard to accomplish those goals
(Withener, 2001; Wood and De Menezes, 1998).
But there is a lack of systematic research on
commitment in family businesses. Usually in fam-
ily business literature, the construct of commitment
has been treated as a one-dimensional construct,
with no research aiming at understanding the
potential differences in its nature (Sharma and
Irving, 2005). Commitment in family businesses
has been identified as a key desirable attribute
because research suggests that it is crucial for
these family members to be committed to their
business (e.g., Sharma and Irving, 2005; Sharma
and Rao, 2000; Chrisman, Chua and Sharma,
1998). Moreover, while much research exists
on commitment in the organizational behaviour
literature (e.g., Meyer and Allen, 1991; McGee
and Ford, 1987; Reichers, 1985; Morrow, 1983)
but none in family business literature.
Scholars distinguish among three or four dif-
ferent bases of commitment (e.g. Sharma and
Irving, 2005; Meyer and Allen, 1991) – affec-
tive commitment, normative commitment, and
continuance commitment (which includes cal-
culative and imperative commitment). Affective
commitment has been described “as one of the
most commonly research attitudes” (Van Dyne
and Pierce, 2004; Meyer and Allen, 1991). It is
defined as the “affective or emotional attachment
to the organization such that the strongly commit-
ted individual identifies with, is involved in, and
enjoys membership in the organizations” (Allen
and Meyer, 1990: 2). Normative commitment
is based on an individual’s feeling of obligation
to pursue a course of action of relevance to one
or more targets (Meyer and Herscovitch, 2001;
Morrison, 1994). And calculative and imperative
commitments (both are dimensions of continu-
ance commitment) are based on an individual’s
awareness of the costs associated with leaving an
organization (Meyer and Allen, 1991).
If a family business wants to maintain and im-
prove their employees’ commitment, they should
focus on improving their human resource practices
and know the relationship between each of them
and each base of commitment. With this knowl-
edge, the family business will reach a competitive
advantage over non-family firms if they manage
to extend the highest levels of commitment char-
acteristic of the family business culture (Gallo,
1995; Poza, 1995; Aronoff and Ward, 1994), to
the non-family members of the firm, who will
make bigger efforts because they feel part of the
same team and they seek common objectives and
benefits for all (Vallejo, 2009).
The key to a human capital that generates
competitive advantage is to improve organizational
commitment in both family and non-family mem-
bers of the business. In this way we integrate family
and non-family employees in the same “team” to
generate commitment and make sure that they all
contribute to reach the objectives. Maybe, those
relatives who are not employees will like the idea
of the business having a way to manage its human
resources which is more objective, formalised,
has a good reputation, is clear and contributes to
obtain high performance.
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104
Managing Human Resources in Family Businesses
CONCLUSIONS, PRACTICAL
SUGGESTIONS AND
FUTURE RESEARCH
The need of research in human resource manage-
ment in family businesses is increasing, although
what literature there is in this field has not paid
enough attention to human resource management,
which has been a neglected topic for a long time
(Astrachan and Kolenko, 1994; 1996).
In addition, in today’s competitive environ-
ment, companies must find ways to enhance
their competitive advantage through effective
use of their resources (Senge and Fulmer, 1993).
Although all resources are important, Ulrich and
Lake (1990) suggest that an organization’s human
resources may be its most important and enduring
asset. Competent people are the key to success
and offer organizations their only sustainable
competitive advantage (Pickett, 1998).
Nowadays several authors write about a re-
source that family businesses should exploit in
order to achieve a competitive advantage. We
are describing “the family human capital” which
includes in its definition other concepts like knowl-
edge, skills and abilities of family members and
also the following factors – commitment, alignment
of interests, responsibility, involvement, etc…
The incorporation of psychological and emo-
tional aspects to the study of the family firms
has increased the researchers’ understanding of
some characteristics and conducts of the family
firms. This facilitates the design of better policies
that help to reduce the company’s weaknesses
and promotes its strengths. In the area of human
resources, the overlapping of the family and
business systems has always been analyzed as an
inconvenience when trying to manage the human
resources of the family firm both efficiently and
effectively. Practices such as nepotism by the
management of a family firm, different treatment
of family and non-family employees, or the lack
of a formal performance appraisal system have
made the separation of both systems the best op-
tion to solve these problems. However, this has
brought about the loss of those positive features
that family firms inherently possess in the initial
stages, which give them a competitive advantage.
Among these we can cite stronger employee com-
mitment, participation, work satisfaction and better
alignment with the long-term goals of the firm.
Besides, recent research has empirically shown
the positive relationship between human resource
practices and important organizational outcomes
such as productivity, turnover, and firm perfor-
mance (Delany and Huselid, 1996; Huselid, 1995),
but little is known concerning human resource
practices in family businesses and their effect on
performance (Reid et al 2002). Recently, Carson
et al (2006) found a connection between five
practices of high performance work systems and
their impact on performance in small and medium
family businesses.
On the basis of some characteristics that a
previous review of the literature offers us, and
which have been identified in family businesses, we
found: nepotism, lack of professionalism, unequal
treatment to family and non-family members and
loss of employee commitment over time. Thus, we
have paid more attention to the need of integrating
both dimensions: family and business; trying to
create a single team formed by family and non-
family members through the implementation of
a human resource management model focused on
organizational commitment. High performance
work practices (HPWP) are presented as a solu-
tion for family businesses to obtain a long-term
orientation, employee commitment and create a
good work atmosphere (Swailes, 2002).
Literature on organizational behaviour focuses
on how to develop employees’ commitment and
which are its basis, but this has not been treated
in family businesses. Traditionally, family busi-
nesses have considered their employees’ com-
mitment as a strong point of the family business,
but it has not considered that the development of
the company, the departure of the founder, and
the inclusion of other members of the family, in-
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105
Managing Human Resources in Family Businesses
laws, and non-family members, does decrease the
illusion and the commitment of family members.
Therefore, we propose a model which increases
the commitment of both family and non-family
members. HPWP has been presented as a tool for
family businesses to improve the human capital
of the companies (Sun et al., 2007). And it is
useful to integrate family and business in order to
align all members’ goal in the same direction as
this helps to obtain a competitive advantage for
family businesses (Roca-Puig, Beltrán-Martín,
Escrig-Tena and Bou-Llusar, 2005). Consistent
with Gong, Huang and Farh (2009) affectively
committed employees could also represent a
valuable, relatively rare and unique resource that
is difficult for competitors to copy.
Thus, family businesses which professionalize
their human resource management and establish
policies aimed at increasing the participation
and commitment of their employees, will in turn
improve the human capital of the firm and gain
a competitive advantage. Among these policies,
we may cite: an effective selection process which
disregards family ties; a fair, motivating, above-
average remuneration scale which rewards both
individual effort and goals reached by the group;
high investment in training focused on the orga-
nizational needs; an information system which
is shared by all employees; high job security;
employee participation in the decision-making
process. If these practices are applied, we will
generate more flexible and innovative behaviour
among our employees, internal conflicts will
decrease and most importantly, we will maintain
or even improve the commitment of both family
and non-family staff.
As result of all that has been outlined above,
we would like to point at new lines of research
that can be useful to clarify certain questions to
which the current literature gives no response, or
one which is not clear enough.
The new lines of research could be the answers
to the following rhetorical questions:
1. Do high performance work practices
(HPWP) in family business generate higher
levels of commitment among workers of fam-
ily firms, in spite of not being the owners?
2. What type of commitment (affective, nor-
mative or of continuity) is best to reach the
highest profits in the family business?
3. We suggest that high performance work
practices are good for the family business
but – can the implantation of these practices
also help to improve the process of succession
as they enhance the training of the employees
and their professionalism?
4. What other elements included in “family hu-
man capital” would be necessary to promote
the improvement of the competitiveness of
the family business?
5. If managers demonstrate the advantages
that the application of these practices bring
about for the family business, which would
be the principal obstacles that they would
find to put them into practice?
6. The implantation of these practices of human
resources not only helps to get economic
benefits but it also ethical ones. Would
it be possible to measure the latter in the
company’s results?
These and other questions will have to be
answered, in as much detail as possible, and they
represent challenges that we would like researchers
to take on in the upcoming years. Undoubtedly
some of them will be answered and will represent
an advance for the science.
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KEY TERMS AND DEFINITIONS
Familiness: Is defined as the idiosyncratic
bundle of resources and capabilities resulting from
the interaction between the family and business
systems.
Family Business: Mix of two systems: fam-
ily and business which can generate competitive
advantage for the company.
Family Human Capital: It includes knowl-
edge, skills and abilities, but in family businesses it
includes factors such as commitment or emotions,
as well as integrity, compassion and forgiveness
of family members.
Family’s Involvement in the Business: It is a
mix of ownership, governance, management and
trans-generational succession.
High Performance Work Practice: Innova-
tive practices of human resource management
which improve employee commitment and per-
formance of the company.
Nepotism: Favouritism shown by the founder
to relatives.
Organizational Commitment: Employee
identification with the company and with its goals.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 6
DOI: 10.4018/978-1-4666-4731-2.ch006
HRM Practices and Problems
in Family-Owned SMEs
ABSTRACT
In exchange for the need for more highly trained employees, there is not enough qualified labor in the
market. Small- and Medium-Sized Enterprises (SMEs) play an important role in the economies of countries
because of their characteristics about generating employment. Effective Human Resource Management
(HRM) is becoming increasingly important in the modern knowledge-based economy and vital for the
success of small- and medium-sized enterprises. However, there are few studies concerning HRM prac-
tices of SMEs. The purpose of this study is to analyze the current HRM practices of SMEs, especially
which are family businesses, and to identify HRM practices and the problems within these SMEs. With
the help of the literature review, helpful suggestions about HRM practices are developed for SMEs.
INTRODUCTION
A small firm was defined as employing between 5
and 19 workers whereas a medium firm as having
between 20 and 199 employees (Kotey & Folker,
2007). According to this definition, firms with
5-199 employees can be called as SMEs. Small
and medium-sized enterprises (SMEs) which are
mostly family-owned, play an important social
and economic role in industry.
SMEs are known to be complex, distinctive and
influenced by many factors and human resources
play a vital role in developing and sustaining
competitive advantage for SMEs Therefore, it
turns out to be difficult to create a balance be-
tween the formal human resource management
(HRM) policies and the informal culture of the
SMEs (Chandler and McEvoy, 2000; Hornsby and
Kuratko, 1990; Brand and Bax, 2002).
Until recently, HRM had been seen as un-
necessary for smaller firms and there is lim-
ited research about the HRM practices in SMEs
(Obasan, 2012). On the contrary, several studies
have reported HRM practices in larger organiza-
tions. Therefore, it can be stated that HRM is
typically more informal in SMEs compared with
the employment practices associated with large
corporate organizations (Marlow, 2002; Marlow;
Taylor, & Thompson, 2010).
HRM is the way of thinking about how people
should be managed as employees in the workplace
and it refers the policies and practices involved
in carrying out the “people” or human resource
aspects of a management position, including
Burcu Özge Özaslan Çalişkan
Istanbul University, Turkey
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HRM Practices and Problems in Family-Owned SMEs
recruiting, screening, training, rewarding, and ap-
praising (Dessler, 2008). HRM practices such as
recruitment and selection, employment security,
compensation management, wages and incentive
pay, performance management, training and skill
development and career management are just a
few of the practices acknowledged as having great
value to the organization. It is believed that such
practices for managing employees have positive
effect on organizational performance (Guest, 2011;
Snape & Redman, 2010). For example, the design
of compensation systems including the consider-
ation of external and internal equity is important
for the employees and effect the motivation of the
organization severely.
Research has shown that the most significant
difference between HRM practices in SMEs and
larger firms is the adoption of HRM practices. The
main question is “are the HRM practices formal
or informal?” Pinnington and Edwards (2000)
believe that HRM theories or models of HRM
are sometimes subdivided under two schools of
thought, “hard” HRM and “soft” HRM. In es-
sence, “hard” HRM focuses on managing and
controlling employees in order to achieve the
organization’s strategic goals, while “soft” HRM
gives more recognition to the needs of employees
and the importance of their commitment to the
organization.
Family businesses which have got some crite-
ria like ownership and control, decision making,
business acquired from parents and employment
of family members may be forced upon the times
to employ, train, promote or lay off for close or
extended family members. Thus, a family busi-
ness manager should focus more on the HRM
practices to identify any infirmities that may come
into existence.
It is not easy for a manager who is a father,
mother, brother, sister, uncle, cousin, etc. to cope
objectively with family members who are their
employees at the same time. Owner-managers
usually have difficulties of having to choose
between either hiring or firing an incompetent
relative, believing that the relationship between
the family members might be damaged as a result.
Under these circumstances, the manager should
apply formal recruitment sources in order to attract
suitable candidates. Set of important factors for
human resource managers can be listed as honest
and open communication, extensive use of peer-
review processes that allow team members to
provide direct feedback to coworkers about how
they may be affecting others, and the promotion
of collaborative decision-making so that man-
agers jointly make key business decisions, and
departmental teams determine their own best way
of working together (Caudron, 1993). Thus, in
order to be fair, family business manager should
protect those important matters during managing
employees.
There are many advantages and disadvantages
of family controlled firms. Long-term orientation,
greater independence of action, less pressure from
stock market and takeover risk are some of the
advantages. Furthermore, family firms have family
culture as a source of pride that includes stability,
strong identification, commitment, motivation and
continuity in leadership. It is also important that
there is greater resilience in hard times in family
businesses. These firms are less bureaucratic and
impersonal and this provides greater flexibility and
quicker decision making. Knowing the business
causes early training for family members. On the
other hand, there are also many disadvantages of
family firms. Less access to capital markets may
curtail growth in family businesses. There may
be a messy structure and no clear division of
tasks in these types of organizations. Nepotism
is another problem for family owned SMEs (Kets
de Vries, 1993). Nepotism can cause inequitable
reward systems and greater difficulties in attract-
ing professional management to the organization.
Founders may derive utility from seeing relatives
involved in the business, they may decide to hire
key managers from within their kinship network
rather than turn to more talented professional
managers. Beyond the direct effect of these lower-
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HRM Practices and Problems in Family-Owned SMEs
quality appointments on performance, nepotism
may also have adverse spillover effects in that it
creates negative incentive effects throughout the
organization. If lower-down employees know that
promotion decisions are not tied to performance,
they might be less willing to exert high effort or
to remain within the family business, thus mak-
ing it more difficult to retain talent (Bertrand &
Schoar, 2006).
Moreover, there might be spoiled kid syn-
drome in such firms, and it is also possible to
have internecine strife and family disputes in the
organization. Paternalistic and autocratic rules
may control the employees. The possibility of
family members milking the business also arises,
leading to a disequilibrium between contribution
and compensation (Kets de Vries, 1993).
In most of the family businesses, the owner
usually handles the HR function and there aren’t
any written rules about hiring and firing employ-
ees. In such enterprises, candidates come on their
own, or managers rely mostly on personal network,
especially from their family and friends. Budget
for training usually turns out to be inadequate.
There are no written job descriptions and no
written policies for performance appraisal. These
may be shown as some of the examples caused by
the informality of the HRM practices in SMEs.
In order to increase the performance of the
family businesses, the management should give
more importance to HRM practices. The question
of “how” HRM practices are adopted in family
businesses should be more important than “which”
HRM practices are adopted.
LITERATURE REVIEW
Human resource management (HRM) has been
defined as the policies and practices involved in
carrying out the “people” or human resource as-
pects of a management position, including recruit-
ing, screening, training, rewarding and appraising
(Dessler, 2008). It is important to attract, develop
and maintain a talented and energetic workforce
to support organizational mission, objectives, and
strategies in HRM (Schermerhorn, 2001, p. 2400).
Human resources in a firm have an asset value
that corresponds to the present value of future net
cash flows that are derived from the skills, moti-
vation, and adaptability of the firm’s workforce
(Becker, Huselid, & Pickus, 1997). It means that
human resource is very important for competitive
advantage. Whether it is called “people”, “labor”,
“intellectual capital”, “human capital”, “human
resources”, “talent”, or some other term, the re-
source that lies within employees and how they
are organized is increasingly recognized as critical
to strategic success and competitive advantage
(Boudreau & Ramstad, 2007).
Cascio and Boudreu (2008) reported that
people costs represent approximately 55 per cent
of operating budgets across all US industries,
thus it is important that more research focuses
on organizational capability and human resource
practices in family businesses. It is obvious that
SMEs are the predominate form of business all
over the world.
SMEs, the majority of which are family-owned,
play an important economic and social role in many
countries. Family businesses are critical to the
health of the economy and to the life satisfaction
of millions of people. These types of SMEs are
special organizational forms whose originalities
have both positive and negative consequences.
Being in a family business affects all the par-
ticipants and also all the functions about HRM.
The role of chairman of the board is different
when the firm was founded by a father, mother
or siblings and the family members sit around the
table at the meetings. Roles in the family and in
the business can become confused. In these types
of firms, professionality in all management func-
tions and HRM practices become more important.
Despite the importance of family-owned SMEs to
economy and to job growth, there is little empirical
research to encourage managers and CEOs facing
rather intimidating human resource challenges
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HRM Practices and Problems in Family-Owned SMEs
(Carlson, Upton, & Seaman, 2006). Despite this,
many functions with regard to human resource
management practices exist in large organizations
and not in the SMEs, which are more common in
the marketplace today.
The appraisal of family members should
include the opinions of subordinates, peers, and
superiors instead of just the potentially biased
opinion of founder or family in order to deal with
the potential conflicts between family and business
principles. It is obvious that effective management
in family businesses requires the organization of
structures and processes which link management
and ownership (Lansberg, 1983).
There are a range of studies indicating small
firms that are characterized by informal HRM
practices although some suggest that there is a
greater sophistication in HRM practices than
would be expected. The vast majority of researches
suggest that smaller firms make less use of high
performance HRM practices than larger organi-
zations do (Barron, Black & Loewenstein, 1987;
Hornsby & Kuratko, 1990). Hornsby and Kuratko
(1990) also searched HRM practices of small U.S.
firms in three size categories and notified increased
sophistication in practices with firm growth. This
is in line with the finding that small organizations
are more likely to operate in an informal and flex-
ible manner than larger firms. Consistent with
Hornsby and Kuratko’s (1990) propositions, Koch
and McGrath (1996) find that, in general, firm size
is positively related with the incidence of HRM
sophistication and small firms provide less training
to their employees. Westhead and Storey (1997,
1999) find that both managers and employees are
less likely to get formal training in a small firm.
In addition to this, they suggest that there appears
to be a linear relationship between the size of a
firm and the amount of formal structured train-
ing provision. In a study by Jackson et al. (1989),
smaller companies were found to be less likely to
use formalized performance appraisals. Aldrich
and Langton (1997) found that larger companies
have more formalized recruitment practices
and smaller firms make less use of formalized
recruitment practices. They also confirmed an
inverse proportion between the number of family
members who work in a firm and formal HRM
practices. It is obviously proven that there is a
negative relationship between family ownership
and management and HRM practices. Research by
Reid and Adams (2001) also accepted this pattern.
They found that family businesses are less likely
to have professional HRM practices, including
the use of references, appraisal systems, a coun-
terpart appraisal process, training evaluation, and
merit-based pay systems. Reid and Adams (2001)
explain this by suggesting that such firms have
more limited organizational capabilities. Due to
their limited organizational capabilities, family
businesses have lagged behind their non-family
counterparts in implementing HRM policies and
practices.
Wilkinson (1999) noted that employment rela-
tions in SMEs are classified by informality and
that formal control systems and communication
strategies are nearly nonexistent. He also argued
that pointing out the rules and procedures is old
fashioned in an environment where owners have
to make quick decisions in reaction to market
pressures.
Research has indicated that smaller firms
make less use of professional HRM practices
than compared to larger firms. Barret and Mayson
(2007) argued that the most commonly found
HRM practices in small firms reflect operational
needs and pragmatic concerns: record keeping;
staffing activities, such as recruiting and select-
ing staff; and, to a smaller quantity, motivation
and retention activities such as compensation and
reward practices.
Smaller firms make less use of formalized
recruitment and selection practices, and are less
likely to use formalized performance evaluations
and give less importance to training activities.
Schulze et al. (2003) indicated that the family is
a neglected variable in organizational research.
De Kok et al. (2006) indicated that family firms
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HRM Practices and Problems in Family-Owned SMEs
are less likely to use professional HRM practices
than their counterparts and they tried to explain
whether and why family-owned and managed firms
tend to use fewer professional HRM practices
than other SMEs.
HRM is a sensitive area for family businesses.
It is criticized for engaging in nepotism and in
some cases it has failed to provide management
training for family members. Therefore, the neces-
sary starting point for these family businesses is
to identify any strengths and weaknesses which
may exist (Reid & Adams, 2001, p. 310). This
leads to the fact that it is difficult to understand
existing HRM practices in SMEs and to prescribe
appropriate practices for these firms. The result
should be an approach about HRM practices that
fits to all SMEs. Theories on best practices sug-
gest that certain HRM practices are relevant to
improved organizational performance.
Small firms tend to have personalized and
informal human resource practices. The devel-
opment of suitable human resource policies and
procedures is the main requirement of these family
businesses.
Recruiting and Selecting
The quality of employees is the most difficult and
the most important HRM requirement in organiza-
tions. The ability to attract and retain competent
and reliable employees has become a key element
in developing an effective and sustainable competi-
tive advantage. The selection and retention of a
competent and qualified workforce is a vital and
important issue in managing and operating a small
business (Hornsby & Kuratko, 1990).
Recruitment and selection is searching and
finding the sufficient quantity and quality of
workforce and then selecting the right person for
the vacancy among those candidates (Bolton,
2002, p. 32).
The first level of attracting the qualified candi-
dates to the firm is human resource management
planning and deciding the quality and quantity of
the personnel required to the jobs. The following
stage is to contact with the potential candidates
by using various recruitment methods. The last
step is selecting the most qualified and beneficial
personnel through the potential candidates (Daft,
1994, p. 406). Parallel to this definition, SMEs
have to focus on recruiting, attracting, select-
ing and retaining more qualified employees to
organizations. As a family owned SME grows,
its owners have to begin increasing the number
of their employees and learn how to develop and
implement human resource management (HRM)
policies.
The selection and recruitment procedures used
by SMEs differ evidently from large organiza-
tions, being far more informal and unstructured.
While recruitment methods such as newspaper
advertising and the use of employment agencies
are considered as formal recruitment methods,
word of mouth and referrals are esteemed as
informal recruitment methods (Tanova, 2003).
Therefore, it can be stated that advertisement,
internet and employment agencies are formal
recruitment methods; whereas walk-ins and refer-
rals are informal recruitment methods. Research
showed that employers emphasize fundamental
personality characteristics such as honesty and
integrity strongly during the recruiting and se-
lecting process.
Cassel et al. (2002) found that recruitment and
selection procedures were used more than any
other HRM practices. Given the long tradition that
these types of practice have had within organiza-
tions generally, and their necessity for keeping the
business going, this is not surprising. In many of
the jobs that people were being recruited for, word
of mouth was seen to be an entirely appropriate
way of getting the right person for the vacancy. As
well as the word of mouth process has no initial
financial outlay, it is a key criterion in the context
of resource poverty.
It is known that SMEs do not recruit or turn
over large numbers of people. It is the fact that
there are so many SMEs (especially family owned)
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HRM Practices and Problems in Family-Owned SMEs
which makes them very important in the labor
market. There is a lack of specific personnel func-
tion in small businesses which means someone
else in the organization can recruit and select
when necessary as a part of his/her normal job. In
addition to this, MacMahon and Murphy (1999)
argued that if small firm owner managers wish to
compete for scarce labour, they must themselves
be capable of attracting and retaining staff in
terms of their recruitment skills, ability to create
attractive conditions, and attitudes to employees.
SMEs have to have multi functioning manage-
ment personnel and so it is less likely that they
will have a standardized policy or procedure on
recruitment and selection. In small businesses,
ability and aptitude tests are used across the board,
whereas personality tests are more associated with
management selection and the selection of older
people into work. Employers considered the inter-
view as providing the best source of information
about what they deemed as the key characteris-
tics. Qualifications and work experience, even
when related to the job, are seen as being of less
importance. These are evaluated through applica-
tion forms or CVs. CVs and application forms are
seen as being most useful for the characteristics
of lower importance and for providing evidence
of general ability and trainability.
Generally, for checking the originality of
information provided, references are seen as use-
ful tools. References provide reliable data about
personality characteristics, ability and trainability
(Bartram, 1995). When the applicant has been
referred by a known and trusted contact, it is not
necessary for the company to search the candidate
profoundly.
It is worrying that employers adopt informal
unstructured interviews as a way of assessing the
key personal characteristics. It is clear that in every
respect of selection there is a lack of training in
SMEs, especially in selection interviewing and
in formalized assessment methods. In order to be
more productive, improved selection methods by
SMEs should be considered.
Stewart and Knowles (2000) found it is appar-
ent that SMEs seek the kind of skills and qualities
which are commonly defined as transferable. It
is also argued that the use of psychometric tests,
presentations and panel and/or sequenced inter-
views is not unusual and the use of job descriptions
appears to be an established practice, while SMEs
are less sophisticated than large organizations.
Kickul (2001) demonstrated that psychologi-
cal contracts can have a considerable impact on
workplace attitudes, commitment, and intentions
to leave the organization. Therefore, it should be
remembered that not only recruiting right person
to a right position is sufficient. Making promises
to retain these employees is the solution for ef-
fective HRM in SMEs.
Recruiting and retaining high quality staff
has to be a major challenge for SMEs. Although
formal human resource procedures could help
small firms, many owner-managers have suspicion
about the value of such formalization, as they do
not thorougly understand the opportunity cost of
using such a human resource function (Carroll,
Marchington, Earnshaw, & Taylor, 1999). Rather
than adopting a formal recruitment and selection
policy, the tendency is for the owner-manager to
find temporary solutions.
According to Carrol et al. (1999), small firms
indicated that recruitment was being undertaken
carefully to make sure they found the “right’’
person, and this included the common use of
informal, word-of-mouth recruitment methods.
While the authors admit that this is comprehensible
from the employer’s point of view, they do raise
the question as to whether recruitment through
informal networks reinforces existing race, gender
or disability imbalances within the workforce, and
whether certain groups are being permanently
excluded from employment in small firms.
Job descriptions in small firms are uncertain
because jobs change in time or develop and em-
ployees usually create their own jobs. Carroll et
al. (1999) found no evidence of systematic job
analysis in U.K. small firms. They noted that
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HRM Practices and Problems in Family-Owned SMEs
managers perceive job descriptions to be too rigid,
restricting the flexibility of their firms. On the
contrary, MacMahon and Murphy (1999) reported
that poor job descriptions lead to role conflicts
and employee frustration. In many cases, both
employers and employees are uneducated and
unaware of their responsibilities, roles, rights, and
obligations. In reality, for a small organization
there generally is no need to have detailed job
analysis, job description, and person specification
procedure. It may be sufficient for one person
to consider the job’s important aspects and the
requirements of the employee. Afterwards, it
must be considered that the vacancy can be filled
internally or externally. Ultimately if the vacancy
has to be filled externally, the aspects that need to
be decided are; which suitable candidates are to be
attracted, how they should apply, and what kind
of selection techniques are goint to be adopted.
In small firms during the recruitment and
selection process word-of-mouth methods are rec-
ognized as having clear advantages. Low cost and
speed of the process is one of the advantages. The
employee who was recommended by an employee
is less likely to quit from the firm. Therefore word-
of-mouth recruitment is sometimes recommended
to employers as a way of reducing staff turnover.
It seems that informal recruitment methods
are used in SMEs, because the whole process of
advertising, initial telephone screening, eliminat-
ing through resumes, curriculum viteas (CVs)
or application forms, shortlisting, interviewing,
checking references and making a selection deci-
sion is considered to be costly and lost time for
many SMEs. On the other hand, informal methods
have some disadvantages. One of them is the
possibility of losing more suitable recruits from
the candidate pool, the other one is to be misun-
derstood and to be blamed for discrimination by
some groups (Carrol et al., 1999).
Ibicioglu and Keklik found that while the
first method preferred by the SMEs in Turkey for
recruitment is advertisement, the least preferred
method is internet. Despite the fact that internet is
the main tool for organizations today, it is disap-
pointing that SMEs do not to use internet effec-
tively. Using internet can reduce the recruitment
costs and can facilitate reaching a larger range
of candidates. In spite of the advantages such as
low cost, shorter recruitment cycle time, reach
of a wider range of applicants, better quality of
response, up-to-date image to the firm, opportunity
to address specific labor market niches, attracting
the passive job- seeker, providing global cover-
age at a constant basis, recruitment through the
internet is used rarely in the SMEs.
Selection of board members in small family
businesses is another typical dilemma. Small busi-
nesses usually prefer not to activate their boards
with externally recruited members. It is thought
that this means introducing an alien element in
the family business context. However when the
firm grows, owners may become directors and
then there is a need for a professional management
structure which has to be supported by external
resources (Johannisson & Huse, 2000).
Employee Training in SMEs
Given the growing importance of smaller firms
in the economy, it becomes important to give at-
tention on their experiences with regard to both
their skill shortages and their attempts to overcome
these shortages through training (Blackburn &
Hankinson, 1989). Training is the key element for
job satisfaction, commitment, ability and morale
of the employees.
In terms of formal training, research in large
firms suggests that training consistently has a posi-
tive impact on individual worker productivity. In
an examination of differences in formal training
between large and small organizations, the cost
of training programs and time spent away from
productive work are important considerations
for determining which training opportunities to
provide to workers, as resources of both money
and worker time are constrained. Orientation is
one specific form of training and it is a long-term
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process where individuals learn their roles within
an organization, and adjust to job demands, or-
ganizational culture, and other employees. It is
a kind of socialization process of organizational
newcomers (Cardon & Stevens, 2004).
Hill and Steward (2000) argued that in many
small organizations training does not take place
at all. They also explained that, training in SMEs
is usually reactive and informal, and further to
that, it is short-term and almost exclusively di-
rected at the solution of immediate work related
problems rather than the development of people.
In opposition to this, some authors supposed that
training and development is a beneficial function
for SMEs and that it will increase their business
performance. However, research shows that the
need for improved management skills in SMEs
is obvious. Despite the importance of employee
training to small business performance, less at-
tention has been given to that field in the litera-
ture. Actually, Jennings and Beaver (1995) have
argued that small business missuccess constantly
results from poor managerial competence. It was
argued that the major distinguishing feature be-
tween high growth and low growth small firms
was the education, training and experience of
senior managers. Westhead and Storey (1997)
have suggested that, the rates of staying alive for
small firms are significantly smaller than those
of larger organizations, and the small firm could
not see the return on its investment in training
and development. Chandler and McEvoy (2000)
argued that firms which invest in employee train-
ing, engage in formal performance appraisal, and
link these to incentive compensation are likely to
have lower employee turnover, higher productivity,
and enhanced corporate financial performance.
Despite all these benefits however, it is discussed
that smaller organizations will spend less on
training than larger firms, because benefits from
training are generally considered to occur in the
long rather than the short term. Thus, the older
the organization, the more likely it would be to
invest in training and development. Perhaps the
most consistent finding in SME research is that
the larger the organization, the more likely it is
to engage in training.
Many workers in the SMEs are employed in
workplaces that are unlikely to invest in training
and development and have unsophisticated hiring
and firing practices, where managers consider
workers easily replaceable and lacking value. As
such, workers in these workplaces are likely to stay
below the desired skill level during their career
life cycle. They will not experience an increase
in their employability, and they do not want to be
deprived from social security services and they
never have chance to have well-paid jobs because
of their lack of skills (Bacon & Hoque, 2005).
It is claimed that less trained, less experienced,
younger workers tend to work in small firms; not
as a result of self-selection but because their lack
of training and previous experience ruled out the
possibility of working in large firms (MacMahon
& Murphy, 1999).
It seems that few studies focused on especially
management training. According to Loan-Clarke
et al. (1999), it would appear that management
training and development is more widespread
among SMEs than previously thought. However,
the characteristics of ownership, family manage-
ment, size and number of managers appear to have
a very strong influence on management training
and development investment. The resistance in
family-owned small businesses is likely to be more
than elsewhere, since coordinators of management
training and development could perhaps do more
to persuade of its benefits in such organizations.
Considerable time resource is likely to be required
by those seeking to promote and provide manage-
ment training and development to such SMEs.
A focus on organizational development which
is clearly business related, is also more likely to
encourage training activity for all staff, and not
only the managers (Loan-Clarke et al., 1999).
SMEs rarely apply formal training needs
analysis and have no systematic approach to train-
ing. Training in SMEs is mostly on-the-job with
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HRM Practices and Problems in Family-Owned SMEs
little or no provision for employee development
(Kotey & Folker, 2007). Owner managers usu-
ally consider formal training as a costly function
that involves not only course fees but also the
cost of lost output because it leads to employees
being absent from work. Reid and Adams (2001)
found that compared to other firms, family firms
spent less of their annual salary and wage bill on
employee training and were less likely to engage
in systematic employee training needs analysis.
Due to the uncertainty in small firms, the own-
ers try to avoid investing in training. As mentioned
before, benefits from training tend to be realized in
long term, and this makes investment in employee
training unattractive to small firms.
Small firms usually have restricted vision
because of the high levels of uncertainty. Fur-
thermore, trained employees are more likely to be
transferred by other employers because of the poor
promotion opportunities in small firms. Addition-
ally, small firms are generally less aware of the
costs and benefits of training programs and do not
have a proper idea about which training program is
more beneficial for their organizations. As a result,
it can be said that owner managers tend to avoid
investing in training because of the incapability to
imagine a direct positive link between training and
performance. Loan-Clarke et al. (1999) claimed
that nonowner managers often show a familiar
interest in their employees’ career progression.
Career progression is perceived as a threat by the
family owners, so they are less likely to develop
their subordinates’ managerial competence. Small
firms have a higher probability of labor turnover,
because they offer less opportunity for career de-
velopment. As a result, better-trained employees
will choose opportunities elsewhere, leaving the
small firm behind with its less-trained employees
and a depleted training budget. A proposed solu-
tion to this problem would be to use company
specific (on-the-job) training, which has little value
to other firms (Brand & Bax, 2002). Therefore,
employee training and development is likely to
receive more attention in larger non-family firms,
rather than in smaller-sized family owned ones.
It was noted that family firms were less likely to
invest in management training, and explained that
even though family owners often lack confidence
in their abilities as managers, they are reluctant to
give up personal control and to delegate tasks to
others. Loan-Clarke et al. (1999) also discussed
that competent non-family managers constitute
a threat to less competent family owners. Since
dominant family ownership and involvement in
management are major differentiating factors
between family and non-family firms, it would
follow that formal employee training would be less
practised in firms with greater family ownership
and management than in firms that are owned by
outsiders and managed by nonowners. In the light
of this information, it can be claimed that family
firms are less likely than non-family SMEs to
provide employees with formal training.
It is clear that as the firm grows, training is
incrementally delegated to specialists within and
outside the organization, making training become
more formal and structured. In such firms training
is oriented toward developing employees for higher
positions (Westhead & Storey, 1997). However,
in many small businesses informal training is pre-
ferred because it is less costly and it can be easily
integrated into daily operations of the small firm,
and employees’ specific needs can be sticked out
easily through the informal training process (Hill
& Stewart 2000).
Consistent with the literature, Kotey and
Folker (2007) argued that on-the-job training is
the predominant training method in SMEs and
that the adoption of formal training increases
with firm size, rapidly in the initial stages but
slower thereafter.
Some researchers claim that informal training
is consistent with the overall strategic orientation
of small firms that is informal and flexible (Hill
& Stewart 2000; Westhead & Storey 1997). SMEs
do not notice on gains in sustained competitive
advantage from a well-trained employee by con-
centrating on informal training. SMEs generally
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HRM Practices and Problems in Family-Owned SMEs
prefer informal training because informal training
fits better with SME strategic orientation. Returns
from formal training programs are realizable in
the long-term, but small firms are concerned with
short-term survival (Hill & Stewart 2000;West-
head & Storey 1997). Given the high level of de-
fenselessness and uncertainty among small firms
and their short-term orientation, training programs
that are specific to the job, low cost, short-term
oriented and aimed at developing a multi-skilled
workforce may be more related to gaining com-
petitive advantage at this stage. Essentially family
firms may have the additional resource of family
skills and involvement, allowing them to achieve
similar levels of effectiveness with less formalized
training. Most probably these additional resources
enable them to gradually increase training as they
evolve, rather than the more existing increase seen
in the non-family firms. The approach to employee
training in family SMEs is in harmony with their
slower growth rates, informal management styles,
limited financial resources, and greater emphasis
on efficiency compared with non-family SMEs
(Kotey & Folker 2007).
Blackburn and Hankinson (1989) argued that
small firm owners are incredulous about the ca-
pability of existing formal training programs and
they tend to see training as an expense rather than
an investment. According to research, the most
important factors about training are found as the
length of training, the cost of training, and the
returns that would be achieved (Kotey & Folker
2007). Although the importance of formal train-
ing in organizations is cited frequently, Johnson
(2002) claimed that there is little convincing
evidence to suggest that increased investment in
formal training leads automatically to improved
business performance for SMEs.
Performance Evaluation
Another important function related with HRM
is the performance evaluation of the employees.
Performance evaluation means measuring an
employee’s current and/or past performance
relative to his or her performance standards. Per-
formance management is the process employers
use to make sure employees are working towards
organizational goals (Dessler, 2005). Furthermore,
this evaluation involves providing feedback on
performance, and taking action to correct poor
performance. Once integrated into the workplace,
an employer needs to know how well the employee
is performing and use performance appraisal to
reward the employee appropriately, or to advise
him about the advancement opportunities in the
organization (Çetinel, Yolal, & Emeksiz, 2009).
Hornsby and Kuratko (1990) found that per-
formance appraisal diversifies by firm size and
sector. They identified employee performance as
the assessment of abilities to meet targets, and the
use of rating scales as appraisal methods. Con-
trarily, MacMahon and Murphy (1999) claimed
that owner managers are generally deprived of the
skills necessary to apply effective performance
reviews. They tend to perceive formal performance
evaluation as waste of time. If owner managers
directly control all activities about employees,
performance appraisal would be informal in small
firms. As the period of the control goes up, it is
anticipated that appraisals would be more formal
and occur at longer intervals.
Harney and Dundon (2006) argued that the
owner manager was actually enthusiastic in ex-
plaining that he had ‘no need’ for an appraisal
system, regarding such people management activi-
ties as a daily routine that is part of a supervisor’s
tacit skill set. Although formal appraisals were
largely absent, this does not mean that employees
who worked particularly hard or were in need of
motivation were not rewarded. Informal reward
mechanisms included a Christmas bonus, a com-
pany social event or being taken out for dinner
in small teams.
As firms grow, it is expected that training
and performance appraisal of operational staff
will be delegated to middle managers. To control
performance effectively, owner-managers would
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HRM Practices and Problems in Family-Owned SMEs
shift their emphasis from operational staff to
middle managers. This means that they need to
pay greater attention to training, development, and
performance appraisal of managers to ensure that
managers develop the skills and abilities necessary
to perform their responsibilities (Kotey & Slade,
2005). It was confirmed that there were greater
increases in the percentage using the various ap-
praisal methods at the managerial level compared
to the the operational level.
Kotey and Slade (2005) found that rating scales
were the most popular appraisal methods at the
operational level, and some employers compared
performance between employees. As the number
of employees increased, appraisal of their per-
formance was delegated to managers. They also
claimed that the use of peer and self-appraisals
also increased with firm size. However, at the
operational level the use of other appraisal meth-
ods rarely changed as firms grew. Compared with
the appraisal of employees performance, fewer
firms appraised the performance of managers in
micro and small firms. This may reflect the small
number of managers in these firms and their close
association with the owner-manager. In micro and
small firms, appraisal of management performance
may take place informally. The most common
methods of appraising managerial performance
were by rating scales and, to a lesser extent, their
ability to meet targets. The use of targets has a
flow on effect by holding managers accountable
for performance targets, they in turn will ensure
that these targets are achieved at the operational
level (Kotey & Slade, 2005).
In family owned SMEs, founders experience
many difficulties when trying to evaluate the
performance of a close relative who works in
the firm, particularly when it comes to objective
evaluation of their own children. The standing
of an individual in a family is determined more
by who the individual “is” than by what the
individual “does.” Applying a set of objectively
derived criteria to evaluate a family member’s
performance goes against the very principles that
regulate and define social behavior in the family
(Lansberg, 1983).
Moreover, the founder’s difficulties in making
such appraisals are frequently compounded by
informational problems. These problems emerge
when non-family employees dissemble a relative’s
incompetence (Lansberg, 1983). On the other
hand Carlson et al. (2006) argued that non-family
managers were more satisfied with feedback from
performance appraisals.
Performance appraisal practices in small firms
generally tend to be informal (Cassell, Nadin, Gray,
& Clegg, 2002). And in small firms these apprais-
als are often used for monitoring and control rather
than development purposes. Furthermore, perfor-
mance review meetings served the dual purpose
of providing feedback for developmental purposes
as well as a forum for discussing compensation
matters: they are used for evaluation or monitoring
of performance (Barret & Mayson, 2007).
Employment Relations in SMEs
Industrial relations in small firms (when defined
in terms of their employment size), are gener-
ally described as harmonious (Barrett, 1999).
Although Barrett’s study (1999) reported that it
can be used to support the “small is beautiful’’
view, this ignores the fact that industrial relations
in large firms are not greatly different. How size
affects industrial relations in one small firm was
examined in his study and it was proposed that,
on its own, size does not provide an adequate
explanation for industrial relations in small firms.
There is little evidence of a principled objec-
tion to increasing employment regulation among
owner managers but they have growing concerns
about its cumulative impact on competitiveness
and much of its appropriateness to the operational
realities of SMEs. Approaches to regulation and
the employment relationship among owner man-
agers tend to be firm specific and embedded in
the individual organizational context. Levels of
productivity and reactivity are highly dependent
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HRM Practices and Problems in Family-Owned SMEs
on the values and the knowledge of individual
owner managers, organizational history, a trade
union presence and awareness of the workforce
(Harris, 2002).
Employment relations in SMEs are often char-
acterized as being different from those in large
companies. It is possible to identify some common
patterns which distinguish employment relations
in SMEs from larger organizations. Their lack of
resources of time, money and people is thought
to inhibit the use of sophisticated management
strategies, the appointment of human resource
specialists, the development of unionism and
hence collective bargaining (Kinnie et al., 1999).
While there are a number of competing analyses
regarding the context of employee relations within
smaller firms, it is possible to suggest that one
generalization might be cautiously applied: infor-
mality regarding labour management compared
to larger firms. Therefore, as the firm grows, it
develops formal, identifiable policies, rules and
regulations to define and control the employment
relationship. It would be easy to argue that formal-
ity defines the employment relationship in larger
firms (Marlow, 2002).
The level of legal intervention in the workplace
plays a significant part in how approaches to human
resourcing develop and change over time (Harris,
2002). In general, employment legislation was seen
as a burden in terms of time and administration
in SMEs. In times of increased demand, regula-
tion can simply be bypassed in SMEs (Harney &
Dundon, 2006).
Wilkinson (1999) claimed that the future would
be dominated by SMEs in terms of job creation
and new patterns of work and that the SME sec-
tor could improve the health of the economy and
SMEs could act as a key source of innovation.
SMEs are the important resources that generate
employment to the labour market. Despite the
importance of SMEs, there is a lack of industrial
relations research in SMEs in literature. It arises
from the problematic issue of SMEs size. There are
many different definitions of a small firm related
to the numbers employed and this causes some
problems about employment relations in SMEs.
The danger of many SME definitions is the
assumption that all firms within the SME sector
have similar characteristics. Size may be a fac-
tor, but it is not sufficient to explain patterns of
employment relations alone. Many internal and
external influences like sector characteristics,
economic indicators, technological improve-
ments, ownership characteristics explain behavior
(Wilkinson, 1999).
Wilkinson (1999) also argued that employ-
ment relations in SMEs are characterized by
informality and that formal control systems and
communication strategies are almost nonexis-
tent. He maintained that emphasis on rules and
procedures is outdated in an environment where
owners have to make quick decisions in response
to market pressures.
Informal employment relations may be defined
as a process of workforce engagement, collective
and/or individual, based mainly on unwritten
customs and the tacit understandings that arise
out of the interaction of the parties at work. As
such, informality is dynamic rather than a fixed
characteristic, and is highly context specific (Ram
et al., 2001).
There are some dynamics of informality in
small firms. Generally, dynamics that employees
and the employers negotiate about pay and market
conditions were indicated in research. Low pay
and the highly informal working times are the
main problems that small firms are faced with.
It can be can be concluded by saying that
there is a need for SME support services which
have the expertise and capability to support the
development of progressive employment policies.
Compensation and Benefits
Compensation includes series of decisions about
payment of workers, pay levels, pay mixes, pay
structure, and pay raises. Pay level is the com-
parison of the salaries between the internal and
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125
HRM Practices and Problems in Family-Owned SMEs
external market; pay mix is the proportion of
salary, benefits, and incentives in the total pay
package; pay structure refers to the steps of pay
rates among jobs in the organization; and pay raises
concern the administration of pay increases with
the organization. Compensation is an important
function because it affects recruiting and reten-
tion efforts of small firms. If they cannot pay
employees enough, then they cannot recruit or
retain required skills or knowledge, which they
need in order to operate effectively. Furthermore,
the compensation and reward system can be an
important communication device to emphasize
desired entrepreneurial activities and to signal
legitimacy to external stakeholders (Cardon &
Stevens, 2004).
The results of Carrasco-Hernandez and
Sanchez-Marin (2007) shows that employee
compensation differs between firms. The research
describes how employee salaries vary according
to the degree of family ownership and family
involvement in the management. Specifically,
the current results indicate that the pay level is
lower in family owned and managed firms than
in both non-family and professionally managed
family firms. Moreover, there are no differences
in employee pay levels between professionally
managed family firms and non-family firms.
Regarding the pay mix, employees in profession-
ally managed family firms receive the highest
proportion of variable pay in their compensation
packages compared to family owned and managed
firms and non-family firms, where the fixed pay
has more weight in the pay mix. In this respect,
employee pay mix is similar in family owned and
managed firms and in non-family firms (Carrasco-
Hernandez & Sanchez -Marin, 2007). Non-family
managers were significantly less satisfied with the
fairness of the compensation system (Carlson et
al., 2006). Nepotism may be a factor about non-
family managers feelings.
Hornsby and Kuratko (1990) found that size
of the payroll had an impact on the level of HRM
policy sophistication used in the firm. The design
of compensation systems including the consider-
ation of external equity has also been linked with
performance (Carlson et al., 2006). The design
of compensation systems in terms of the form of
incentive compensation used is also critical to
the success of the organization. In fact, pay mix
was found to be related to financial performance
(Gerhart & Milkovich 1990).
The use of incentive compensation is propor-
tional to organizational performance. The theory
suggests that using incentive compensation, in-
dividuals are motivated better to perform rather
than by simply relying on fixed rewards (Carlson
et al., 2006). Carlson et al. (2006) found that
organizations that are high performing are more
likely to offer a greater amount of incentives in
order to address motivation and retention issues.
Which pay system is adopted by an SME is not
the only aspect, but the fairness about compensa-
tion is also a key element of individual and orga-
nizational performance. Therefore, it concluded
by saying that top management should give more
importance to compensation and benefits in an
organization to have maximum effectiveness from
the employees and the business.
FUTURE RESEARCH DIRECTIONS
CEOs, policy advisors and managers need to be
aware of any business practices that may improve
the competitive edge of the firm. It is obvious
that family businesses should frequently use
employee reviews, written employee policies,
written job descriptions, compensation plans or
formal entry requirements for family members.
The structure of family business that links man-
agement and ownership reduces conflicts in the
organization. Furthermore, it can be effective
in the area of HRM to improve the practices of
selection, compensation, performance appraisal,
promotion, training and development in SMEs.
Human resource management is a complex set of
activities that are legislated within the organization
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126
HRM Practices and Problems in Family-Owned SMEs
to support through corporate strategies. Future
studies will investigate the issue of comparing
policy and practice in SMEs and large enterprises
on a regional basis. Finally, the matter of which
specific activities are associated with the HRM
identified especially and how those specific activi-
ties impact performance directly and indirectly in
SMEs can be tackled.
CONCLUSION
Mazzarol (2003) argued that the faster the growth
experienced by the small firm the more likely it
will experience human resource problems. It is
said that the main problem is finding and retain-
ing high quality employees for many fast grow-
ing SMEs. Founders and owners of such growth
firms must learn to communicate their mission,
vision and values to their employees along with a
clear understanding of how the firm is to achieve
these goals.
As the number of employees within the
company increases, the need for a formal human
resource manager or improved human resource
activities arises. With less than 100 employees, the
firm can probably operate successfully without a
full-time personnel or human resource manager.
However, once the employee base exceeds 150, a
professional manager may be required and when
this number becomes over 200, a dedicated hu-
man resource department may become necessary
(Mazzarol, 2003, p. 28). In response to increased
competition and globalization, small businesses
should also consider the management of the hu-
man resource strategy in building a sustainable
competitive advantage. The ability to sufficiently
provide competitive compensation, employee par-
ticipation, and effective training and development
are some of the critical elements associated with
the effective and efficient processes of SMEs.
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ADDITIONAL READING
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Chapter 7
DOI: 10.4018/978-1-4666-4731-2.ch007
Intergenerational Transition
in a Small Family Business:
Evidence from a Process Study
ABSTRACT
Family businesses constitute the key infrastructure of wealth creation across the globe. One of the most
important human-resource challenges they face is intergenerational transition, an issue that has received
considerable attention from scholars in various countries. Despite this great interest, academics are
still attempting to understand the phenomenon and provide effective managerial guidance on how fam-
ily businesses can make it to the second generation. This chapter seeks to contribute to family business
research by offering a more nuanced understanding of intergenerational transition that builds on a con-
ceptualization of the phenomenon as a process rather than the prevailing view of it as an instantaneous
event. In order to capture the processual nature of intergenerational transition, evidence is presented
from a field study carried out in a small Italian family business that was the arena of three different
intergenerational transitions taking place at different time periods. The evidence gathered suggests that
the process is shaped by interaction of the different parties involved, who renegotiate their roles as it
unfolds, with various factors playing a part.
INTRODUCTION
Family firms or businesses constitute the key
infrastructure of wealth creation across the globe.
In Italy, 56.9% of companies with a turnover of
more than €50M are owned by families (2012
Observatory of Italian Family Firms Report), and
this percentage is even higher in the case of small
and micro firms. These figures explain the birth
of an academic field and a number of scholarly
journals devoted to family business research.
Scholarly research has concentrated to date on
unraveling peculiarities and commonalities with
non-family businesses. Viewing the family busi-
ness as a homogenous phenomenon with respect
to the non-family concern leads, however, to a
Carlo Mari
University of Molise, Italy
Olimpia Meglio*
University of Sannio, Italy
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132
Intergenerational Transition in a Small Family Business
simplistic portrait that does not do justice to its
heterogeneity. A family business is actually com-
posed of two interdependent systems, namely the
family and the business (Kepner, 1991), and the
relationship between them can take various forms,
thus resulting in great heterogeneity of family
businesses across the globe. This is mirrored by
the multitude of definitions of the family business
and paradigms to be found in the literature. As an
analysis of definitions and paradigms lies beyond
the scope of this chapter, readers are referred to
Westhead & Cowling (1998) for a comparative
overview and to Chrisman, Chua & Steier (2003)
for an introduction to family business theories.
Even though each of these definitions and
paradigms presents an angled view of the family
business, taken together they suggest that the fam-
ily social and human capital is the most important
asset, as it cannot be hired or imported.
The awareness that family businesses are het-
erogeneous and that human resources are essential
to ensuring competitive advantage and long-term
survival has contributed to recognition of the
importance of human resource issues in family
business research (King, Solomon & Fernald,
2001, Lansberg, 1983). While the literature has
generally neglected these aspects, Astrachan &
Kolenko (1994) constitute an exception. The
authors highlight the importance of activities
such as recruitment, selection, development, and
compensation policies. These polices may be
affected by family values and personality issues
as well as family culture (Dyer, 1986). Among
human resource issues, Astrachan & Kolenko
(1994) include the adoption of a succession plan,
which is rarely formalized by family firms in the
way that all other decisions regarding human
resources are (Nguyen & Bryant, 2004). The
lack of a formal succession plan could account
for the widely recognized fact that the majority
of family businesses fail to make it to the second
generation (e.g. Barach, & Gantisky, 1995; Le
Breton-Miller, 2004) . Despite the attention that
this issue has received from scholars in various
countries (Brockhaus, 2004; Litz, Pearson &
Litchfield, 2012), the findings are inconclusive
and scholars are still attempting to understand
how this transition can be successfully managed.
This chapter seeks to contribute to family
business research by offering a more nuanced
understanding of intergenerational transition that
builds on a conceptualization of the phenomenon
as a process rather than an instantaneous event,
which is the prevailing view. In order to capture
the processual nature of intergenerational transi-
tion, evidence is presented from a field study car-
ried out in an Italian small family company that
was the arena of three different intergenerational
transitions taking place at different time periods.
Our findings offer a multi-authored account of
this process, in which successors and founders
have their say, and provides an understanding of
the relations between them. They also capture
the lengthy, ambiguous and ongoing nature of
the transition, with roles renegotiated on a day-
to-day basis and various factors, both internal and
external, exerting their influence.
The chapter is organized into following
sections: a review of the existing literature on
intergenerational transition, discussing flaws in
existing conceptualizations of this phenomenon
and addressing the limitations of research methods
employed in empirical studies; a description of
the field study; presentation and analysis of the
findings; and finally a discussion of the study’s
limitations and future paths of research as well
as managerial implications.
INTERGENERATIONAL TRANSITION
IN FAMILY BUSINESS RESEARCH
This section compares different ways to con-
ceptualize intergenerational transition in family
businesses and goes on to review the existing
literature on the subject. It ends with a proposal to
employ a process approach as a fruitful research
orientation to further current understanding of
the phenomenon.
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133
Intergenerational Transition in a Small Family Business
Alternative Conceptualizations
of Intergenerational Transition
The process of handing over management and
ownership from one generation to another is
generally referred to in the literature as succes-
sion or intergenerational transition. Succession
is defined as “the act or process of one person’s
taking the place of another in the enjoyment of
or liability for rights or duties or both” (Merriam-
Webster’s Collegiate Dictionary, 2003: 1247).
This definition permits two alternative views
of succession: one that focuses on the final out-
come of the process, described as the act of one
person’s taking the place of another, and one that
conceives it as something that unfolds over time.
The latter view is the one adopted by the pres-
ent authors, who therefore suggest that the term
“intergenerational transition process” should be
adopted as capable of conveying its nature more
effectively. In particular, it does justice to the
often steady and gradual withdrawal of the senior
generation from active management in the firm
(Morris, Williams, Allen, & Avila, 1997) and
the existence of a time lag between the handing
over of managerial functions and the transfer of
ownership. Moreover, this process includes the
socialization of successors into the operation of
the family firm (Garcia-Alverez, Lopez-Sintas,
& Gonsalvo, 2002) and involves acceptance and
integration of the new management (Sharma,
Chrisman, Pablo & Chua, 2001). The frequently
used metaphor of “passing the baton” therefore
paints a misleading picture of this phenomenon,
as it fails to capture its nature as a lengthy, am-
biguous, and socially constructed process with
various actors playing a role: founders, succes-
sors, families, other employees, customers and
suppliers (Hall, 2003).
The conception of intergenerational transition
as an ongoing process involving multiple stake-
holders dates back to Handler (1990), who depicts
it as one of mutual role adjustment involving
the transfer of leadership experience, authority,
and decision-making power. More recently, Hall
(2003) expanded the analysis of role changes
during the transition process by adding value,
emotions, and rationality as theoretical perspec-
tives for investigation of the process.
To sum up, a view of intergenerational tran-
sition as a process recognizes the interaction of
various stakeholders and the influence of family
as well as business factors that concurrently and
iteratively shape its course and determine its out-
come. The existing literature will now be examined
in the light of these considerations.
The Existing Literature on
Intergenerational Transition
While different labels are attached to this phe-
nomenon, the literature focuses primarily on
the first instance of intergenerational transition,
with a few studies addressing second- or third-
generation transition (e.g. Lee, 2006; Sonfield
& Lussier, 2004). The existence of a whole host
of studies shows that intergenerational transition
is a well-researched topic. To make sense of the
variety of issues addressed and methods em-
ployed, the existing studies are categorized here
as: 1) seeking to explain performance in family
businesses; 2) focusing on the decision-making
process; 3) investigating single constructs, such
as commitment, or single actors, such as founders
or successors; 4) approaching intergenerational
transition as a process with the aim of developing
a holistic overview.
Within the first category, analysis of the rela-
tionship between family issues and performance
is a major focus among family business scholars.
A range of factors is investigated with a view to
explaining or predicting successful intergenera-
tional transition. Stewart & Hitt (2012) provide
a detailed summary of empirical studies pub-
lished in the 2000s to assess the effects of family
involvement on firm performance. They review
59 empirical studies, mainly investigating public
companies (e.g. Poutziouris, 2006), with only 12
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134
Intergenerational Transition in a Small Family Business
studies focusing on privately owned firms (e.g.
Westhead & Cowling, 1997). These studies take
into account various geographical contexts, rang-
ing from Italy (e.g. Sciascia & Mazzola, 2008)
to the USA (e.g. Villalonga & Amit, 2006) and
Australia (e.g. Kotey, 2005). Some of them are
country-focused (e.g. Saito, 2008), while others
provide cross-country analysis (e.g. Fogel, 2006).
Moreover, they assess the effects of different vari-
ables on different measures of performance, and
it is therefore hardly surprising that the resulting
picture of the relationship between family involve-
ment and performance should be ambiguous and
the findings inconclusive. In our view, given the
heterogeneity of family businesses, it is more
useful to investigate how family and business fac-
tors interact and shape one other and determine a
certain performance. This is in line with Dyer &
Dyer (2009: 218), who suggest that “ to measure
family effectiveness we must get at the underlying
family processes.”
The second category comprises studies in-
vestigating the decision-making process during
intergenerational transition. Bjuggren & Sund,
(2001) identify different legal arrangements to
deal with possible problems, which are contingent
upon the legal system in force in a given country.
Other studies analyze the decision-making process
from the perspective of the future leader, focus-
ing on the effect of both financial and behavioral
sunk costs on the succession process (Shepherd
& Zacharakis, 2000). Others focus on planning
intergenerational transition with a view to offering
practical guidance on how to make it successful
(e.g. Sharma, Chrisman & Chua, 2003). Planning
financial, fiscal and legal as well as emotional
issues in advance has long been considered an
essential tool for successful intergenerational tran-
sition in a family business (Mazzola, Marchisio &
Astrachan, 2006). Planning succession also means
relying on an effective succession management
program that deals with HR issues, such as the
involvement of line management in identifying
candidates or developmental assignments as part
of the process (Taylor & McGraw, 2004). Various
scholars claim, however, that there is no connec-
tion between planning and successful succession
(Aronoff, 1998; Lansberg, 1999; Murray, 2003).
Others point out that some firms, such as those
based in northeastern England, neither believe in
the efficacy of planning nor plan the succession
process for periods of over five years (Kirby &
Lee, 1996). The limitations of these studies arise,
in our view, from failure to take into consideration
behavioral factors that actually do affect how the
intergenerational transition process evolves over
time, above and beyond what has been rationally
planned.
The third category presents a great deal of
variation, with studies addressing aspects such
as communication between founder and succes-
sor (Janjuha-Jivraj & Woods, 2002), intra-family
conflicts (Levinson, 1971), family cohesion and
adaptability (Lansberg & Astrachan, 1994), the
gender of actors involved (Harveston, Davis &
Lyden, 1997), the role of family identity (Zellwe-
ger, Nason, Nordqvist & Brush, 2013), successors’
career expectations (Sharma, 1997), and desirable
successor attributes such as commitment (Sharma,
& Rao, 2000), analysis of which can be extended
to include all the family members (Handler, 1989;
Sharma, 1997). There are also conceptual con-
tributions such as Sharma & Irving (2005), who
contend that commitment is a multi-dimensional
construct and identify and discuss four bases of
successor commitment to family firm—affective
(based on perceived desire), normative (based a
sense of obligation), calculative (based on an op-
portunistic assessment of costs and benefits), and
imperative (based on a perceived need).
To further understanding of the positive role
of the family, Eddleston & Kellermans (2007)
point out that stewardship relationships can play
a key role in small family businesses by keeping
family members focused on the well-being and
success of the business and permitting the devel-
opment of supporting mechanisms, which can be
categorized as psychological (such as collective
serving, commitment to values or the attainment
of higher-order needs) and situational (such as a
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Intergenerational Transition in a Small Family Business
high level of trust). These studies are, in our view,
a step towards a more nuanced analysis of key
concepts in intergenerational transition.
The fourth category comprises studies address-
ing the intergenerational transition process in a
more holistic way. Miller, Steier & Le Breton-
Miller (2003) inductively identify three possible
patterns of intergenerational transition—conserva-
tive, rebellious, and wavering—and discuss their
possible impact on performance. Beyond this
substantive contribution, the need clearly emerges
for joint consideration of how family issues shape
and are shaped by business ones.
The contribution of Cabrera-Suarez, De Saà-
Perez & Garcìa-Almeida (2001) proceeds in the
same direction with an integrative model incor-
porating the characteristics of the founder and
successor (age and gender) as well as the family
and the business context. The authors do justice to
the multiple, concurrent and sometimes conflict-
ing factors that recursively shape this process. The
main flaw of this model is the fact that they focus
on founders and successors, while there are several
other stakeholders to take into account, such as
professional managers, other family members,
employees, and customers. All of these play a
part in the intergenerational transition process,
which is described as one of mutual adjustment
by Handler (1990). Lam (2011) further develops
Handler’s view of intergenerational transition by
pointing out that each individual play different
roles simultaneously and putting forward the
idea of multi-entity roles, which is a step towards
comprehension of the ambiguities surrounding
this process. This in turn requires reflection on
suitable methods of inquiry, as discussed below.
Methodological
Considerations in the Study of
Intergenerational Transition
On the methodological side, the family business
field has registered progress in the last 25 years
through the increasing use of large-scale surveys
of representative samples of firms (e.g. Bird,
Welsch, Astrachan, & Pistrui, 2002; Davidsson,
Low, & Wright, 2001).
In an overview of past achievements and future
perspectives, Sharma, Chrisman, & Gersick (2012)
see this trend positively as a sign of greater sci-
entific rigor but draw attention, echoing Zahra &
Sharma (2004), to the danger of empirical research
becoming mechanical with low value in terms of
new knowledge of substantive issues surround-
ing family businesses. In this connection, family
business scholars advocate demolition of the pre-
vailing paradigm of positive rationalist research
ontology and epistemology that still dominates
the field (Litz, Pearson & Litchfield, 2012). In
a similar vein, Dawson & Hjorth (2012) argue
against methodological conformity characterized
by variance-based research aimed at identifying
statistically significant systematic patterns of rela-
tions rather than understanding how organizational
processes actually unfold through time. Following
this lead, the present authors contend that family
business scholars are caught in a straight-jacketed
mindset of hypotheses-testing on large samples,
looking for the ultimate dependent, moderating
or mediating variable explaining succession. The
result is that research seems to be hamstrung by
a set of standardized procedures that allow rigor
but sacrifice deep understanding of the ambiguous
process examined here. It is in order to remedy this
situation that the adoption of a process research
approach is advocated here.
Process research incorporates time with a view
to obtaining an understanding of the world that
is ignored or underestimated by variance-based
conceptual models (Langley, 2009). The definition
of process employed here is borrowed from Van
de Ven (1992), who states that the word can be
used in the management and organization field to
designate causal mechanisms in variance models,
to label certain types of variables or to indicate
how and why significant temporally evolving phe-
nomena take place. The latter conceptualization
is adopted in this chapter, where a process is seen
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Intergenerational Transition in a Small Family Business
as a sequence of events or activities that describe
how things change over time. This definition
takes a historical developmental perspective and
focuses on the sequences of incidents, activities,
and actions unfolding over time and taking into
account enabling and constraining influences
from contexts inside and outside the firm. The
underlying conception is that social reality is a
dynamic process constructed by human agents
through their actions. Actions shape and are
shaped by social structures. The interplay between
actions and structures take place over time in a
cumulative manner, so that the past contains the
seeds of the future. Embeddedness and temporal
interconnectedness are therefore key features of
process research (Pettigrew, 1992). The process
research approach is adopted here as consistent
with the conceptualization of intergenerational
transition discussed above. In line with this view,
the question addressed here is this: How does in-
tergenerational transition unfold over time? With
the research approach clarified and the research
question stated, the following section presents
description of the field study carried out.
THE FIELD STUDY
The term “field study” is used here to describe an
investigation of ongoing organizational life in its
natural settings with first-hand observations from
the viewpoint of a particular individual or group
(Van de Ven & Poole, 2002). The hallmark of such
a study is the fact that it takes place in a natural
social setting familiar to the subject (Lofland,
Snow, Anderson, & Lofland, 2006).
Our approach to this study was case-based
and processual (Pettigrew, 1992). In order to
capture both complexity and depth, a qualitative
case study was developed: “A case study is an
empirical inquiry that investigates a contemporary
phenomenon within its real-life context; when the
boundaries between phenomenon and context are
not clearly evident and in which multiple sources
of evidences are used.” (Yin, 1989: 23). As the
focus of the research was on how different actors
experienced and made sense of the ongoing inter-
generational transition, the study was conducted as
an interpretive inquiry (Lincoln & Guba, 1985).
It commenced in medias res with three in-
tergenerational transitions at different stages of
development. For this reason, a partly retrospec-
tive and partly real-time research approach was
employed with a view to linking past and present
as well as external and internal contexts. In order
to obtain a multi-authored account of the transition
process, it was decided to investigate three units
of analysis: the fathers, the sons/daughter(s), and
the relations between them. A focus on relation-
ships is essential to any understanding of how
each intergenerational transition interacts with the
others and how they shape one other over time.
The field study stretched over the three-year
period from 2008 to 2010. Access to the research
setting was obtained through the personal rela-
tionship of one of the authors with Antonella
(Mauro’s daughter). The idea of investigating the
intergenerational transition arose out of informal
talks with her and listening to her stories about
the firm. What aroused our interest was the fact
that she described it as a family business even
though there was no familial link between the
three founders. It is, however, intergenerational
transition that makes the company a family busi-
ness. The peculiarity of the situation prompted us
to investigate this setting.
While access was easily negotiated, obtaining
the cooperation of all the informants proved rather
difficult for the same reasons. The relationship
of one of the authors with Antonella was known,
and it took time both to explain what was being
undertaken and to make it clear to all the parties
involved that they could speak freely. It was also
important to guard against undue importance be-
ing attached to Antonella’s viewpoint.
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Intergenerational Transition in a Small Family Business
The Research Setting
The research setting is a small Italian service
company operating in southern Italy. Its core
business is selling plumbing and heating materi-
als both as wholesaler and as retailer. The first
business accounts for 80% of turnover and sales to
end consumers for the remaining 20% . The firm
currently has 20 full-time employees.
Founded in 1976, the company is run by three
shareholders, Luigi, Federico and Mauro, who are
fully involved in the day-to-day managerial activi-
ties. Luigi is responsible for the wholesale section,
Federico for retail, and Mauro for finance and
procurement. While Luigi, Federico and Mauro
are not related and their wives play no part in the
firm, they started it with the idea of “passing the
baton” to their children and perceive it as a fam-
ily business. Figure 1 shows the composition of
the families. The names are invented in order to
preserve anonymity.
Data Collection and Analysis
A range of both primary and secondary data was
gathered during the study. Primary data were gath-
ered mainly through focused interviews with the
three founders and the three successors. Informal
talks were also held with two siblings not involved
in the process (Marco and Marianna) in order to
ascertain their views. In the case of Federico, the
interview took place in the presence of the whole
family and thus turned into a group session with
the wife, daughter, and son, who are not involved
in the company, offering their opinions. This pro-
vided some insight into the role played by family
in the transition process.
Each informant was interviewed at least twice
in sessions lasting one hour on average. Topics of
interest were focused on and the informants were
asked to reconstruct key events and experiences
from 1976 on. All the interviews were recorded
and transcribed with the informants’ consent. The
interviews were also supplemented with observa-
tions and informal talks set down in field notes.
A chronology of events provided by one of the
founders and minutes from key meetings served
as secondary data.
Our analysis of the data drew on Langley
(1999) for process data analysis strategies and
Miles & Huberman (1994) for qualitative data
analysis procedures. As the former points out,
“Process data consist largely of stories about
what happened and who did what when—that is,
events, activities, and choices ordered over time”
(Langley, 1999: 692), and are therefore messy and
ambiguous. The initial collapsing of data into a
chronological reconstruction of the three different
transitions was followed by coding, codes being
understood here as “tags or labels for assigning
units of meaning to the descriptive or inferential
information compiled during a study” (Miles &
Huberman, 1994: 56). A list of codes was created
by proceeding iteratively back and forth between
data and theory. The next step was to identify
patterns of codes, i.e. themes emerging from our
data so as to account for both similarities and
differences between the three intergenerational
transitions.
Figure 1. The composition of the three families
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138
Intergenerational Transition in a Small Family Business
FINDINGS
Langley’s (1999) narrative strategy is adopted
here as a tool for the analysis and presentation
of process data. A narrative strategy serves to
show how the three intergenerational transitions
unfolded over time and shaped one other. The key
events are set out in a timeline in order to facilitate
understanding of their chronology (see Figure 2).
With a view to clarity of exposition, it was
decided to present the three transitions first and
then go on to discuss themes emerging from their
comparison and overall picture.
The Luigi-Carlo Transition Story
The first successor to enter the firm was Luisa,
hired as a simple employee. The plan was for the
business to provide her with a fixed income but
no responsibility in the decision-making process.
Moreover, she was initially hired to stand in for
an employee on maternity leave and therefore
supposed to leave after just a few months. Things
turned out differently, as we shall see.
The first generational transition perceived as
such involved Luigi’s son Carlo, who joined the
firm in 2002. While the father’s account suggests
that it was taken for granted that Carlo would
gradually take over from him, the son’s suggests
that joining the company was not a foregone con-
clusion but perceived rather as an opportunity to
work and earn some money, as he had no wish to
continue his education at university level. Carlo’s
entrance was therefore quite unplanned and he
had no previous training on the job. The idea was
for him to learn through hands-on experience.
His father made it clear to the entire workforce,
however, that he was no ordinary employee but
rather the successor. For this reason, he took a
dim view of Carlo’s tendency to work side by
side with others. Carlo seems to have attached
little importance to this, being simply willing to
learn the business.
The learning process is described, albeit with
different nuances, as a process of continuous
adjustment and sometimes as a clash between
different ways of envisaging and performing the
role, with the father unwilling to make changes
and the son trying to innovate. This adjustment
process is not described as difficult by the par-
ties involved. One possible explanation for this
is the fact that the transition had been under way
for six years at the time of the field study, and
it is therefore possible that some initial friction
between father and son had been resolved or
rationalized ex-post. They both agree that while
the acquisition of skills has been completed, the
father is not yet ready to leave his post, and there
is thus still some ambiguity about who is actually
responsible for the role.
The Federico-Ludovico
Transition Story
This story follows much the same lines. It began
in 2003, one year later, and was facilitated to
some extent by the previous transition. Federico
too stresses the idea that the entrance of sons and
daughters was a natural evolution of the firm, in
a way the fulfillment of founder’s personal goals.
The sentiment is best captured by his question,
“What is the point of our work if we don’t hand
over to our children?” Once again, the son’s
entrance was not formally communicated (this
Figure 2. Chronology of key events
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139
Intergenerational Transition in a Small Family Business
is an ambiguous issue, as we shall see) and once
again it took place because the son did not want
to continue his education and was looking for a
way to earn a living. Federico candidly admits
to a problematic relationship with Ludovico and
states that he encouraged him to look for a job
elsewhere but helped him to join the firm when
these attempts fell through. Federico’s account
presents some inconsistencies. On the one hand,
he used to take Ludovico to the office in order
to involve him in the business; on the other, he
encouraged him to look elsewhere. This confirms
the existence of Federico’s problematic relation-
ship with his son and pressure from the family
(especially his wife) to assert Ludovico’s “right”
to a job in the business. This is reinforced by the
idea that if Marco (Ludovico’s brother, see Figure
1) does decide to join, there will be a position for
him too.
In order to facilitate his son’s socialization and
training on the job, Federico suggested that Mauro
should serve as his mentor during this period. No
formal program was established, however, and
the training developed largely on a contingent,
day-to-day basis. The interviews suggest that
Federico is not so ready to hand over, seeing it
as his responsibility to protect the company from
his son’s possible mistakes and his son from pos-
sible exclusion by the other successors. They also
suggest a clash between different ways of doing
things and the difficulty of changing the way
“things are done around here”. Father and son
simply seem to be speaking different languages
and do not understand each other. Our findings
indicate that they tend to avert the risk of open
conflict by simply avoiding any frank discussion
of sensitive issues. It emerges from Ludovico’s
account that he does not recognize the primacy
of his father’s experience. He stated several times
during the interviews that he spent more time in
the firm and therefore understood the situations
much better than his father. This implies that he
would be able to handle problems better but is
not allowed to do so.
As for relations with the other successors, his
philosophy seems to be: “I am here, as I have the
right to be here. Nobody can change this situation
and I won’t interfere with the others as long as
they don’t interfere with me.” What is interesting
is what he says about his sister and her attempt to
replace his father through a switch of role from
employee to successor. This is the only instance
of candid reference to this situation, which means
that Luisa’s position is yet to be clarified.
The Mauro-Antonella
Transition Story
It was in September 2004, after graduating in busi-
ness administration with a major in finance, that
Antonella joined the company. On one hand, her
introduction as Mauro’s daughter was considered
both natural and inevitable; on the other, she was
the first woman to join the company as a succes-
sor. Luisa was actually the first of the children to
be hired, but as an employee. Antonella therefore
had to fight against prejudice from various sides:
the founders, the employees, the suppliers, and
the customers. She recalls joining the company
with the conviction that she possessed skills
and know-how acquired at university. This was
a strength but also a weakness, as she had no
practical knowledge of the difficulties of running
a business on a day-to-day basis. She asked her
father to give her a mentor within the company
and focused on questions of taxation. Her back-
ground enabled her to fill a gap in quite a short
time. Though competent, she had to face several
awkward situations involving clashes with her
father and the other shareholders. She claims that
her father “sacrificed” her simply in order to avoid
conflict with the other shareholders even though
she was evidently right, and that he never admitted
this. She also recalls several heated discussions
on different issues that continued at home, with
her mother caught in the crossfire. They learned
how to cope in time and stopped bringing work
problems home with them, which was essential
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140
Intergenerational Transition in a Small Family Business
in order to avoid tension and conflict within the
family. The result of this difficult situation was
that Matteo, who was to have taken over from his
father as head of procurement, decided not to join
the firm, thus leaving the position vacant.
It clearly emerges from Antonella’s account
that she experienced difficulties with Ludovico
and some male employees. He tried on several
occasions to place her in an awkward situation,
with the others taking his side, and she felt they
had a low opinion of her. This feeling gradually
disappeared, however, and the situation has now
changed completely with due appreciation of her
skills and competence. Her feeling is that being
female in a male-dominated company hindered
the transition process or at least slowed it down.
The problem now appears to have completely
disappeared, however, and she believes the tran-
sition to her father’s role is almost complete, as
it is known that she can take the right decisions.
Antonella knows that she can rely on her father
if any doubts should arise.
A further consequence of her joining the
company as a successor was that Luisa, who had
previously been considered an ordinary employee,
started renegotiating her role. This was made
evident by the fact that she began to attend meet-
ings of the founders and successors as though
one of the latter. Mauro summed up the situation
succinctly: “Luisa is an employee, but when she
attends company meetings she is a successor.”
Themes Emerging from the Data
After this brief reconstruction of the three inter-
generational transition stories, it is interesting
to examine themes emerging from comparison
of the different accounts offered by the parties
involved in the process. Our data can be analyzed
with reference either to the overall process or to
individual interactions between actors throughout
the process. The complementary perspectives
thus offered can be taken together to improve
our understanding of the intergenerational
transition process. Examination of how the dif-
ferent transitions evolved over time shows how
the approach adopted here makes it possible to
capture the ambiguous nature of the process, as
already outlined by Hall (2003) and Lam (2011).
The process emerging from the three transitions
contains elements of the conservative, rebellious,
and wavering patterns identified by Miller, Steier
& LeBreton-Miller (2003). It is possible to see
how apparently opposing models can coexist in
the same company simply by examining the daily
interactions between the parties involved. Planned
and unplanned actions, lack of communication
and clearly announced actions, training on the
job and university-level education, all play a
part in the process, blending with one other into
the flow of events. Moreover, investigating the
intergenerational transition process through the
accounts provided of that experience by those
involved makes it possible to unravel conflicts
between different goals and views about the future
of the company that methods based on a variance
approach would fail to detect. The three cases
were thus compared so as to identify a number
of points worthy of attention.
The first point emerging from the accounts
offered by founders regards the way in which
they announced the entrance of their children to
the other shareholders. Luigi and Federico offer
a partially overlapping account. They simply told
the others: “My son is starting work here tomor-
row.” Their recollection of that moment during
the interviews does not, however, square with
Mauro’s account. According to him, Federico said
nothing and Luigi mentioned it only informally
during a coffee break. The underlying message
is that a son joining the firm is a natural event,
something that will take place sooner or later, and
not a matter requiring a company decision. This
means that there is no need for formal discussion.
Even though several years have passed, Mauro
is still unhappy at the lack of transparency in the
way intergenerational transition is handled. This
is why he notified the others of Antonella’s deci-
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141
Intergenerational Transition in a Small Family Business
sion four months in advance and reminded them a
week before she started work. Moreover, while it
had simply been taken for granted in the previous
cases that the successors would take over from
their fathers, Mauro now initiated discussion of
roles and responsibilities. It was, however, such
a foregone conclusion that the successor would
take the father’s place in the same role that no
objections were raised.
Our findings are in line with the view that
planning intergenerational transition is not only
a matter of setting goals but also of communicat-
ing those goals to all the parties involved in and
affected by the process.
The second point regards the education and
training of the new generation. Comparison of
the three transitions reveals the different role
played by education in the successors’ lives. While
Antonella graduated in business administration
with the idea of applying her knowledge within
the company so as to improve its management,
neither Ludovico nor Carlo was interested in fur-
ther academic education. This reflects a different
relationship with the family firm. Antonella wants
to give something to the business, to improve the
way it is run, whereas Ludovico and Carlo expect
it to give them something, namely job security
and an income. Apart from this difference, they
all believe that getting hands dirty is essential to
learning how to run a business. These findings
suggest the need for careful evaluation from a
process perspective with a view to identifying an
appropriate mix of formal education and training
inside and outside the firm.
Another point is the influence of gender on
intergenerational transition. Daughter marginal-
ization and paternalistic masculinity are addressed
in the literature (Aisnworth and Wolfram Cox,
2003). Our study provides mixed evidence. Luisa’s
story seems to suggest paternalistic masculinity,
as employing her in the company was a way to
maintain her dependent status. While Antonella
did not suffer from this paternalistic masculinity,
she did experience attempts to marginalize her.
Antonella reports prejudice on the part of
founders, employees and successors. Federico
and Luigi both admit that while they never ques-
tioned the idea of her joining the firm, they were
very skeptical of her ability to take over from her
father. They also add that it took a year or two to
change their minds. Mauro played a key part in
this situation, as he never showed Antonella any
favor, even when she was evidently in the right.
His purpose in this was to avoid clashes with the
other founders, which brings us to the next point.
Several sources of conflict were identified,
ranging from role to gender. The most important
is indisputably the tendency of founders not to
question the way “things are done around here”
and the attempt of successors to introduce changes.
Gender conflicts regard the suitability of women
to play a male role such as decision making.
Analysis of the data reveals various conflicts
under way between the parties involved—father
and son/daughter, founders, and successors—with
each influencing the others. Our findings sug-
gest that family relations can become a liability
when negative feelings and escalating conflicts
get in the way of working together (Sorensen &
Bierman, 2009). Managing these conflicts means
finding a way to balance opposing interests, and
the solutions vary a great deal. In some cases,
conflict is simply avoided, resulting in a stand-
off. In others, a third party is asked to judge the
situation and suggest which of the opposing ideas
should be adopted, thus revealing the inability of
founders and successors to reach agreement in
company’s best interest. These findings confirm
the great influence of family ties on the dynamics
of this process.
A final point regards the way founders and
successors envisage the firm’s development.
Despite all the differences detected between the
three transitions, it is commonly felt by the suc-
cessors that the firm would benefit greatly from
the introduction of a third party to handle the
turnaround and transition. They all believe that
even though the figures do not indicate a crisis,
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Intergenerational Transition in a Small Family Business
the firm should be reorganized and managed
more professionally. They maintain that the skills
required to carry through this process cannot be
found inside the firm and that hiring a manager
from outside could prove helpful.
The founders never mentioned this possibility,
which suggests that they do not think the time
is ripe to hand over. Gagné, Wrosch, & Brun de
Pontet (2011) shed light on these dynamics. Their
analysis of family business leaders identifies two
different capacities, namely goal adjustment (help-
ing the successor to join the company) and goal
disengagement (concrete steps to ease retirement).
Our findings reveal a lack of goal disengagement
capacity in the leaders examined. They are all
middle-aged men, eager to work, and above all
committed to protecting their shares of the firm
and therefore the position of their children. These
findings are in line with the idea of transition
as a wavering process with unclear goals and
confused roles.
CONCLUSION
This closing section discusses what our findings
have to say to the community of family business
scholars and to those involved into the day-to-day
management of a family business.
Implications for the
Academic Community
Our study jettisons the simplistic view of succes-
sion in the family business as “passing the baton”,
a metaphor that fails to capture the essence of a key
process in the life of such an enterprise. Family
and business systems influence one other all the
way through this process, which can take a whole
variety of forms depending on the different factors
involved. It is therefore suggested that succession
should be viewed not as an instantaneous event but
as a process, for which the term “intergenerational
transition” is more suitable. It is further suggested
that a process approach should be adopted in
empirical research. These views underpin our
investigation of how three intergenerational tran-
sitions unfolded over time and shaped one other
in a small Italian family business. Our findings
provide a multi-authored account in which both
successors and founders have their say, thus shed-
ding light on the relations between them in such
as way as to capture the lengthy, ambiguous and
ongoing nature of the process, where roles are
renegotiated on a day-to-day basis and various
internal and external factors are involved.
The findings are in line with previous process
research on intergenerational transition (Hall,
2003; Lam, 2011) and confirm both that transition
is greatly influenced by the relationship between
founder and successor, and that the family in-
terferes in it. If a problematic relationship exists
between them, it will most probably be accentuated
during the transition process and come in turn to
influence how this unfolds over time. While gen-
der and education also play a role, their influence
wanes over time, with training on the job and role
adjustment prevailing in the long run.
Alongside these contributions, our study suf-
fers from various limitations that should be noted
in this closing section together with our sugges-
tions for future research. The major weakness
is the small number of cases examined. Process
research is frequently based on a small set of cases,
as the extensive field work required makes it very
difficult to investigate more than one setting when
the sites are at any distance from one another or
the investigator is alone. While individual case
studies offer a deep understanding of the contextual
factors affecting a process, multiple case studies
“offer scope to develop insights from cross-case
comparison” (Bizzi & Langley, 2012: 228). It is
therefore strongly recommended that family busi-
ness scholars adopting a process approach should
find a better balance between depth and breadth
in constructing empirical samples of case studies.
Another limitation regards the research setting
under investigation, namely a small firm. Although
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143
Intergenerational Transition in a Small Family Business
family businesses are frequently small, many
of them are large. Research is therefore recom-
mended to ascertain whether similar or different
patterns emerge during the transition process in
large companies.
Attention was focused on internal commu-
nication during the study. While founders and
successors are key actors, it would be interesting
to investigate how employees and customers were
informed of and perceived transition. This could
cast light on how other stakeholders experience
the process and how their perceptions change as
it unfolds.
These suggestions can be encapsulated in the
following list of research questions.
RQ1: How does intergenerational transition un-
fold in large family companies? How does
the size of the company interact with such
a process?
RQ2: How do customers/suppliers perceive the
intergenerational transition process of a
family company? How does such perception
evolve over time? How does it affect the busi-
ness relationship with the family company?
RQ3: How do employees perceive the inter-
generational transition process of a family
company? How does such perception evolve
over time? How does the relationship (loy-
alty, trust and affective relationships) with
the founder affect the relationship with the
successor?
While the list is only tentative, it is our belief
that answering these research questions by means
of a process approach is an effective way to further
our understanding of intergenerational transition
in the family business.
Implications for the
Business Community
Our findings can be read also in the light of possible
managerial implications. Given the heterogeneity
of family businesses, it is not our aim here to pro-
vide a list of best practices, the practical usefulness
of which has in any case been questioned (Dana
& Smyrnios, 2010 ). Our present aim is rather to
consider what our findings may imply as regards
managing an intergenerational transition process.
Attention should be drawn first of all to the
fact that that flexibility is essential to the ef-
fective handling of this process. This does not
mean disregarding the possible role of planning
but rather recognition that not even a carefully
crafted plan can foresee and therefore manage
the emotional and behavioral factors that actually
shape the process.
In addition to planning, education and training
are essential ingredients of a transition process.
Tacit knowledge must be transferred from founders
to successors. At the same time, fresh knowledge
can be essential to revitalization of a business. A
focused education provides the successor with
basic know-how that needs to be fine-tuned
through an on-the-job training program. Experi-
ence in other firms operating in the same sectors
can also prove an excellent source of fresh ideas
for the successor to introduce into the family firm.
Unfortunately, the successor often has no reason to
look for experience in other companies or perhaps
even in other countries, especially when the firm
is small. The family company is seen not as an
end in itself but rather as a way to get by. This
can prove detrimental in the long run, as it may
reduce the likelihood of implementing changes
and innovations.
Due attention should be paid to the interaction
between family and business. The hiring of an
external consultant is frequently recommended as
an effective way of resolving conflict and preserv-
ing the company value, and the idea was in fact
put forward by the successors in our study as an
effective way to accommodate divergent interests
among the parties involved. In any case, it is neither
a magic formula nor a one-size-fits-all solution.
This reinforces the need for careful evaluation of
the situation and the constraining and enabling
forces that affect the transition process.
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ENDNOTES
* Both authors contributed equally and are
listed in alphabetical order.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 8
The Role of Human
Resources Practices in
Conflict Management:
Implications for Small-Medium Enterprises
ABSTRACT
The aim of this chapter is to provide a conceptual basis on the role of HR (Human Resources) practices
in conflict management in the context of small business. However, conflict management is not accounted
as a formal function of HRM (Human Resources Management) such as selection, performance appraisal,
or administrative services. Besides, HR functions in Small-Medium Entreprises (SMEs) are usually
carried by owners or line managers while some practices might be outsourced, as well. Consequently,
managing human resources is different in SMEs due to firm size, priorities of the owner, and informal-
ity. Therefore, the challenge is to build the link between HR functions and conflict management in the
context of small business. In this respect, the chapter emphasizes the importance of managing human
capital effectively in terms of managing conflicts.
INTRODUCTION
SMEs can be conceptualized as entrepreneur
or family owned, small and flat organizations,
characterized by informality. An owner’s basic
concern is the survival of the enterprise. In addi-
tion to survival, striving for financial effective-
ness would enable the firm growth and increase
profitability. Thus, priorities of the organization
shape the mission, vision and purposes at first
hand. In such cases, the context of small business
is likely push for efficiency through the inbalance
of minimum input and maximum outcome contro-
versy. Therefore, it is evident that contextual and
entrepreneural characteristics influence human
resources management. When it is all about the
financial capital, human capital might be ignored.
It is for sure, small business is challenging from
the standpoint of entrepreneurs. However, hu-
man capital needs attention, especially when
organizational goals would be reached through
their contribution.
In this respect, this chapter addresses the con-
flict phenomena in organizations; starting from
Nil Selenay Erden
Istanbul University,Turkey
DOI: 10.4018/978-1-4666-4731-2.ch008
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149
The Role of Human Resources Practices in Conflict Management
the human resources management in SMEs and
nature of conflict in small business in relation to
human resources management perspective. After
providing the background in conflict research, the
HRM functions’ contribution to conflict manage-
ment will be presented. Finally, recommendations
for potential small business related problems in
conflict management and future research direc-
tions will be discussed.
In this framework, the objectives of this chapter
are, as follows:
• Discuss issues related with human resourc-
es management in small business.
• Discuss conflict phenomena in small busi-
ness to sharpen the focus on work conflict.
• Identify the sources of conflict in small
business.
• Build the link between human resourc-
es management functions and conflict
management.
• Suggest solutions for conflict resolu-
tion through the implementation of HR
functions.
HUMAN RESOURCES
MANAGEMENT IN SMALL-
MEDIUM ENTERPRISES
SME Growth
In general, small-medium enterprises are known
to be companies that have less than 250 employ-
ees. However, number of employees for SMEs
differs from country to counrty; depending on the
characteristics of the economy (Gibson & Van der
Vaart, 2008). For instance, in Albania, a SME is
defined as a company that has six to 80 employees
while in United Kingdom SMEs are defined to be
companies with less than 50 employees (Kushnir,
2010). Thus, no clear definition of SMEs exist
as there are many criterion used to define SMEs;
such as profitability, sales turnover or size (Storey,
1994), that would again vary among countries. To
overcome this confusion, we will use the term SME
to refer to companies with less than 50 employees
throughout the chapter.
It is a well known fact that a large percentage
of newly established small firms die in the first
five years, and solely the ones that can adjust to
their environment are likely to survive. Once the
firm has survived, external and internal barriers
to growth come up as new challenges. Therefore,
one can think that SMEs make transitions through
stages of growth and every stage requires different
management techniques (MacMahon & Murphy,
1998).
According to organizational life cycle models,
there might be many stages of growth. However,
growth stages are not stable with well-defined
characteristics. (Kazanjian, 1988). For instance,
at the first stage, informality and little planning
would exist in a newly established firm. The
entrepreneur could adapt formal procedures and
establish a solid organizational design to pass
through stage two; of which is concerned with
growth. Management becomes more professional
at this stage. Finally, the firm gets mature at the
third step; by implementing rules and regulations
while becoming more long-term oriented with
planning and strategies (Smith, Mithcell & Sum-
mer, 1985). One can think that most SMEs could
be at stage one or in the middle of stage one and
two; of which seems to be important in terms of
firm growth.
SME growth depends on the amount and
effective use of financial resources, product
development and effective management of hu-
man capital through formally established HRM
functions (Dobbs & Hamilton, 2006). In this
respect, human resources should be concerned
as the internal capability of the SMEs and the
source for competitive advantage (Katz, Aldrich,
Welbourne & Williams, 2000). However, survival
needs push for more concern over finance and
marketing functions, hence to the underestima-
tion of human resources management. As such,
workers in SMEs are described as the invisible
workforce (Wilkinson, 1999).
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The Role of Human Resources Practices in Conflict Management
Owners/Managers Role in HRM
Usually, owners/managers take the responsibility
of HRM in small firms employing less than 50
employees (MacMahon, 1996). In this case, effec-
tive HRM would be dependent on the managerial
skills, attitudes and experiences of the owners/
managers. Even though the firm grows larger,
owners/managers might still be unwilling to del-
egate HRM functions. This might be due to the
view that human management is not a technical
matter that requires to hire specialists. The owner/
manager could also be willing to invest resources
into other work areas rather than HRM, as well
(Wilkinson, 1999). For instance, a study conducted
by Matlay (1999) indicates that none of the 540
owner/manager respondents of British SMEs were
prepared to delegate the responsibility of HRM
functions to a specialist. This might also be due to
the view that HRM would be seen as an essential
function to fulfill business strategy. Therefore,
either managers/owners think that for effective
HRM there is no need to invest resources to hire
HR specialists, or HRM is vital for company
growth so that they would like to implement the
HRM functions on their own way. In addition to
mentioned reasons, Hill (2004)’s review on the
barriers for human resources development in small
business indicates that, in some cases owners are
not well educated to consider benefits of effective
human resource planning or short-term survival
issues are more important than considering effec-
tive management of human capital. For instance,
training is perceived as the time away from job,
as well as additional expenses for the owner. The
link between training and performance is not well
demonstrated due to the awareness level of the
owner. On the other hand, employees might not
be interested in training if they think they do not
need to be trained to fulfill their duties. Although
training would contribute to the development of
employees, absence of promotion would demo-
tivate employee desire for training- knowing that
no change will occur even if they improve.
The concern of SME survival, possible fulfill-
ment of HR functions by owner/ managers,and
the limited firm size prevents the existence of
HR department in SMEs as well as limiting our
academic knowledge on human resources man-
agement functions, concerns and needs in SMEs.
What’s more, current HRM theory has been de-
veloped in larger organizations and neglected the
context of small business. Limited literature on
HRM in SMEs offer two models; suggesting that
either there is the happy family streotype charac-
terized by close interpersonal relationships with
employers, harmony, reasonable pay and flexible
work or the bleak house model characterized by
authoritative relations, conflict, long work hours
and low wages (Cunningham & Rowley, 2007;
Richbell, Szerb & Vitai, 2010). Both views seem
contradictory and deliver a conclusion that em-
ployee relations in SMEs might be complex due
to weighted importance of firm survival concerns,
preference of informal management styles and
lack of specialized HR personnel. In addition to
the lack of managerial inability to deal with con-
flicts; external factors such as the state of product
market, increased emphasis on cost reduction, and
customer pressures for the delivery of products
can harm the quality of working conditions and
employer-employee relations, as well (Jones, 2003;
MacMahon, 1996).
Informality and Managerial
Behaviour as Root Causes of
HRM Specific Problems
Informality is an important aspect of small firm
employment relations and culture. Consequently,
most of the SME owners/managers prefer informal
management styles (Matlay, 2002). As a result
informal networks of recruitment, informal styles
of communication and ad hoc responses to staff
problems would be common; leading to complex-
ity, informality and contradiction in employee
relations (Wilkinson, 1999). Matlay (1999)’s study
reveals that nearly 90% percent of the British SME
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The Role of Human Resources Practices in Conflict Management
owners preferred informal management styles.
This said, recruitment procedures were found to
be dependent on the network of the owner/man-
ager and evaluations of training needs were also
based on the expectations and perceptions of the
owners/managers. Another study comparing HRM
functions of Canadian Small and Large Enterprises
indicates a similar finding; as larger enterprises
implement more formal HRM functions compared
to smaller ones (Golhar & Deshpande, 1997).
Especially when HR functions are carried by
owners/managers, managerial behavior becomes
the root cause of HRM specific problems. Due to
close proximity between owner and employees,
relationships are more personalized and proce-
dural informality exists (MacMahon, 1996). In
this respect, disagreements could be taken more
personally and transform task conflicts into rela-
tionship conflicts. Occasionally, when there is no
formal method of expressing disagreements with
managers, or owner/manager does not encourage
the discussion of differing views, the end result
would be lower productivity or staff turn-over, of
which are leading causes of SME failure (McEvoy,
1984). Therefore, conflict in the context small
business receives special attention with regard
to its potential effects on SME failure. In this
respect, we will define conflict and discuss con-
flict phenomena in the context of small business.
CONFLICT DEFINED
Basicly, conflict refers to the disagreements over
any kind of topic. According to Rahim (2002),
conflict is an interactive process manifested in
incompabilities or dissonances within or between
parties. Incompabilities can be over perceptions,
desires, interests, responsibilities and ideas (Al-
most, 2006; Swanstrom & Weissman, 2005). The
conflict process can get started when one party
perceives or feels that the other party is likely to
harm or already harmed their concerns, so that
incompability might be perceived by one party
or disagreements resulting from those incompa-
bilities would already be occuring in a sense that
both parties are aware (Sanson & Di Bretherton,
2011). Thus, conflict can start with the perceived
threat that the other party is about to frustrate the
other, or already frustrated.
Conrad (1990) states that conflict can be
viewed to be a communicative interaction among
people who are interdependent. Interdependence
between parties can increase interaction in which
the struggle of payoff maximization would give
rise to disagreements (Kelley, 2000). This should
not mean that unless people are interdependent,
there will would no conflict. Instead, interdepen-
dence should be considered as a potential element
of conflict.
Scarcity of resources is another factor, which
is very much likely to influence the exchange
process between parties (Brinberg & Wood, 1983)
that can also be regarded as a source of conflict.
Based on the principle of payoff maximization,
it seems reasonable to assume that interdepen-
dent parties would have a tendency to have the
biggest amount of resources. If we think of orga-
nizations as systems that strive for effectiveness
and profit maximization with employees who
have to complete the assigned tasks with scarce
resources, conflict becomes an inevitable aspect
of organizational life.
The desire of the parties to have control over
each other is another factor that leads to conflict
(Fisher, 1977). For instance, power and status
differences can result in the violation of equity
or equality assumptions and set the base for con-
flicting situations (Kabanoff, 1991). In this case,
powerful ones might dominate others and trigger
win-lose dynamics.
Conflict in SMEs
Most of the existing research on conflict has been
done in public or large organizations. Thus, of
interest is, whether the form and consequences
of conflict would differ in the context of small
business (Corts, Boz, Medina, Benitez & Mun-
date, 2011).
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The Role of Human Resources Practices in Conflict Management
It is possible for employees from different
generations to work in a SME. One could think
that those different generations could also work in
large organizations, as well. That is true, however,
considering the small firm size and informality,
employer and employees would have closer and
personal interactions in a SME . In this case, the
incompabilities between different generations’
work values and work related expectations would
be more likely to create generational conflicts.
Generational Conflicts in SMEs
The characteristics of generational groups are
summarized to point out the incompabilities
between generations.
Baby Boomers: Are born between 1946 and
1964. They work hard, are loyal to their employer
and ready to follow chain of command. They ex-
pect job security, authoritative leadership, money
and recognition rewards. They are technically
challenged and prefer face to face contact (Yu &
Miller, 2004).
Generation X: Referred to as Gen Xers are born
between 1965 and 1980. For Gen Xers, work is a
contract, they prefer to work on their own and be
loyal to their profession instead of their employer.
They question people around them instead of
following chain and command. They also expect
flexible and challenging jobs Therefore, they
need instant feedback on how well they are doing
(Haynes, 2011).
Generation Y: Referred to as Gen Y, are born
between 1981 and 2000. They are energetic, not
afraid to express their opinions and have an en-
trepreneurial sprit. They look for creative tasks,
participative climate, instant help and feedback.
They prefer to contact via e-mails and social media
tools (Kapoor & Solomon, 2011).
As Gen Xers and Gen Y have more similar
characteristics, one can expect Baby Boomers to
have disagreements with Gen Xers and Gen Y more
often. If the SME is a family business, disagree-
ments could occur between family members. This
could occur in many facets. For instance, younger
family members would like to participate in deci-
sion making while older family members would
like younger ones to follow their decisions. This
said, younger family members could question the
decisions of older members and would like their
views to be taken into account while older gen-
erations could perceive this as disrespectfulness.
Another possibility is that older parents might not
be willing to let their power go off, they might even
be distrusting the younger family members and fear
that the business will fail with younger members’
leading. Despite everthing, succession planning
could manage generational conflicts among fam-
ily members; as it would help to fairly distribute
company assets, pass control of the business and
maintain family harmony while contributing to the
future growth of family business (Wang, Watkins,
Harris & Spicer, 2004).
Owners/managers and employees could also
have disagreements due to generational differ-
ences, as well. Then, the question is: what are new
graduates looking for from their work and what
are today’s SMEs expecting from their employees?
As mentioned, an SME is characterized by
informal work relations and concerned with the
survival and growth issues. Limited financial
resources would force the owner to pay extra
attention for costs. In that case; the owner who
grew up in the baby boomer generation, would
look for hard working, loyal employees who are
ready to follow whatever they are asked for. This
could mean demanding, routine, repetitive work,
unparticipative climate and long working hours.
On the other hand Gen Xers and Gen Y, would
expect challenging jobs that would contribute to
their skill development, flexible work that would
give them more free time, and participative work
that would let them participate in the work deci-
sions. According to Szamosi (2006), today’s
employees look for supportive management
instead of authority, empowerment and respect,
tangible and intangible benefits as well as training
and development opportunities, open and honest
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The Role of Human Resources Practices in Conflict Management
communication, involvement in the company’s
success. How much of those characteristics hold in
an SME depends on many factors such as market
conditions, industrial and job characterictics as
well as the management style of owners. External
factors could be highly out of the control of the
owner/manager; whereas managerial skills could
be improved in terms of meeting the expectations
of the workforce. Until now, it is evident that par-
ties could have opposing views and expectations
due to generational differences. However, there
should be more conflict scenarios based on the
contextual characteristics of small business. Let
us see what they are.
Vertical Conflict in SMEs:
Disagreements Among Owners/
Managers and Employees
As previously mentioned, small businesses
can start with the efforts of an entrepreneur or
collobarative efforts of family members. In the
entrepreneural condition, there would be one
owner that would be willing to do anything for
the survival of the firm. Hence, the owner would
build a strong emotional bond between the self
and the firm. This bond can effect the professional
management style of the owner as well as his/her
desire of having control on every detail of work-
related issues. The desire to have control over
all aspects of the small business would lead to a
climate of distrust and anxiety in the work place.
Evidence indicates level of trust and psychological
safety would transform task conflicts into personal
conflicts (De Dreu & Weingart, 2003). Therefore,
one can expect destructive superior-subordinate
conflicts to exist in SMEs.
Since the primary motivation of the owner
would be to work for the survival and profit of
the business, cutting expenses would be the best
choice based on the idea of getting maximum
output with minimum inputs. However, cutting
expenses would lead to scarcity of resources, which
is one of the most common sources of conflict
(Brinberg & Wood, 1983). Salaries, compensation
and benefits would be negatively effected while
the owner would push employees to work longer
hours; which would decrease perceptions of justice
and form the basis for decreased motivation and job
satisfaction, (See McFarlin & Sweeney, 1992 for
a review of organizational justice consequences).
If the small business is run by a family and
characterized in a non-bureacratic structure, family
member owners and non-family member employ-
ees would co-exist together, in a close manner
during the work hours. The amount of interaction
would increase perceived incompatibilities and
disagreements. Power and status differences could
also to lead to conflicts between parties (Corts
et al., 2011). Another source of conflict between
family owners and non-family employees would
be the perceived fairness of decision processes and
outcomes; closely related with human resources
management functions such as performance ap-
praisal and compensation (Barnett & Kellermans,
2006). The granting of certain privileges to certain
individuals or relatives, known as nepotism, can
be highly common in small business. Nepotism
effects the objectivity of selection, performance
appraisal and rewarding processes. As nepotism
has consequences on the effectiveness of an
organization due to hiring incompetent relatives
without proper selection procedures, it can also
effect organizational loyalty, job satisfaction and
individual performance of the work force in nega-
tive terms (Keles, Ozkan & Bezirci, 2011; Asuna-
kutlu & Avcı, 2010). As can be seen, mentioned
conflict sources seem to be related to informality
of managerial behavior and managerial influence
on HRM specific issues.
Managerial Conflict in SMEs:
Disagreements Among
Family Members
If the small business is started with the collab-
orative efforts of family members, certain family
dynamics are likely to influence family members’
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The Role of Human Resources Practices in Conflict Management
work relations. In other words, the family would
exert influence on business while business exerts
influence on the family (Jernigan & Lord, 2010).
Conflicts in the family life would be transferred
to the conflicts at work place, as the family life
will get involved with the business life. Therefore,
relational conflicts would integrate with conflicts
at work, mainly because of power struggles; such
as who will make the decisions and who will be
the next leader (Fisher, 1977).
Family members are usually different from
the founder, as well (Davis & Harveston, 2001).
For instance, the founder’s main concern would
be firm growth, hence investing resources for
developmental issues. On the other hand, family
members might be interested in spending those
resources to achieve a certain life style due to
not having a desire to run family business. State
of power sharing in ownership and generational
differences in terms of work values, attitudes and
expectations could also lead to destructive con-
flicts (Brun de Pontet, Wrosch & Gagne, 2007).
Excessive usage of financial capital, the division
of compensation and benefits is another source of
conflict, especially among younger members of
the family, rising in the form of payoff maximiza-
tion. This said, conflict between family member
owners would have several adverse effects on the
organizational climate as those conflicts can have a
negative impact on the management of employees.
Horizontal Conflict in SMEs:
Disagreements Among Co-Workers
Until now, we considered the SME as an organiza-
tion with employees who work under the control of
an owner/manager, or a family business including
family member owners and non-family member
employees. However, as the organization grows
larger, staff managers could be hired to define the
roles of line personnel; of whom directly operate
or produce. Traditionally, staff managers coun-
sel, assist and advice line personnel but has no
formally defined authority in the other portions
of the organization (Browne & Golembiewski,
1974). Consequently, staff managers work in close
interaction to the line personnel. In this case, task
dependence, shared resources, power struggles
and role ambiguities of staff specialists and line
personnel become main sources of line-staff
conflicts (Walton & Dutton, 1969).
A systematic job analysis provides job descrip-
tions and clears roles associated with the jobs.
However, in a small-medium enterprise, processes
are less formalized and less structured. This is a
source of role ambiguity as employees are required
to fulfill a large variety of tasks and go beyond their
responsibilities (Bernhard & O’Driscoll, 2011),
which could give rise to disagrements between
co-workers; in terms of work distribution. Previ-
ously mentioned, nepotism is a source of conflict
among family members and non-family employ-
ees. Moreover, it might also trigger interpersonal
conflicts between co-workers, due to the feelings
of anger triggered by favoritism. Co-workers might
also carry the deadweights of incompetent others
as result of the inappropriate match between the
person and the job (Donnelley, 1964).
Since human resources management do not
posses a clear function of conflict management,
the indirect contribution of human resources
management functions (selection, performance
appraisal, training, reward systems) to conflict
management could be considered. In this respect,
each HR function could act as a predined remedy
for the potential sources of conflict regarding the
context of small business.
CONFLICT MANAGEMENT
THROUGH HRM FUNCTIONS
A newly established firm with small numbers of
employees might not need to hire HR specialists
as HR functions could be carried by owner/manag-
ers. However, as the firm grows larger, the need
for professional management and formal regula-
tions would be necessary as the owner/manager
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would be overwhelmed with increased amount of
tasks. Therefore, at the growth stage, hiring HR
specialists to implement effective HRM would
become necessary.
Human resources management can be defined
as an approach to the management of human capital
in an organization; in terms of contributing to the
achievement of organizational goals through hu-
man assets (Armstrong, 2008). Effective human
resources management starts with the selection
process as selection is concerned with match-
ing available human resources to jobs. Second
step is performance appraisal, highly essential
for determining the developmental needs of the
workforce. As a result of performance appraisal,
training would provide adequate knowledge, skills,
abilities that would contribute to performance.
Another function of performance appraisal is re-
warding employees which would also contribute
to employee performance through motivation.
Hence, the purpose of human resources manage-
ment is to improve the productivity of people at
the organization through HRM functions (Werther
& Davis, 1989).
Selection
All other functions of effective HRM follow after
recruitment as the primary objective of HRM is
to attract and select the most appropriate human
capital in the organization. Proper selection en-
ables person job fit and person organization fit. It
has the power to predict future job performance
of the selected employee, as well. Making selec-
tion mistakes is costly for an SME due to smaller
number of employed personnel; as each personnel
constitutes a greater percentage of the workforce
compared to larger enterprises (Wyatt, Pathak &
Ziberras, 2010).
Rated to be a key component of organizational
success in small business (Williamson, 2000),
selection is essential for the future success of
SMEs. Occasionally, informality and managerial
styles have high influence on small firm HRM
practices due to owner/managers having the
sole responsibility and control over HRM proce-
dures (Matlay, 2009). Therefore, more informal
employee selection practices, such as employee
referrals and unstructured interviews are known
to adapted in SMEs (Dessler, 2013). Many SMEs
do not conduct job analysis and do not validate
the effectiveness of their selection processes, as
well (Singh & Wohra, 2009).
In this respect, what are the steps of effec-
tive selection? And how can SMEs adapt those
steps? Generally, three basic steps are known to
be common in effective selection. First, owner/
managers need a sound job analysis to prepare
proper job descriptions that includes the selec-
tion criteria. Job descriptions define the job in
terms of its task requirements and include detailed
information such as characteristics of the job, pro-
cedures, methods, and standards of performance.
Job specifications refer to people requirements;
these are knowledge, abilities, skills and other
personal characteristics required to perform the job
(Voskuijl, 2005). Those specifications will serve
as selection criteria. Second, based on the selec-
tion criteria, appropriate selection tools should be
decided. Those include personality and aptitude
tests, blank forms, curriculim vitae evaluation, in-
terviews or assessment centers. Finally, validation
of the selection would help to determine whether
selection was reliable, valid, fair and successful
(Cook, 2009). However, implementation of those
steps might not be possible for every SME due to
lack of trained personnel or it might not even be
necessary in every occasion. Therefore; owners/
managers should consider the context of their
business such as the firm size, the growth objec-
tives and the qualifications of vacant positions
when deciding on the appropriate selection steps.
By way of job analysis, internet resources such
as O*NET, can help owners/managers at writing
job descriptions and defining job specifications.
Building applicant pools is possible with inter-
net, as the owners/managers can post positions
via social media tools. Some personality and
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The Role of Human Resources Practices in Conflict Management
aptitude tests could also be easy to use if certain
employee characteristics should be evaluated in
a more objective manner (Dessler, 2013). Inter-
views would be good performance predictors if
they are structured (Sadler-Smith & Lean, 2004).
Structured interviews requires owners/managers to
prepare for the interview, such as defining specific
evaluation factors, conduct the interview, and then
match the candidate to the job (Dessler, 2013).
An objective and fair selection process will
help to overcome nepotism and perceptions of
unfairness.Clearly defined jobs will enable to
overcome role overload and role conflict by fair
distribution of work. As a result, implementation of
sound selection procedures will eliminate sources
of conflict such as jobs, mismatch be-
tween the person and the job, fairness perceptions
and nepotism. Therefore, selection can act as a
predefined remedy for potential conflicts rising
due to work-related ambiguities, unfair staffing,
deadweights of incompetent others and favoritism.
Performance Appraisal
Performance appraisal is the process by which
organizations determine goals, evaluate work and
distribute rewards (Varma, Budhwar & Denisi,
2008). Therefore, primary objective of perfor-
mance appraisals is to enable the utilization of
human capital, Second, appraisal results reveal
areas of incompetency, and guide managers to
decide on the content of training for knowledge,
skills and abilities that needs to be improved. Third,
appraisal results will identify high performers. In
this respect, appraisal results will guide manag-
ers to decide on motivating high performers with
rewards or other benefits to pursue organizational
goals (Arthur, 2008). Consequently, the results of
the appraisals would help managers decide the ap-
propriate action to implement; such as increasing
performance through training or motivating high
performers through effective reward systems. In
this respect, performance appraisals are essential
to increase organizational effectiveness.
The requirements of an effective system in-
clude defining the employee goals driven by the
business strategy, defining sound performance
criterion to make systematic judgments and giving
performance feedbacks to employees regarding
continuous improvement (Tyson, 2006). Many
large enterprises have performance appraisals
systems (Lawler, Benson & McDermott). It is
evident that large enterprises could implement
performance appraisal systems with formal pro-
cedures whereas informality of the small business
could be effecting the fairness and objectivity of
performance appraisals. Well, first we should
know whether SMEs implement performance
appraisal systems. If yes, then how do SMEs
evaluate employee performance?
Research evidence indicates small firms in New
Zealand have informal performance appraisals in
line with the informal managerial styles adapted
due to small context of the business. There was
no clear evidence of employee goal setting. Own-
ers/managers evaluated performance based on
subjective judgments made through the available
data; such as sale returns, customer feedbacks and
actual job performance (Gilbert & Jones, 2000).
Another study conducted among Australian small
firms revealed that it was common to set employee
goals and evaluate performance against goal sets.
However, evauations were heavily relied upon
management and supervisor control of appraisal
functions. Existence of performance appraisal was
related to the firm size and existence of HR man-
ager (Wiesner & McDonald, 2001). It seems SMEs
can conduct performance appraisals through the
subjective judgments of owners/managers. It might
not be possible to implement formal performance
appraisals in the informal context of small busi-
ness. However, the level of subjective judgments
could harm fairness perceptions of employees and
discourage them to perform well on their jobs. This
could lead to poor performance, absenteeism, turn
over, dissatisfaction and hostile attitudes towards
the organizations.Taken together, increased nega-
tive affect could influence organizational climate
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The Role of Human Resources Practices in Conflict Management
in negative terms and act as a source of conflict.
To overcome negative consequences of subjec-
tive performance evaluations; owners/managers
should try to adapt more objective performance
criterion based on the job specifications. Em-
ployee goals could be set in line with the growth
objectives of the firm. Structured performance
appraisal interviews could be conducted includ-
ing a review of job responsibilities, a review of
performance standards, employee performance,
setting goals and development of an action plan
(Beaver & Hutchings, 2004).
Training and Development
Training refers to planned efforts to facilitate em-
ployees’ learning of job-related competencies that
are critical for successful job performance (Noe,
2008). As such, training contributes to employee
development through improving knowledge,
skills, abilities, competencies. Required attitudes,
behaviors and human relation skills are other
developmental areas that could be improved with
training (Tyson, 2006). However, in order to omit
the risk of doing too much or too little training,
organizations must conduct training needs analy-
sis. Need analysis will identify the areas of per-
formance deficiencies that needs to be improved.
Need analysis requires data gathering through
interviews, observations, tests, performance ap-
praisals or group discussions. Justifying the costs
and benefits associated with training could also
guide the managers to decide on the appropriate
training methods (Brown, 2002).
Training could be seen as an investment
regarding the development of human capital in
the organization; hence directed towards effec-
tive work performance and to the development
of organizational performance. In this respect,
training is highly essential for the improvement
of internal capabilities. The positive relationship
between training and firm productivity has been
well established in the context of large enterprises
(Black, Noel & Wang, 1999). This finding suggests
a similar relationship to exist between training and
firm productivity in SMEs. Both employees and
managers in SMEs could also be receiving less
amount of training compared to their counterparts
in larger enterprises (Hoque & Bacon, 2006). As
training requires systematic methods of analysis,
formal procedures and financial resources, how
do SMEs compete with larger enterprises in the
era of training their employees?
Research indicates most of the Indian SMEs
preferred to hire trained employees who need no
further training. The majority of the companies in
the sample implemented on the job training after
recruitment. A small amount of SMEs offered
in house training by training specialists (Singh
& Vohra, 2009). Another study reports 60%
percent of the SMEs in the Australian sample
had training budgets whereas offering training
for younger personal and re-training for older
personnel due to new technology demands. Both
internal and external providers ran training in the
organization. Training was also related with the
firm size and presence of HR manager (Wiesner
& McDonald, 2001). Another study conducted
in Britain reported that majority of the SMEs
analyzed training needs based on the perceptions
and expectations of owners/managers. Training
evaluation, provision and feedback were carried
out informally, as well. Only a small number of
owners preferred to outsource formal training as
they thought it was required and managers’ time
was limited to provide in house training (Matlay,
1999). In this respect, it is evident that informal-
ity influences training function carried in SMEs.
However, owners/managers could still improve
training activities with minor changes instead
of solely relying upon subjective experience.
For instance, they could consider internet-based
training or implement a four step training program
themselves. This requires writing a job description,
developing a task analysis record form, develop-
ing an instruction sheet and preparing a training
program (Dessler, 2013).
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The Role of Human Resources Practices in Conflict Management
Then, how could training and development of
the workforce act as a predefined remedy regard-
ing workplace conflicts? First, as training would
contribute to the performance of the workforce,
employees could well be developed in terms of
fullfilling their tasks- this means high performers
would not have to carry the weight of incompe-
tent others. This would prevent sacrificing own
work time to help others and potential failure in
projects that requires teamwork. Second, training
could directly attempt to improve human relations
skills and conflict handling behaviors if designed
with relevant training content.
Reward Systems
One of the most important elements of work is pay,
it is what drives and rewards the employees for
the work they do (Tropman, 2001). Consequently,
what employees need and expect from work is
the key to an effective reward system (Richbell
& Wood, 2009). In this respect, organizations use
monetary (pay and benefits) and non-monetary
rewards (recognition, flexible work, psychologi-
cal characteristics of work) as motivation tools
(Heneman, Fisher & Dixan, 2001). Besides
organizational, industrial, job and employee
characterictics, performance appraisal results
could also serve as a source for the allocation of
rewards (Greer, 2001).
Why do organizations use rewards? First, it is
the employer’s obligation to pay for employee ef-
forts. Second and most basic, it is what motivates
the workforce to work for the survival and growth
of the organization. SMEs might not afford high
salaries compared to larger enterprises. However,
they can offer additional time off, compressed
workweeks and flexibility because of their
relatively small size. The small size of business
could also enable recognition of the employees
(Dessler, 2013).
How could rewards influence conflict? At first,
they do not seem much related. However, research
indicates the consequences of justice perceptions
regarding organizational benefits and compensa-
tion systems can be desctructive or constructive
in terms of having positive or negative influence
on employee behaviors, attitudes and emotions
(Martin & Bennett, 1996). A fair reward system
based on objective performance evaluation would
motivate employees to perform better while facili-
tating positive attitudes towards the organization.
On the other hand, an unfair reward system would
negatively effect the morale level of the workforce;
leading to hostile feelings among staff. The end
result would be a negative organizational climate
vulnerable to conflict. Favoritism among staff
personnel would lead to decreased trust towards
management; knowing that no change will occur
even if they perform well, the employee might
feel discouraged to perform well and continue
working in the SME. In this respect, once more
we direct our attention towards the informality
of small business. Nepotism and unfairness per-
ceptions are highlighted as potential sources of
conflict among staff and towards management;
hence highly essential.
RECOMMENDATIONS
So far, we have discussed the conflict phenomena
in the context of small business as well as the indi-
rect contribution of HRM functions in managing
conflicts. Regarding the conflict issues discussed
in the preceding section, some suggestions for
small-medium enterprise owners are presented
as follows:
• Accept conflict as a natural phenomena
that occurs in every work place. Try to re-
solve relationship conflicts. However, en-
courage moderate levels of task conflict to
increase the potential of your staff.
• Arbitrary management practices would
create psychological conflicts within your
staff. Keep in mind that conflict within the
self is a source of stress that would hinder
work performance.
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The Role of Human Resources Practices in Conflict Management
• Since unfairness perceptions of your work-
force would hinder organizational effec-
tiveness as the end result, implement fair
procedures to increase fairness perceptions
of your staff.
• Develop your conflict management skills.
Manage your emotions and consider the
characteristics of the situation to decide on
the best conflict handling strategy.
• Enhance the amount and quality of the
communication with your staff. If you are
an approachable leader, they would be
willing to ask for your help in unresolved
destructive conflicts.
• If the SME is established as a family busi-
ness, succession planning could act as a
predefined remedy for generational and
managerial conflicts. Basic steps of suc-
cession planning include successor de-
velopment, management of generational
differences and establishing a fair compen-
sation system.
• Successor development requires effective
mentoring and training of the successor.
Jobs and competencies that need to be de-
veloped should be specified and developed
step by step.
• Inter-generational differences should be
managed with empathy. Formal procedures
could help to overcome disagreements in a
more professional manner.
• Fair compensation system should be estab-
lished in order to satisfy both family and
non-family members.
• Be an objective third party in staff conflicts.
Enhance the communication between your
staff and let them overcome their incom-
pabilities. Motivate them to work for the
common goals of your organization.
• Share your vision with your staff and let
them be a part of your accomplishments.
• Pay attention to the needs of your work-
force, as their accomplishments will be
your accomplisments. Emphasize for the
harmony and team spirit. Remind yourself
that they are the people who work for the
survival and growth of your organization,
same as you do.
• Hire HR people to carry out HR func-
tions as your firm grows larger. Start the
HR management process with well-defined
jobs as jobs are antecedents of
role conflicts and intragroup conflicts
among your staff.
• Try to establish job analysis and formal
training methods for proper selection.
• Implement fair and objective performance
appraisal systems through effectively car-
ried HR functions. Make sure results of
performance appraisals are linked with
training needs and reward systems.
• Provide training for the development of
your staff. Know that your staff can im-
prove their conflict management skills.
FUTURE RESEARCH DIRECTIONS
Rapid growth in technology fosters globalization
and ambiguity in work environments. Hence,
future organizations will be in search of more
efficient ways to adapt those changes as larger
organizations are at a disadvantage of being
inflexible in terms of adapting to environmental
changes. From this stand point, the number of
small- medium enterprises can increase. Thus,
future research should consider the variables of
interest in the context of small business.
In this respect, sources of conflict in small-
medium enterprises, should be investigated. As
such, conflict in small business would become
more specific. Second, outcomes of constructive
and destructive conflicts should be investigated
in small and medium enterprises. At this point,
qualitative data would suggest more in depth
knowledge as a starting point to build research
models. For instance, what is the mediating role
of conflict between firm characteristics and orga-
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The Role of Human Resources Practices in Conflict Management
nizational outcomes? How does owner perceptions
of conflict influence conflict management strate-
gies of the staff? What is the role of conflict in
predicting performance and turn-over rate? How
do employees deal with conflict in the context
of small business? Are there certain strategies
preferred or do owner’s characteristics influence
conflict handling behaviors of the employees? Are
role conflicts common due to jobs? Do
fairness perceptions of HR practices influence
conflicts among the staff? When do owners need
HR people? How can owners and HR people
foster a positive organizational climate-are there
specific, small business related implementations?
Literature survey on HR practices in conflict man-
agement and HR management in small-medium
enterprises indicates more research is needed in
terms of increasing small business related con-
flict management and HR practices in managing
context-related conflicts.
CONCLUSION
This chapter has demonstrated the types and
sources of conflict considering the character-
istics of small-medium enterprises. Conflict is
inevitable; beneficial if managed and harmful if
non-managed. It could be a significant contribu-
tor of creativeness and work performance or a
threat for the quality of relationships that would
hinder the work performance. Unresolved and
emotion loaded personal conflicts experienced
in the context of small business can become a
source of negative attitude towards the job and
the organization. End result would be decreased
commitment and intent to leave. Considering
the self-growth opportunities in terms of career
development, small-medium enterprises might
not have much to offer when compared with the
opportunities employees have in larger organiza-
tions. Therefore, owners face to lose their trained
and valuable human assetts if they do not manage
the morale level of their workforce, properly.
As the organization grows in size, the owner
will start to deal with more demanding issues.
Time and other likely constraints would decrease
the owner‘s interest in needs of the workforce.
This said, HR department would become a ne-
cessity in terms of managing the effectiveness of
human capital, quality of organizational climate
and human relations. Basicly, we emphasized the
importance of identifying the sources of conflict
and curing destructive conflicts with predefined
remedies through the effective implementation
of HR functions. This was the main message
for small-medium enterprise owners/managers;
hoping that future research would identify more
implementations to manage work conflicts consid-
ering the characteristics of small business context.
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KEY TERMS AND DEFINITIONS
Conflict: Disagreement over any kind of issue.
Conflict Management: Strategies and behav-
iors parties adapt to resolve the disagreements.
Human Resources Department: A work team
of individuals who work towards the effectiveness
of human capital in an organization.
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The Role of Human Resources Practices in Conflict Management
Human Resources Functions: The functions
that are carried out to increase the effectiveness
of human capital in an organization.
Job Analysis: The cornerstone of human
resources functions, that aims to break a job into
smaller units to determine knowledge, skills, abili-
ties, competencies and personality characteristics
that an individual should possess to perform the
job.
Nepotism: Hiring relatives or incompetent oth-
ers regardless of considering their qualifications.
Small-Medium Enterprise: An organization
that employees less than 250 employees.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 9
DOI: 10.4018/978-1-4666-4731-2.ch009
Occupational Health
and Safety in SMEs:
Overview as a Part of Management System
ABSTRACT
Employees of Small- and Medium-Sized Enterprises (SMEs) are exposed to higher risks than the em-
ployees of larger ones, and SMEs have difficulties in controlling risk. Many countries have noticed the
potential of the SMEs, and they judge employment and economic growth to a great extent based on these
enterprises. The studies regarding this subject have increased during the last decade, parallel to the
political and economic interests in occupational health and safety in SMEs. The objective of this chapter
is to reveal general conclusions on effective approaches to prevent occupational diseases and injuries
in SMEs and to gain information related to employment, welfare and health facilities, health education,
legislation, occupational health, and safety management as a part of integrated management systems and
other safety activities. The chapter also aims to facilitate developing an informative perspective about
Occupational Health and Safety Management Systems (OHSMS) in SMEs by emphasizing the drivers,
benefits, and barriers of SMEs trying to adopt these systems.
INTRODUCTION
OHSMS has been developed as a mean of control-
ling risks of hazards at workplaces. Such develop-
ment occurs in many organizations because of the
tightening regulations about occupational health
and safety and the need for effective and efficient
management of health and safety.
Considering the fact that SMEs generate
employment to majority of the workforce, they
need to be pointed out as an important element
of countries’ economical structures. The great
majority of businesses in the European Union
and elsewhere are smaller businesses (European
Union 2006). In the United States, 97% of all firms
employed less than 500 employees in 2003 (US
Bureau of the Census 2006).
Another example is China, where SMEs are
playing more and more important roles in the
national economy and the social development of
the country. With the significant contribution of
SMEs, China has become one of the world’s largest
Burcu Özge Özaslan Çalişkan
Istanbul University, Turkey
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Occupational Health and Safety in SMEs
developing countries. The SMEs have become an
important driving force of economic growth. In
China, more than half of gross domestic product
per capita (GDP) and social sales, more than 70%
of the newly added industrial output value, more
than 40% of tax and more than 60% of total exports
are created by SMEs (Jingdong, & Han, 2012).
SMEs create and provide jobs and have become
sources of innovation. They create competition
between enterprises and employees. It also has
to be noted that employers have responsibilities
to ensure the safety of their workers. As long as
accidents and injuries occur at work, responsible
organizations will try to improve workplace safety.
However, the existing legislation are not suf-
ficient to protect millions of employees (Clarke,
2006; Clarke&Robertson, 2008; Seneviratne &
Phoon, 2006). Nevertheless McCallum, Schofield
and Reeve (2013) indicated that judges in their
study did see employers as centrally responsible
for failures in workplace safety; however, some
judges also struggled with the complex nature of
occupational health and safety breaches, which
they also thought could be attributed to worker
carelessness in some instances. Legislation and
regulation are used by governments around the
world aim to protect workers against health and
safety risks at work. A government can propose
new legislation which needs to be passed as law
by a legislative body. Enforcement of occupational
health and safety legislation is conducted in most
countries by special government enforcement
agencies. Additionally, there are many agencies
which help to implement occupational health and
safety standards and regulations, such as social
insurance agencies, private insurers, or certifiers
of management systems. Only specific agencies
have the power to enforce compliance, however.
In many European countries the so-called “labour
inspectorate” is responsible for occupational health
and safety legislation enforcement. In the United
Kingdom, it is the responsibility of the Health
and Safety Executive. In the United States it is
the Occupational Safety and Health Administra-
tion’s responsibility. Even though the agencies’
names differentiate, their duties and instruments
are essentially the same (Mischke et. al., 2012).
A small firm was defined as employing be-
tween 5 and 19 workers and a medium firm as
having between 20 and 199 employees (Kotey
& Folker, 2007). Based on this definition, firms
with 5-199 employees can be specified as SMEs.
European Union Commission has provided a
different perspective, stating that the category of
SMEs is made up of enterprises which employ
less than 250 people and have an annual turnover
not exceeding EUR 50 million, and/or an annual
balance sheet total not exceeding EUR 43 mil-
lion (Official Journal of the European Union,
2003). Furthermore, in the “Annual report on
small and medium-sized enterprises in the EU,
2011/12” SMEs are emphasized as they form
the backbone of the EU economy –accounting
for 99.8% of non-financial enterprises in 2012,
which equates to approximately 20.7 million
enterprises. The overwhelming majority (92.2%)
are micro-enterprises, defined as those with fewer
than ten employees. Small enterprises (employing
between 10 and 49 employees) account for 6.5%
of SMEs in the EU and 1.1% are medium-sized
(50-249 employees). Large businesses, with more
than 250 employees, comprise only 0.2% of enter-
prises in the EU’s nonfinancial sector (Wymenga,
Spanikova, Barker, Konings, & Canton, 2012).
SMEs form a major proportion of the com-
panies all around the world. SMEs often lack
the facilities, resources and work systems that
characterize larger firms (Gardner, Cross, Fon-
teyn, Carlopio, & Shikdar, 1999). There is lower
participation in the prevention of occupational
hazards in such organizations, because financial
costs and time are often a problem for the com-
panies. The lack of skilled personnel and the lack
of access to necessary information are also one of
the reasons resulting in poor occupational health
and safety practices.
To set guidelines for good health and safety
management practices, national frameworks for
each country have to be considered. Implementa-
tion of health and safety management systems can
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Occupational Health and Safety in SMEs
only be effective if the top management supports
the process. Health and safety management must
be integrated in a policy on the work environment
issue. Risk assessment is the other important pro-
cess about health and safety in the companies. If
senior managers are unable to find time to take
interest and do not take an active role in health
and safety, it cannot be possible to suppose that
the attitudes and performance of junior managers
and the other employees will be affected posi-
tively. The promotion of health and safety should
not only be a function of good management, but
should also be a normal management function
in an organization. Health and safety should be
treated like any other major management function
in companies and should be based on Deming’s
plan-do-check-act (PDCA) model of continuous
quality improvement (Robson et al., 2007).
OHSMS in the organization has five main
sections which follow the internationally accepted
Deming cycle of PDCA, which is the basis to
the “system” approach to management. These
sections are namely policy, organizing, planning
and implementation, evaluation and action for
improvement (Booth & Lee, 1995).
The workforce is a valuable factor for com-
panies. SMEs’ employees are usually younger,
less experienced and less educated than their
counterparts in large firms. Urwin, Karuk, Bus-
cha, & Siara (2008) stated that the proportion
of employees who have a degree level or higher
qualification rises from 15.2 to 31.3 per cent of
employees, as it moves up from consideration of
micro-businesses to those with more than 250
employees. All other employees who report a
lower level of ‘highest qualification’ make up a
larger proportion of employees in smaller busi-
nesses. This situation may increase the risk of
accidents occurring in small organizations. Due
to the lack of knowledge, education, and required
information about health and safety; employees
may not necessarily be aware of the risks they
come across. They do not know how to protect
themselves. In general, employees are less aware
of internal factors, for which they have the control.
They usually tend to attribute health and safety
problems to external factors.
The other dimension of occupational health
and safety management is the workplace. Most
employers tend to underestimate the importance
of risk in workplace. They tend to adopt risk as a
natural factor of the work activity. As a result, they
do not attribute much importance to prevention.
They usually do not have a systematic approach
about health and safety. In order to manage oc-
cupational health and safety in an organization,
the starting point must be gathering information
about the company. Thus, the managers who are
responsible from the safety activities need to have
full understanding of all present health and safety
arrangements about the company. The managers
have to accept health and safety as an integral com-
ponent of management. On the other hand, know-
ing about positive motivators like reduced lost time
and overhead costs, improved quality control and
productivity, enhanced company image, increased
awards and benefits will be motivating for both
employees and the managers. Risk management
is also important for managing health and safety
in the workplace. In order to develop OHSMS,
the risks of workplace has to be evaluated. Health
and safety has to be managed in SMEs with the
help of practical activities, risk assessment, us-
ing personnel protection equipment, accident
investigation, measuring safety performance
and developing safety culture. Around the three
dimensions which are “employees”, “workplace”
and the “top management”, OHSMS has to be
improved in SMEs.
LITERATURE REVIEW
During the past few decades conditions at work,
and occupational health and safety have greatly im-
proved all over the world, but the general situation
still remains below the necessary requirements.
Working conditions of the majority of employees
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Occupational Health and Safety in SMEs
do not fulfill the minimum standards and guide-
lines set by the International Labour Organization
(ILO) and the World Health Organization for
occupational health, safety and social protection.
Kheni et al. (2008) argued that accident rates in
developing countries are inadmissibly high and
it is estimated that the numbers will increase in
direct proportion to the speed of industrialization.
The most important components to decrease the
accident rates can be listed as the presence of
safety officers with higher ranks; the presence of
such managers who were personally involved in
safety activities; training for new employees, with
frequent retraining for existing employees; and
more pervasive lines of informal communication
between higher management and workers, e.g.
daily communication between supervisors and
their teams (Mearns, Whitaker, & Flin, 2003).
Most of the studies show that SMEs have dif-
ficulties in implementing formal systems, and they
find it extremely difficult to manage occupational
health and safety (Champoux & Brun, 2003;
Kongtip et al., 2008; Kheni, Gibb, & Dainty, 2010).
Although SMEs have got significant economic
driving force, accidents occur more frequently in
SMEs compared to larger organizations. Informal
management styles, lean management structures
and absence of bureaucratic procedures that form
key characteristics of SMEs all influence against
the formal and transparent processes required by
health and safety management systems, and only
few successful examples of simplified health and
safety management systems exist (Kheni et al.,
2008). SMEs are more fragile financially, which
makes occupational health and safety investments
less attractive for them, because the financial ben-
efits of prevention are not observed in the short
term (Lamm, 1997). Furthermore, SMEs manag-
ers/owners tend to be personally responsible for all
management functions in their firms without any
management training and consultative arrange-
ments. Occupational health and safety programs
are often poorly developed or absent (Gardner et
al., 1999). Vassie, Tomas, and Oliver (2000) found
that SMEs spent between three and five hours per
week on health and safety management matters,
indicating that in most cases the enterprises did not
employ a full-time health and safety professional
and that health and safety management was only
part of the respondent’s job. As a result, it can be
professed that occupational safety and health is
very low on their priority list.
Hasle and Limborg (2006) classified literature
about occupational health and safety in SMEs.
There are seven groups of research included:
work environment and health (18%), workplace
culture (11%), organization of preventive health
and safety activities (25%), methods and tools
(30%), intermediaries and support systems (32%),
regulation and legislation (7%), economy and work
environment (3%). Apparently, most of the studies
concerning the subject are about intermediaries
and support systems.
A survey indicated that the majority of small
firms regarded health and safety as important,
but adopted a “common sense” approach to it.
It was also considered that regulations were too
complex and time consuming. Thus, SMEs were
reluctant to approach the UK Health and Safety
Executive fearing that it might stimulate a visit
(Vassie, Tomas, & Oliver, 2000).
Occupational Health and
Safety Management System
and Related Systems
The management system is best viewed as an
organizing framework that should be continually
monitored and periodically reviewed. It provides
effective direction for an organization’s process
management activities in response to changing
internal and external factors. OHSMS is the part of
the management system in an organization (Noble,
2000). OHSMS is differentiated from traditional
occupational safety and health programs by be-
ing more proactive, internally integrated better
and by incorporating elements of evaluation and
continuous improvement (Robson et al., 2007).
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Occupational Health and Safety in SMEs
General Scope of Occupational
Health and Safety
Management System
The identification of hazards and their correspond-
ing control measures provides the foundation for
a safety program and essentially determines the
scope, content and complexity of a successful oc-
cupational health and safety management system
(Makin & Winder, 2008).
Due to complex business operations, regula-
tion-based occupational safety and health activities
are often forced to shift autonomous risk-based
activities. Occupational health and safety manage-
ment systems are considered to be a solution to
this problem. When occupational safety and health
programs are incorporated into OHSMS, they
are conducted under management leadership and
monitored as major aspects of business activities
(Mori, Kameda, & Kobayashi, 2006).
Redinger and Levinge (1998) developed a uni-
versal occupational health and safety management
system assessment instrument. Management com-
mitment and resources, employee participation,
occupational health and safety policy, goals and
objectives, performance measures, system plan-
ning and development, OHSMS manual and pro-
cedures, training system, hazard control system,
preventive and corrective actions, procurement
and contractor selection, communication system,
evaluation system, continual improvement, inte-
gration, and management review are the main
sections of this universal occupational health and
safety management system assessment instrument
(Redinger & Levine, 1998).
OHSMS provides a set of tools that enhance
safety risk management efficiency related to all
the organization’s work activities. This system
should be considered as a key part of the manage-
ment systems of any organization (Santos, Barros,
Mendes, & Lopes, 2013).
Integration of OHSMS and the
Other Management Systems
Noble (2000) argued that an organization should
have only one management system-not a stack of
them- and OHSMS should be integrated into the
existing organizational system. The integration
of OHSMS into broader management systems
was regarded in the literature and in consultations
as necessary for effective OHSMS (Gallagher,
Underhill, & Rimmer, 2001). For example, the
integration of occupational safety health man-
agement system and environmental management
system can help companies to find solutions that
handle both environmental and safety risks in an
optimal way, therefore, further effort is required
to develop the integration of occupational safety
health management system and environmental
management system performance evaluation
(Chen, Wu, Chuang, & Ma, 2009). Integration of
the safety function with other management func-
tions such as quality and environment is argued to
result in improved business performance and the
important elements of an integrated management
system that includes employee involvement, com-
munications, training, documentatiton, records,
hazardous materials, emergency preparedness and
contingency planning processes and use of equip-
ment, tools and the facility (Kheni et al., 2008)
The ultimate goal of using integrated manage-
ment systems is to reduce time to perform tasks
and to increase efficiency while reducing costs,
waste, and personnel injuries. There is tremendous
benefit to integrate the management processes
together (Noble, 2000).
From the perspective of Deming cycle of
PDCA, the principles of OHSMS are divided into
five sections as mentioned above. The policy and
planning include setting of the goals, determina-
tion of the safety objectives and priorities, and
preparation of the working program to achieve the
objectives (Kuusisto, 2000, p.33). An organization
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Occupational Health and Safety in SMEs
should define its process control policy to ensure
commitment to the management system. Execu-
tion of management’s policy should be evident
in internal documents and procedures, including
management, supervisors, and staff training. The
policies should include conformance to regulatory
requirements, systematic risk assessments and
process control evaluations (Noble, 2000). The
safety policy should be put into practice through
careful planning of the safety activities (Kuusisto,
2000, p.36).
Planning and implementation contains the
elements of initial review, system planning,
development and implementation, occupational
health and safety objectives and hazard preven-
tion. Through the initial review, it shows where
the organization stands regarding occupational
health and safety, and uses this as the baseline
to implement the occupational health and safety
policy (ILO, 2001). For effective implementation,
an organization should develop the capabilities
and support mechanism necessary to achieve its
occupational health and safety policy, objectives,
and targets. Policy should be posted and clearly
communicated to all managers, supervisors,
and employees. Action plans and target dates or
milestones must be established and monitored
to ensure plan execution (Noble, 2000, p.2). For
small SMEs, general principles of planning and
implementing for occupational health and safety
are the same as for any organization. However,
managers within SMEs should note that planning
and implementing occupational health and safety
could be carried out by a single individual or a
small number of people within the organization.
The approach adopted should be tailored to their
needs (BS 8800, 2004).
OHSMS Performance and
Certified Management Systems
A company can improve its safety climate through
OHS initiatives. A better safety climate can lead
to better safety performance and ultimately better
financial performance (Fan & K.Y. Lo, 2012).
There are two main types of measures for evalu-
ation of OHSMS performance. First ones are the
conventional outcome measures of incidents and
compensation claims. The second measures are
Positive Performance Indicators (PPIs) which may
be developed on a workplace or industry basis,
may involve employees and other stakeholders in
the development of relevant measures, and may
also monitor aspects of the management system
(Gallagher et al., 2001). An organization should
measure, monitor, and evaluate the performance
of the process and should take preventive and
corrective action. It should also regularly review
and improve the process management system in
general, with the objective of continuous process
improvement, progressive risk reduction, and
complying with relevant standards or guidelines
(Noble, 2000).
An SME should have arrangements for
monitoring progress with the implementation
of its health and safety improvement plans and
for measuring the extent to which the targets
and objectives set under those plans have been
achieved. It should also have some arrangements
for active monitoring (i.e. checking) to ensure that
its control measures are working properly, health
and safety rules and procedures are being followed
and the health and safety standards it has set for
itself are being met. It is also important to report
and investigate accidents, incidents, near misses
and hazardous situations. There should be some
arrangements for analyzing the causes of any
potentially serious events so as to identify the
underlying root causes including causes arising
from shortcomings in safety management system
and safety culture. Measuring customer satisfac-
tion in relation to safety of the products, services
and activities SME provides are another important
aspects of safety performance. Finally, SMEs
should ensure supervisors to continue checking
that information, instruction and training has been
fully understood and being processed regularly by
authorized staff (Hogan & Foster, 2013).
OHSMS is a systematic mean for employers to
handle challenges and reduce haphazard attitudes
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173
Occupational Health and Safety in SMEs
to risks and problems in the work environment.
OHSMS certification makes it possible for firms to
document a certain pattern of working conditions
to demonstrate both the public at large and its own
customers that they are living up to established
production standards (Granerud & Rocha, 2011,
p. 1031).
Certified management systems have increas-
ingly been adopted by firms in recent decades
although they may be mandatory or voluntary and
now cover the management of health and safety,
especially through the OHSAS 18001 standard
(Robson et al., 2007; Granerud & Rocha, 2011).
The OHSAS 18001 standard includes the
principles laid down in the BS 8800, which is es-
sentially a guide to Occupational Health and Safety
Management Systems. BS 8800 is particularly
useful to small and medium-sized organizations
that have little formal occupational health and
safety management systems in place, as it aims
to provide guidance on how management of oc-
cupational health and safety may be integrated with
the management of other aspects of business per-
formance, in order to minimize risk for employees
and others, to improve business performance and
to assist organizations to establish a responsible
image within the marketplace (BS 8800, 1996).
In order to become certified, firms must not
only accomplish the relevant legislation, but also
improve performance and set up future goals re-
garding health and safety on a continuous basis
(Granerud & Rocha, 2011).
Following the successful introduction of
the “systems” approach to management by the
International Organization for Standardization
(ISO) through its series on Quality Management
(ISO 9000 series) and Environmental Manage-
ment (14000 series) during early 1990s, public
opinion was that the same approach could be used
for managing occupational safety and health at
the organization level. The possible initiation of
work to develop an ISO standard on OHSMS was
discussed at an ISO International Workshop on
OHSMS Standardization in 1996. The workshop
formed the view that the ISO should discontinue
its respective efforts and that the International La-
bour Organization (ILO), because of its tripartite
structure, would be a more appropriate body than
ISO to elaborate international guidance documents
for the establishment and implementation of effec-
tive occupational safety and health management
systems (ILO, 2001). It is not a coincidence that
these systems have implementation procedures
which are coherent with each other. All the systems
are subject to a system approach that defines an
organizational structure in terms of procedures,
responsibilities, resources and documents.
Almost all countries have had legislative pro-
visions for encouraging voluntary OSHMS and
are now developing nationally applied OSHMS
standards or guidelines. Kogi (2002) diversified
national approaches to OHSMS: (a) mandatory
OSHMS in specified undertakings with regulatory
measures (Indonesia, Singapore); (b) nationally
applicable voluntary OSHMS standards with the
support of certification systems (Australia and
New Zealand, China, Thailand); (c) promotion of
national OSHMS models through guidelines is-
sued by a statutory OSH body (Hong Kong, Japan,
Korea); and (d) encouragement of the voluntary
adoption of OSHMS without nationally applied
models (India and Malaysia).
At the national level, ILO provides the estab-
lishment of a national framework for OHSMS,
preferably supported by national laws and
regulations. Action at national level includes the
nomination of (a) competent institution(s) for
OHSMS, the formulation of a coherent national
policy and the establishment of a framework for
an effective national application of ILO-OSH
2001, either by means of its direct implementa-
tion in organizations or its adaptation to national
conditions and practice (by national guidelines)
and specific needs of organizations in accordance
with their size and nature of activities (by tailored
guidelines) (ILO, 2001).
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Occupational Health and Safety in SMEs
OHSMS from the SMEs’ Point of View
Occupational health and safety problems in
SMEs were studied in different countries in the
last decade. They indicated a steady framework
of factors that affect health and safety in SMEs.
Key findings were that most SMEs had little or no
awareness of occupational health and safety legis-
lation and associated regulations and low priority
was given to occupational health and safety by
the managers/owners. The studies recommended
that providers recognise the special needs on how
occupational health and safety information should
be prepared and delivered to SMEs (Seneviratne
& Phoon, 2006).
The literature on small business and occupa-
tional health and safety has identified a number
of factors influencing the level of small business
understanding and compliance with OHS require-
ments. These factors can be listed as; difficulty
accessing resources (such as lack of resources,
inability to spread costs & wider market environ-
ment); limited training or industry experience;
pressure from large businesses to reduce costs;
influence of large businesses requiring safe work
systems from suppliers; influence of quality man-
agement systems (such as qualified integration
of occupational health and safety with quality
management systems); and their relationship
with occupational health and safety regulatory
agencies (often perceived as distant and lacking
an understanding of small business) (Gallagher
et al., 2001).
Arocena and Nunez (2010) found evidence that
the effort and type of occupational health and safety
management system does significantly affect the
injury rate in SMEs. More specifically, firms
that complement traditional technical preventive
activities with people and organization-oriented
procedures are the most effective in reducing oc-
cupational accidents. Such advanced occupational
health and safety systems are significantly less
developed in SMEs. Their results also revealed
that the choice of occupational health and safety
system is determined by the quality of industrial
relations, rate of unionization, intensity of price-
based competition, access to public aid and training
activities provided by the occupational health and
safety public agencies, technology intensity and
the manual nature of workers’ tasks.
SMEs are interested in safety schemes in
order to improve or ensure the health and safety
of employees, and to raise awareness throughout
the organization. The key features required in any
scheme are low cost, easy maintainability and to
be tailored to suit sectorial needs (Vassie & Cox,
1998, p.72).
The importance of senior management involve-
ment in managing health and safety has been
shown to be a key factor in organizations achiev-
ing excellence in health and safety performance
and is admitted as a key element in achieving a
positive safety culture (Vassie et al., 2000). An
organization’s culture determines the level of
safety to be obtained. The decision of the board
of directors or senior management is acceptable
for the prevention; whereas control of hazards is
a reflection of its culture (Swartz, 2000).
ILO-OSH 2001 encourages the integration
of OHSMS elements into overall policy and
management arrangements, as well as stressing
the importance that at the organizational level,
occupational health and safety should be a line
management responsibility, and should not be
seen as a task for occupational health and safety
departments and/ or specialists (ILO, 2001).
The manager should be acknowledge how to
share the health and safety responsibilities as listed
in the policy statement. This is the key element
involving staff at all stages of development and
introduction of the OHSMS. Health and safety
education has to be provided to all employees in
the company. Safety awareness of all the employees
in any organization is crucial in order to improve
the firm’s health and safety performance. Safety
professionals in high performing organizations
agree that effective employee involvement builds
confidence and trust in the organization, develops
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Occupational Health and Safety in SMEs
more successful and productive employees, and
supports the position that all are working together
to achieve the objectives. Employees have to
believe that they are responsible for their safety,
and they must be provided with the training, tools,
and the necessary authority to act (Swartz, 2000).
The safety awareness of managers and senior
managers is especially important, since their deci-
sions can influence critical safety actions (Vassie
et al., 2000).
The awareness and knowledge of managers are
the key principles of occupational health because
they make decisions about several aspects of work
that determine health and safety. As mentioned
before, awareness, knowledge and skills are also
needed by the workers and the self-employed
for appropriate safety and health behavior and
for adopting safe working practices (Goldstein,
Helmer & Fingerhut, 2001).
The chief executive officer in a certain com-
pany is also the chief safety officer. Managers can
function as the chief safety officers, too and are
to be regarded as role models. Managers cannot
delegate these responsibilities (Swartz, 2000).
Larger companies have the capital to employ
external consultants or in-house executives, but
in smaller firms there are few key employees who
can concentrate themselves on safety concerns.
However, it is undeniable that management com-
mitment in health and safety management is the
essential part of the OHSMS.
The people to whom a duty of care is owed;
the physical workplace that people use or convert
in order to produce goods and/or services; and the
management employed to organize and direct the
transformation of resources into organizational
outputs impact on the nature of the organization.
Hazards in the workplace may emerge from within,
or from changes to, any of these three elements;
at the interfaces between these elements; or at the
boundaries with the external environment (Makin
& Winder, 2008).
Safe Workplace Strategies
Safe place strategies are supported by the risk
assessment process and the application of the
hierarchy of controls up to the point where
modifications are made to the existing physical
environment. Safe place strategies also include
arrangements for abnormal emergency situations,
as well as the monitoring and evaluation to as-
sess the efficacy of solutions applied and peer
review of modifications. These techniques are
most effective when the hazards are predictable
and there is an abundance of information avail-
able about the potential problems. The flexibility
and adaptability of this approach represent some
of its greatest merits, however it does not come
without its limitations (Makin & Winder, 2008).
In order to overcome the hazards derived from
external and internal factors in the workplace,
occupational health and safety regulations and
standards are based on a technical approach
to the management of occupational health and
safety risk. According to this, risk management
is defined as a three staged process. First, hazards
in the work environment are identified; second,
the risk posed by these hazards is assessed; and
finally, appropriate controls for risks are selected
according to a risk control hierarchy (Holmes,
Lingard, Yeşilyurt, & De Munk, 1999).
Safe workplace strategies endeavor to provide
that the existing physical environment is harm-
free and the strength of this methodology lies
in its practical and portable application and the
intent to remove predictable hazards from their
physical source. The shortcomings of this ap-
proach are connected with the mechanics of the
process itself and actually the action deals with
what already exists rather than the planning stage
(Makin &Winder, 2008).
There is a great amount of so-called “almost-
accidents” and risk situations which consist of the
whole statistical population in which accidents
happen. Increasing environmental and workplace
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Occupational Health and Safety in SMEs
safety not only involves technical interventions,
but also requires the adopting of management,
organizational and training instruments which
can influence “risk behavior” (Scipioni, Arena,
Villa, & Saccarola, 2001). To be precise, it can
be concluded that safe employee strategies are the
most important part of the OHSMS.
Safe Employee Strategies
Safe employee strategies involve all the techniques
that focus on equipping the person with the
knowledge of skills to avoid creating dangerous
scenarios in the first instance or with the ability
to deal with unsafe situations should they arise;
communicating awareness of situations that have
the potential to cause harm; or with the recovery
of a person after an illness or injury experience
whether it be physical or psychological (Makin &
Winder, 2008). Employees must be made aware
of possible OHSMS risks in the work environ-
ment, including product or service delivery risks
and physical and chemical hazards. They should
understand these risks as they relate to their work
and recognize and take action to prevent work
practices or activities likely to lead to accidents
or process nonconformance (Noble, 2000).
To make employees safer, training is another
required strategy. Safety training must be well
planned, continuous and measured for results.
Supervisors and employees have to believe that the
content of the training program is what manage-
ment expects them to apply, and that it serves real
knowledge and skill requirements (Swartz, 2000).
Each training item should describe methods for
introducing and communicating new ideas into
the workplace, reinforcing existing ideas and
procedures, and implementing safety and health
program into action (Reese, 2009, p.223).
Candidate’s accident proneness ratio is also
important in the employee selection process.
The goal of the manager or supervisor should be
estimating if the candidate is tend to enact human
behaviors that cause accident in the workplace
(Dessler, 2008).
Management has to make the commitment to
involve the workforce in safety and health at the
worksite. Employees are most in contact with
potential safety and health hazards and having a
safe and health workplace is a vested interest. By
the involvement of employees group decisions can
be made and brain storming may be beneficial to
the firm. Therefore, it is clear that employees are
more likely to support and participate when they
feel themselves more involved (Reese, 2009).
Safe Management System Strategies
Top management usually plans the company’s
strategies and determines the company’s long-term
goals. Organizational and safety culture are both
effected by the top management. Thus, top man-
agement is ultimately responsible for the defects
in the company’s safety performance.
A safe systems approach addresses many
hazards associated with lack of leadership and
direction and as a result many of the options avail-
able are preventive by nature – such as creating a
safety policy; establishing safety criteria for the
selection of suppliers, raw materials, design and
equipment (Makin & Winder, 2008).
A safety initiative cannot succeed without
soundly established and implemented safe work
practices. The success of the safework practices is
another reflection of an organization’s culture. It
is understood in superior performing companies
that establishing, communicating and implement-
ing prescribed work practices are to be taken very
seriously at all employment levels. Developing
safe practice standards more often includes some
form of employee involvement through which their
input is sought. These work standards become the
substance of training programs and of expectations
by supervisors (Swartz, 2000).
The need for written health and safety programs
has been considered as barricades for some time.
Many companies think that written health and
safety programs are only paperwork, and nothing
more than another bureaucratic way of mandating
health and safety in the workplace. However, over
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Occupational Health and Safety in SMEs
a period of years, data and information have been
mounting in support of the need to develop and
implement written safety and health programs for
all workplaces. This perceived need for written
programs must be tempered with a view to their
practical development and implementation. A very
small enterprise who has got one to four employees
and no supervisors in all likelihood needs only
a basic written plan. However, as the size of the
company and the number of employees increase,
the employer becomes more removed from the
hands-on aspects of what now may be multiple
facilities or worksites (Reese, 2009).
Safety audit is the way for measuring overall
compliance with health and safety programs in the
organizations. This tool can provide management
with the means of tracking progress as well as
program compliance. The safety audit should be
designed to identify key elements that are to be
included in an organization’s overall health and
safety program, and must provide some form of
measurement to continually improve on the orga-
nization’s loss prevention efforts (Swartz, 2000).
Well managed auditing programs usually stand
out at the levels where hazard control and pre-
vention are managed best. Hazardous conditions
and practices are to be identified and corrected,
and should be considered as the most important
management determinants.
Drivers, Benefits and Barriers
about OHSMS in SMEs
Many reasons enforce SMEs to integrate man-
agement systems. Many authors identified these
drivers. Customers, local government, local
community, regulators and employees have been
identified as the most significant elements which
can force SMEs to improve their environmental
performance and, as a result, to adopt a more
integrated approach to management systems.
Although most of the pressure comes from the
regulatory agencies rather than directly from
customers, customers are the key driver.
Beyond that, Griffith (2000) claimed that
quality, environment and safety are key standards-
based project functions that need to be managed in
a systematic way. In context, these functions are
support services. Each one is a precondition for en-
terprise and effectiveness but they do not produce
direct financial income. Therefore, management
should look at the potential to reduce operational
general expenses while maintaining a high level
of delivery. SMEs have to establish improvements
in quality, environmental performance and better
health and safety management in order to comply
with the increasingly strict legislation.
General Motors, Daimler-Chrysler, Toyota and
other automobile manufactures also require all of
their manufacturing facilities around the world to
adopt an environmental management system and
to certify them by international standards. They
also need to encourage and assist their suppliers
to do the same (Stamou, 2003). Consequently it
can be said that integrated management systems
are very important and obligatory for SMEs to
cooperate with larger firms.
Jingdong and Han (2012) found that 11% large
enterprises staffs were clear about OHSAS 18001
and 8% the respondents didn’t know the meaning.
6% SMEs knew OHSAS 18001 well and 69% were
not clear about OHSAS 18001. 33% of the large
enterprises had OHSAS 18001 certification and
15% of SMEs had it. As to whether occupational
health and safety management was important
to enterprises, 91% of SMEs believed it to be
important and 83% of large enterprises agreed
with it. Large enterprises were significantly bet-
ter in the implementation of occupational health
and safety management than SMEs. In addition
to the “company equipment examination and
repair”, SMEs ratio is slightly higher than that
of large enterprises, however with other options
large enterprises were higher than that of SMEs.
With the guidance of this comparison, it can be
noted that employees in large enterprises had
better understanding of occupational health and
safety than those in SMEs. They also found that
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Occupational Health and Safety in SMEs
25% of large enterprises have occupational health
and safety department and related professionals.
It was found that 56% of large enterprises collect
and save related data and 89% of large enterprises
organize physical examination. In addition to all
these results, it was also found that SMEs have
less related occupational health and safety training
for workers, have less monitoring of hazardous
substances and have less developed regulations
and laws on occupational health and safety.
Safe operation of workplace is a moral obliga-
tion imposed by modern society. This necessity
contains consideration for loss of life, human
pain and suffering, family suffering and cost of
living (Reese, 2009). It is all the same for SMEs
also. Furthermore, governments have legislations
deploying the employer with the responsibility for
safe working conditions and sufficient supervision
of work practices. In addition to this, employers
are also responsible for paying the costs derived
from injuries.
OHSMS offers SMEs the opportunity to reduce
damage to equipment, inventory or product loss
and generation of hazardous waste and to minimize
accidents and lost time (Noble, 2000). Accidents
cost more than prevention. The direct and indirect
cost of not to implement prevention strategy is
compulsive for SMEs. It is hard for SMEs to bear
such financial cost, making OHSMS an essential
requirement for SMEs (Friend & Kohn, 2007).
OHSMS provides standard directions, poli-
cies, and procedures for all SMEs’ employees,
enforcing the firm to define its view of health and
safety. It also provides a plan that shows how the
firms’ health and safety initiatives work together.
Therefore, it is a primary tool for communicating
the standards set by the organization regarding
health and safety (Reese, 2009).
The improvement of efficiency and quality
of management is an outcome that SMEs can
gain. A successful safety management system is
a reflection of an organization’s culture (Swartz,
2000). OHSMS provides safer working conditions
and make employees feel better. It also creates
a better company image among employees and
improves relations between management and
employees. SMEs can have competitive advantage
with OHSMS.
Most of the SMEs are companies with limited
budgets, thus they cannot allot reserves to initia-
tives that perceived to be secondary company
aspects. They also need management capabilities,
which result in stagnation as the lower the percent-
age of managers trained, the less the development
of the companies’ approaches to new technologies.
Moreover, the low level of employee awareness
and involvement, as well as the time constraints
influence significantly the achievements in the
management systems area (Stamou, 2003). The
short term orientation and the limited strategic
capacity of the SMEs do not allow to have incen-
tives for innovations. Lack of financial resources,
lack of management and employees knowledge
and training, lack of employee involvement and
motivation, lack of time can be considered as
barriers to have OHSMS in SMEs.
FUTURE RESEARCH DIRECTIONS
It is recommended that future occupational health
and safety management interventions can compare
the performance between SMEs that have OHSMS
and SMEs do not have OHSMS empirically. Some
performance indicators such as accident costs,
absenteeism, turnover rates, loss time, almost-
accidents, cost of compensation, and penal sanc-
tions etc. can compared between the SMEs with
respect to having OHSMS or not having. Such
discrimination can shed light on other SMEs in
order to develop OHSMS in their organizations.
CONCLUSION
The results of the studies in the literature indicate
that most of the SMEs do not implement proactive
health and safety measures to control the risks of
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Occupational Health and Safety in SMEs
hazards. In order to address the lack of awareness
of health and safety standards required by legisla-
tion, training and advertising are needed.
Ministries could organize some programs about
occupational health and safety and they should
target owner/managers. Non-governmental orga-
nizations operating in developing countries, and
government should provide funding to SMEs. The
cost of implementing health and safety standards
should also be identified within prime cost items
in bills of quantities in the organizations.
Despite the difficulties of quality standards,
some SMEs may have an appreciation of the
benefits of a total quality approach to operational
management issues. It can be clearly said that
employers need to be educated on the importance
of the improvement of employee health and well-
being. SMEs usually do not have the advantages
of dedicated resources, occupational health and
safety services and human resource departments.
In order to overcome these obstacles, the most
important issue is to constitute a safety culture
in the organizations.
Some prevention activities should be imple-
mented frequently in small firms. The activities
required to ensure efficiency are actually support-
ing the integration of prevention into production
activities in order to increase prevention manage-
ment in small firms. Therefore, employees are
sometimes unable to identify obstacles to the
improvement of working conditions and safety in
their firms. SMEs need support and guidance in
order to deal with the barriers to improve OHSMS.
Although occupational health and safety man-
agement is becoming increasingly seen as part of
an organization’s management strategy, it has not
been widely adopted by SMEs.
The literature review showed the lack of hu-
man and financial resources, time, management
commitment and the perception that management
systems are revolutionary and only red tape. How-
ever, SMEs require most of all information about
the benefits of the systems and need guidance in
order to have OHSMS. Consequently it can be
said that SMEs are not aware that implementing
OHSMS not only improves the performance and
efficiency, but also provides cut back in costs.
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Chapter 10
DOI: 10.4018/978-1-4666-4731-2.ch010
The Impact of the
Entrepreneur’s Educational
Level on the Employment
Creation by New Small and
Medium Enterprises
ABSTRACT
This chapter examines the effects of different types of start-up rates on subsequent employment change.
Longitudinal data on start-ups and employment in Portuguese regions in the period 1996–2007 is used
for the analysis. The study addresses whether diverse types of new small- and medium-sized enterprise
formation have heterogeneous effects on regional employment generation. It is found that, for the range
considered, the seven types of start-ups led to significant and negative effects on the average variation
of regional employment. It is also observed that these effects were more negative for start-ups with at
least one business owner with higher education in engineering and for start-ups with at least one busi-
ness owner with higher education in management. The last conclusion is that the share of highly skilled
employees has a statistically significant and positive impact on the average employment change and,
therefore, on regional development.
INTRODUCTION
Entrepreneurship is considered to be important
for job creation and economic development
(Audretsch, 2003). Therefore it has been gaining
increased attention by scholars and policy-makers
as a relevant research topic and as a mechanism for
addressing economical and labour market issues.
Academic studies from authors, such as Fritsch
& Mueller (2008) and Baptista et al.(2008), de-
veloped for Germany and Portugal, respectively,
examine whether there is a relationship between
João Zambujal-Oliveira
Instituto Superior Técnico, Universidade de Lisboa, Portugal
Luis Contente
Instituto Superior Técnico, Universidade de Lisboa, Portugal
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
new business creation and an increase in employ-
ment growth at the regional level. These studies
show that the impact of new business formation
on regional development is not immediate but,
instead, can be delayed in time for a period of
about 10 years.
For example, in Great Britain as a whole, no
significant relationship between start-ups and
employment creation was found in the 1980s but
for the 1990s a significant positive relationship for
Great Britain as a whole was found. Van Stel &
Storey (2004) feel this raises questions over poli-
cies designed to raise rates of new firm formation
as a strategy for employment creation. Investiga-
tions carried out in the field of entrepreneurship
and regional development bring an additional
relevance to the field: regional differences in
entrepreneurship may explain the differences in
economic performance (McQuaid, 2002).
The current paper contributes to the un-
derstanding of the relationship between new
business formation and employment growth.
Since there is empirical evidence that the role of
entrepreneurial activity differs across the stages
of economic development, in that there appears
to be a U-shaped relationship between the level
of development and the rate of entrepreneurship
(Sternberg & Wennekers, 2005), this study aims to
empirically identify and examine the main effects
of several types of start-ups and business owners’
different educational backgrounds in employment
growth, at the regional level. It is expected that
a significant share of highly qualified workers
stimulates employment growth (Lofstrom, 2000),
since productivity tends to rise via technological
complementarities or knowledge spillovers. Al-
ternatively, Chen & Funke (2008) state that the
debate surrounding the question of how inertia
of highly regulated labour and product markets
has a negative impact on the creation of jobs and
unemployment can contribute to explaining why
the growth situation sometimes does not occur.
Moreover, the firm size matters in the case of em-
ployment dynamics. SMEs are more constrained to
capital markets, so that capital is a complementary
good for labor for these entities (Kölling, 2012).
These effects are analysed and compared
within the period 1996 and 2007. Specifically, the
following econometric estimations are developed
using different segments of start-ups: all sectors;
technology based; knowledge intensive; with at
least one business owner with tertiary education;
with no business owners with tertiary education;
with at least one business owner with higher
education in engineering; and with at least one
business owner with higher education in manage-
ment science.
Assessing the heterogeneity of businesses’
(and types of business ownership) dimensions
that bear the potential to generate higher positive
impacts on employment growth may bring relevant
contribution and implications at various levels.
While in the present investigation the specific
variables under analysis and main results are
strongly rooted in the literature and follow valid
theoretical approaches and methodologies, there
is also an original contribution regarding the use
of business owner educational background as
variables of interest. Since the 1980s Mcmullan
& Long (1987) have been arguing that the real
promise of education will only be realised when
it is strategically organised for economic develop-
ment and job creation. Moreover, this potential
academic contribution can be equated with a
contribution for supporting eventual higher-edu-
cation and regional-development policies aimed
at stimulating different types of entrepreneurship
and job creation.
The remainder of this study proceeds as fol-
lows: the next section presents and discusses previ-
ous theoretical and empirical approaches regarding
the interplay between entrepreneurship and job
creation, economic development and regional
development. Section 3 provides information on
the data and methodology used for the empirical
analysis. Results are presented and discussed in
section 4 and, finally, sections 5 and 6 conclude
the article with avenues for further research.
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185
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
BACKGROUND
Labour Market in Portugal
Portugal is a relatively small country when com-
pared to Germany. It has considerably large urban
agglomerations, with an industrial structure, which
is constituted by small and medium enterprises
(SME). In Portugal, large firms account for only
a very small part of firms’ births (Baptista et al.,
2008; Holl, 2004). It is often said that there are
too many small firms in Portugal, and that average
firm size is too small. However, when looking at
SMEs it is hard to find a significant difference
between Portugal and the average OECD country.
In recent years, rapid changes unleashed by
the globalization, combined with a deteriorating
economic conjuncture shrunk recruitment and
changed employment conditions in the traditional
types of employment that usually absorbed uni-
versity students. Today, graduating students are
beginning to evaluate the possibility of creating
their own enterprises as a positive rather than re-
sidual career option (Kolvereid and Moen, 1997).
These characteristics are responsible for the fact
that the Portuguese labour market emerges as one
of the most regulated in Europe, even if it was
the first country to introduce fixed term contract.
Portuguese labour market is characterized by
a high degree of collective bargaining power as
a result of unionization. Trade unions still play a
relevant role in wage determination in the public
sector. In the private sector, trade unions have
almost disappeared. Despite of this, trade unions
have retained their influence in the submission of
new labour legislation through negotiations with
employer associations and the government (Abreu
& David, 2009; Varejão & Portugal, 2007).
Broadly speaking, since 1999 that Boeri et al.
consider that exists a tendency for a significant
deregulation of temporary contracts, while only
modest changes had been made for permanent
ones. Portugal and Spain are examples of coun-
tries that had significantly eased the regulation
for permanent workers. Recently, introduced
new permanent contracts with lower severance
payments.
On the other hand, Auer & Cazes (2000)
compared average tenures and the distribution
of employment by tenures’ segments to get the
patterns of job stability across countries and over
time. They found the longest average tenures in
Greece followed closely by Portugal. Germany is
slightly below the overall average of 10.5 years,
as are Ireland and Spain. Leschke & Watt (2010)
showed that tenures remained broadly stable or
increased in most European countries, declining
slightly in Germany and Portugal and strongly
in Ireland. Figure 1 indicates that temporary em-
ployment as a share of total employment varies
greatly. At well above 20%, it is highest by far in
Spain and Portugal.
In what concern to labor market outcomes,
Rogerson (2004) states that changes in aggregate
unemployment rates mainly reflect changes in
relative employment rates in industry. Table 1
summarizes the employment and unemployment
by economic sector in Portugal. Actually, the
agriculture-based economy decreased from 1%
between 2002 and 2007, while the service-based
economy increased 4.5% in the same period. Thus,
Abreu & David (2009) consider that Table 1 shows
enough evidence of transformation from an agri-
culture-based economy into a service based one.
After all, the analysis of 175 regions of the EU
15 made by Pinto & Guerreiro (2010), permitted
to find the dimensions underlying the innovative
phenomena and create homogeneous groups of
regions, determining the four most relevant fac-
tors: technological innovation and economic
structure; human capital and its availability on
the employment market. Therefore, transferring
qualified people to the economy creates value and
getting graduates to create new business ventures
seems to be to the most fruitful transfer mechanism
(Franco et al., 2010). As a result, entrepreneurship
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186
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
has been considered as a relevant factor for im-
proving economic growth (Carree & Thurik, 2010)
and the SMEs job creation potential has been
widely demonstrated (Fölster, 2000).
Job Creation and Economic
Development
The first contribution of new small and medium-
sized enterprises (SME) formation to employment
growth is the number of jobs directly created by
new SMEs that successfully enter and grow in the
market (Baptista et al., 2008). However, part of this
direct effect can be attributed to the fact that new
businesses stimulate job growth in other sectors
of the region (Andersson & Noseleit, 2011).The
literature is not consensual regarding the effect
of start-up creation on employment. While some
studies argue that unemployment stimulates en-
trepreneurial activity, another stream of literature
concludes that higher levels of start-ups lead to a
decrease in unemployment.
According to Blanchflower (2000) there is,
among many countries, little evidence of an
extant correlation between entrepreneurship and
unemployment. He also states that, while the
evidence shows support for a general negative
effect, there is also evidence of positive effects
for some countries.
Figure 1. Temporary employment as a share of total employment
Source: European Labour Survey (Eurostat, 2010).
Table 1. Employment and unemployment by economic sectors (2002-2007)
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
Therefore according to Baptista et al. (2008),
it is important to take into account the indirect
positive supply-side effects (spillovers) that the
entrepreneurial activity can create, which can
generate significant improvements in the competi-
tiveness of a country, region or industry, leading
to economic growth. Fritsch & Mueller (2008)
provide a more detailed framework and descrip-
tion of such effects: (a) efficiency guaranteed: the
threat of or the effective entry of new business
in the market makes the incumbent SMEs more
efficient; (b) structural change accelerated: the
entry of new SMEs and exit of incumbent SMEs
constitutes a turnaround in the respective economic
units, leading to structural changes; (c) amplified
innovation: new companies often introduce radical
innovations; and (d) greater variety of products:
new businesses can introduce innovations in
products and processes, which lead to customer
needs being met more efficiently. The increase in
variety may boost economic development.
In particular, Schroeter (2009) explained how
the distinct characteristics of urban areas contrib-
ute to the emergence of high-quality start-ups that
are known to cause larger employment effects than
other types of new businesses. She argues that
the relatively intense competition in urban areas
further stimulates the economic effects of new
business formation in agglomerations.
Regional Development
According to Audretsch (2003), for studies of
entrepreneurship at the regional level, the most
common and extensively used variable accounting
for performance is growth – typically measured in
terms of employment growth. For this author, the
vast majority of this type of research tries to find
the link between the start-up rate (as a measure
of entrepreneurial activity) and economic growth.
Most of them do not consider that, during the start-
up phase, the firms are unable to increase their
financial leverage and so their capital structure fails
to promote correct investment strategies (Segarra
& Teruel, 2009). Some authors have extended this
type of approach to try and measure the impact of
new business generation in job creation over time.
For example, Fritsch and Mueller (2008),
looking at the effects of new business creation on
employment at the regional level, concluded that
the effects of new SME formation on net employ-
ment are small in the year of entry and become
negative during the first six years. Positive effects
occur, but only after this six-year period, reach-
ing a maximum peak at around the eighth year
and eventually disappearing after the tenth year.
Sometimes, in accordance with Daunfeldt et al.
(2005), the delay hides real market uncertainty that
affects the entry decision. Studying the Swedish
retail food market, these authors concluded that
the entry was less frequent in highly concentrated
local retail food-markets characterised by a high
degree of uncertainty.
While the initial negative effects are due to the
failure of new businesses and the exit of incum-
bents, the positive effects are probably associated
with spillovers (Fritsch & Mueller, 2008). The
model formalised by the authors to describe this
temporal impact on employment development is
illustrated in Figure 2. Recent evidence focuses
on the relationship between finance development
Figure 2. Direct and indirect effects of new busi-
ness formation on regional employment growth
over time
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188
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
and productivity (Beck et al., 2000; Levine et
al., 2000) and supports the existence of a causal
relationship between financial development and
economic growth (i.e., growth in real gross domes-
tic product per capita, and productivity growth).
For example, King & Levine (1993b, 1993c) have
found that financial development has a positive
effect on productivity, and Beck et al. (2000) have
shown that financial intermediaries help economic
growth through more efficient resource allocation
rather than through investments or savings.
Baptista & Preto (2011) argue that the higher
the entry rate is into the knowledge-based sectors,
the higher both job destruction (due to increased
competition and exiting capacities) and job cre-
ation (due to supply-side effects) will be. Bap-
tista et al. (2008), analysing the effects of new
business creation at the regional level in Portugal,
concluded that the indirect effects of this creation
only begin to occur about eight years after the
entry of new companies in the market. They also
concluded that these indirect positive effects
promote growth and employment within the re-
gion, but there is a nine-or 10-year lag until this
effect begins to become observable in the econ-
omy.
Following Fritsch & Mueller (2008) and
Baptista et al. (2008), that is, taking into account
the time intervals found by Baptista & Preto
(2011) to address the lag structures of the effects
on employment changes, taking into account the
formation of different types of new companies,
gives us as follows: (a) start-ups larger than average
versus start-ups smaller than average; (b) foreign-
owned start-ups versus domestic start-ups; and (c)
knowledge-based start-ups versus other start-ups.
Their conclusions are that the creation of new
businesses that are larger than average, new com-
panies with foreign capital and new companies
in knowledge-based sectors have considerably
stronger positive effects on employment change
than their counterparts. Baptista & Preto (2011)
also consider that these types of start-ups seem to
be responsible for most of the effects of new SME
formation in industrial restructuring and employ-
ment growth. In sum, there is strong evidence that,
at the regional level, the creation of new busi-
nesses has a positive impact on job creation and,
consequently, on economic development. These
effects take place only after a certain period of
time, depending on the country.
Human Resource Management
and Employment Growth
It should be natural existing a theoretical link
between human capital management (HRM) and
employment growth, as both refer to people in the
firm context. By considering that human resource
strategies frequently have a delayed return (Black
& Lynch, 1996; Boxall & Steeneveld, 1999), it
implies that cross-sectional studies may not detect
the long-term effects of human resources practices
(Cosh et. al, 2000). Therefore, the employment
growth turns into a relevant variable for analysing
long-term effects of HRM, even knowing that,
according to the contingency theory, Chandler
and McEvoy (2000) consider the effects of human
resource practices depends highly on the context.
Figure 3 permits to visualize the conceptual
model on managing people within SMEs. It helps
us to realize how entrepreneurs rely heavily on
their social relationships for creating start-ups
and contributes to reinforce the relation between
the entrepreneur level of education and the HRM.
Rauch et al. (2005) described a model where own-
ers’ human capital as well as employee’s HRM
affect employment growth. They also concluded
that HRM was most effective when employees’ hu-
man capital was high. Behind Rauch et al. (2005),
there is a row of authors who consistently found
positive relationships between business owners’
human capital and small business success (Brüderl
et al., 1992; Chandler & McEvoy, 2000).
According with Baron and Kenny (1986), the
relationship between HRM and employment
growth can be conceptually represented by three
not contradictory models: a direct effect model
(DEM, Model 1), a mediator model (MTM,
Model 2), and a moderator model (MDM, Mod-
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
el 3) described in Figure 4. The robustness of
DEM is a prior condition for applying MTM
(mediator). However, the model MTM is the most
simple one because it reduces the number of
causal paths may be valid. The model DEM implies
direct effects of the owners’ human capital besides
employees’ human capital and HRM, analysing
how these variables contribute to employment
growth. The MTM shows the perspective of
Brüderl et al. (1992), confirmed by Hitt et al.
(2001) and Wright et al. (2001), of assuming
owners’ human capital as a resource with capac-
ity to improve HRM, which leads to employment
growth. In what concern to the relationship be-
tween owners’ human capital and employment
growth, MDM is conceptually similar to DEM.
Its divergence comes from the role assumed by
the employee human capital. It acts as a modera-
tor of the relationship between HRM and employ-
ment growth, decreasing the influence of strategy
interactions on HRM (Youndt et al., 1996). How-
ever, the assumption of the moderator effect on
MDM also seems to be relevant for our study
because it assumes that better educated people
have a higher potential to contribute to the em-
ployment growth.
Recently, Rauch et al. (2005) confirmed, in
German firms, the effect of HRM on small busi-
ness development. Once more, they concluded
that HRM was positively related to employment
growth. Besides finding evidences showing that
SMEs grow faster than larger ones, Cosh et al.
(2000) also found a significant effect of training
on employment growth. Even criticizing strongly
the training literature to be more perversely con-
cerned with its impacts on employment growth
rather than sales growth, Bryan (2006) obtained
strong evidence confirming the relation between
training and employment growth.
DATA DESCRIPTION AND
METHODOLOGY
Data Set Description
The data used in this study come from the micro-
data set Quadros de Pessoal, which originates from
mandatory information submitted annually by
Portuguese companies to the Ministry of Labour
and Social Solidarity. The information in this data
set includes the mobility of companies, establish-
Figure 3. Conceptual overview of literature on HRM and entrepreneurship
Source: Brereton and Jones (2001).
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190
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
ments, workers and business owners in the period
1986–2009. The data set includes annual reporting
of all private establishments with at least one paid
employee in the Portuguese economy. Therefore
sole traders or self-employed individuals without
employees are not included. Some industries are
not included in the data, namely: agriculture,
military, government, and institutionalised work-
ers. Additionally, as suggested by Parker (2009)
and in line with Fritsch and Schroeter (2011),
information about start-ups and employment in
fisheries, energy, mining, railways and postal
services, because of their highly regulated market
conditions, will be excluded from the data set for
the present empirical analysis.
Table 2 shows that the Norte region has the
strongest incidence of SME creation across all
industries. Regarding all regions, the creation of
technology-based and knowledge intensive start-
ups accounts for a small percentage of the total
start-ups. The mean values of start-ups with no
business owners with higher education attainment
are considerably higher than the mean values of
start-ups with at least one business owner with
higher education for all regions. As observed,
for both types of start-ups with at least one busi-
ness owner with higher education in engineering
or management, the Lisboa region presents the
higher mean values, followed by Norte and Centro.
Methodology
The current section discusses the methods em-
ployed to estimate the regression models and to
analyse the effect of new firm creation on regional
economic development over time at the spatial
Figure 4. Models of human resource effects on employment growth
Source: Rauch et al. (2005)
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191
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
level of regions. The activity of new business
formation is measured following Baptista et al.
(2008) and Garofoli (1994). The last author deals
with the hypotheses to be tested for the interpreta-
tion of the regional differentiation in firm birth
and analyses the problem of the choice of socio-
economic variables which must be examined.
Both authors argue that, in order to control for
different sizes of region, entry rates must be mea-
sured using regional work force as a denominator
(Labour market approach, re = numberof newfirm-
sworkforce). According to Fritsch and Schroeter
(2011), the denominator must be in thousands.
To identify and to analyse the diverse effects of
new business formation on employment, a robust
fixed effects estimator is employed. The regional
development indicator used is the average change
in annual employment. To avoid disturbances due
to short-run fluctuations, the geometric mean is
calculated over a period of two years (2007–2009;
(Baptista et al., 2008; Fritsch & Mueller, 2008;
Fritsch & Schroeter, 2011). The composition of
business dynamics (net-entry of start-ups) and
the different impacts of different start-up activity
on regional employment change are estimated by
the non-linear least squares regression equation:
η α β εr 0 2 t-1,t-10 r,t-1 r,t,t ,t +X += + r, (1)
• ηr,t0,t2: Average growth on regional employ-
ment between period t0 and, t+2 in region r.
• βr,t-1,t-10: Start-up rate, calculated as a mean
over a 10 year period.
• χr,t-1: Control variables; εr,t: error term.
The model uses a lagged regressor ηr,t0,t2 and
the control variables are included to take into
account other factors that, beside the start-ups,
are also relevant to regional growth. In particular,
the population density is included as a variable
that represents certain local characteristics that
may affect regional growth (Duranton & Puga,
2004), such as the wage level, real estate prices,
quality of the infrastructure, or qualification and
diversity of the labour market (Fritsch & Schroeter,
2011). According to this author, the population
density is the most significant regional feature,
since human capital is an important determinant
of regional growth (Glaeser et al., 1992) and the
share of highly skilled employees; that is, the
percentage of workers with higher education is
included in the model.
Table 2. Data description (average values for 1996–2006)
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192
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
Using the Kauffman Firm Survey, Sanyal &
Mann (2010) also examine how characteristics of
a start-up’s assets, information about the start-up,
and entrepreneurial attributes relate to financial
structure at inception. They have concluded that
start-ups with human capital embodied in the
entrepreneur or intellectual property assets have
a lower probability of using debt and more edu-
cated founders are more likely to be financed by
external sources.
The model also contemplates the the percentage
of workers with a degree given that the human
capital is a significant determinant of regional
growth (Glaeser et al., 1992). In order to correct
the effects of the number of start-ups in the com-
position of regional industries, the model applies
a procedure to correct for the confounding effect
of the regional composition of industries on the
number of start-ups; a shift-share procedure was
employed to obtain a sector-adjusted measure
of start-up activity (Audretsch & Fritsch, 2002).
Since the industrial structure is measured as the
number of establishments, the first step is calcu-
lating the hypothetical number of establishments
in each industry j for each region i:
η ξ
ξ
ξij
h
i j i
j
ij
ij
i
ij
=E E
E
E
j
ij
* * *ϕ = =∑
∑
∑
(2)
• ηij
h : Hypothetical number of establish-
ments from the industry j by each region i.
• Ei: Total number of establishments in the
region i.
• Ei /E: Share of establishments from indus-
try j in the total number of establishments.
• Ei: Total number of establishments in in-
dustry j.
• E: Number of establishments from indus-
try j in region i.
The second step estimates the impact of a shift
in the industrial structure of a region in the number
of start-ups. It multiplies the difference between
the hypothetical etaij
h and the observed number
of establishments in each industry by the national
rate of start-ups of the respective industry. Adding
the results from all sectors, we are able to obtain
the number of start-ups induced by differences
between the industrial structure of the region and
the national average:
η ξ η ξ η
Φ
ξ η
φ
ξ
i
8
ij ij
h
j
j ij ij
h
j
j
j
ij ij
h
j
j
i
i
i
= ( – )* r = ( – )*
E
= ( – )*
∑ ∑
∑
∑
∑∑
(3)
Subtracting the number of induced start-ups to
the total number of start-ups, the model generates
the industry-adjusted number of start-ups by each
region (Fritsch & Mueller, 2008). These industry-
adjusted number of start-ups can be defined as
the number of new businesses within a region
that would be expected if the industry’s compo-
sition was identical in all regions. This measure
adjusts the raw data to emulate the same industry
composition in each region (Fritsch & Schroeter,
2011). In the next section the paper organises the
experiences considering different models. Each
model distinguishes from the others by the start-
ups rate included. For example, model I includes
the start-up rates from all industries.
RESULTS
We have used econometric analysis in order to
identify the different determinants of the start-up
rates. Table 3 presents our results, using specific
start-up rates for different types of start-ups. The
columns of the table show the models associated
with types of start-ups. First, the model was ap-
plied taking into account the start-up rate in all
industries (model I). As shown in the results, start-
ups throughout all industries have a statistically
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193
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
significant negative effect on the average change
in regional employment. Taking as a reference the
results obtained by Fritsch & Schroeter (2011),
an equally significant impact would be expected
but, in contrast, it would be positive.
While model II includes the technology-based
SME start-up rate, model III focuses on the
knowledge-intensive SME start-up rate. Both rates
are included in model IV. By comparing model
II with model III, evidence shows that, for both
models, start-ups have a statistically significant
effect on the average variation of regional employ-
ment and, once again, their coefficients are
negative. The impact of knowledge intensive
start-ups is slightly more negative than the impact
exerted by technology-based start-ups. Combining
both start-up rates in one single model (model
IV), the results do not suffer major changes.
Subsequent analyses focus on business owners’
educational level and background. Specifically,
model V includes the rate of start-ups with at
least one business owner with higher education
and model V looks at the rate of start-ups with-
out business owners with higher education. As
shown, the start-ups with at least one business
owner with higher education have a statistically
significant negative effect on the average variation
of regional employment (model V). For start-ups
without business owners with higher education,
there is also a statistically significant and negative
impact, on average change in regional employ-
ment (model VI).
Finally, different additional estimations are
made taking into account the rate of start-ups
with at least one business owner with higher
education in engineering (model VII), the rate
of start-ups with at least one business owner with
higher education in management (model VIII) and
the rate of start-ups accounting for both educa-
tional backgrounds (engineering and management;
model IX). Comparing model VII with model
VIII, results show that, in both models, start-ups
Table 3. Employment effects of new business formation differentiated by the type of start-up
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
have a statistically significant effect on the aver-
age variation of regional employment and, once
again, their coefficients are negative. The impact
of start-ups with at least one business owner with
higher education in engineering is slightly more
negative than the impact exerted by start-ups with
at least one business owner with higher education
in management. By analysing both start-up rates
within the same model (model IV), one can observe
that the results do not suffer major changes and
the effects continue to be statistically significant
and negative.
For all different types of start-ups, the R-
squared values show that the models explain a
large percentage of the variance. Regarding the
control variables, as expected a statistically sig-
nificant positive effect of human capital intensity
and population density in regional employment
growth in all models was found. It should be noted
that such effects are more positive for the share
of highly skilled employees than for the popula-
tion density. The regional industry structure is
also statistically significant for the variation of
regional employment, but its coefficient is nega-
tive and close to zero.
FUTURE RESEARCH DIRECTIONS
Based on the results of the current research, the
recommendations for future research would be to
broaden the analysis. The research can be expanded
by gathering participants from other organisa-
tions or other countries and the study should be
replicated with other targeted populations to draw
generalisations. In our view, the challenge to future
research will be to more finely address the efficacy
of public employment policies in the regional
employment growth process and the outcomes of
such different types of entrepreneurship initiatives
on local employment markets.
We also could point to the path followed by
Gatewood et al. (1995) that measured attributions
before potential entrepreneurs had started their
businesses in order to make stronger claims for
causal relationships between initial attributions
and each company’s subsequent success for cre-
ating jobs. Alternative paths of research are sug-
gested by Dobbs and Hamilton (2007) who focused
their study on small business growth as a process
rather than an episode. These authors claim that
future research should adopt multiple measures
of growth and be based on theory longitudinal in
scope but idiosyncratic in its focus. Additionally,
Dobbs and Hamilton (2007) consider that empiri-
cal work should seek to explain the periodicity
of growth and the role that learning plays in the
idiosyncratic development of small businesses.
CONCLUSION
The economic growth that comes from entrepre-
neurship through the creation of companies can be
translated directly into job creation, or indirectly
through the stimulation of efficiency, structural
changes in industries, innovation and variety of
products that meet consumer needs. There is strong
evidence that, at the regional level, the creation of
new businesses stimulates job growth, but such
effects are noted only after a few years. Taking into
account the range of 10 years, found previously
(Baptista et al., 2008; Fritsch & Mueller, 2008),
an analysis was done on the effects of start-ups of
all sectors considered, technology-based start-ups,
knowledge-intensive start-ups, start-ups with at
least one business owner with higher education,
start-ups with no business owners with higher
education, and start-ups with at least one busi-
ness owner with higher education in engineering
or management.
As discussed in the literature review chapter,
recent studies indicate that there is a positive re-
lationship between the creation of new businesses
and subsequent growth in regional employment;
however, the results obtained by the empirical
analysis do not confirm such conclusions, since
the start-ups rate for all sectors considered between
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
1996 and 2006 is statistically significant, but with
a consistently negative effect on the average change
in regional employment between 2007 and 2009.
In line with the literature, it would be expected
that both the creation of new technology-based
businesses and of new knowledge-intensive com-
panies would lead to positive effects in employ-
ment change. Such assumptions, once again, have
not been confirmed.
In contrast, it was concluded that, in both
cases, the rates of start-ups have had statistically
significant effects on the average variation of
regional employment, and those effects were
negative. Therefore, these results seem to confirm
previous findings of Andersson & Noseleit (2008)
who have concluded that start-ups in high-end
services have significant negative impacts on em-
ployment in other sectors but a positive long-run
impact. Perhaps Caballero & Hammour (1996) can
contribute to explain these discrepancies. When
they analyzed the timing of ongoing job real-
location that results from innovation, concluded
that incomplete contracting between labour and
capital can disrupt this synchronised pattern and
decouple, employment creation and destruction.
Furthermore, we should remember that an analysis
of job flows made by Spletzer (2000) indicated
that firms’ births and deaths account for only 19%
of quarterly job creation and destruction.
The results obtained when considering the
rates of start-ups with at least one business owner
with higher education or the rates of start-ups
with no business owners with higher education
show statistically significant negative effects. The
same happened with the rates of start-ups with at
least one business owner with higher education
in engineering and the rates of start-ups with at
least one business owner with higher education
in management. The latter two rates of start-ups
showed the most negative coefficients. On the
other hand, there were significant and positive
effects from the share of highly skilled employees
and population density. It might be noted that the
share of highly qualified workers resulted in a
more positive impact than the population density.
From these results it was concluded that, for
the period under analysis, start-up rates had nega-
tive impacts on the average variation of regional
employment and high levels of entrepreneurship
appear to lead to a decreasing effect in job creation.
Regarding the share of highly skilled employees,
positive effects on the average change in regional
employment have been observed over all models.
Subsequently, these results suggest that the greater
the percentage of employees with higher educa-
tion in a given region, the greater the economic
development of the region, measured as changes
in employment. Armington and Acs (2002) partly
supported these conclusions, finding evidence
of significant differences in new firm formation
rates from industrial regions to technologically
progressive regions.
As Fingleton (2003) comments, the conjecture
that human capital plays an important role for
regional growth is not new. This argument recalls
Lucas (1988), who saw human capital as a central
factor of production and Mankiw et al. (1992)
have concluded that changes in human capital
translate themselves into significant changes
of growth rates. By considering the perspective
of Kiker and Santos (1991) who studied the
determinants of labour market earnings in the
Portuguese work force and presented evidence
on the different education levels and regions, the
conclusions suggesting that labour markets appear
to be geographically in disequilibrium can explain
the regional employment variations.
Thus the more relevant public policies which
analyse and implement entrepreneurial activity
with higher potential and, eventually, more op-
portunity oriented, are those policies relating
to the strengthening of skills and capabilities
of individuals through education and training.
Sometimes the price demanded by these public
policies to create highly skilled jobs it is too high.
Timothy & Kevin (2012) estimated the cost of the
tax credit R&D jobs in the state of Washington and
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196
The Impact of the Entrepreneur’s Educational Level on the Employment Creation
concluded that it was so high (in part because the
credit was non-refundable) that about one-quarter
of the firms receiving credits were maxed out on
credit eligibility. In a sense, the paper of Chen &
Funke (2008) is an attempt to provide a unify-
ing modelling framework on the inter-linkages
between regulation, investment and employment.
Its simulation shows that the intensity of product
market competition variables, in tandem with
hiring and firing costs, is an important driver of
employment and growth.
Our study, while investigating some of the
variables traditionally associated with start-ups
and regional employment change, seeks to provide
an original contribution by exploring and testing
specific variables at the business-owner level,
such as educational attainment and background.
Hopefully this attempt to broaden the spectrum of
explanatory variables associated with job genera-
tion can bring new perspectives and discussion to
the fore and act as an incentive for further studies
on the topic. It is also hoped that the present ap-
proach and results can facilitate and contribute
to decision making with regards to public poli-
cies tailored at fostering entrepreneurial activity.
Policy-makers should be well aware of the diverse
effects of new firms on regional employment.
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ADDITIONAL READING
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The Impact of the Entrepreneur’s Educational Level on the Employment Creation
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KEY TERMS AND DEFINITIONS
Econometrics Analysis: Statistical and
mathematical analysis of economic relationships.
Econometrics creates equations to describe phe-
nomena such as the relationship between changes
in firms creation and employment growth.
Entrepreneurship: The capacity and willing-
ness to develop, organise and manage a business
venture along with any of its risks in order to
make a profit. The most obvious example of en-
trepreneurship is the starting of new businesses.
Highly Skilled Jobs: Combination of oc-
cupation (professional) and education (college-
educated) jobs.
Regional Development: The provision of
aid or assistance to less economically prosper-
ous areas.
SME: Small and medium-sized enterprises.
The main factors determining whether a company
is an SME are the number of employees and either
turnover or balance sheet total.
Seed: Financing provided to research, assess
and develop an initial concept before a business
has reached the start-up phase.
Start-Ups: Financing provided to companies
for the product development stage, and further
funds are required in order to initiate commercial
manufacturing and sales. These companies do not
generate profits yet.
OCDE: Organisation for Economic Co-
operation and Development.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 11
DOI: 10.4018/978-1-4666-4731-2.ch011
Placing SMEs at the Forefront
of SHRM Literature
ABSTRACT
High Performance Work Practices (HPWPs) provide firms with resources to improve employee- and
firm-level outcomes. While recent literature in this field begins to explore the role and benefits of HPWPs
in Small- to Medium-Sized Enterprises (SMEs), much remains unknown. To address this deficiency, the
authors explore the dominant HPWPs used by SMEs, demonstrating that in some U.S. firms SMEs are
just as human resource savvy as their larger counterparts. Ultimately, they both advance the SHRM
literature and provide a better understanding of the common HPWPs (e.g., compensation, training,
development, etc.) used by U.S. SMEs.
INTRODUCTION
Scholars and practitioners have long recognized
the importance of small- and medium-sized en-
terprises (SMEs) in the stimulation of economic
development (e.g., Schumpeter, 1934; Birch, 1987;
Mazzarol, Volery, Doss, & Thein, 1999; Baumol
& Strom, 2007). To illustrate the magnitude of
the impact of SMEs, consider that in the United
States SMEs are responsible for over 80% of new
jobs created annually (Hisrich & Grachev, 1993).
Despite this importance of SMEs to the economy,
strategic human resource management (SHRM)
scholarship remains focused on larger corporations
and does not provide enough emphasis on SMEs
(Klaas, Semadeni, & Ward, 2012). For example,
Huselid’s (1995) seminal study on high perfor-
mance work practices (HPWPs) excluded firms
with fewer than 100 employees, an approach that
is all too common in the HPWPs literature. Way
(2002) is a notable exception in that it focused on
organizations with more than twenty employees.
While this is certainly important, relevant, and
Josh Bendickson
Louisiana State University, USA
Eric W. Liguori
California State University – Fresno, USA
Jeffrey Muldoon
Louisiana State University, USA
Lindsay N. Newport
The Martin Agency, USA
K. Mark Weaver
University of South Alabama, USA
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Placing SMEs at the Forefront of SHRM Literature
a step in the right direction, organizations with
fewer than 20 employees vastly outnumber those
with more than 20 employees, and labor laws vary
greatly in many locales for an organization with
more than 25 employees compared to an organi-
zation with fewer than 12 employees. This legal
disparity, along with the general lack of empirical
investigation of SMEs in SHRM, illustrates the
critical need for further research of this type.
In general, HPWPs use tactics such as staffing,
self-managed teams, decentralization, training,
flexible work assignments, communication, and
compensation to better develop, train and motivate
workers (Evans & Davis, 2005). Thus far, the
HPWPs literature has enlightened scholars and
practitioners alike to the fact that these human
resource practices profoundly impact employee
and organization performance, and while most
studies focus on larger firms, the relationships
can be applied to SMEs as well.
Past research demonstrates that as firms em-
brace HPWPs they experience higher levels of
economic and social performance (Combs, Liu,
Hall, & Ketchen, 2006; Crook, Ketchen, Combs,
& Todd, 2008). Yet, HPWPs are often costly,
require highly dense networks of employees, and
require a fully committed, staffed human resource
(HR) department with top management support
(Cappelli & Neumark, 2001; Collins & Clark,
2004; Nahapiet & Ghoshal, 1998). As SMEs often
lack the resources to maintain a HR department
and bear the costs involved, it would appear that
a “one size fits all” approach is not feasible for
SMEs. In fact, SME employees are often more
interconnected due to the smaller organizational
size, and therefore SME management can more
easily foster commitment from individual em-
ployees via flatter organizational structures and
fewer degrees of separation from ownership. Thus,
while size may in some ways limit the application
of HPWPs in SMEs, it may also in some ways
amplify the impact as well.
In this chapter we examine the human resource
practices of SMEs using U.S. data from a national
sample collected by the National Federation of
Independent Businesses (NFIB; N=755). Figure
1 presents a visual theoretical overview of the
HPWPs topics. Ultimately we take a realistic
look into the practices of U.S. SMEs, discussing
each from a HPWPs perspective. To begin, we
define HPWPs, explain why they lead to higher
degrees of performance, and provide a theoretical
rationale for this higher performance. We then
discuss how contingencies such as firm size
influence the deployment of HPWPs, asking the
following questions in the process: To what extent
are HPWPs amicable to a small business, and to
what extent do HPWPs need to be adapted to fit
the SME? In doing so, we address the following:
(1) the need for SME-centric HPWPs, (2) some
specific HPWPs (e.g., compensation consider-
ations, training and development, payroll, equal
opportunity, workforce behaviors), (3) an overview
of the data collected and results, (4) solutions and
recommendations, and (5) study limitations and
future research directions.
Background: What are High
Performance Work Practices?
Traditionally, neither scholars nor managers fo-
cused on the role that human capital could play
in obtaining higher firm performance, and from
a strategic standpoint, the HR function was the
least influential (Snell, Shadur & Wright, 2001).
Indeed, as Snell, Youndt and Wright (1996) ar-
gued, the goal for most firms was to take out the
human factor in terms of strategy, substituting
capital for labor and separating those who work
from those who think. This distinction began to
blur over time as both scholars and managers
began to realize how important human resources
were to firm profitability. From this perspective,
although workers were the most difficult asset of
the firm to control, they were also potentially the
most profitable and important resource (Pfeffer,
1994; 1998). Realizing this, scholars began to
study the role of human resources and its impact
on strategy, creating a new subset in HR referred
to as Strategic Human Resource Management
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Placing SMEs at the Forefront of SHRM Literature
(SHRM). Wright & McMahan (1992, p. 298)
defined SHRM as “the pattern of planned human
resource deployments and activities intended to
enable the firm to achieve its goals.” Essentially,
SHRM seeks to encourage HR and other manag-
ers to consider the impact of strategic goals and
external factors on human resource management
and human resource configurations. In doing so,
managers began to make a distinction between HR
with an emphasis on cost reduction (old viewpoint)
and HR with an emphasis on value creation and
firm performance (new viewpoint).
The distinction between old and new ways of
thinking about HR began to emerge as scholars
developed better and better ideas on the concept
of human capital (Becker, 1964). Borrowing Gary
Becker’s concept that human capital is normally
distributed and can increase profitability for those
who control it, scholars began to recognize that
the distinctions between strategy and human
resource management were blurred. As Snell,
Shadur and Wright (2001, pp. 627-628) put it, if
“what people think and how they behave” influence
performance, then human resources are really the
sine qua non of strategic management. A trans-
formation in corporate governance was another
important development was the understanding
that if human capital matters in firm performance,
new and more efficient ways are needed to create
and ensure the cooperation of workers and the
organization than simply using economic incen-
tives were needed (Nahapiet & Ghoshal, 1998;
Leana & Van Buren, 1999). Thus rather than us-
ing pure economic incentives, organizations are
encouraged to promote trust and cooperation so
that individuals will be more willing to exchange
resources and share information.
SHRM also commonly involves the use of
HPWPs, which are a comprehensively aligned set
of practices designed to create a more knowledge-
able and motivated work force via the recruiting,
selecting, compensating, performance managing,
and training of a firm’s potential and current
employees (Huselid, 1995).Essentially, HPWPs
Figure 1. An embedded overview
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Placing SMEs at the Forefront of SHRM Literature
were designed to decentralize the organization and
place more power, knowledge, information, and
resources at the hands of the worker (Snell et al.,
2001), thus creating communities the “thinker”
and the “doer” roles are blurred. Although there
is considerable debate over what practices should
be included in a catalog of HPWPs (e.g., Huselid’s
selection of practices are different than Pfeffer’s;
cf., Huselid, 1995, and Pfeffer, 1994,1998), there
is neverthelesssignificant evidence that HPWPs
lead to functional turnover, higher firm perfor-
mance, and more satisfied workers (Becker &
Gerhart, 1996).
Over the years, several criticisms have been
directed at HPWPs. The first common criticism
is the lack of theoretical development and the
atheoretical approach of the initial HPWPs work
(Wright & McMahan, 1992). Although there
are several major theoretical approaches used in
HPWPs, one of the most common and useful is
the resource-based view (RBV; Wright, Dunford
& Snell, 2001)which suggests that firms develop
heterogeneous resources that allow them to gain
competitive advantages over their rivals. Unlike
Porter’s approach, RBV focuses on internal versus
external factors (Wernerfelt, 1984; Barney, 1991),
stating that if firms control rare, valuable, imper-
fectly imitable and non-substitutable resources,
then they will enjoy superior performance. A
valued resource is one that provides value to a
firm, and a rare resource is one that is not readily
available in the market place. A firm may possess
valued resources, but unless valued resources are
also rare, then they will not provide a firm with
a competitive advantage. In addition, once firms
have developed valued and rare resources, other
firms will be motivated to try to copy or find a
substitute. Inimitable resources are resources that
cannot be easily copied, and non-substitutable re-
sources are those resources that cannot be replaced.
If a resource fits all of the above criteria, then it
will lead to sustainable competitive advantage
(Barney, 1991).
Although scholars have criticized the HPWPs
approach for being tautological, others have dem-
onstrated that firms that employ these practices
will enjoy superior performance (Snell et al.,
2001). In this case, SHRM scholars have found
that those firms that use HPWPs will enjoy com-
petitive advantages over companies that do not.
This occurs because human capital is normally
distributed, and some workers have more knowl-
edge, motivation, and skills than other workers
do. Thus, although the practices can be easily
copied, Wright and coauthors (1994) found that
human capital pools may not be copied, due to
the normal distribution of talent and motivation
or the various social interactions between workers
themselves (Wright, McMahan, & McWilliams,
1994). In addition, Lado and Wilson (1994) argued
that it was the unique interaction of HPWPs that
created competitive advantage.
Another criticism of HPWPs is that it treats
the relationship between HPWPs and performance
as a black box with little understanding of any
mediating factors that are at play (Evans and Da-
vis, 2005). From the perspective of the manager,
how these practices lead to superior performance
remains an unknown. Several notable studies have
emerged that explains the relationship in detail.
For example, Evans and Davis (2005) found that
not only do the practices lead to better workers,
but they also encourage the workers to provide
more prosocial behaviors and create reciprocity,
thereby encouraging greater levels of exchange
which makes the organization a better place to
work. Takeuchi, Chen, & Lepak (2009) found
that HPWPs lead to higher levels of job satisfac-
tion and affective commitment, both of which
are important motivational factors in terms of
gaining performance and exchange of resources.
Other explanations include that fact that firms
with HPWPs have an easier time recruiting the
top talent and being more efficient in deploying
that talent.
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Placing SMEs at the Forefront of SHRM Literature
The HPWP Contingency Approach
Whereas scholars understand that some HPWPs
are better than others, there is considerable de-
bate specifically regarding the role of external fit
(Snell et al., 2001). The contingency approach
analyzes whether certain practices are universal
or, instead, require managers to tailor and fit them
to the specific needs of individual firms. In addi-
tion, there is significant discord over the extent to
which strategy and human capital influence what
types of HPWPs should be deployed in a firm.
For instance, some scholars argue that the type
of adaptive strategy (viz., prospector, analyzer,
reactor, defender) to which a firm subscribes will
influence the types of HR configuration that firm
should use (Delery & Doty, 1996). Some scholars
argue that human capital should be treated accord-
ing to the employee’s strategic value to the firm,
with highly important, difficult to replace workers
receiving the majority of benefits, compensation,
attention, and resources (Lepak & Snell, 1999),
while others believe practices are universal and
the types of contingencies that firms face do not
matter (Huselid, 1995; Pfeffer, 1994).
Compounding this problem is the fact that HP-
WPs often involve high financial and social costs
(Cappelli & Neumark, 2001; Nahapiet & Ghosal,
1998). For instance, firms that use HPWPs often
pay higher wages for workers since they gener-
ally hire higher quality employees. In addition,
HPWPs include high social costs since workers
are required to spend more time building relation-
ships with coworkers. These high costs associated
with HPWPs are a prime example of the pitfalls
involved with only investigating HPWPs in the
context of larger firms, as many SMEs simply do
not possess the assets necessary to deploy HPWPs
in the same manner and magnitude as larger firms.
Recent findings from a symposium published
in the Academy of Management Perspectives cri-
tiques SHRM for using examples generated from
large organizations like National Cash Register,
Ford Motor Company, and Standard Oil (Kaufman,
2012). Despite this criticism, other works from
this very symposium, albeit in different contexts,
relied solely on larger organizations for their stud-
ies, revealing the magnitude of the problem (e.g.,
Haier, IBM, and China Mobile; Liang, Marler,
& Cui, 2012). The point here is not to discount
any of the aforementioned studies, but rather to
address a concern in the range of organizations
we are considering in the SHRM literature. Al-
though SMEs represent a far greater percentage
of industry, large organizations appear to reap the
greatest benefits from scholarly research (Cardon
& Stevens, 2004), and while we see potential in
finding similarities between sub-units and SMEs,
scholars often research the former without being
able to confidently generalize to the latter (e.g.,
HPWPs and bank branches within a larger orga-
nization; Liao, Toya, Lepak, & Hong, 2009). In
adding to the issue, studies that have considered
SMEs and their HPWPs often do not reflect SMEs
as a whole. For example, Way’s (2002) study
of HPWPs in SMEs did not take organizations
with fewer than 20 employees into account, thus
focusing only on the larger firms among SMEs.
Our focus here will be examining the extent to
which HPWPs are applicable to SMEs and how
these practices vary (if at all) in smaller firms. In
doing so, we add to research that has examined
whether internal and external factors such as
managerial influence or legislate influence HR
practices (Harney & Dundon, 2006). We know that
some of the HPWPs most important to strategic
outcomes in SMEs are compensation, benefits, job
security, equality / equal opportunity, training and
development, and communication, but due to data
availability (discussed later), we focus specifically
on compensation, right-sizing the firm, training,
and equal opportunity. In doing so, we contend that
these HPWPs are important practices that SMEs
can employ to maintain employee morale as well
as foster retention, job satisfaction, motivation,
and productivity.
Looking forward, it is important to remember
that SMEs may already use HPWPs. As an ex-
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Placing SMEs at the Forefront of SHRM Literature
ample, one of the major concepts behind HPWPs
is to foster a work force based on social rather than
economic exchange (Nahapiet & Ghoshal, 1998).
Economic exchange requires exchange conditions
to be clearly set ahead of time, whereas social
exchange does not. As Blau stated(1964, p.93),
social exchange is the “general expectation of
some future return, [although] its exact nature is
definitely not stipulated in advance.” Given the
fact the exchanges in SMEs occur often without
bureaucracy and may include family members,
such an approach may not be necessary since the
relationships involved are often already closer and
more social than those in a larger firm. Similarly,
the relationship network in a small business will
likely be small as well, thus creating by nature
strong ties with high levels of interactions, trust,
and connection (Krackhardt, 1992; Granovetter,
1973).
DATA COLLECTION AND
IMPLICATIONS
A third-party surveying subcontractor specializing
in public data collection interviewed 754 SME
owners and managers via telephone. Respondents
were randomly selected from the INFOUSA da-
tabase and represented small- and medium-sized
firms within the continental U.S. employing be-
tween 1 and 180 employees. Respondents were
primarily male (62%), the firms owner (68%),
college-educated (80%), and averaged 49.8 years
of age. Respondent firm size averaged 12 full
time equivalent employees and was representa-
tive of a variety of industries, including retail
(20%), wholesale (4%), professional & personal
services (30%), construction (8%), etc. The overall
participation rate was 41.5% and calculated using
the AAPOR Participation Rate 4 formula. The
participation rate is reported in lieu of a response
rate because initial respondent eligibility was
unknown (Standard definitions: Final, 2008).
An abbreviated summary of the survey questions
representing key HR considerations in SMEs is
provided in Table 1. Table 2 provides a summary
of the results.
Focal HPWPs in SMEs
At the onset of our research, we believed there to
be a low occurrence of HPWP in SMEs. This be-
lief stemmed from two complementary thoughts,
namely (1) that SMEs would not willingly part
with the capital necessary to institute HPWP as
willingly as their larger counterparts, and (2) past
research had likely explored HPWPs in SMEs only
to realize there was nothing of interest (i.e., pub-
lishable) occurring (n.b., this was an observation
of a colleague of the authors that was seemingly
plausible at the onset). Nevertheless, we contented
that HPWPs were not only affordable for SMEs,
but that they had to exist and perhaps were just
conceptualized differently. The following sec-
tions address the focal HPWPs of our study, and
confirm that HPWPs are in fact employed by U.S.
firms of all sizes.
Compensation-Related Issues
Compensation covers a broad range of HR issues,
including performance-based pay and benefits
packages. Compensation programs affect em-
ployee behavior yet are often under-implemented
in practice despite findings which suggest that
pay for performance is an important aspect within
HPWPs (Rynes, Brown, & Colbert, 2002; Pfeffer,
1994). Compensation is vital to HPWPs and orga-
nizations that seek to attract the best talent must
understand the powerful roles that incentives play
in encouraging behavior. Unfortunately, smaller
firms often struggle to find qualified workers
(Brown, Sturman & Simmering, 2003; Golhar
& Deshpande, 1997) and therefore giving greater
emphasis to pay can have positive implications on
acquiring qualified staff. The research that has
been conducted found that compensation is differ-
ent in large organizations than in SMEs such that
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Placing SMEs at the Forefront of SHRM Literature
Table 1. HR survey questions administered to SMEs
Of your (response in S2) employees, about how many are full time?
How frequently do you pay your full-time employees?
At what intervals do you pay your full-time employees? Do you pay any?
What determines how often an employee gets paid?
Do you pay your part-time employees with the same frequency that you pay your full-time employees?
How frequently do you pay your part-time employees?
Do you do the payroll in-house, have an outside accountant or bookkeeper do it for you, or do you hire a payroll service company for that
purpose?
In your business, who does the payroll?
About how many HOURS per pay period does it take to make out the payroll, including reviewing the time cards or similar data,
calculating pay and withholding taxes, preparing the checks, and other associated tasks?
Are most of the steps in preparing your payroll computerized?
Why do you continue to do your payroll in-house?
Approximately, how much does the outside accountant or bookkeeper charge you every time he or she does your payroll?
Do you pay him or her a flat fee or an hourly fee to do it?
Do you send your payroll records to the accountant or bookkeeper in electronic or paper form?
Does the accountant or bookkeeper manage the financial transactions for you, such as tax deposits, or do you conduct that part of the
process in-house?
Approximately, how much does your payroll service company charge you per month for the service when the company does your payroll?
Do you send your payroll records to the payroll service company in electronic or paper form?
What is the most important reason that you chose to engage a payroll company rather than doing your pay in-house?
How often do you remit payroll taxes to the federal government?
Do you use an Internet banking arrangement that allows you to remit your payroll taxes electronically?
Do you have direct deposit for employee pay checks, that is, do you give employees the option of having their paychecks automatically
deposited directly into their bank account?
About how many of your employees use direct deposit?
Do you allow employees to make direct deposits to more than one account? For example, could part of the employee’s check be directly
deposited into a checking account and part into a saving account?
What is the maximum number of accounts that an employee can have his or her money deposited into, or has that issue never arisen?
Can two or more deposits for a single employee be sent to two or more financial institutions?
What is the most important reason that you instituted direct deposit?
Has direct deposit generally been helpful, a hassle, or inconsequential to the operation of your business?
What is the most important reason that do you not have direct deposit?
Employees can change their tax withholding by completing and filing a new W-4 form. Considering the frequency of employee changes
and any administrative issues for you, are W-4 changes one of the most difficult or one of the least difficult government paperwork
burdens you have?
Do you have any employees who claim eligibility for the Earned Income Tax Credit and submit form W-5 to you?
Considering the frequency of claims and any operational issues involved for you, is administration of the Earned Income Tax Credit one
of the most difficult or one of the least difficult government paperwork burdens you have?
Do you offer your employees a retirement plan?
Is it a 401(k), a SIMPLE plan, profit-sharing, a SEP plan, or something else?
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208
Placing SMEs at the Forefront of SHRM Literature
Table 2. Descriptive statistics
Category Description # %
N Sample Size 754
Gender (Overall) Male 515 68%
Female 239 32%
Gender (Managers Only) Male 60 48%
Female 64 52%
Gender (Owners Only) Male 35 63%
Female 21 38%
Gender (Manager-Owners) Male 420 73%
Female 154 27%
Full-Time (FT) Employees No FT 66 9%
1-25% FT 36 5%
26-50% FT 103 14%
51-75% FT 102 14%
76-100% 446 59%
Retirement Plan Offerings Available 270 36%
Not Available 476 63%
Don’t Know/Refused 8 2%
Payroll Procedures (Overall) In-House 445 59%
Outside Individual 101 13%
Payroll Service Company 190 25%
Don’t Know/Refused 18 3%
Payroll Procedures (<10 emps.) In-House 268 69% Outside Individual 57 15% Payroll Service Company 58 15% Don’t Know/Refused 8 2% Payroll Procedures (10+ emps.) In-House 177 49% Outside Individual 44 12% Payroll Service Company 132 36% Don’t Know/Refused 10 4% Education Level Didn’t Finish HS 19 3% HS Diploma/GED 153 20% Some College/Associate’s 171 23% Vocational/Technical 14 2% College Diploma 254 34% Advanced/Professional Degree 127 17% Don’t Know/Refused 16 2% EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 209 Placing SMEs at the Forefront of SHRM Literature SMEs are at more risk regarding pay than larger firms, but as the firms increase in size these risks diminish and firms isomorph toward larger organi- zations (Cardon & Stevens, 2004). Below we focus on two specific compensation-related topics and consider how their evaluation and implementation should account for organizational size. Payroll Payroll is the process by which members of or- ganizations receive compensation for their work. The complexity of payroll processes and systems greatly vary across organizations and must account for a number of influencing factors including but not limited to the type of employees, the type of work being done, hourly compensation versus salaried pay, full-time versus part-time, benefits, pensions, and industry-specific factors. Some of these factors are so complex that they will require organizations to outsource the process to another organization, whose expertise may be payroll. Hence, organizations adhere to the principles of transaction cost economics when deciding whether they will “make” payroll (i.e., manage their own) or “buy” it (i.e., outsource payroll to a third-party individual or organization; Geystens, Steenkamp, & Kumar, 2006; Williamson, 1975). Payroll decisions seem to correspond with employee size among SMEs. Historically, SMEs have outsourced payroll to allow themselves the leeway necessary to focus more heavily on their core competencies (Thomas & Thomas, 2011). The survey (N=754) of SME owners and manag- ers revealed that approximately 59% of SMEs on average conduct their payroll functions in-house, which is a greater percentage in comparison to larger organizations. In addition, subdividing the SMEs included in the study by size even more clearly reveals that payroll decisions seem to rely on organizational size. Approximately 70% of SMEs with fewer than 10 employees process their payroll in-house, but only around 50% of SMEs with 10 employees or more handle their own payroll. As discussed previously, the inverse relationship between firm size and in-house payroll responsibilities seems to suggest that as the number of transactions (employees) becomes fewer, the likelihood of SMEs performing their own payroll increases. Keeping this in mind, it is important that SMEs that choose to handle their payroll in-house adopt a communication-centric HPWP in handling em- ployees’ payroll-related issues. Organizations that choose to outsource payroll operations have the luxury of deferring employees’ payroll-related concerns and questions to a third-party organi- zation. If there is a mistake with an employee’s paycheck, an organization outsourcing payroll can deflect responsibility for the mistake to the third- party payroll service provider. If a payroll mistake occurs within an organization that conducts payroll in-house, however, the organization runs the risk of the mistake negatively affecting the employee’s trust in the organization, morale, et cetera and the organization’s internal HR department is left to deal with any residual damage. Yet, there is a tradeoff here in terms of payroll. While some issues with payroll may be deflected to the third party, often times the presence of a contractor may create additional social costs since the monitoring of third parties is difficult and costly (Williamson, 1975). One way around this is for the owner of the SME to develop relationships with potential third parties by developing social relationships with them as a means of ensuring trust (Larson & Star, 1993). Thus, SME owners and managers should be encouraged to develop a social network when they outsource, as a means of encouraging appropriate behaviors from those they do business with, given the embedded nature of exchanges (Granovetter, 1985). One additional issue of dealing with payroll and pay for performance is that a large portion of SMEs are family owned businesses (Wortman, 1994). A family owned business may have different ways of providing compensation than simply monetary. Accordingly, implementing the HPWP of clear, EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 210 Placing SMEs at the Forefront of SHRM Literature honest, and frequent communication with employ- ees can help minimize this damage should any payroll-related incidences occur such as unwar- ranted social comparisons between employees (Brown et al., 2003). Benefits In comparison to larger organizations, SMEs offer their employees fewer benefits options, includ- ing but not limited to 401(k)s, investment plans, and benefits packages. In fact, only 36% of SME owners and managers claimed to offer retirement plans to their employees. This is likely due to is- sues of cost, among other things, as SMEs cannot negotiate with benefits providers as proficiently as larger organizations can. For instance, a large corporation such as Wal-Mart will not only be more effective in gaining low costs through negotiations, but since there will be so many employees, the insurance becomes less risky for the insurance corporation (Shi & Singh, 2012). Yet there are still reasons why the SME should offer insurance. The positive outcomes of offer- ing a satisfactory quantity and quality of benefits options, including retirement plans, are two-fold. First, organizations that provide their employees with sufficient voluntary benefits options find it easier to attract a breadth of qualified candidates for open positions. In addition, offering better benefits increase employee productivity and improve employee retention (Jackson, Schuler, & Werner, 2012). It is understandably not possible for all SMEs to offer benefits packages comparable to those offered by larger competitor firms but especially larger-small organizations should be capable of mirroring larger organizations (Cardon & Stevens, 2004; Golhar & Deshpande, 1997). That being said, these SMEs should implement other HPWPs such as fostering psychological empowerment which by making the work more enjoyable will also reduce stress (Halbesleben & Buckley, 2004). As there are less workers and bureaucracy, a worker in an SME will be more likely to feel important since they will have the ability to self-determine at work (Spreitzer, 1995). One of the major is- sues with modern work life is the breakdown of meaning, satisfaction and intrinsic enjoyment for many employees (Pfeffer, 2007). Studies have found that when workers feel empowerment, their stress is reduced, fears of being injured are reduced, burnout is reduced through providing employees with a sense of meaning and impact on their work environment (Halbesleben & Buckley, 2004; Muldoon, Matthews, & Foley, 2011). A particular area that SMEs perform well in is offer- ing flexible work hours, but only in cases where it makes business sense (Dex & Scheibl, 2001). As implied previously, one way to provide for compensation and benefits is to create envi- ronments where workers can feel that they have more meaning. As many SMEs are family owned, for instance, by creating a sense of connection between employees and the family may in turn reduce stress. This type of dynamic is not likely as common at a larger corporation where family and friend networks are less probable to exist, and contracts are more economic, rather than social (Nahapiet & Ghoshal, 1998). Another possibil- ity would be to create opportunities for further training as a means of providing workers will the ability to improve their condition. For example, SMEs could hold seminars to improve financial literacy or provide employees with continuing education options that they may not have otherwise offered. To summarize, SMEs can still attract top talent, but they need to offer different resources and conditions for employees to grow. Of course, their ability to do so will be influenced by the conditions of the workplace, resources the firm controls, and ownership issues. Training and Development Training and development are a well-researched HPWP, and meta-analyses of the SHRM litera- ture show training to be effective in promoting EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 211 Placing SMEs at the Forefront of SHRM Literature cognitive learning, changes in work behaviors, contribution to strategic issues, changes in orga- nizational culture, improved quality, and customer satisfaction, among other things (Arthur, Ben- nett, Edens, & Bell, 2003; Jackson et al., 2012). That being said, training and development needs vary greatly both across and within firms based on several characteristics (e.g., organizational structure, organizational size, person, job duties, or demographics). For instance, it is easier for a large corporation to have a formal training pro- cess and department since they possess the slack resources needed for such an approach (Cardon & Stevens, 2004). They can bear the costs of having strong HR departments. While training and development is beneficial at organizations of all sizes, key differences across organizations should be taken into consideration to ensure that training and development opportunities achieve maximum impact. In a SME, training is important because workers have to fill many roles (Cardon & Stevens, 2004). As an example of this, we will focus on person-related training need differences between SMEs and large organizations. Only roughly 50% of managers in SMEs have earned a bachelor’s degree or higher, but the per- centage of college-educated managers is much higher in larger organizations. While commonly accepted hiring practices imply that education is universally valued among firms of varying sizes, these results imply that either larger organizations more strongly emphasize educational attainment or that more highly educated individuals strive to work in larger organizations (Davidson, 2011). A potentially valid viewpoint on why this is the case is that education is often used as a proxy for intelligence and since larger firms must adhere to employment laws, they can use education as a means of judging intelligence without the potential costs of lawsuits (Spence, 1973). In ad- dition, tuition assistance is more readily available at large firms than in smaller firms (Cappelli, 2004), essentially compounding the educational disparity between large and small organizations and ensuring that the rich (large firms) get richer in terms of employee education levels while the poor (small firms) continue to suffer. As a related side note, employees with greater cognitive ability benefit more greatly from train- ing and development and are also more capable of adapting to and taking advantage of new technolo- gies (Salas & Cannon-Bowers, 2001). Although the two are not perfectly correlated, education level is often considered to be a suitable proxy for cognitive ability (Spence, 1973). Because many modern-day training programs heavily integrate technology into their curricula, employees with lower education level (and thus lower cognitive ability/technological know-how) such as those more commonly found in SMEs, are less likely to benefit from training opportunities than those with higher levels of educational attainment. SMEs can address educational/cognitive dis- parities by offering tailored training solutions that (1) maximize the impact of training by tailoring training to employees’ cognitive abilities and education levels and that (2) are a suitable yet more efficient substitute for formal education. First, SMEs can offer training and education opportunities that are tailored to the individual capabilities and needs of their employees instead of capitalizing on turn-key training offerings that are standard across organizations and industries. Adapting training opportunities to the specific needs of SME employees will allow employees to achieve maximum benefit from their studies versus being faced with a curriculum that is either too complex or too overly simplistic. In addition, SMEs can try to account for an educational deficit among its employees by offering on-the-job training as a suitable alternative for formal education. Such training can save both employers’ and employees’ time by focusing specifically on imparting knowl- edge that directly applies to the job at hand and is also likely a much more cost-effective alternative to typical tuition assistance programs. Moving forward, SME office managers and other human resource employees are more likely EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 212 Placing SMEs at the Forefront of SHRM Literature to be assigned a wide variety of tasks than simi- lar employees working in larger organizations. Employees who are expected to perform a broad set of responsibilities are less likely to receive specific training opportunities than employees in specialized roles. To address this issue, SMEs should conduct a systematic employee needs as- sessment (another HPWP) to guide training design, development, delivery, and evaluation (Arthur et al., 2003). Training and development presents a great deal of short- and long-term organizational improvements, but accomplishing these improve- ments requires implementing processes (e.g., needs assessments) to ensure that appropriate train- ing opportunities are offered for SME employees when/where needed, regardless of the breadth of tasks for which they are responsible. Equal Opportunity Another critical aspect of HPWPs is the impor- tance of selection and promotion opportunities based on merit and fairness (Pfeffer, 1994). One of the principle benefits to such an approach is if used properly, may reduce friction caused by discrimination and bigotry (Pfeffer, 1994). Large corporations, especially those that use humanistic management techniques, are often considered better places to work and are more fair in their treatment of minorities. (Pfeffer, 2007) One especially important aspect of diversity is the concern over gender in the workplace, whether it is for a large corporation or a SME. The gender of a small business owner plays a significant role in determining business performance, but the re- lationship between the two is far from clean-cut (Rosa, Carter, & Hamilton, 1996). Thus, gaining further insight into the gender breakdown of SME owner-managers is a useful undertaking. A Di- versityInc (“Where’s the Diversity,” 2012) study of the top 50 Fortune 500 companies found that only 24% of CEOs are women. The NFIB survey determined that this trend carries over into the small business environment as well, with 32% of SME heads being female. Isolating managers from owners and owner- managers in the NFIB survey data revealed an interesting shift in gender breakdown, however. The gender gap among SME leaders identified solely as managers (not owner-managers) was much less than that of SME leaders overall, with 48% of SME managers being female. These ob- servations raise two similar yet unique questions when it comes to the role of gender among SME leaders. First, the overall gender disparity among both large- and small-sized business raises the question of the causes and effects of such ineq- uity. In addition and perhaps more interestingly given the topic at hand, the greater proportion of women as SME managers (versus SME owners) strongly alludes to the existence of gender-based challenges in the SME environment. Recent research suggests that SMEs do in fact, struggle with gender inequality issues, especially when it comes to business performance and suc- cess. Loscocco and Bird (2012) recently found that small businesses headed up by females were less likely to be successful than those headed up by males due in part to the fact that work-family balance issues weigh more heavily upon females than males. In addition, men are more likely to uncover business opportunities due to a gender imbalance in both human and social capital (Gonzalez-Alvarez & Solis-Rodriguez, 2011). Similarly, gender disparities in SME leaders’ job training and relevant career development experiences also play a role in determining suc- cess. Using a survey of managers across various business sizes and types, Ohlott, Ruderman, and McCauley (1994) confirmed the existence of gender differences in career training and devel- opment experiences. Loscocco and Bird (2012) further investigated such differences through the lens of small business performance, ultimately concluding that the higher success likelihood of male-owned (versus female-owned) small busi- nesses is at least partially attributable to dissimi- larities between gender and previous employment experiences. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 213 Placing SMEs at the Forefront of SHRM Literature Finally, there has been discussion over the role that gender plays in females’ decision to pursue self-employment opportunities like SME ownership (Hughes, 2003). Some scholars argue that females willingly pursue self-employment to avoid the effects of gender inequity in traditional work environments and/or to take advantage of the independence and flexibility inherent in self- employment. Other scholars, however, are more pessimistic, believing instead that women are somewhat unwillingly forced into self-employ- ment by a lack of available jobs. Establishing a more in-depth understanding of these gender inequalities and their origins is an important first step toward eradicating such disadvantages among future generations of SME leaders. In addition, HPWPs like training and development opportunities, as discussed in the previous section, can be used to lessen the effects of gender inequalities whether it is adding ad- ditional skills or providing experiences that may increase self-efficacy (Gist, 1987). SMEs should be sure to take a tailored approach to such training, however, ensuring that women and men receive training based on their individual strengths and weakness. Otherwise, the disparities will continue. Full Time Employee (FTE) According to the U.S. Department of Labor, part- time workers compose approximately 18.7% of the employed civilian workforce (United States De- partment of Labor 2013a; 2013b). In comparison, the NFIB survey of SME owners and managers revealed that, on average, 23% of SME employees are part-time workers, a number slightly higher than the national average. One of the reasons why the workforce has become part-time is due to concerns regarding health insurance, especially with the ongoing increases in healthcare costs in the United States (Shi & Singh, 2012). Yet, another reason, for more part-time workers being hired is that firms are encouraged to “right-size” the firm, rather than downsizing as a firm faces fluctuations in the market. Rather than simply laying-off workers, which would violate best practices, organizations are encouraged to hire part-time workers since those workers do not have expectations of full employment and can be laid off with minimum social costs (De Meuse & Marks, 2003). As a result, job-related attitudes and behaviors vary between part-time and full-time employees (Conway & Briner, 2002). Knowing this, and knowing that SMEs employ a larger-than-average proportion of part-time employees, SME owners and managers should take great care in account- ing for the unique characteristics of part-time employees to minimize the occurrence of em- ployment level-related issues and thus maximize productivity and profitability. For example, research has shown that turnover is more unpredictable among part-time workers than among full-time workers (Peters, Jackofsky, & Salter, 1981). This volatility is more problematic for SMEs than larger firms because SMEs are more likely to employ part-time workers (and thus more likely to experience unexpected employee turnover) and because the value of each employee is greater in a SME due to the inherently smaller employee base of SMEs. Thus, firms of all sizes should seek to minimize turnover via HPWPs, but doing so is of critical importance to SMEs. Yet, these findings need to be tempered by the fact that a great number of people employed by SMEs are either family or friends of the owner. As such, they are not a true market contract as with the normal relationship with an employee in a larger organization. This presents some benefits and costs. If an employee leaves the firm, it could lead to some family issues and the employee may face sanctions outside the firm. Yet, they may not be willing to punish the family member based on the relationship. For example, if a parent employs a child, they may not punish the child, due to the “rotten-child phenomena,” thus they may be lim- ited in sanctions as they are unwilling to punish the child (Becker, 1974). Or the child may feel EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 214 Placing SMEs at the Forefront of SHRM Literature a great sense of connection with the parent, and may be less likely to turnover. Another example would be Patel and Conklin (2012), who studied the interplay between HPWPs, employee reten- tion, and labor productivity in 145 businesses with fewer than 100 employees. They ultimately concluded that fostering and emphasizing group culture among employees, a HPWP, corresponded with improved employee retention and perhaps even higher labor productivity, albeit indirectly. The potential benefits of HPWPs in relation to part-time employees and SMEs are not rel- egated solely to turnover reduction. For instance, job satisfaction patterns also differ based on employment level (Logan, O’Reilly, & Roberts, 1973), and research has shown that HPWPs like salary adjustments and job enrichment strategies positively correspond with improvements in job satisfaction (Luna-Arocas & Camps, 2008). Yet by also fostering a group environment and a family atmosphere, individuals within the organization will experience an increase in satisfaction and meaning. The SME may possess excellent condi- tions for this approach as the owner/manager (who is the agent through which a worker develops their attitudes towards the firm) has such an impact on the worker. SOLUTIONS AND RECOMMENDATIONS The implications arising from the various differ- ences between SMEs and larger firms discussed above shed light on a number of strategic rec- ommendations. First, as mentioned previously, compensation-related issues such as payroll and benefits provide fertile grounds for SME actions to differ from large organizations. Communication between employees and those completing payroll is critical in SMEs that perform payroll functions in-house, as there is no third-party provider whom employees can contact with questions. Also, if the SME contracts outside the firm, the owner of the firm should hire those firms with excellent reputa- tions and with whom s/he has a social relation- ship with. If a SME is unable to provide certain resources inside the firm, utilizing the social net- work of the owner will be paramount. Chambers of commerce, Rotary Clubs, and LinkedIn may provide cost effective ways to identify options in your local community, as well as avenues by which feedback on past performance of potential vendors can be solicited easily and with candor. In addition, SMEs have a higher proportion of part-time employees than larger firms, and the payroll process is often much less clear for these employees. Thus, while organizations enjoy the efficiency inherent in paying these employees less frequently than full-time employees, further inqui- sition into understanding best payroll practices for both full-time and part-time employees should be a priority for SMEs. On a related note, SME man- agers should give part-time employees additional emphasis/attention, including the opportunity to participate in the organization’s decision-making process, even if unorthodox. Such an initiative would likely be much more fruitful for SMEs than larger organizations given the greater proportion of part-time employees employed within. Emphasis must be given to the labor laws that govern hours worked and employee job categories as these vary from location to location, often even within the same state. In some instances, pay frequency is not something the employer has the flexibility to control, thus limiting the ability of the employer to try and exploit frequency as a benefit. Next, under the compensation umbrella, SMEs should consider the ways in which they can use their smaller size to their advantage in imple- menting HPWPs and other strategic management techniques. For example, SMEs may be unable to compete with stock options and pension plans offered by larger organizations due to the fact that they simply are not large enough in number to achieve the bargaining power (and, thus, lower- cost benefits) of their competitors. Nevertheless, SMEs should instead focus their efforts on provid- ing employee benefits that are within their realm of possibility, including but not limited to flex- EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 215 Placing SMEs at the Forefront of SHRM Literature ible work initiatives and profit-related bonuses. In doing so, we recommend that organizations consider factors which may prevent them from embracing human resource configurations, as Bacon and Hoque (2005) have recommended. Both of these measures are fiscally feasible and could potentially impact employee job satisfaction and performance to the same extent as more tradi- tional benefits offerings. Other options, that may be good substitutes for stock options and pension plans, are 401k savings plans. While 20 years ago the implementation of such plans was cost and/ or time prohibitive for SMEs, today technology enables brokers to easily administer these plans as part of normal payroll cycles (e.g., Paychex and ADP, the two largest payroll and benefits proces- sors nationally, offer this as an add on service to their SME clients). Moving forward, training and development must be considered distinctly different between SMEs and large organizations. Employee needs should be evaluated based on a variety of factors, including education level, gender, and demograph- ics, among other things. These factors should be analyzed through a needs assessment to identify appropriate training opportunities for each em- ployee. For example, males and females may have different work experiences due to inherent gender differences, and a holistic needs assessment should uncover these differences. Furthermore, individu- als in small businesses tend to have lower education levels than individuals in large businesses, and as discussed previously, training activities should be tailored to account for these differences. We would also like to draw further attention to the fact that differences between SMEs can sometimes be as distinct (or perhaps even more so) than differences observed between SMEs and large organizations and should thus be kept under constant consideration. For example, one HPWP, job rotation, increases employee commitment and productivity (e.g., MacDuffie, 1995). Job rotation is based on characteristics of individual firms and not the overall size of the firm. Thus, a proper optimization of job rotation cannot be achieved by comparing SMEs to large organization but instead must be accomplished by an in-depth analysis of the individual SME itself and how it perhaps differs from other similar SMEs. Lastly, our final and perhaps most fundamental recommendation is to continue to address the HP- WPs both mentioned and not mentioned within this chapter, as doing so will allow the SHRM literature and SME scholars and practitioners to continue developing and improving their human resource practices in an educated, informed manner. LIMITATIONS AND FUTURE RESEARCH The data analyzed for this study focused solely on SMEs. While we used this data to compare SMEs to larger organizations, we did not collect original data for the latter. Additionally, more advanced statistical analysis may lead future authors to draw more nuanced and concrete conclusions. The analyses performed largely treat SMEs as a whole and thus do not account for within-group differ- ences, and how these differences may contribute to strategic and tailored HPWP development. As such, some contingencies between SMEs such as industry, family ownership and other potential variables may have been ignored. Furthermore, exploring differences between SMEs will also provide a further understanding of how HR functions vary based on factors other than merely organizational size. We believe dis- tinguishing SMEs from large organizations is a necessary first step in such an undertaking, and thus this analysis achieves its purpose. That being said, further research pitting SMEs against each other could help us further these conclusions. For example, do SMEs that use HPWPs early in the formation, experience higher or lower growth than those who do not? In addition, examining the various strategies and relationships of the owners of the SMEs may allow for a greater understanding EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 216 Placing SMEs at the Forefront of SHRM Literature CONCLUSION HPWPs lead to both behavioral- and performance- oriented beneficial outcomes, including improved organizational citizenship behaviors and better firm performance (e.g., Evans & Davis, 2005). Gaining a richer understanding of these HPWPs in the SHRM literature, especially as they specifi- cally pertain to SMEs, helps enable organizations of all sizes to strategically improve their human resource management function. While research has been diligent in investigating HPWPs among larger organizations, we believe continued work is warranted at the SME level. As scholars, we should continue supplying the demand for such management knowledge (Abrahamson, 1996), and we hope this effort as well as the effort of our fel- low scholars will make incremental advancements in facilitating further development of HPWPs in SMEs. While certainly SMEs have come a long way in the last 125 years in relation to how they treat employees (cf., Liguori, 2012), it’s now time for smaller organizations to get strategic and evaluate the potential positive impact that HPWPs may offer. ACKNOWLEDGMENT The support of the National Federation of Inde- pendent Businesses is gratefully acknowledged. REFERENCES AAPOR. (2008). Standard definitions: Final dispositions of case codes and outcome rates for surveys. Lenexa, KS: AAPOR. Abrahamson, E. (1996). Management fashion. Academy of Management Review, 21(1), 254–285. Arthur, W., Bennett, W., Edens, P. S., & Bell, S. T. (2003). Effectiveness of training in organiza- tions: A meta-analysis of design and evaluation features. The Journal of Applied Psychology, 88(2), 234–245. doi:10.1037/0021-9010.88.2.234 PMID:12731707. Bacon, N., & Hoque, K. (2005). HRM in the SME sector: Valuable employees and coercive networks. 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Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 12 How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest of Hopeless Unemployed Youths: Case Study of Two Selected Cities in Tanzania ABSTRACT There is a general consensus among scholars that the HR practices by corporate companies cannot be imitated by Small and Medium Enterprises (SMEs). Even though it is a neglected sector, SMEs in Tanzania are considered to be a major contributor to the national economy in terms of tax payment and job creation. Using a case study, this chapter investigates human resource practices in the recruitment process among the SMEs in a car maintenance sub sector. The nature of doing business is more informal, whereby a customer can bring a car to the garage and the technicians work on the car without bargain- ing for the cost of the work. Accordingly, there have usually been complaints from customers regarding over charging for the services offered and lack of trust among technicians, especially on matters relating to falsification on spare parts. In addressing this problem, garage owners have to make sure that they employ people with good character; those who cannot temper with customers’ property tarnish the im- age and reputation of the company. Felix Adamu Nandonde Aalborg University, Denmark Pamela John Liana Open University of Tanzania, Tanzania DOI: 10.4018/978-1-4666-4731-2.ch012 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 223 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths INTRODUCTION The collapse of the central planning system (Ujamaa policy), in which the government was responsible for providing a job ‘for every one’, has created significance employment uncertainty in Tanzania (Bagachwa and Maliyamkono, 1990, Mbwambo 2003). In this regard, small and medium enterprises (SMEs), which mostly constitute the private sector, become even more important in creating new jobs. Although SMEs have a big role to play in the economy, their management practices are still vague (Bryant and Nguyen, 2004). And even though SMEs create a significant portion of jobs and employment, current research on human re- source recruitment (HRR) has focused primarily on large firms that employ fulltime specialised personnel (Annette and Marilyn, 1999, Hene- man et al, 2000, Hornsby and Kuratko, 1990). This vacuum compels SMEs to either use human resource practices that were developed for large firms or not to use any practices because of not being appropriate for them. Unlike the firms in developed countries, SMEs in the emerging economies are operating under weak market infrastructures (Peng, 2001, Mbwambo, 2003, Mbwambo and Tundui, 2003, URT, 2002, Wabwire, 1996). SMEs in developing countries may be familiar with HRR practices used by corporate organisations, but the recruitment practices of SMEs, arguably, may be very differ- ent from those in large firms (Bredl, et al 2009). Thus, despite the fact that SMEs in Tanzania play a very important role in economic development and job creation, there is very little knowledge about how they recruit human resource. The subject of HRR in SMEs has received less attention in developing countries (Bryant and Nguyen, 2004, Aryeetey and Offori, 2011). In Tanzania, research on HR has focused much on local and central government (Bana, 2008, Itika, 2010, Issa, undated). This implies that research in SMEs human resource recruitment is urgently needed in developing economies such as Tanzania. This chapter addresses the need of carrying out research in this area by asking one basic question: “What human resource recruitment practices do Tanzania’s car maintenance SMEs formally exercise?” The answer to this question will provide owners of car maintenance and public policy makers in the country better perspectives of the challenges that SMEs face, instead of relying on what is available in the HRR studies on larger firms and models from developed countries. Overview of Car Maintenance Business in Tanzania The definition of SMEs is still subject to debate among scholars. According to Copeland and Weston (1998), the concept lacks universal ap- plicability. This is true because if sales turnover is used as the benchmark, then which currency would you use and what about the impact of ex- change rate? Van der Wijst (1989) defines SMEs as a privately owned firm with 1-9 and less than 10-100 employees. Jordan et al (1998), on the other hand, define SMEs as the firm with fewer than 100 employees and with less than € 15 million turnover. It is clear from literature that scholars have not reached consensus on what should con- stitute SMEs, in terms of as to whether to to use annual turnover, the size of enterprises, ownership of the enterprises, or the value of fixed assets. This study uses a definition based on quantitative dimensions (number of employees and number of revenue). Globally, the concept of SMEs varies from one country to country; in Tanzania, SMEs categorization has been on four tiers as shown in Table 1. On the other hand, the country has scanty statistics on SMEs (The Guardian, 2010). Tanza- nia Chambers of Commerce Industries and Ag- riculture (TCCIA) estimated that there are 1 million entrepreneurs in the country, which con- tribute 30% of the GDP and employ 40% of the total population (www.tccia.com). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 224 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths According to the National Bureau of Statistics (NBS) (2011), estimated 12% of the Tanzania population consist of the unemployed people (www.nbs.go.tz). According to Business Times, (2011) report, unemployment rate among the youth in the country stood at 13.4% in 2010. Such a large army of unemployed young and energetic people indeed poses a threat to the country’s future political stability and peace. On the other hand, the government has embarked on various strategies with the aim of absorbing the youth into different formal and informal legal activities that could help them earn a living. One such strategy is the National Strategy for Growth and Reduction of Poverty (2005-2010). Car maintenance subsector seems to be promis- ing in terms of redressing youth unemployment due to the fact that the number of cars has been in- creasing in the country. For instance, it is estimated that in the commercial city of Dar-Es-Salaam 1 in every 4 people has a car (Daily News, 2012). Currently, the city has the population of more than 4 million people. This provides a potential market for the SMEs in the car maintenance in the country. Table 1 shows that SMEs can be categorised based on capital investment as it has been done in certain project. However, this criterion may not work with many of the individuals involved in the private sector. This is because SMEs are not ready to disclose their income and investments; and on the other hand, the data cannot be easily available because the owners operate informally. Research Problem There is a general consensus among scholars (Deshpande, and Golhar, 1994, Ivy, 1997 and Deshpande and Golhar, 1997) that SMEs are the engine of the economy in the developed and developing countries. However, Tanzania has not benefitted from the full potential of the SMEs due to the following reasons namely; unfavourable legal and regulatory framework (Nkya, 2003, URT, 2002), undeveloped infrastructure (URT, 2002, Mbwambo, 2003), limited access to finance, and poor business development services (Maziku, 2012, Anderson and Ssendi, 2009, URT, 2002). SMEs in car maintenance in Tanzania work under constraints that threaten their very existence (Leonard and Mfaume, 2004). Firstly, the group is characterised with low revenue per year (Mb- wambo, 2003), low level of education (Spring, 2009, Leonard and Mfaume, 2004) and majority do not have any formal training, (Leonard, and Mfaume, 2004, Mwananchi, 2012), they also do not have any permits to work in the areas where they operate, (Leonard and Mfaume, 2004, Nkya, 2004) as they usually use road reserve to undertake their businesses. To survive in this business environment, trust is very important among workers employees, and customers who bring their cars for services in these garages. The nature of doing this kind of business in Tanzania is highly informal whereby customers can leave a car at the garage without any notification; this is in addition to the reality that the technicians would work on the car without knowing how much he/she was finally going to be paid by the customer. The cost of the services is usually agreed upon after the services. In most cases conflicts between car owners and technical attendants, are common phenom- enon, especially regarding the value of the items replaced in the car during the service. Normally, complains abound on over charging for the services and on the fact that sometimes used spare parts Table 1. Categories of SMEs in Tanzania Category Employee Capital Investments (TSHS) Million Micro enterprise 1-4 Up to 5 Small enterprises 5-49 Above 5 to 200 Medium enterprises 50-99 Above 200-800 Large enterprises 100 Above 800 Source: URT, 2002 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 225 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths are replaced and charged for the prices of new and genuine spare parts by unscrupulous technicians. To minimise these conflicts the garage own- ers employ well behaved and trustworthy people who cannot temper with customers’ vehicle parts for fear of damaging the image and reputation of the company. In order to realize the potential of SMEs, issues on how human resource is utilised by the sector deserve a consideration. This study set out to explain how SMEs recruit employees from the community. LITERATURE REVIEW Theoretical Literature Review Recruitment and selection practices are the key factors for success of any organisation (Ongori, 2010). The ultimate goal of recruitment and selection is to have people with similar skills, knowledge, experiences, core competences and preferred attitudes that will enable an organisation to survive in a stiff business competition (Boddy, 2006, Itika, 2012). According to Armstrong (2009), if an organi- sation fails to attract skilled and knowledgeable human resource, such an organisation is likely to fail to achieve its objectives. Some of the problems which SMEs face include high labour turnover and organisation conflicts (Aryeetey and Ofori, 2011, Bredl, et al, 2011). To minimise these problems, proper recruitment and selection procedures of employees becomes very crucial. A system theory which is propounded by Dun- lop (1958) considers human resource recruitment as a system that constitutes inputs, process, and output. However, small scale businesses have a shortage of managerial skills (Daniels, and Ng- wira, 1993 and Monsted 1989). In addressing this problem among the SMEs Aryeetey and Ofori (2011) suggest three things: (1) developing the managerial skills of the owner (2) employing managerial consultant when problems arise; and (3) recruiting an employee who would perform managerial tasks. SMEs have to make sure that they attract and recruit talented youths. However, this is not what actually happens in the labour market whereby graduate have no jobs and SMEs have no skilled employees (Budhwar, and Saini, 2008). SMEs in developing countries face many prob- lems ranging from financial related constraints to those related to access to finance (Anderson and Ssendi, 2009, Gagoitseope, and Pansiri, 2012). Such constraints limit SMEs from implement- ing the three suggestions by Aryeetey and Ofori (2011). On the other hand, corporate organisations fail to absorb all graduates from technical colleges and higher learning institutions. Another theory is the resource based value theory (RBVT). The theory originated in the economics some times back and propounded in 1990s by Barney (Barney, 1991). Penrose (1958) propounds the idea that firms should be analysed from resource side and only focusing on the product side at the level of industry. The RBVT focus on internal analysis of the differences in resource endowments of the firms (even within industry) and explains how these differences can be a source of sustainable competitive advantage (Armstrong, and Shimizu, 2007, Barney, 1991). As Barney (1991) argues, a firm has the potential of generating sustained competitive advantage from firm resources that are valuable, rare, inimitable and non substitutable. The RBVT was chosen as a conceptual framework because it provides a theoretical bridge between HRM and a firm competitiveness (Friedmann, et al 2010, Dunford, et al 2001). Since its inception, the theory has faced criticism (see Barney, et al, 2011, Barney, 2001, Armstrong and Shimizu, 2001 for detail). Applying the RVBT concept to research has led to discussions of opposing implications among scholars (Dunford, et al 2001). Despite the criti- cism (Armstrong and Shimizu, 2007, de Kok et al, 2006), the RBVT has become the most ap- plied theory in HRM research. However, scholars have different views on the use of the RBVT and EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 226 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths HRM. As McMahon et al (1994) argue, human resource may lead to competitive advantage, on the other hand, Lado and Wilson (1994) argue that sustainable competitive advantage lies within HR practices. According to Friedmann, et al (2010), and Barney, (1991), HR practices constitute a complex and interdependent system that cannot be copied easily. Exploring the influencing role of HR on the competencies of the firm (Dunford et al, 2011), suggest that HR systems (as opposed to individual practices) can be unique, causality ambiguous and synergistic in how they enhance firm competencies, and thus could be inimitable. This study follows the RBVT to HR practices whereby the value, uniqueness, and unilimitability are argued to enhance efficiency. According to de Kok, et al (2006), the RBVT supports relation- ship between the firm size and organizational complexity on the one hand and professional HRM practices on the other. In the Tanzania’s business context, this means HRM practices with those three features will help SMEs to survive in competitive business environment. But to have employees with these features, a firm has to practice HRM recruitment processes that depend on RBVT. The SMEs dependency on community seems to be an inevitable phenomenon because of the financial constraints that limit them from employing qualified staff and or formalizing of their operations. To survive in this situation, SMEs have to depend on the surrounding community for the supply of unskilled labour because they (SMEs) cannot employ skilled labour from universities and technical education institutions. This, in turn, reduces their competitiveness in the provision of services while on the other hand financial institu- tions encourage SMEs to take loans which however make them unable to attract highly skilled labour. In broad perspective, SMEs in car maintenance depend on the human resource from a pool of poor skills. In addressing the problem unquali- fied staff, SMEs recruit unemployed individuals as trainees. However, the challenge with regard to this approach revolves around bringing ethical and moral behaviour of new recruits up to the acceptable standards. SMEs Recruitment Processes Armstrong (2009) identifies three stages of human resource recruitment and selection procedures, which include (1) defining recruitments (preparing job; evaluating alternative sources of applicants either inside or outside the organisations) (2) attracting candidates; (through advertising the vacancies inside or outside the organisation); and (3) Selecting candidates (through interview, testing, assessing candidates, obtaining references and preparing the job contracts). The problem many companies in developing countries face is lack of trust among employees (Egbert, 2001). To overcome this problem com- panies, in most cases, use a network of friends to get employees (Bredl et al, 2011). As Trulsson (1997) observes, business owners in Tanzania rely on friends and other sources when searching for employees. On part of entrepreneurs, this is more challenging because in some situations (Bredl, et al, 2001, Ongori, 2010), they (entrepreneurs) don’t have enough means of screening their workers and do not use formal procedures such as signing of work contracts. In the study conducted in Tanzania, Bredl et al (2009) found out that employers either formalize their human resource operations or not, do otherwise, depending on the size and age of the firm. Furthermore, the same study reveals that Tanzanian-Africans do not formalize their human resource recruitment unlike their counterparts Tanzanian-Asians. In a study conducted in Tanga, Tanzania, Egbert (2001) found that SMEs owners use two criteria, namely; trust and qualifications in the recruitment of employees. Lack of trust is the biggest problem in the world of business today, and it is very ram- pant in the SMEs because they (SMEs) don’t have a good mechanism of screening new recruits and thus these SMEs recruit workers without formal skills (Ongori, 2010, Bredl et al, 2011). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 227 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths In another study, Huselid,(1995), Adams and Reid (2001) found that firms that use comprehen- sive employee recruitment selection procedures, extensive employee involvement and training, and formal performance appraisal approach linked to incentives are likely to enhance corporate financial performance. However, training is normally faced with setbacks in many organisations due to finan- cial difficulties (Dunford, et al, 2001). The situa- tion is even worse with SMEs because they face with financial constraints, and researchers have found that training is not one of the components that are taken into consideration more serious. However in most cases, SMEs carry out informal training following the nature of their organisation that jobs are a routine and there is no specialisation (de Kok and Kok, 1999). Aldrich and Langton (1997), found a negative relationship between the number of family members who work in a firm and the formal HRM practices. Furthermore (de Kok et al, 2006, Adams and Reid, 2001) found that family firms rarely consider experience and level of education in making decisions on promotion. In a study conducted in Ireland, Adams and Reid (2001), found that SMEs were not implementing professional HRM practices. Study Area The respondents of the study were recruited based on the agreement that the researchers would treat the information provided with the highest level of confidentiality and would conceal the identity of the respondents. The problem was that SMEs were sceptical from participating in the research for fear that the government and its agencies would investigate their operations. For that matter hy- pothetical names such as garage A, B, C, and D. The study data were collected in Morogoro and Dar-Es-Salaam using a random sampling technique. The researchers approached the or- ganisation and introduced the study and upon agreement, the date for the interview and time were agreed upon. Eight SMEs were approached to participate in the study, four refused for fear that their business secrets would be revealed. Snow bowling technique was used to get other four SMEs with reference to the first one. Two respondents were garage owners who operated in both cities and whose car maintenance services were also used by the researchers. The technique is biased, but, it was reliable because the person suggested by someone (who is also in the sample) is likely to share similar characteristics with the first person (Zikmund, 2009, pp.384). Data Collection Unstructured questionnaire was used for data collection. The questionnaire was developed after consulting literature such as Bredl et al, (2011), Egbert, (2001) and Trulsson, (1997). The questionnaire contain questions such as: When did you start this business operation? Was your business registered? Where is the source of your employees? How do you recruit trained mechan- ics? Do your use interview in recruitment? What methods do you use in the selection process of the employees? Do you consider gender balance in your recruitments? Does your company face labour turnover? If yes what are you doing to retain those talents? The researchers shared with the respondents, the objectives of the study and tools that were to be used in the data collections. The interviews were all tape recorded to allow the researchers to concentrate on the conversations during the interviews. However, for ethical reasons, the in- terviewees were informed about the tape recording and its purpose; that is, allowing the researcher to keep a record for data analysis. Upon agreeing on the procedures by both parties, then the interviews began. All interviews lasted for 30 to 45 minutes depending on how busy the respondent was. The researchers visited the respondents’ premises for convenience and for verifying some of the things cited. The interviews were conducted from June to August in 2012 in the cities of Morogoro and Dar-Es-Salaam. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 228 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths Case Selections Yin (2009) defines case study research method as an empirical inquiry that investigates a contem- porary phenomenon in its real life context, and when the boundaries between the phenomenon and the context are not clearly evident; and in which multiple sources of evidence can be used. A multiple case study design was used in this study whereby four cases were studied as a unit of analysis. In selecting the SMEs three criteria developed by Nkya (2002) were used in the study as follows. • The enterprises must have operated for at least five years. • The enterprises must not at the time of the study be employing more than a hundred people. • The enterprises management should be willing to provide the necessary information. Data Analysis The collected qualitative data from interviews with the owners of car service stations were analysed using critical discourse analysis (CDA). The transcribing of the data was conducted before the analysis of the data. The CDA looks at the linkages between the language used by the person such as (voice, intonation and body language), and the social context during the interview (Winstanley, 2009). The transcribing started on the same day after the interview while information from the respondents was fresh in the memories of the researchers, the context and analysis of the case also started almost immediately. Findings Four companies, two from Dar-es-Salaam and two from Morogoro were included in the study (see Table 2). The company names were A and B from Morogoro and C and D from Dar-Es-Salaam. SMEs RECRUITMENT PROCESS Recruitment Sources SMEs use two sources of recruitment, internal and external. However, the internal one is very strong because when trainees (for the purpose of this study trainee is the one who did not attend any formal mechanical training but has received training at the car services centre based on the skills and experiences) graduate from the com- pany, they decide to remain with the company because of a long relationship they have had with the organisation. The external sources are not a major source, even though they generate a good number of recruits. However, in most cases, these recruits do not stay with the company for a long time due to low pay and harsh working conditions. Similar findings are reported by Johnson (1993), who shows that SMEs see graduates as a product of the academic world. One owner said: Some of the technicians from colleges do not have good practical training but they are good in theory, while here we don’t need theory. So they find this as not being the right place for them. Table 2. Business status No Name of the Company Number of Employees Year Started Legal Status 1 A 18 1992 Valid 2 B 7 2005 Not valid 3 C 12 1990 Valid 4 D 11 2000 Valid Note: the name of the companies have been hidden for confi- dentiality EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 229 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths RECRUITMENT METHODS Indirect Methods The study found SMEs not advertising vacancies in the local media and neither do have job descrip- tions. Interesting findings were on the source of human resource, that SMEs depend do not use formal sources such as vocational training and colleges; but they use relatives, family friends and own family members as their major source of labour supply. One garage owner said: You have seen that I have seven employees who are working here one is a young boy; his mother is working in the next door, the other one is a child of the owner of the auto spare parts shop and two are my relatives; this helps us to protect property of our customers. The findings of this case study reveal further those SMEs in a car maintenance industry use more informal and unstructured means of recruitment. The findings correlate with the ones in a study by Bartram et al (1995) who found that recruitment in small businesses is unlike that in SMEs. When asked why they do not advertise vacan- cies in local media to enable them attract skilled staff, SMEs gave several reasons; for example one owner of a car service centre had this to say: People come to our offices to ask for jobs, but we don’t have enough places for them, why advertise? Another respondent made this remark: Due to the nature of this business, you don’t need to incur more cost; also employees are very mobile so you don’t need to advertise. This shows that the problem with SMEs in car maintenance industry is not getting skilled labour; rather it is how to retain the skilled staff. This is unlike in large firms where employees get good pay and work under good working condition. Large firms can therefore, afford to retain their staff quite easily. SMEs AND SELECTIONS OF THE EMPLOYEES Interviews The study found two techniques being used in selecting new recruits. One involves indirect methods (to get trainees), whereby companies conduct informal interview to candidates accom- panied with members of the families. A family member can either be a parent or guardian and who has to provide reference for candidate and be answerable for any wrong doing committed by the candidate. The owner of the garage will ask for a verbal commitment from the parent/guard- ian to assure the company that the trainee would not display an unacceptable behaviour. Also, the family member has to provide pocket money to the candidate during the first few days of the training sustain him or her at the garage. One of the owners has this to say: We will question the parents on the commitments of the youth that (he/she) will behave and not steal other people’s properties. The agreement is made between the parent and the owner of the garage and not the child. This means the parent would be responsible for any loss resulting from the candidate’s misbehaviour. One garage supervisor commented, We don’t have any alternatives but to protect ourselves, otherwise we will pay a lot of money for mistakes which are not ours. To avoid recruiting children with bad behav- iour, the company would usually recruit techni- cians from next of kin. Such a procedure saves the EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 230 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths owners from the hassles of searching for detailed information of the trainee in terms of whether or not the candidate is of good character. Personality and Ability Test A recruitment process of candidate from voca- tional training institutions and colleges is different from that of those who have not attended formal training. As for the former, there is usually, a small test on the field on the use of various mechanical tools. As one garage owner says: In 2008 there came one guy claiming to have graduated from a vocational centre and has skills on metal welding. I gave him a small test of setting the gas cylinder and valve cylinder but he failed. Furthermore, personality and ability tests are used to evaluate the physical nature of the candi- date to see if he/she can work in a particular field. The personality test, which can be carried out to either a trainee or a graduate, corresponding with the nature of the job (Boddy, 2005) as one car services centre observes. What we do at the very first time is to look for the physical strength of the candidate one and then we advice him or her where to go and work, we also look at the ability of the trainee in captur- ing technical things; these are very important for selection. To test for the ability, normally a small as- signment can be given to the recruit in the early days of training. Such an assignment may look at things like how fast can the candidate identify the size of a spanner, car parts or spares. The results of the test are then used for placement purposes, whereby one can be assigned to work either in a car wiring section, panel beating, engine mechan- ics, or in other related section. It was observed that SMEs reward is related to the quantity of the output as this garage owner reports: We don’t work for high income people or corpo- rate organisations because we don’t have modern technologies which our competitors have; due to this our payment is quite low and in most cases we first do the job and request for payment later. Car owners usually start bargaining while the job is already done. Such trends have severe conse- quences on our revenue collection. SMEs do not sign job contracts with their employees. Perhaps this is the reason why many graduates do not work with them. In a study conducted in Ghana Aryeetey and Ofori (2011) found out that the SMEs face great challenges in retaining graduates. Thirst for Being Independent In most cases, a garage receives a number of trainees in a day, however in many cases; it is only a few who get retained at the organisation. When trainees become knowledgeable most of them run away without even saying goodbye. I had two boys last year who were working under my supervision and could sometimes receive job when customers call in; but both of them have left without even sending a text message to me that they were quitting. I heard from my friend that my trainees are in Mbeya and have opened their office there. SMEs in a car maintenance industry lose a lot of skilled personnel because of high rate of labour turnover among the young talented personnel due to poor pay. There are two main reasons as to why young talented trainees quit jobs without even saying bye. First, because trainees detest working at the garage with their trainer, this is because a EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 231 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths trainee will not get new customers because as all customers who visit the garage would want to see the supervisors, even though the trainees are the ones who would do the job. Second, is the fact that payment for the any job done is made to the supervisors; the trainees get paid in accordance with the business trend of that day. Gender Balance in Recruitment Researchers asked garage owners if they take into consideration gender issues during recruitment of the trainee or employees. From the results, it was noted that the nature of the job limits participa- tion of women in the garage business because the SMEs use low level of technologies and most of the activities depend on the use of muscles. Ac- cordingly, this sub-sector is usually gender –im- balance. However, some girls still continue to join the sub-sector, which is growing in the country due to importation of used cars from Japan, In- donesia, South Africa, and Singapore, as well as Europe especially in the United Kingdom. Usually, women who participate in the garage activities are engaged in the welding, car painting and wiring as this garage car owner observes: Two women were employed in our organisation but, both of them have been engaged without the notice of our customers. If you are not keen customers can turn you into a father of the young lady. So we are trying to observe gender balance, however we face great challenges in engaging female ap- prentices in a garage business. This is mainly because ladies often fall in love with customers and vice versa; such love relations sometimes end up in taking each other’s hand in marriage. When our lady apprentices get married, their husbands no longer allow their wives to come to the garage again and meet a forest of men. Men in Africa are considered to be bread winner, heads of the family and political leaders (Tarimo, 2004). It is therefore assumed that men in Africa can decide the future of their spouse after marriage. One garage owner reported that he had engaged three girls the year before, but only one of them stayed behind and was still working at the garage. According to Nkamnebe et al (2010), the perception of African community is that women’s place in the kitchen. This explains it is difficult to retain young women to work as mechanics in the car maintenance centres because one has to fight against the customers’ mentality that these young girls are here to be befriended. Retention of the Talented Youths SMEs at the car maintenance sub-sector also face a challenge of retaining talented youth due to a number of reasons. First, the entry barriers to the sub-sector are quite low; anyone can start his ga- rage provided he/she has the basic knowledge on how to repair a car. One supervisor commented: Nowadays there are no technicians because the spare parts are easily available especially for Japanese cars. This simplistic nature of starting ones’ own garage leaves old garages without talented work- force; because the youths can afford to operate their own garage. Also, most garages operate without following proper procedures of running a garage business. For example, one of the garages which even the author of this article sends his car for service operates illegally. The garage is in the open space where young people with skills and spanners can meet and assist car owners to get service at more affordable prices that the ones charged by registered companies that are required to pay taxes. On the other hand, registered garages provide car maintenance services to well off people, government officials, and private companies or organisations. Informal SMEs offer similar ser- vices to low income earners who pay less; and this in turn, constrain these SMEs from retain- EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 232 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths ing talented people, because they do not regular rewards for them to salaries, rather they can only afford to pay wages on daily basis. FUTURE RESEARCH Due to globalisation pressures, the local market is flooded with highly skilled labour from Asia and Europe. These people provide services which were once been provided by local people. How- ever, this trend looks favourable to consumers, because they (consumers) can now get services using modern technologies. On the other hand, there is a growing tension among the locals who were once depending on the field. However, the interesting part is the understat- ing of how different cultures organise and work together. How Tanzanians perceive techniques of handling human resource issues that are found in a car services of sub sector of owners from other countries. This study used qualitative method which limits generalisation, although the business environ- ments in African countries are similar. Accord- ingly therefore, the findings need to be interpreted with caution. Further research can use quantitative analysis method to allow generalisations of the concepts for broader applicability. CONCLUSION Bohlander and Snell (2007) see recruitment as a process of encouraging and evaluating people who apply for current and anticipated job opportunities; and selection as a process of choosing individuals who have relevant qualifications to fill the current and anticipated job openings. However, the study has revealed that SMEs in a car maintenance sub sector are not using recruitment tools such as advertising through the radio or televisions, the print media, or the internet. This implies that it is difficult for these SMEs to get qualified staff. On the other hand, the demand for jobs gives these SMEs the opportunity of having a pool of potential employees in the labour market. The interesting finding is with regards to the use of family members to provide references for candidates vying for recruitment in the car maintenance industry. This innovation gives those (SMEs) a chance to build a strong team of good behaving, positive attitude, and trustworthy indi- viduals. Such attributes are very critical in the car maintenance industry because car owners usually complain of having their car parts been replaced with fake ones by unscrupulous technicians. This study has also shown that SMEs are not practicing general recruitment procedures due to a number of factors, which include lack of funds to cover the cost of advertisement in the electronic and print media. There is also, the issue of reward system because SMEs work with customers in low income bracket, thus the small holder entre- preneurs cannot afford a good reward system to enable them retain talented employees, especially graduates. Additionally due to high labour turn- over many SMEs end up losing talented youths who always keep on looking for greener pasture. On the other hand, SMEs are generally consid- ered as the engine of the economy; accordingly, various programmes have been introduced at the national level with the intention of formalizing SMEs. According to Beck et al, (2010), the banks find SMEs as a lucrative market to lend different products. The banks provide loans to SMEs which are faced with high labour turnover and that compromises the ability of these SMEs to compete in the services market. Persistent high labour turnover it likely to make a number of SMEs default payment back their loans. The reason is simple; they don’t have well talented young mechanics with formal education. It can therefore be suggested that the banks ought to enable SMEs to recruit well talented mechanics and design retention strategies for the recruits to continue working in the firms owned by SMEs in order to help the latter improve performance. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 233 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths Policy Implications This study has several policy implications in Tan- zania. While the current cultural and economic context may encourage informal HRM practices, the study indicates that there is a positive asso- ciation between a firm’s size and HR formality and performance (Brayant and Nguyen, 2004, Athur, 1994, MacDuffie, 1995). This implies that the government should support programmes that introduce more professional training and education to SMEs. An organisation like Small Industries Development Organisations (SIDO) and Local governments can be used to support SMEs in acquiring this education. Furthermore, public universities such as the Open University of Tanzania and MUCOOBS with centres in almost every region in the country can be integrated to support SMEs in getting HRM education. Cur- rently, education which is provided to SMEs in the country is not coordinated and regulated in the manner that can encourage private institutions to come up with their own syllabuses. Also in the training awareness among to the owners of the car service stations need to be raised. This is because the current study has identified those SMEs in the subsector are not proud with what they are doing. While in Kenya, (D’Lima and Oyuga, 1992, Obura, 1996) workers in an informal sector are proud of their job while in Tanzania the opposite is the case. This trend will destabilize their will and jeopardise their future. Managerial Implications Scholars in management and SMEs believe that SMEs can adopt what large companies are do- ing but not the other ways round (de Kok, 2006, Cassel, 2002). However, the findings of this study suggest that large companies can also copy what SMEs in a car maintenance industry are doing with HR recruitment process. The finding has also shown that SMEs in Tanzania request for references from the next of kin of the candidate to comment on the behaviour of the latter with the intention of avoiding recruiting unethical people. Currently common practice by large companies is to request for reference with a condition that the referee should not be a relative or a member of family. The assumption is that relatives or family members can recommend a candidate favourably you. However, unethical practices such as theft, embezzlement, bribery and corruptions still abound in these organisations with these formal recruitment procedures. Such practices could be minimised if some one was to realise that stealing, embezzlement or involvement in other similar acts would lend one’s relatives in trouble. Furthermore, SMEs in car maintenance sector they interview the guardians or parents of the candidate, in order to be assured that the candidate is indeed reliable and a responsible individual. The assumption is that during the probing the honest guardian or parent will provide positive commendation for a bad behaving family member, with the realisation that such an act may have severe consequences not only to the candidate but also to the guardian/ parent him/herself. Scholarly Contribution Chandler and McEvoy, (2000), Barrett and May- son, (2006), observe that although published research indicates that effective management of HR is one of the most important problems faced by SMEs, there is still an acute shortage of research that investigate the common practices in small businesses. This study aimed at investigating the practices used by SMEs in a car maintenances sub sector in Tanzania. Generally, HRM practices among the SMEs vary depending mostly on the nature of the job and sector (Barret and Mayson, 2005, de Kok et al 2006). This study has shown that SMEs a car maintenance sub sector in Tan- zania has its own mechanism of handling human resource issues and which help them to minimise the problem of unethical behaviour among the staff at the working place. Some of the mechanisms in EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 234 SMEs in Car Maintenance Industry Recruit Employees from the Forest of Hopeless Unemployed Youths recruitment include the use of family members as referees, interviewing, the candidate’s guard- ian or parent, and the use of in house training for capacity building purpose. Furthermore, scholars wishing to do further research on SMEs and their practices should focus on much on what they (SMEs) are doing instead of expecting them to adopt corporate managerial methods which have no importance to them for the improvement of their business performance. 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Case study research: Design methods (4th ed.). London: Sage Publication. Zikmund, W. G. (2009). Business research meth- ods. New Dehli, India: Cengage Learning. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 238 Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 13 The Rise, Decline, and Regeneration of Industrial Districts: Enhanced HRM, SMEs, and Location ABSTRACT Who does what, and how, is central to Human Resource Management (HRM). Where people do it has been central to theories of location and the clustering of firms in industrial districts. Yet there has been little synergy boundary spanning between HRM and location theories. This chapter seeks to redress this in relation to the rise and decline of industrial districts of small and medium firms and to draw implica- tions for their potential regeneration. It relates this to cost-based models of locational and competitive advantage, theories of flexible specialisation, the “triple helix” concept of enterprise-university-gov- ernment relations, and the challenges both for entrepreneurs and for policy makers in an era in which industrial districts are no longer only local but already have “gone global.” In forwarding the concept of “enhanced HRM,” the chapter advocates that public policies for SMEs should encourage surfacing tacit knowledge in new product innovation, achieving kaizen style continuous improvement, stretching core competences, profiling and extending latent abilities and implicit skills, and boundary spanning to synergise research with new high-tech start ups. While critical both of Michael Porter’s dismissal of tacit knowledge and kaizen, and of European research and regional policies, the chapter gives examples of success in such policies and how “enhanced HRM” can draw from them to regenerate industrial districts. Stuart Holland University of Coimbra, Portugal Teresa Carla Oliveira University of Coimbra, Portugal DOI: 10.4018/978-1-4666-4731-2.ch013 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 239 The Rise, Decline, and Regeneration of Industrial Districts INTRODUCTION There have been a range of analyses of location and competitiveness, including regional and ur- ban studies, theories of networking, theories of innovation and ‘new economic geography’ (e.g. Krugman, 1995), but fewer in terms of human re- source management rather than local and regional development policies. There is a wide literature on the role of tacit knowledge in competitiveness but only some on its role in successful small and medium firms (SMEs) in industrial districts. This chapter seeks to address such issues from a Schumpeterian perspective on product and pro- cess innovation. It is critical of the local ‘cluster analysis’ of Michael Porter (1980, 1990, 1998) and contrasts it with the more dynamic analysis of local and global polarisation of François Perroux (1955, 1961, 1964, 1965) which was influenced by Schumpeter’s (1949) concept of ‘creative destruction’ as well as parallel dynamics in the circular and cumulative causation of growing and declining areas in Gunnar Myrdal (1957). Drawing on Streek (1989) it analyses the concept of flexible specialisation and the claims for this of Piore and Sabel (1984) and Beccatini (1978, 1986, 1990, 2003) for a new production paradigm in the industrial districts of the ‘Third Italy’. It recognises the importance of flexible specialisation for some industrial districts of small and medium firms, yet also evidences that by failing to match high levels of process innovation by product innovation many of the districts in the ‘Third Italy’ already were in decline by the time that Piore and Sabel and Beccatini claimed to have derived a new production paradigm from them. It also illustrates cases of ‘reverse globalisation’ such as how regeneration of a declining Italian industrial district which at its height accounted for a quarter of Italian textile and clothing exports - Prato - has seen the development a ‘parallel’ district through immigration of Chinese entrepreneurs. The chapter also shows that the industrial district model of Piore and Sabel and Beccatini assumes a micro foundation of small and medium enterprise within a framework of imperfect com- petition. In qualifying this in a global context, it distinguishes micro local economic systems such as small firm industrial districts from meso intermediate regions in the global economy, such as Southern Europe or South East Asia (Amoroso, 1996, 1998; Gallina, 2003; Papadaskalopoulos et al., 2005; Roth, 2007; Scott & Garofoli, (2007). It also differentiates micro from large meso firms and how the latter influence both micro and global outcomes. It further distinguishes between very small firms of less than 10 employees and medium sized firms, recognising that the former may have little scope for HRM, whereas enhancing it may be imperative for those that Eurostat definitions deem micro, of up 250 employees. It illustrates the difference between sponta- neous creation of SME industrial districts and government creation of industrial processing and export zones in Asia, and especially China. It claims that effective responses by micro firms to globalisation need ‘innovation trajectories’ in a manner closer to Schumpeter’s (1949) concept of product and process clusters than only to Por- ter’s (1980) local clusters. It shows that there has been an acceleration and compression of the new and growth phases of a product cycle and that multinational corporations may rapidly locate the growth phase anywhere in the global economy. Whereas the innovative new phase of such a cycle still may be in mature economies and SME high tech start-ups may have an advantage at this phase since bigger business may be ‘locked into’ (Witt, 1997) and ‘path dependent’ (Deeg, 2005) on its own larger scale and longer term research and development programmes. In forwarding the concept of ‘enhanced HRM’ the chapter advocates that local and regional agencies should be directly concerned with (1) surfacing tacit knowledge in new product in- novation (Ichijo & Nonaka, 2007); (2) achieving kaizen style continuous improvement in process innovation (Colenso, 2000); (3) ‘stretching’ core EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 240 The Rise, Decline, and Regeneration of Industrial Districts competences (Miller, Lawless, and Carton, 2011); (4) extending latent abilities and implicit skills (Oliveira, 2007; Oliveira & Holland, 2007) to cre- ate new ‘skill clusters’; (5) boundary spanning to synergise unapplied research with new high-tech start ups (Mazzucato, 2011) as well as thereby (6) fostering Schumpeter’s (1949) ‘creative aptitude’, and applying it in actual innovation rather than only assuming that public policy can create the condi- tions in which the private sector might innovate. It outlines that where new innovation trajecto- ries and the creation of Perroux’s (1965) ‘entirely new’ sectors have been successful this in key cases has been due to governments creating ‘platforms’ for innovation and the creation of new markets by SME start-ups. It illustrates that this has been the case in the US by the federal government boundary spanning between researchers and what initially were small firms (Lazonick, 2009: Block & Keller, 2011; Mazzucato, 2011). It contrasts such proactive boundary spanning with the pas- sive institutional logic of science and technology framework programmes in the European Union. It illustrates a missed chance for this and for more proactive HRM policies in the 2000 Lisbon Agenda and its 2005 re-launch. It ends by recognising that austerity pro- grammes pursued by European governments and institutions since the onset of the Eurozone crisis in 2010 have hindered SME growth and inhibited new high-tech start-ups. It outlines how alternatives to this could be modelled not only on what it proposes as ‘enhanced HRM’ but on the US New Deal which offered major gains for the meso-region of the Deep South through the Tennessee Valley Authority, including support by European employers and trades unions for bond finance, recycling global surpluses and enabling a European venture capital fund for SMEs which could assist their survival, high-tech start-ups and the diversification of declining industrial districts. How Small is Beautiful? In a case which at the time attracted great atten- tion in the early 1970s, E. F. Schumacher argued that ‘small is beautiful’ (Schumacher, 1973, 1999). This was ironic since he had spent most of his professional life working for the British National Coal Board rather than with SMEs. But has force in that smaller firms may be fleeter footed in promoting or reacting to change, and more entrepreneurial, than either organs of state or monolithic corporations. His case also had a neglected implication for HRM in the sense that the subtitle of his book Small Is Beautiful was Economics As If People Mattered. Yet if small is beautiful this depends on how small, and in what regard. For example, a report to the European Commission (Ecorys 2012) has found that a company with over 250 employees is twice as more likely to have introduced in- novations than a small company with under 10 employees. Realism is needed also on whether a very small firm of less than 10 employees can adopt any HRM practices, and how few SMEs have a high technology base. For example, Table 1 indicates the different size categories of firms in the European Union in 2011. More than 20 mil- lion SMEs in the EU amounted to over 99% of its enterprise and 67% of its employment. But nine out of ten of them had less than 10 employees. Table 2 also shows how few firms have a high technology knowledge base. Table 1. SMEs and Large Firms in the EU-27 2011 Employees Less than 10 10 to 49 50 to 249 Over 249 SMES No. of firms 19,143,521 1,357,533 226,573 43,654 20,727,627 % 92,2 6,5 1,1 0,2 99.8 Source: Ecorys (2012) EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 241 The Rise, Decline, and Regeneration of Industrial Districts Moreover (1) fewer than one in ten SMEs have earnings from exports. (2) The main export ob- stacles for SMEs not only are the lack of knowledge of foreign markets but also lack of finance. (3) In domestic markets they also have reported a lack of demand with either low growth or recession since the financial crisis of 2008, and the auster- ity response to it within the Eurozone. Nonetheless, (4) despite high unemployment, and especially youth unemployment, they face a lack of already skilled labour and problems in gaining an appro- priate workforce. Especially in the new member states, a significant number of jobs remain unfilled (Ecorys, 2012). What is striking is that the fourth of these factors is an HRM issue concerning not only SMEs, but also public policy and the degree to which local or regional governments can assist in remedying this. We address such issues in what follows. Industrial Districts: Marshall and After In his ‘Principles of Economics’ (1890), which ran through eight editions until 1920, Alfred Marshall developed the concept of external economies by which it is cheaper for a firm to specialise in some products and buy in others from firms that also specialise to gain mutual advantage from their different economies of scale. Marshall related this to industrial districts, the role of local knowledge in successful local economic systems and the im- portance of ‘industrial atmosphere’ even if he did not much elaborate on this. Marshall also stressed the role of geography and geology in the rise of industrial districts, such as the steel production and cutlery industrial district of Sheffield being close to iron ore deposits, the British potteries being close to clay deposits, and also the role of infrastructure and transport links. When Marshall developed his industrial district concept, proximity counted not only for shared external economies but also because of high transport costs in a world still only developing the internal combustion engine, and with no mass motor transport for freight. Such costs were central to the theory of agglomeration of Alfred Weber (1909, 1928) and to the ‘central place’ theory of Walter Christaller (1933, 1966) and August Lösch (1944, 1952). Yet, over the twentieth century, they fell by over 90% in real terms (Glaeser & Kohlhase, 2003). Besides which, the main costs in transport are not distance but in the purchase and insurance of vehicles, stock and inventory control, machines for loading and unloading, and the labour for handling or driving (Holland, 1976a). With motorways, container transport and jumbo air freight, proximity is not a sufficient condition for competitive success. For example, there is no automatic synergy through local external economies within an indus- trial district simply because firms are close to each other. An example given by Romero (2000) is of the industrial district in the northern Portuguese region of Vale do Ave. The industrial structure of the district has been dependent on a small core of sophisticated firms, supported by a layer of a few others, but without any characteristics of an industrial district in the sense of Marshall. Romero found that not only were there no synergies in terms of joint innovation or R&D within the district but, other than for the core firms and their direct sup- pliers, there were no synergies whatever. Table 2. Firms by technology and knowledge base in EU-27 2011 Sectors Firms % of firms High tech Pharmaceuticals, electronics 45 871 0.2 Medium- high-tech Chemicals, machinery, vehicles 192 980 0.9 High to medium- high-tech Metals, rubber, plastics 238 851 1.2 Source: Ecorys (2012) EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 242 The Rise, Decline, and Regeneration of Industrial Districts Flexible Specialisation In what has been become known as a neo-Mar- shallian approach, Piore and Sabel and Beccatini reinvoked Marshall’s industrial districts in the context of the ‘Third Italy’ of Emilia Romagna, Tuscany, Umbria and Veneto, contrasting this with the ‘First Italy’ of the industrial northern triangle of Turin, Milan and Genoa and the ‘Second Italy’ of the southern Mezzogiorno (Piore & Sabel, 1984; Becattini, 1978, 1986, 1990, 2001, 2003, 2004). The Third Italy districts were not as geologically dependent as those initially identified by Marshall. They had little to no coal, iron ore or other useable mineral deposits. There were other differences also from Marshall in that Becattini paid more attention to social relationships between small and medium firms and their entrepreneurs than Marshall had. In parallel, in their New Industrial Divide Piore and Sabel (1984) distinguished flexible specializa- tion by small and medium firms from inflexible Fordist mass production and claimed that this as a new production paradigm. Streek has distinguished between Fordist and post Fordist production in terms of standardised and diversified product strategies (Streek, 1989). Thus in terms of the left upper quartile of Figure 1, low volume standardised production was typical of local handcraft production in the ancient world, such as of sandals or pottery or other household goods (Landels, 2000), It also was typical of production controlled by medieval guilds. It was inflexible mass production as in the lower left quartile of Figure 1 that Ford achieved by Tay- lorist division of labour and economies of scale and that FIAT and others achieved in the ‘First Italy’ of the northern industrial triangle of Turin, Genoa and Milan. In the case of Ford, and his se- rial assembly line, this yielded vast productivity gains which eliminated more than three hundred SME handcraft assemblers of automobiles (Lacey, 1987). But, after WW2, this was progressively overtaken in Japan by more customised flexible mass production as in the lower right quartile of Figure 1 and of which the prototypical example was the Toyota Production System (Womack, Jones & Roos, 1990). It was low volume flex- ible specialisation of the right upper quartile of Figure 1 that Piore and Sabel identified with the Third Italy. Limits of the Porter Competitive Advantage and Cluster Model Much of the literature on industrial districts refers to Michael Porter’s ‘industrial cluster analysis’ and his theory of competitive advantage (Porter, 1980, 1990, 1998). Some has recognised that his cluster concept was a reworking of Marshall despite Porter making only passing reference to Marshall, or neo-Marshallians such as Becattini. One of Porter’s merits was to address competition Figure 1. Standardised and diversified product strategies Source: Adapted from Streeck, W. (1989). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 243 The Rise, Decline, and Regeneration of Industrial Districts between firms rather than alleged comparative advantage between countries, even if he then compromised this by writing of The Competitive Advantage of Nations (Porter, 1990). But there are open questions on how Porter’s iconic ‘competitive diamond’ and his related ‘cluster’ theory either is original or useful in terms of the regeneration of declining industrial districts. For example, the five factors the main variants of the Porter ‘diamond’, have been (1) corporate strategy and structure; (2) demand conditions; (3) factor conditions including in particular the supply and cost of labour, and (4) the economic context of whether there are related and supporting industries, (5) the role of government. The first of Porter’s five factors, corporate strategy and structure, had been stressed inter alia by Chandler (1962). His second and third factors in terms of the role of demand and the costs of supply have been recognised since Adam Smith and are the foundations of any introduction to economics. The fourth factor in Porter’s competitive diamond is whether there are related and supporting indus- tries in local clusters of firms which already was in Marshall’s (1890) industrial district concept. The fifth, on the role of government, whether national or local, is important, but also had been stressed earlier at both local and national levels by Perroux (1964, 1965). One of the limits of the successive variants of Porter’s competitive advantage model is that they are based more on product differentiation than on innovation. The concept of product differen- tiation dates from the imperfect or monopolistic competition of Joan Robinson (1933) and Edward Chamberlain (1933) and still can be important in enabling a higher price for basic products such as leather goods or clothing where the differentiation may be in design but otherwise can be enhanced by gaining the brand attachment of a name such Gucci or Armani. Yet while these may be designed in Italy, or Europe or the US, they no longer neces- sarily are produced there, any more than an iPad, rather than in Asia. Moreover, the principles of oligopoly and tech- nical progress (Sylos-Labini, 1962, 1968) vital to understanding the dynamics of global competition (Hymer, 1972) do not feature in Porter, for whom technical progress and innovation are not the tra- jectory which Schumpeter (1949) saw as lifting both economies and societies to higher levels of income and welfare, but an ‘add on’. Other than in some passing references to innovation, such as by Dutch tulip producers in marketing, it was not until 2001 that Porter began to focus more on innovation itself, while still claiming that access- ing it would be more local than global (Porter & Stern, 2001). Porter further deemed tacit knowledge to be ‘inexplicable’ despite this being widely recognised in management theory as vital to competitive advantage, and to whose relevance for SMEs we return later in this chapter. He also dismissed in- novation such as kaizen style continuous improve- ment as having been illusions and failed American managers with a one line with reference to rapid die changes, such as in pressing cold steel body parts for cars, but without offering supporting evidence other than claiming that: continuous improvement has been etched on managers’ brains. But its tools unwittingly draw companies towards imitation and homogeneity. Gradually, managers have let operational effec- tiveness supplant strategy (resulting in)… zero sum competition, static or declining prices, and pressures on costs that compromise companies’ ability to invest in the business for long term (Porter, 1998 pp. 42-43, 45). Yet this is a failure to understand that con- tinuous improvement in Japan has been based on rejecting imitation and homogeneity, and motivating employees to suggest ongoing means of enhancing the labour process and making it more efficient (Colenso, 2000) which is an HRM function. One of the failures of US managers was that they thought kaizen was a technique – an EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 244 The Rise, Decline, and Regeneration of Industrial Districts add on to what they already knew. As Kaplinsky and Posthuma (1994) have put it, the answer to why kaizen has not ‘delivered’ for so many firms outside Japan: lies in the social rather than the technical domain, for the essential principles of these Japanese tech- niques - their technics - are easily comprehended and not technologically complex… [But] their successful adoption overturns many of the social relations of domination which were so important in the evolution of Taylorist forms of production management and control (Kaplinsky & Posthuma, ibid, p. 285). Polarisation and Cumulative Causation: From Local to Global While Porter’s derivative cluster model gains ritual reference in literature on local economic systems, the more original concepts of polarisation and ‘growth pôles’ in the work of François Perroux now rarely gain a mention, and merit recovery. Like Marshall, Perroux (1955) initially stated these in terms of local external economies but then went beyond this in terms of identifying innovation trajectories by leading ‘firmes motrices’ (Per- roux, 1961) rather than only mutually reinforcing external economies, such as in Marshall’s (1890) concept of in an industrial district. This stress on innovation, and Perroux’s parallel claim of the need to develop ‘entirely new’ product markets was adopted in the French Ministry of Economy and Finance and Economy and became central to long-term planning in France.1 His concept of a firme motrice which often could be the core firm in a successful local economy, combined with Sylos-Labini’s (1962, 1969) analysis of how oligopolies could domi- nate macroeconomic outcomes influenced one of us in making the distinction between meso and micro firms (Holland, 1974, 1976a,b, 1979, 1980, 1987a,b). The title of the book which gained Perroux influence with French policy makers was Les Techniques Quantitatives de la Planification (Per- roux, 1965) even if most of it was concerned with qualitative change through national and regional policies to support and promote innovation. His concept of growth pôles (Perroux, 1955) was central to the concept of technopôles in France, or clusters of innovative firms sharing a joint in- novation trajectory to gain competitive advantage, rather than the more static concept of external economies in Marshall. He further extended the concept of polarisation to asymmetries and uneven development (Perroux, 1964) rather than assuming that comparative advantage would assure equilib- rium outcomes in global investment and trade. Perroux also recognised in the 1960s that, in the postwar period, firms were going global not only as in how, prewar, they had invested in colonies but also since they were being attracted to developing countries by lower cost labour and the importance of offsetting this in Europe by in- novation. This was confirmed by evidence given by multinational companies in Britain in the 1970s to the Expenditure Committee of the House of Commons that the cost of labour in Taiwan, the Philippines, Mexico and Brazil could be as little as a tenth that of the UK. Since labour could be as much or more than 40% of total costs, while investment typically as little as 15%, it was a key reason why even 40% investment grants were not attracting them to the British regions, with evi- dence also that, if they did so, it was because of the need for a pool of accessible labour from which they could select, and which was not available to them in the South East or Midlands of England (HC, 1974; Holland, 2013). Asymmetric dynamics as in Perroux’s concept of polarisation also was central to the parallel economic and social theory of Gunnar Myrdal. He conceptualised this in terms of circular and cumulative causation, where strong points within an economy would tend to attract both capital and labour with positive ‘spread effects’ whereas EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 245 The Rise, Decline, and Regeneration of Industrial Districts this inversely would ‘backwash’ other regions by depleting them of capital and younger more adaptable labour. Myrdal analysed this in terms of asymmetries in capital and labour flows in his Economic Theory and Underdeveloped Regions (Myrdal, 1957), where he used the term ‘region’, as did his fellow Swede, Bertil Ohlin (1933), to refer either to a region within one country or to a global region. In his An American Dilemma Myrdal had related the concept of circular and cumulative causation to the dynamics of social and ethnic advantage and disadvantage in the US (Myrdal, 1944), which also is relevant to self-reinforcing growth and decline of industrial districts, whether or not they have significant ethnic minority populations. ‘Enhanced HRM’ In what follows we suggest that ‘enhanced’ HRM has a key role to play in identifying tacit knowledge, latent abilities and implicit skills in firms in declin- ing industrial districts which could be surfaced in new process and product innovations. Also that this concerns the degree to which policies for local or regional development can advance from concern only with investment in ‘hard’ physical infrastructure to extending Mintzberg’s (2004) concept of ‘soft’ HRM within firms to interactive learning between them. Yet ‘enhancing’ HRM also needs to recognise its current scope and limits. After decades in which the term HRM has displaced ‘industrial rela- tions’, Guest and others (e.g. Guest, 2011; Guest & Bos-Nehles, 2012; Guest, Paauwe & Wright, 2013) recognise that we still need to gain a better understanding of links between it and performance. Also what we are recommending amounts to what what Mørk, Hoholm, Maaninen-Olsson and Aanestad (2012) have deemed ‘boundary span- ning’ or Sitkin, Kelly, Miller, Lawless, and Carton (2011) have called ‘stretching’. With challenges also in that Sitkin et al., ibid) (have maintained that stretch goals, paradoxically, may be the most seductive for organizations that can least afford the risks associated with them, while Mørk et al. (2012) have found successful cases of boundary spanning only within organisations rather than between them. Yet ‘boundary spanning’ and ‘stretching’ can be cognitive as well as institutional, and can be achieved by very small firms such as was the case with high tech start-ups such as Steve Wozniak creating the Apple 2, which transformed the lap- top market, by intuitively configuring and then reconfiguring it in a few weeks, even if Steve Jobs initially overpriced it. Or as with Hewlett and Packard starting in a garage, if also knowing that there was a potential market since the US Defense Department wanted more computing power for less weight (Waters & Nuttall, 2012). In terms of ‘stretching’, Sitkin et al., (2011) also cite the case of Takeuchi, Osono, & Shimizu (2008) that reaching for the seemingly impossible goal of a 100 percent improvement in fuel efficiency played a key role in the development of hybrid vehicle technology by Toyota. Moreover, drawing on the concept of ‘bound- ary spanning’ of Mørk et al. (2012) we also cite proactive examples of this by the federal govern- ment in the US which have been highly effective in enabling synergies between researchers, enterprise and government including the creation of both new high tech SME start ups and also entirely new civil rather than defence related markets. Which also, for either small or medium firms able to undertake what Argyris and Schön (1978, 1996) have characterised as ‘reflective practice’, may mean gains from ‘delving down to learn up’ by surfacing tacit knowledge and implicit skills for competitive advantage (Oliveira, 2007; Oliveira & Holland, 2007). Black Boxes In a paper on interactive learning and economic performance Lundvall (2005) has submitted that getting closer to understanding how learning takes place needs opening the ‘black boxes’ of ‘verti- cally organized’ production chains. But the same EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 246 The Rise, Decline, and Regeneration of Industrial Districts case can be made for opening the ‘black boxes’ of horizontal production chains either in an industrial district, or in globalisation, through networking, while little analysis of these has included what may be the implications for HRM. Thus Ramsay et al. (2000), Purcell et al. (2003) and Guest (2011) have stressed the need for further research to open the ‘black box’ of the links between HRM and performance. Beardwell, Holden, and Claydon (2004) have evidenced lack of either clarity or consensus on what constitutes best HRM practice, submitting that it is difficult to convince firms operating within tight financial margins to invest in HRM policies. To which it could be added that ‘the drive to survive’ for small and medium firms means that they may reactively reinforce ‘hard’ HRM such as performance ap- praisal while ‘soft’ or ‘enhanced’ HRM that would mean enhancing competences gets side lined. But regenerating declining industrial districts and whether at least some firms within them can innovate, with synergies for others, suggests the need to explore and extend HRM policies which are mainly internal to firms, such as in terms of training in what is ‘known already’, to include the development of new joint competences through networking. This has been examined and to varying degrees evidenced by Lee and Chen (2000) in terms of actual and potential synergies in multiple busi- ness activities, by Liu and Chen (2011) in terms of competence leveraging; by Asheim (2007) in terms of industrial districts as ‘learning regions’ and by Maskell and Malmberg (1999) and Malm- berg and Maskell (1999) in terms of localised learning and industrial competitiveness as well as by Nooteboom (1999) in terms of inter-firm alliances. But while these studies may have been enlightening, their implications for HRM rarely have been followed through. HRM, innovation strategies and trade and location theory have tended to stay within their own boxes. Boundary Spanning and the Triple Helix Model The recent HRM literature on boundary spanning (e.g. Guston, 2001; Mørk et al, 2012) has mainly been concerned with doing so within firms or institutions. Yet this also can be between them (Breschi & Malerba, 1997; Santos, Abrunhosa and Costa, 2006), and also between firms, uni- versities and governments, as has been developed in the ‘Triple Helix’ model by Leydesdorff and Etzkowitz, (1996) and Leydesdorff (1998, 2012). As represented in Figure 2, the Triple Helix principle is basically simple, even though this has been developed in three main variants. Thus in Triple Helix 1 the three spheres are defined insti- tutionally (university, industry, and government). Interaction across otherwise defended boundaries is mediated by industrial liaison and technology transfer. In Triple Helix 2 the helices are defined as different communication systems consisting of the operation of markets, technological innova- tions and control at the interfaces (Leydesdorff 1997). The interfaces among these different func- tions operate in a distributed mode that produce potentially new forms of communication as in a sustained technology transfer interface or in the case of patent legislation. In Triple Helix 3 the spheres of university, industry, and government, in addition to performing their traditional func- tions, each assume the roles of the others, with Figure 2.The triple helix model Source: Leydesdorff (2012) EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 247 The Rise, Decline, and Regeneration of Industrial Districts universities creating a penumbra, or performing a quasi-governmental role (Leydesdorff, 2012). Key questions arising, however, are whether the Triple Helix concept over-identifies the rela- tions between government and universities rather than between government and enterprise. Also to what degree this works in practice. For example, in a study of Hungary, Lengyel & Leydesdorff (2011) found three regional systems of innovation following the transition of the 1990s and the ac- cession to the EU in 2004. These included: (1) a metropolitan area in and around Budapest, (2) a knowledge-based innovation system in the west- ern part of the country which has transnational links other EU countries, and especially with adjacent Austria and Germany and (3) an eastern part of the country where old (state-led) dynam- ics still prevail. In reporting on this, Lengyel & Leydesdorff (ibid) found that there is little syn- ergy between these three regional systems. In reporting also on an as yet unpublished recent study of Norway, Strand & Leydesdorff (cit. Leydesdorff, 2012) found that foreign direct in- vestment in the marine and maritime industries in the coastal regions of the country were a greater source of synergy in knowledge-based developments than the university environments of the major centers in Trondheim and Oslo. Leydesdorff (ibid) allows that the respective roles of academic, industrial, and governmental contributions have not been sufficiently explored and that the context of competitive challenges from globalisation in Triple Helix studies often are displaced by their local focus. Evidence also suggests only modest support for Leydesdorff’s (2012) claim of universities creating an industrial penumbra, or performing a quasi-governmental role. For example, in reporting on data from Eu- ropean universities and public research institutes, Piccaluga, Daniele, and Patrono (2012) found very little confirmation of knowledge transfer between them and industry. The total number of spin-offs created each year in Europe is stable, around 500, but the average number of them per university is only 1.6. We suggest later that the failure to achieve higher levels of such boundary spanning may lie less with the principle of the Triple Helix model than the inertial institutional logic of the Science and Technology Framework Programmes of the European Union. For example, their criteria for project research grant approval have been highly dependent on whether projects could produce an article in an internationally refereed journal without concern that they should create a new product, process or high-tech start-up. Whereas also, while the ‘publish or perish’ syndrome for academics has reached near notoriety, it has been found by Oliveira, da Costa and Holland (2013) that engineers are far more interested in manag- ing and intra-firm success than seeking external recognition from publishing, while doing so in international journals does little to promote syner- gies with local SMEs. US Boundary Spanning, Innovation and High Tech Start-Ups The principles of boundary spanning nonetheless have been followed with notable success in the US. Even during the high period of neoliberalism, the federal government initiated ‘base up’ research and ‘launch platforms’ with the Small Business Innovation Development Act, signed by Ronald Reagan in 1982, and which required government agencies with large research budgets to designate a fraction (originally 1.25%) of these to support initiatives of small, independent, for-profit firms. Block and Keller (2011) and Mazzucato (2011) have shown that between 1971 and 2006, 77 of the most important 88 innovations rated by R&D Magazine’s annual awards had been fully depen- dent on federal support, and not only, if especially, in their early phases. A year after the Small Business Innovation Development Act a further spur to private sector innovation occurred, in the biotech industry. The 1983 Orphan Drug Act (ODA) made it possible for small, dedicated biotech firms to carve what initially was a niche in the drug market. The act EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 248 The Rise, Decline, and Regeneration of Industrial Districts included some tax incentives, clinical as well as R&D subsidies, fast-track drug approval, along with protection of intellectual and marketing rights for products developed to treat rare conditions. A rare disease was defined as any disease that affects less than 200,000 people and given this potentially small market, it was argued that without such incentives these potential drugs would remain ‘orphans’. The protection provided by the act enabled small firms to improve their ‘technology and innovation platforms’. Orphan drugs played an important role in enabling biopharmaceutical firms such as Genzyme, Biogen, Amgen and Ge- nentech to become meso players in the industry and in the global economy (Mazzucato, 2011). The under-recognised outcome was that by 2008 most innovations in the US not only were government sponsored but government initiated through boundary spanning of pure R&D applied research in different disciplines and institutions ranging from federal funding of the research for Google’s algorithm through to and nanotechnol- ogy. Thus Mazzucato (2011), Block (2008) and Block and Keller (2011), as well as Lazonick (2009) and Lazonick and Tulum (2011), have demonstrated that government can create innova- tion platforms and do so in a manner that spans boundaries between both intellectual disciplines and firms, including new high-tech start-ups, thereby creating the ‘entirely new’ products and markets that had been advocated earlier by Per- roux (1964, 1965). We suggest that this is an example of what we propose as ‘enhanced HRM’ in the sense of synergizing human resources between institu- tions rather than only HRM within them and has significant implications for the regeneration of declining industrial districts if proactively pursued by local and regional development agencies and innovation centres. We also propose that such enhanced HRM can surface tacit knowledge, latent abilities and implicit skills in new skill trajectories rather than be concerned with more commonly accepted HRM practices such as formal training or performance evaluation. Tacit Knowledge and Local Economies Belussi (1996, 1999, 2001) and Maskell (2001) have sought to relate the viability of industrial districts to knowledge-based theories of the firm, including both tacit and implicit knowledge. This was initially identified by Thorndike and Rock (1934), and then gained higher profile through the physicist Michael Polanyi (1958, 1962, 1968) who held that such knowledge was more vital, even for the ‘hard sciences’, than deduction, inference or conscious calculation. He recognised that ‘there are things that we know but cannot tell’ (Polanyi, 1962, p. 601), and claimed that this is strikingly true of our knowledge of skills, of which his best known examples are riding a bike or swimming, which one may have learned to do but without readily being able to explain how one did. Or, in an example given by Nelson and Winter (1980), a runner tacitly knowing the risk of muscle strain, without any explicit knowledge of physiology. According to Polanyi semantic knowledge through speech or reading conveys little unless we can relate it to previously acquired meanings derived from experience, which is consistent with the claim of the later Wittgenstein (1953) that all knowing, or claiming to know, depends on a tacit presupposition. Kakabadse et al. (2001) submit that surfacing tacit knowledge can reveal ‘invis- ible assets’ in terms of what employees know but has not been identified, and has been widely seen in management theory as a key to competitive advantage (e.g. Ambrosini & Bowman, 2001; Edmonson, Winslow, Bohmer & Pisano, 2003; Nonaka, 1994, 1998; Nonaka & Takeuchi, 1995; Ichijo & Nonaka, 2007). As already indicated, Belussi (1996, 1999, 2000) has claimed that accumulation of tacit knowledge is vital for the success of industrial district and local production systems. She stresses that tacit knowledge tends to be dependent on where it has been gained within firms, economic and social networks, and within districts and local systems. Thus, while codified knowledge may be EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 249 The Rise, Decline, and Regeneration of Industrial Districts simply transmitted, as on the web, such as a com- puter aided design, tacit knowledge by its nature is embodied in individuals and firms and its main characteristic is that it is localised. She also has related this to ‘cognitive division of labour’ and knowledge creation, based on the accumulation over time of tacit and ‘locally sticky’ knowledge, as also claimed by von Hippel (Hippel, 1994, 1998). Belussi’s approach, is similar to that of Nonaka in his ‘SECI’ model which is replicated in Figure 3, and known as such from the initial letters of four stages of interfacing tacit and explicit knowledge: (1) Socialisation, either in informal sharing of ex- perience, or doing so more formally, in a manner similar to Schön’s (1983, 1987, 1991) reflective practice; (2) Externalising an idea or practice which may not earlier have been ‘in the open’ by group discourse to refine it; (3) Combining tacit and explicit knowledge, such as in developing an idea or building a prototype, which was what Henry Ford did with a small inner circle in developing his concept of the innovative Model T (Lacey, 1987); (4) Internalisation of new explicit knowledge as this becomes part of a group knowledge base in the sense of something now ‘known already’ and tacitly accepted as common practice. Nonaka has claimed that it is the process of surfacing what is tacit that counts in innovative thinking and management. As he puts it: When tacit and explicit knowledge interact.., something powerful happens... What’s more, as new explicit knowledge is shared throughout an organisation, other employees begin to inter- nalise it – that is, they use it to broaden, extend and reframe their own tacit knowledge (Nonaka, 1998. Pp. 29-31). Giving examples from NEC, Sharp, Canon, Matsushita, and the auto sector, he submitted that: In each of these cases, middle managers syn- thesised the tacit knowledge of both frontline employees and senior executives, made it explicit, and incorporated it into new technologies and products (Nonaka, 1994, p. 45.). Figure 3. From tacit to explicit: Nonaka Source: Derived from Nonaka (1998) EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 250 The Rise, Decline, and Regeneration of Industrial Districts Yet, although not commonly conceptualized as such, surfacing tacit knowledge, latent abilities and implicit skills through discourse (Oliveira, 2007; Oliveira & Holland, 2007), should be inte- gral to human resource management and enable diversification of core competences. Boundary Spanning and Diversifying Core Competences By contrast with Porter’s (1980) stress on strat- egy, Prahalad and Hamel (1990) and Hamel and Prahalad (1994) introduced the concept of core competences in relation to how to identify and co-ordinate diverse production skills, how to integrate multiple technologies and how to trans- fer knowledge across organisational boundaries. In this sense Prahalad and Hamel, predated the boundary spanning within an organisation of Mørk et al. (2012). They focussed more, however, on how core competences may be enhanced if they are synergised and shared. Further, as with tacit knowledge, a core competence is difficult for competitors to imitate because it is a complex combination of both skills and attitudes, such as ‘user friendliness’ at Apple, which helped it sur- vive Steve Job’s initial misjudgement in pricing the Apple 2. A ‘defiant attitude’ also was stressed by the engineer who developed kaizen continu- ous improvement at Toyota after WW2, Taaichi Ohno, when it was struggling to avoid bankruptcy (Shinohara, 1988). Thus while Porter had turned strategic think- ing back in the direction of strategy such as in Chandler (1962) Prahalad and Hamel sought to change it in the direction of HRM. On the other hand, one of the consequences of their claim was to reinforce the parallel case advocated in the 1990s by Hammer and Champy (1993) that a company should out-source any competences that were not ‘core’ (The Economist, 2008) or as Hammer (1990) had bluntly put it in the subtitle of a paper published in the Harvard Business review: ‘Don’t Automate, Obliterate’. An example from the 1970’s relevant to the diversification of core competences was the Alter- nate Corporate Plan of the Lucas Aerospace trades union combine committee chaired by Michael Cooley (Wainwright and Elliott, 1982; Cooley, 1987). Cooley, a mathematician, engineer and linguist was an adviser to an EU Socrates-Leonardo programme directed by one of us on identifying tacit knowledge, latent abilities and implicit skills from informal learning-from-life and non formal learning-from-work (Oliveira, 2003). Lucas Aero- space was a company whose sole client was the UK Ministry of Defence, and which specialised in components for fighter or other military aircraft. The engineers at Lucas Aerospace were tired of designing weapon platforms for what implicitly were instruments of death and, encouraged by Cooley, proposed to management that they should apply their core competences to instruments for health, safety and the environment. Rather than seeing this as an opportunity, or a new dimension to HRM, the management felt threatened by this challenge to its authority. Ac- cording to its own mind set (Senge, 1990), project proposal and human resource deployment was a management prerogative and a boundary which workers should not overstep. Cooley asked them whether they ever had considered that the Cold War might end some day and that diversifica- tion of core competences into civil products and markets could be a safeguard against future cuts in defence spending. Dismissing such a prospect, the management rejected the proposals outright. The engineers then adopted a ‘work-to-rule’ which brought the company virtually to a halt. In return, defensively and without goodwill, the management agreed to the combine committee using company facilities in their own time to design, develop and prototype their own alternative products (Wain- wright and Elliott, 1982). The outcome at Lucas Aerospace was sug- gestions by its engineers which resulted in over 100 new product prototypes none of which was adopted by the company but which were patented EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 251 The Rise, Decline, and Regeneration of Industrial Districts by the trades union combine committee. One of the most striking was the development of a portable kidney machine. The insight that led to its design not only is an example of Nonaka’s (1994, 1998) interfacing of the tacit and the explicit, but also was an interfacing of tacit learning-from-work and explicit learning-from-life. The Lucas engineer who designed it knew that people needing dialysis had to attend a health centre or hospital. But his mind set was to miniaturise components, and he applied the same principle to reducing the weight and size of a dialysis machine, therefore making it portable. The machine now is commonplace and has increased both individual and social wellbeing. When the Cold War ended and UK defence procurement was cut, the management at Lucas Aerospace for the first time recognised that there could be merit in proposals for product diversi- fication. But most of those involved in the 1970s combine committee’s Alternate Corporate Plan by then had moved on or retired, while their convic- tion of the feasibility of surfacing tacit knowledge, and readiness to do so, had been lost. Whereas Cooley became economic adviser to the Greater London Enterprise Board whose model was less an assumed spontaneous agglomeration of small and medium firms on the lines of an industrial district than municipal promotion of innovation and diversification of local firms which otherwise had no proactive HRM and were adopting defen- sive cost and job cuts in reaction to international competition. The model for the Greater London Enterprise Board was that of a UK National Enterprise Board, designed by one of us in a series of papers for the Labour Party, and introduced by the 1975 Industry Act (Holland, 2013). Yet the Thatcher government, with some relish, abolished the Greater London Council in 1986 and the Greater London Enterprise Board became an independent company, Greater London Enterprise (GLE), and thereafter was reliant on its own income to fund its activities. The government also abolished the National Enterprise Board. This had supported Clive Sinclair, who in the 1970s had 40% of the lap top computer market in the UK, by enabling funding for him of new company start- such as Inmos and Nexos in the US. Without such support, and although Margaret Thatcher recommended him for a knighthood as an example of private sector small firm entrepre- neurship, Sinclair shortly thereafter was bankrupt, opening the way for Toshiba and others to scoop the UK lap top market that he had opened. Only some of the initial design for a Greater London Enterprise Board survived in that profit from GLE’s commercial activities were reinvested in delivering not-for-profit activities and since when the Greater London Enterprise has been the most active investor in SMEs in London (GLE, 2013). Local Industrial Districts As already indicated, Piore and Sabel (1984) and Beccatini (1978, 1986, 1990, 2003) evidenced that industrial districts or in the sense of SME local economic systems were flourishing in the Third Italy. Small and medium manufacturers in Tuscany, Emilia Romagna, Umbria and Veneto, as in much of Western Germany, took advantage both of local external economies and handcraft skills to customise on the lines of Piore and Sabel’s (1984) ‘flexible specialisation’. In many cases this was in still traditional sectors such as shoes, leather goods, textiles and clothes in which SMEs through flexible specialisation could rapidly meet changes in market demand. This both was new and impressive. At the end of World War II, the local production system of the Third Italy had been concentrated in a limited number of large, integrated firms, producing low- quality textiles. But such firms had an ‘inertial organisational logic’ typical of many meso firms relying on inflexible economies of scale rather than flexible production and economies of scope. With increasing international competition, many either closed or started to outsource part of their value chain by local subcontracting to new small EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 252 The Rise, Decline, and Regeneration of Industrial Districts firm start-ups. In this way, a number of small firms compensated for employment decline in bigger ones. By the early 1970s 1960s these micro firm districts employed more people in industry than the ‘golden triangle’ of Milan, Turin and Genoa (Piore & Sabel, 1984). Their average size was and continued to be very small. According to the Italian Federation of Districts, in 2011, 86% of all district firms had less than 10 employees (IFD, 2012, cit Sun, 2012). But Piore and Sabel also discounted the failure of SMEs in much of the Third Italy to diversify its traditional production base. For instance, Tuscany has been highly proficient in processing wool into textiles and fashioning leather since at least the pre-Roman Etruscan period. Rising demand with rising real incomes after WW2 gave new life to such industries. The local entrepreneurs of the Third Italy also were brilliant at process innovation in better ways of making the same things through new technology including computer aided design and manufacture. Yet a CAD design such as for clothing could be sent to electronically to the other side of the world for cutting, stitching and assembly and then shipment to markets rather than manufactured locally (Holland, 1991). Moreover, such technical progress and out-sourcing tended to displace labour rather than create new jobs. A notable exception was Benetton, initially a small family firm which achieved process inno- vation in its own variant on just-in-time delivery, such as retaining the colouring of garments to the last stage of production to keep in line with changing fashion trends. Yet, as Belussi (1996) has stressed, Benetton was not a local industrial district, but a network, both in retail franchising and in production in Veneto, where a chain of small firms were dispersed rather than concentrated in one location. Other commentators on industrial districts (e.g. Amin, 1999; Belussi, 1999, Garofoli, 1992, 1993, 1994, 2002; Martin & Sunley, 2003; En- gelstoft, Jensen-Butler, Smith and Winther 2006) have similarly suggested that the case for spatial concentration for a Third Italy as a production paradigm has been exaggerated, not least since the Italian 1991 industrial census showed that many of small firm industrial districts in the Third Italy already was in decline. Muscio and Scarpinato (2007) have qualified this by claiming that such decline was typical of Italian manufacturing as a whole, but this does not therefore support the claim of Piore and Sabel (1984) for such districts as a ‘new industrial divide’ between Fordism and post Fordism. Realism Giuliano Bianchi (1998), at the time director of regional programming for the Region of Tuscany, recognised that the evolution of the Third Italy from 1951-91 was dynamic but identified two key limits in the neo-Marshallian analysis of industrial districts: first, that their employment already was in decline by the time of the 1991 industrial census; second, that idealisation of the districts as a new production paradigm impeded timely adoption of appropriate policies for their diversification. Agnew, Shin and Richardson (2005) also have observed that claims for the Third Italy as a new production paradigm received only limited empiri- cal support in terms of export performance. After examining Italian province level export data from 1985 to 1999 they concluded that this wrongly projected localised examples of some successful industrial districts to an entire geographic region, and downplayed the role of the North, and par- ticularly the centrality of Milan. This already had been observed by Cappellin (1989), who showed that many small and medium firms in the Milan area were flourishing by providing new services in what was an industrial metropolis rather than a Marshallian industrial district, whereas many of small firm industrial districts in the Third Italy faced had failed to diversify and develop related services. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 253 The Rise, Decline, and Regeneration of Industrial Districts Besides which, a recent analysis of the com- petitiveness of Italian industrial districts (IFD, 2012, cit Sun, 2012) showed their very high dependence on quality and product design (over 60%) and image and brands (16%). Product inno- vation ranked at only just over 4% and the model of organisation of the firm at little more than 2%. Sun (ibid) has suggested that this is changing, especially with environmental regulation and a more active approach by intermediate agencies supported by some local governments to achieve district-level cooperation on developing related technology citing the district of aeronautic prod- ucts in Varese and that of bio-medical products in Mirandola as two examples. But as yet these appear to be exceptions. Meanwhile, the brand attachment advantage of ‘Made in Italy’ already was being transformed. The Transformation of Prato A key Italian industrial district specialising in textiles since the 12th century is Prato, near Flor- ence (Origo, 1963). After WW2 much of its labour supply was by migration from southern Italy and at its height in the postwar period it was producing a quarter of the textile exports of Italy. This is a striking indication of success granted the more recent evidence for the EU-27 cited earlier than less than one in ten SMEs export at all. But by the 1990s, through process innovation displacing labour and competition from newly emerging economies in Asia, its employment was in decline whereas from the second half of the decade, its clothing industry grew significantly. But this was not by Italian textile entrepreneurs in Prato than by an inflow of Chinese immigrants who set up their own clothing workshops in premises which had been vacated by Italian firms during the district’s earlier down-sizing (Ottati, 2009). The inflow was cumulatively self-reinforcing in the manner stressed by Myrdal (1944, 1957). Chinese immigrants rarely sought employment in Italian owned local companies. They set up small or very small firms of only two or three people where they manufactured knitwear and high-street garments, and in the main employed only Chinese personnel, with only a few medium sized firms also employing Italians as executives. Chinese-owned firms showed a tendency towards ‘ethnic vertical Integration’, rather than horizontal integration with local Italian firms, often buying in textiles for clothes-making from China rather than Italian firms in the Prato district (UIP, 2012). The scale of the inflow, and its speed, was phenomenal. Within only fifteen years, 60.000 Chinese workers amounted to a quarter of the population of the district. Thus a ‘parallel indus- trial district’ developed with little dependence on local external economies with the earlier Italian district. This also meant that the firms established by Chinese immigrants could gain an advantage that their counterparts in China could not - the stamp of ‘Made in Italy’ - while their very low and little more than subsistence wages challenged the ambition of the local authority and the local chamber of commerce to achieve both a high performance and high income local district (UIP, 2012). Local and Global Value Chains Further, though leaders in process innovation, few firms in the Italian industrial districts were able to command a value chain through to distri- bution and sales, such Benetton from its base in Veneto. This has not only been a problem for the Third Italy. Others have identified difficulties in sustaining value within such a chain either in a manner which cannot readily be outsourced to lower cost countries or, inversely, how the latter can gain from them (e.g., Morris, 2011; Gereffi & Sturgeon, 2005; Giuliani, Pietrobelli & Rabel- lotti, 2005; Kaplinsky, 2000, 2007; Humphrey & Schmitz, 2002). In highlighting the dynamics of global value chains, Humphrey and Schmitz (ibid) have deemed integration into them as a ‘two-edged sword’ and EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 254 The Rise, Decline, and Regeneration of Industrial Districts which also has meso-micro dimensions. For the oligopsony by a few dominant firms in purchas- ing high tech components, or major retailers for finished articles in a traditional sector such as textiles, is an unequal power relationship. While the demands of such meso buyers can mean that micro suppliers need to upgrade processes and skills, the scale of their bulk buying, such as of 300.000 or more items at a time, can mean that small and medium firms cannot meet this, and result in large firms coming to dominate industrial districts in emerging economies (Wang, 2010). Western Decline and Global Regeneration In the aftermath of the catastrophe of WW1 Oswald Spengler gained renown for what was translated from its German editions in two vol- umes (Spengler, 1918, 1922) as The Decline of the West (Spengler,1959). In these he argued that among the reasons for this decline would be its presumption that its scientific rationality would give it indefinite advantage against other regions of the world, yet which displaced that when Asia could combine western technology with low cost labour it then could out compete anything produced in the West. Shortly before his death, he presciently related this to industrial districts, warning that, already: Today, more or less everywhere - in the Far East, India, South America, South Africa - industrial regions are in being, or coming into being, which, owing to their low scale of wages, will face us with a deadly competition. The huge masses of men centred in the Northern coal areas, the great in- dustrial works, the capital invested in them, whole cities and districts, are faced with the probability of going under in the competition. The centre of gravity of production is steadily shifting away from them... (Spengler, 1932, p. 51). From Comparative to Absolute Advantage For nearly a century the West displaced this by the premise dependent assumption that comparative advantage, as claimed by Ricardo (1817), would mean that some countries always would be more efficient in some products than others, which was assumed by the postwar General Agreement on Tariffs, the IMF and the World Bank. This displaced the warning of Adam Smith that free trade would tend to be on the basis of absolute advantage, and his prescient recognition in his Glasgow lectures, on which he later drew in his Wealth of Nations (Smith 1776) that: The cotton and other commodities from China would undersell any made with us, were it not for the long carriage, and other taxes that are laid upon them (Smith, [1763], 1975, pp. 141-142). Like Ricardo, later variants of the comparative advantage principle such as by Samuelson (1948, 1949, 2004) assumed no capital mobility. which was false even at the time that Ricardo made the case, since the wine in which he assumed Portugal would have a comparative advantage in its trade with England had been developed by English firms investing in its production, and especially that of port, in the Douro Valley which were early examples of multinational companies rather than local national firms (Holland, 1987b, 2009, 2011; Holland & Oliveira, 2013). A decade ago, it was estimated that multi- national companies could reduce their direct and indirect labour costs by up to 70 per cent by outsourcing to or locating production in Asia (Farrell, 2005), which was a confirmation of the previously cited findings three decades earlier by the House of Commons Expenditure Committee, to which one of us at the time was adviser, that this could be the case (HC,1974). By 2010 more than half of China’s manufacturing exports were by American, European, Japanese and Taiwanese EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 255 The Rise, Decline, and Regeneration of Industrial Districts companies located in China (McKinsey, 2010; Yadev, 2010). Most of this was either in industrial districts or economic zones. As Sun (2012) has recognised, some of this was informed by Italian experience of industrial districts. Product Cycles, FDI and Export Substitution As Legge (2005) has recognised, flexible speciali- sation can imply that labour intensive, low skill assembly is located in low labour cost areas of the global economy, and research and development retained in the parent companies home country. New products still are being introduced by US and European companies in their ‘home markets’. But they now may face a competitive disadvantage if they do not as soon as possible ‘go global’. This relates to an acceleration and compres- sion of the Vernon (1966) three phase interna- tional product cycle, as outlined in Figure 4, as well as for how long and why firms may retain ‘core’ activities and especially core technologies and competences and ‘at home’ rather than also or otherwise ‘go abroad’. This not only poses a challenge for industrial districts in either Europe or the US, but also for Japan and relates to how Japanese companies increasingly have located the second growth phase of a product cycle in lower cost economies in Asia paralleled by direct investment in the US and Europe. This, rather than only the 1985 Plaza accords which revalued the yen, or its late 90’s banking crisis, has been a neglected but key factor in the slowing growth of the Japanese economy. By the early 1980’s a survey by the Japanese International Trade and Industry Ministry MITI found that four out of five Japanese firms decid- ing on direct investment in other countries did so with the intention of substituting exports to them, whether to avoid tariff retaliation, or currency fluctuations, or ‘get closer to the market’ or to gain lower labour costs for at least part of their value chain (Kono, 1984). Japanese direct invest- ment and production in these countries therefore substituted for a large share of Japanese exports to them, and thus slowed Japan’s economic growth. This export-substitution effect of foreign direct investment was noted by Bertil Ohlin in a book for which he gained the Nobel Prize in economics (Ohlin, 1933) even though later ignored by Samu- elson in the so-called Heckscher-Ohlin-Samuelson model of comparative advantage (Holland & Oliveira, 2013). For Japan, this has been highly significant since up to a third of the production of the Japanese auto majors early into the 21st century was abroad, with components supplied either by Japanese companies which had gone with them, or local suppliers. This has reduced the rate of growth of exports from Japan and, with it, the generation of income and employment. It is not because Japanese flexible specialisation has been tried and failed that the Japanese economy has slowed down. Rather, it has slowed because the Japanese companies most successful at it have gone global (Harding & Soble, 2009; Perry, 2012). Yet this does not mean that core manufacturing in Japan is finished. Japanese manufacturing’s share of gross domestic product, at some 20% in Figure 4. Accelerated innovation and global location Source: Holland (1987) EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 256 The Rise, Decline, and Regeneration of Industrial Districts 2010, was high by developed-country standards, and comparable with that of Germany, against less than 12% in the US and 11% in the UK. This also is despite Japan’s outward foreign direct investment being more than ten times its inward investment inflow, as with Japanese auto firms producing in the US for the American market, including their first and second tier suppliers, and much of the remaining manufacturing value added in the UK being due to Japanese firms locating and produc- ing there (UNCTAD, 2011). Nor does this deny that firms in mature econo- mies can sustain innovation in the initial phase of a product cycle before its standardised production phase may be relocated elsewhere. For example, despite foreign direct investment outflows on major scale since the 1980s, leading Japanese companies similar to Perroux’s firmes motrices have been retaining development of new products either in or near to a ‘mother plant’ in Japan. For in the innovative first stage of a product cycle, as originally identified by Vernon (1966), there are a host of things that need to be ‘ironed out’, ‘delved into’ and ‘learned up’ (Oliveira, 2007) while much of this involves surfacing tacit learning (Suh, 2012). Japanese production abroad therefore still relies on first stage product development in Japan (Yamaguchi, 2006; Abo, 2007). Two other kinds of plant have been retained locally in Japan: ‘quick factories’, producing just- in-time goods for the domestic market, and ‘key- stone’ production facilities, kept alongside local research centres to provide immediate feedback to product designers. Harding and Soble (2009) cite Takanobu Ito, chief executive of Honda, as saying that the broad trend at his company is away from exports in favour of localised foreign production, but that there still is an important role in Japan for such keystone facilities: Our approach is to perfect the newest and most advanced technologies in Japan before transfer- ring them overseas…These technologies aren’t just products, they’re connected to the production process itself. This means that without produc- tion [in Japan], our technology couldn’t advance (Harding & Soble, ibid). Some firms that have moved down this road have reduced jobs in Japan but still maintained high levels by diversifying them in the sense of Schumpeter’s innovation clusters. Yamaha Motor employed 11,000 workers in Japan at the start of the 1980s, when it made three out of four of its mo- torcycles locally. By 2009 domestic bike produc- tion had dropped to 5% of the total but Yamaha’s Japanese workforce has shrunk only slightly, to 9,000 in Japan not only because this includes employment in the company’s headquarters, but also because Japan still is where its leading firms locate product and process innovation (Harding & Soble, ibid). But such leading firms are meso multinational rather than only micro local SMEs in local industrial districts. Asian Mega Zones and Meso Firms Further, while local industrial districts in Italy were spontaneous local economic systems of small and medium firms rather than the outcome of central or local government policy, the economic zones of Asia have been planned and created by governments in terms of advance preparation and financing of world class infrastructure and com- munications intended to attract direct investment inflow. There also are different kinds of zones which have been developed by the government - Export Processing Zones (EPZs), Development Zones (DZs) and Special Economic Zones (SEZs) (Wang, 2010). Before China set up its first Export Processing Zone in 1979, EPZs had started spreading in Asia. Unlike Japan, which not only had not welcomed but had resisted foreign direct investment rather than relying on its meso firms to drive indigenous export led growth, Hong Kong, Singapore, South Korea and Taiwan had welcomed it in their EPZs. It was when China decided to adopt them, and EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 257 The Rise, Decline, and Regeneration of Industrial Districts invest in infrastructure for them and for Develop- ment Zones (DZs) and Special Economic Zones (SEZs) on a mammoth scale that the number of such zones in Asia increased to 500 by 1996 and then leapt to 2,700 by 2003. Of the 42 million workers in such zones, 30 million of them work in more than 200 of them in China (Fu & Gao, 2007), i.e. one and a half times the total employ- ment of SMEs in the European Union (Table 1). One Taiwanese firm in China, Foxconn, is a meso enterprise on a mega scale. It is the coun- try’s largest private sector employer, the world’s largest contract maker of electronics and employs 1.2 million mainland Chinese workers. A major customer is Apple, and because of the high pro- file of Apple, it has been subject to criticism for exploitation of its labour force following suicides and alleged death from overwork. Yet also was among one of the first to follow the Chinese gov- ernment’s recommendation to recognise trades unions in 2013 and raise minimum wages (Hille & Jacob, 2013). Yet such zones, combining meso and mi- cro firms, were not only established by central government in China. Wang (2010) cites the Changshu Commercial Zone as an example. It was established in 1985 by Changshu Commercial City Holding Company in the garment district of Changshu city, Jiangsu Province. More than 5000 apparel firms and 1000 apparel related firms were fostered by its creation. Wang also has illustrated the role of core firms in even entirely traditional sectors. For example, three meso enterprises of Sanxiao, Wu’ai and Mingxing dominate a tooth- brush cluster in Hangji, Jiangsu province, and have significantly contributed to knowledge diffusion, the training of workers, and the improvement of business management (Wang ibid), each of which are enhanced HRM roles. Wang’s (2010) evidence is a confirmation of Perroux’s case on firmes motrices in the now highly global era that he anticipated (Perroux, 1964). Initially, China’s different export processing development and special economic zones were on or near its coast. But Christerson and Lever-Tracy (1997) evidence dense networks of small micro firms emerging in rural China that in many ways resembled the industrial districts of the ‘Third Italy’. They are globally competitive in market niches, they contain networks of relatively au- tonomous firms which are at least partially locally owned and managed and which often take part in high-value activities such as design and marketing. Global Spread and Backwash Effects As already outlined, the growth of China’s zones aimed to attract foreign direct investment on the basis of low wage manufacturing of consumer goods (Rawski, 2005). But not on the basis of ex- ternal economies between small scale micro firms rather than attracting multinational companies as the not only the low cost of labour but also the high quality of infrastructure in the zones, their world class transport links, including airports al- lowing hub-and-spoke delivery of finished goods or components within less than 24 hours, also attracted modern and advanced technology firms. There also was the unprecedented growth of the internal Chinese demand for manufactures which was about to overtake that of Germany and the US. While also inducing leading western and Japanese multinational (meso) firms in modern and advanced technology sectors to accept the invitation of the Chinese government to undertake joint ventures with mainly government owned and controlled companies. Yet, in the manner of Myrdal’s (1957) spread and backwash effects this meant less investment and production in the US or Europe, or closures. Both Boeing and Airbus have run down swathes of production in both since and transferring them to China. For Airbus this includes no less than a quarter of its total employment in Europe, and the closure of six of its European plant (Watts, 2007). Moreover, once initially micro Chinese firms had gained technology transfer from companies such as Siemens in advanced passenger trains, and EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 258 The Rise, Decline, and Regeneration of Industrial Districts learned up on flexible specialisation from joint ventures with Japanese, Taiwanese and South Korean firms, many of them by then were meso went independent (Bradsher, 2012). Sutton (2004) has shown that its leading auto producers, while threatening some of some thirty other smaller micro firms extinction, had achieved world class standards of post Fordist kaizen style continuous improvement and kanban just-in-time delivery from their first tier suppliers by early into the new millennium and were extending it to second tier suppliers. Meanwhile China not only had its own aerospace industry, and already was producing its own mid range passenger jets but, discarding its joint ventures, planned to produce its own super jumbo by 2020, and where the learning gains from Boeing and Airbus in China have made the prospect credible to industry analysts (e.g. Arnold, Hollinger, Williamson & Weismann, 2007). Inversely, in India, the government’s initial insistence on joint ventures with indigenous firms in any foreign direct investment meant that com- panies such as JCB, Honda, Suzuki and Michelin first teamed up with local firms, but then went independent as soon as a change in government regulations allowed it. For instance, in the case of Suzuki’s break with the third largest India mo- tor cycle manufacturer TVS, a TVS spokesman reported that: in terms of the most interesting new technical developments, Suzuki ‘wanted to keep its technology for itself’ (Marsh, 2006). The Challenge for Enhanced HRM The size of both enterprise zones and industrial districts in Asia dwarfs industrial districts in the West. Besides which, until the financial crisis of 2008-09, China had been growing at 10% per year for near three decades and up to 7% thereafter whereas, by 2013, both the US and Europe were in recession. Further, the scale of the financial and physical investments undertaken by China in such zones, and their employment levels, are unlikely to be replicated in the West. In analysing one of the major export processing zones in China, at Shanghai, Cheng, Zeng and Zhang, (2012) also have found a three phase life cycle by which it has moved from processing through to more au- tonomous manufacturing and then to endogenous innovation jointly with Chinese R&D institutions rather than relying on technology transfer from joint ventures with multinational companies. This poses questions on how the West can safeguard and regenerate much smaller industrial districts composed mainly of small or very small firms. The challenge of this is formidable and may not be met. Yet we suggest that, if it were, this would need to be by advancing the forefront of innovation in the first phase of a product cycle, and continually advancing it by process and product innovation which would give it a leading edge in what thereafter either would be followed by Asia or matched independently on its own in other process and product innovations. Which is where we see roles for ‘enhanced HRM’ in the several senses that were outlined earlier, including fostering Schumpeter’s (1949) ‘creative aptitude’, and applying it in actual innova- tion rather than only assuming that public policy can create the conditions in which the private sector might innovate, enabling how it actually does so in terms of promoting synergies not only between firms but within them, at group levels. Yet which also implies recognizing Schumpeter’s (1949) case that this is likely to involve intuition, which has been the Cinderella of western social ‘science’ despite gaining widespread recognition in both management decision-making and the hard sciences (e.g. Kahtri & Ng, 2000; Sadler-Smith, 2008; Glöckner & Witteman, 2010). Concept Cycles and HRM Vandenbosch at al., (2006) have observed that although any innovation may be triggered by a single intuition or insight, the idea itself then is likely to be re-shaped and also often re-invented during an ongoing iterative trial-and-error process EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 259 The Rise, Decline, and Regeneration of Industrial Districts of its development, which is one of the features that we suggested should be adopted in ‘enhanced’ HRM. This also has support from cognitive theory and neural research in that intuition does not ‘come from the blue’, though it may appear to do so, but by an interfacing of conscious and unconscious processes by a referential rather than inferential rationality (Bartlett, 1995; Wittgenstein, 1953; Edelman, 1992; Oliveira, 2005, 2006; Oliveira & Holland, 2012). Thus if an innovative idea or concept is intui- tive, it is likely to refer to a previous solved or unresolved insight but its development will be iterative in a step-by-step approximation to what then becomes definitive whether in a product or process, where the process also may be a service, as with Skype or YouTube. Within two years of its launch, Skype had so challenged telecom giants, and attracted such advertising, that it had been worth $2.6 billions to its two founders Niklas Ze- nnström and Janus Friis when they sold it to Ebay. Within eighteen months of its launch in February 2005, YouTube had a 100 million people daily on line (Van Duyn, Taylor & Waters, 2006). Such successful high-tech start-ups SMEs also may have an advantage in this regard in that iterative development of a new product or process may be blocked in bigger meso business by what Witt (1997) has deemed ‘lock-in’ and Deeg (2005) has deemed ‘path dependence’ in trying to validate investments they already have made in their own larger scale, longer term and less flexible R&D programmes. The risk of being ‘too different’ through what may prove unduly radical innovation also is one reason why global companies for decades have undertaken strategic alliances in R&D to the point of courting the attention and distrust of competition authorities. Most global companies neither want to be too behind or too in advance of an innovation frontier since if too behind they may not catch up, whereas being too far in advance they may be on their own with a niche item rather than what comes to be the market standard for the growth phase of a product cycle. Better products that never made this include the Betamax video, widely deemed at the time better than JVC’s VHS, whereas VHS became the market norm (Grindly, 1995). Networking, Innovation and HRM In principle, one of the main potential gains for small and medium firms is whether they can gain some of the features of larger multinational companies by networking research and product development which was a claim by one of us in the drafting of the 4th Framework Programme for Science and Technology of the EU. This gained the condition that a successful application should include at least a partner in an Objective 1 (less developed) region and preferably also an Objec- tive 2 (depressed) urban area (Holland, 1993). It was informed by Perroux’s (1965) concept of Schumpeterian innovation trajectories and was designed to shift regional development assistance beyond investment in ‘hard’ infrastructure such as motorways to ‘soft’ investment in fostering creativity including the surfacing and transfer of tacit knowledge (Holland, 1993). Again, this relates also to knowledge-based theories of the firm rather than only local external economies. Newman, Hanges, Duan and Ramesh (2008) distinguish between (a) traditional HRM models of organisational culture and climate premised on behaviour within an organisation or group and (b) a network-connectionist model where the connections are between them. They also relate this to schema theory, claiming that in the network-connectionist case it is possible for entire schema patterns - or features of them - to be held in common, while schemas are likely to be shared more strongly by cohesive network subgroups. In a manner suggestive for theories of local agglomeration and clustering they suggest that ‘these mental schemas come to be shared through interpersonal interaction that takes place in cohesive, informal social network clusters’ (Newman et al, p. 120). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 260 The Rise, Decline, and Regeneration of Industrial Districts But again, this may depend on proactive HRM policies rather than assuming that such personal interaction happens without them, as was not the case in the earlier cited example of the Vale do Ave (Romero, 2000). An open question also is the degree to which this is feasible for very small rather than medium firms. As, for example, in the Italian Federation of Districts’ 2011 finding that 86% of all industrial district firms had less than 10 employees. If ‘enhanced HRM’ can enable entrepreneurs in SMEs to identify tacit knowledge, and bound- ary spanning is able to identify ‘platforms’ for regeneration of industrial districts, this will depend on whether they are open to considering it and in Freeman’s (1995) typology already are leaders, or potential leaders of a cluster of follower firms. Also, whether entrepreneurs of small firms who initially succeeded in part because of what von Hippel (Hippel, 1994, 1998) has called ‘sticky’ tacit knowledge may get stuck into a particular mind set (Senge, 1990) and cannot escape from it anymore than some larger meso firms which may be locked into (Witt, 1997) or path dependent (Deeg, 2005) on their own innovation trajectory. This has implications for boundary spanning in shifting HRM from concern with performance criteria within a prevailing production paradigm, to concern with innovation and whether or not a firm, aided by a regional development agency or innovation centre, can shift from a narrow preoccupation with costs to proactive concern with promoting product and process innovation, whether in local joint innovation trajectories, or by networking. It confronts a dilemma in relation to the earlier stress on tacit knowledge being a key to competitive advantage (Ambrosini & Bowman, 2001; Edmonson, Winslow, Bohmer & Pisano, 2003) in that, in principle, this should mean that firms should retain such knowledge ‘in house’ rather than open their doors to other partners. Yet there also is the counter case that networking ideas and ‘innovation clusters’ may be crucial to sustaining a joint innovation trajectory near to or advancing a global innovation frontier. Clustering of products in innovation trajecto- ries can avoid dependence on only one product innovation which may excel in technical terms yet not become the standard for the market, and therefore neither achieve the growth or mature phase of a product cycle. It relates to what Quinn (1995) has called ‘side bets’ and ‘logical incre- mentalism’ in observing that: Even after selecting the approaches to empha- size, innovative managers tend to continue a few others as smaller scale ‘side bets’ and options. In a surprising number of cases, these alterna- tives prove winners when the planned option fails (Quinn, ibid, p 713). But this depends on organisational and opera- tional culture and relates also to effective HRM that can foster and sustain the transition of innova- tive concepts into practice. For example, several smaller Italian companies from the later 1980’s had prototyped electric scooters which have the advantage of not sounding like a wasp, nor pollut- ing in the manner typical of two stroke engines. Yet Piaggio, maker of the Vespa, or ‘Wasp’, located in Tuscany, and the only Italian company in the sector with global reach, would not adopt them for volume production, despite increased competition from Asian producers in conventional scooters and smaller motor cycles, and although most Ital- ian cities had formally committed themselves to introducing low emission zones. The tacit rules and implicit norms (Oliveira, 2007) of first wait-and-see whether a market emerges, rather than lead the market, were too strong. It was only from 2003, by which time Piaggio’s debts were 60% of its annual sales, and workers were frustrated and confrontational, that a new management team took over the company and developed a new ‘hybrid’ or ‘green’ Vespa. But which still faced dilemmas in marketing an‘entirely new’ product less from failure to innovate than EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 261 The Rise, Decline, and Regeneration of Industrial Districts from the growth of demand for its conventional scooters and motor cycles in Asia, and especially China (Reuters, 2011). As with Betamax versus VHS, the better new product did not become the market norm. Networking as Reducing Psychological Distance Manuel Castells, with Borja and Himanen, has been among the most eminent of those advocating that networking is a key response to globalisation (Castells & Himanen, 2002; Borja & Castells, 1996; Castells, 1997). As indicated earlier, re- duced transport costs since the time that Marshall and Weber stressed them in terms of industrial districts and agglomeration economies no longer are a barrier to global location of production nor, therefore to global networking by even medium and small firms. Further, language and cultural similarities may close ‘psychological distance’. For instance, in an extensive study for OECD on the effects of globalisation, Coe (2007) found that language, cultural similarities or familiarity played a key role in the degree to which China could gain from and utilise foreign direct investment effectively, and that the Chinese diaspora in east Asia were the first investors to seize the opportunity of its open-door policy, contributing more than half of China´s FDI during the 1990s. English as the now lingua franca, also helps. India, after keeping its US diaspora at arm´s length until the 1990s, now embraces it, with a contribution which is more technological than financial. Both countries have large, highly educated, and prosperous nationals in Silicon Valley. This recently has been shifting, with a reverse flow of highly educated and trained professionals coming back to Asia from the US (Tainio & Lilja, 2003; Lazonick, 2009). Yet reduction of psychological distance may have both regional and global dimensions. For example, most Portuguese entrepreneurs can understand and read Spanish whether or not they have higher education, nor need a translator, nor are far from home either literally or in cultural terms when in Spain. Reis (2007) has stressed that what has happened in terms of linkages since Portugal joined the European Community has been more a process of Iberisation than Europeanisation or globalisation (Actualidad, 2007). It therefore is probable that Portuguese SMEs should be enhanc- ing partnerships and strategic alliances both in Spain and in common language Brazil for joint in- novation through lateral synergies without needing vertical integration in organisational hierarchies or needing to depend only on a local industrial district or cluster. A key in this regard therefore may be for smaller firms to focus on not only intraregional but also interregional cooperation, with regional and municipal governments, and development agencies, helping to synergise this. Europe’s Inertial Innovation Agenda The need for innovation, competitiveness as well as economic and social cohesion underlay the preparation and publication of Commission President Jacques Delors’ White Paper on Growth, Competitiveness and Employment of 1993 (EU, 1993; Holland, 1993). New policies followed such as the ADAPT programme which could fund retraining and skills extension for firms in declining sectors. ADAPT was inspired by the Lucas Aerospace model (Wainwright and Elliott, 1982) of drawing on and adapting employees’ tacit knowledge, skills and experience to enable smaller firms to diversify and was strongly sup- ported by the Commission’s directorate general for employment and social affairs. Another was the RECITE regions and cities of Europe programme, which was based on the principle that small and medium firms could gain some of the features of larger multinationals through networking (Hol- land, 1993). But both programmes lacked profile, agency and adequate finance not least since their rationale conflicted with dominant institutional ideology EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 262 The Rise, Decline, and Regeneration of Industrial Districts of the most powerful directorates generals of the Commission, such as those for finance, competi- tion and trade, that the legitimate role for public policy was in creating the conditions within which the private sector could flourish, rather than the boundary spanning such as evidenced by Maz- zucato (2011) and Block and Keller (2011) to help it diversify and innovate. This is reflected in successive Framework Programmes for Science and Technology. Yet, although they have been networked since the early 1990s, these are ‘pure’ research programmes which lack insistence that finance for research should be related to actual innovation. The officials administering these programmes in the research directorate general of the Commis- sion sign on and sign off such projects without any obligation to ensure that this has been followed through by creating any new high-tech start-up, or aiding any firms in a traditional sector to diver- sify. The budget for these programmes also has been so low that as few as one in twenty funding applications are approved, giving rise to appre- ciable ‘submission fatigue’. Few of the small and medium firms in the EU facing competition from globalisation have the time, expertise or resources to enter such a one-in-twenty chance of funding approval. In a Barometer public survey report in 2012 42% of respondent companies identified municipal, local or regional government as the most innovative, 19% national government, and only 11% the EU Commission (EU, 2012). In a further finding, suggesting support for enhanced HRM (EU, ibid), a majority of firms sampled did not think that public policies were delivering training systems enabling personnel to innovate. Missed Chance: The Lisbon Agenda Several policy recommendations in the prepara- tion of the Lisbon Agenda European Council, (2000), to which one of us was an adviser, aimed to counter this, including gaining post Fordist flex- ible production and flexibility-by-consent rather than flexibility-by-constraint (Holland, 2000). One of the flaws with the Lisbon Agenda was that it included the phrase that Europe should become the world’s ‘most competitive’ economy by 2010’ rather than ‘one of the most competitive’. Another was that while governments signed up to it, they failed to implement it or ensure the resources for it to gain regional and local resonance. The rationale for the Lisbon Agenda was Schumpeterian in his sense that it is not lower cost and price alone that shifts economies and societies to higher levels of income and welfare, but process and product innovation (Schumpeter, 1949; Holland, 2000, Oliveira & Holland, 2006) while these can be enhanced through flexibility- by-consent and innovation agreements between management and labour at enterprise level. The EU Commission followed Lisbon through with two documents which made this explicit: ‘The European social dialogue, a force for innovation and change’ (EU, 2002), and the Communication on ‘Partnership for change in an enlarged Europe - Enhancing the contribution of European social dialogue’ (EU, 2004) grasping and pushing the point that Lisbon was not simply about formal training but innovation by social partnership. The Lisbon Agenda, therefore, was a call for innovation-by-agreement between social partners at plant, branch or other local level to gain and sustain skill and innovation trajectories (Holland, 2000; Oliveira & Holland, 2006). But the agenda, again, unlike the boundary spanning of innovation in the US, lacked agency and especially funding for regional and local institutions to pursue it. Com- mission President Manuel Barroso then responded to the failure to make progress on its ‘relaunch’ in 2005, by proposing a European imitation of America’s MIT rather than an institution such as Japan’s MITI which had successfully synergised research and diversified leading Japanese firms on a ‘boundary spanning’ basis after the crisis for Japan following the 1970s oil shocks (Ohmae, 1982; Okimoto, 1989). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 263 The Rise, Decline, and Regeneration of Industrial Districts Centres, Peripheries and Crises Besides which, the growth and survival of small and medium firms in not only the Third Italy but also elsewhere in southern Europe has been in question since the onset of the Eurozone crisis following the salvage of banks from their folly in buying subprime and other toxic derivatives (Sarmento & Nunes, 2012). The EIM Business and Policy Research group found that 63% of sampled firms with less than 10 employees, and 58% of those with from 10 to 249 employees reported falling demand as their main problem whereas only 10% of the former and 13% of the latter reported no negative effects (EIM, 2011). In 2011 only SMEs in Germany and Austria ex- ceeded their 2008 levels of real value added and employment, while these had stalled since 2008 in Belgium, Finland, France and Luxembourg. In the remaining EU countries, SMEs had not recovered their pre-crises levels (Ecorys, 2012). Part of this related to the constrained prem- ises for the introduction of the euro, where it was presumed that limits to debt and deficits in a single currency area would assure its survival. This had been criticised years before, drawing on both Myrdal (1957) and Perroux (1964), stressing that without offsetting public investment poli- cies the introduction of a single currency could disintegrate Europe (Holland, 1980). The same case then was made in a report for Jacques Delors which he had personally requested and commis- sioned for policies and financial instruments to offset the deflationary debt and deficit conditions for a single European currency and to realise the commitment to economic and social cohesion of the first revision of the Rome Treaty in the 1986 Single European Act (Holland, 1993). The model for this was the US New Deal and how disparities in income and employment in different regions could be offset not only by fis- cal transfers but through bond funded social and environmental investments. In his TVA and the Grassroots, Selznick (1949) had showed that the Tennessee Valley Authority both was a regional development programme and a social instrument not only within a democracy but reinforcing it at local levels. This included engagement of local communities in their own future, such as in not only directly and indirectly supporting small and medium firms but also in promoting production cooperatives. The report to Delors (Holland, 1993) recom- mended that the EU should issue its own bonds through a European Investment Fund to finance regional development programmes and promote innovation in new high tech start ups through a European venture capital fund. This was opposed at the time by Germany, although Delors managed to get the European Investment Fund set up and with terms of reference in its statutes that en- able it to issue EU bonds. Delors then endorsed this in his Commission White Paper on Growth, Competitiveness and Employment of December 1993 (EU, 1993). But Helmut Kohl was opposed and the proposal stalled. Eurobonds then hit headlines after the 2008 financial crisis and the onset of the Eurozone crisis from 2009. But Angela Merkel, having first displaced Helmut Kohl as leader of the CDU and then replaced him Chancellor, still was opposed. This proposal for bond finance for recovery, and for a European venture capital fund for SMEs and new high tech start-ups was supported by European employers’ federations, including those of Ger- many, and trades unions, in a report of February 2012 (EESC, 2012), but still opposed by Germany and not supported by Austria, the Netherlands and Finland. Notably, Germany and Austria at the time had no problems with their SMEs, central to their policy of medium firm Mittelstandspolitik, since they had by then exceeded their 2008 levels of real value added and employment (Ecorys, 2012). The issue is still open, if closing too fast. Financed by EU Bonds, a European venture capital fund would have major potential for the regeneration of declining industrial districts. An option open at the time of this chapter going to press is that the European Council could introduce both bonds for eco-social investments to promote EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 264 The Rise, Decline, and Regeneration of Industrial Districts recovery and a European venture capital fund by ‘enhanced cooperation’ which it had adopted for a Financial Transaction Tax, and which does not need all member states to support such a proposal even though, directly and indirectly, they would benefit from it through direct and indirect multipli- ers (Holland, 2010; Varoufakis & Holland, 2012) and thus Myrdal’s spread rather than backwash effects. Whether enough European governments will learn up from this potential, and act without Germany, or in moving such a policy proposal by enhanced cooperation, persuade a German gov- ernment not to oppose it, rather than be outvoted, remains to be seen. Summary This chapter has stressed the relevance of knowl- edge based theories of the firm for competitiveness, innovation and their implications for local and regional development policies. It has claimed that the re-invocation of Marshall’s industrial district concept as a paradigm by Beccatini, Piore and Sabel and others, based especially on claims for their initial success in the Third Italy, was exag- gerated and that employment in these already was in decline by the time that Porter rebranded industrial districts as industrial clusters. It has outlined that one of the reasons for this was that the firms concerned were strong on process in- novation but not on product innovation. Another was outsourcing by the more successful among them to lower cost economies. The chapter also has submitted that the in- dustrial district concept is weaker than the more dynamic concept of polarisation and growth pôles in François Perroux and that of circular and cumulative causation in Myrdal. It has suggested that the role of Perroux’s firmes motrices or core or meso firms has been neglected in the dynamics of regional success. Whereas the industrial district concept both in Marshall and neo-Marshallian analysis has assumed spontaneous creation of lo- cal agglomerations of small and medium firms, it has distinguished this from government creation of economic zones in Asia, and especially China, while allowing that industrial districts within or adjacent to them share features of the initial suc- cess of the Third Italy model. In analysing global value chains its cited Kap- linsky and Humphrey and Schmitz’s warning that integration into them is a ‘two-edged sword’. In analysing the acceleration and compression of the Vernon product cycle model with globalisation, it has shown that Japanese meso firms have retained not only research but also the innovative first phase of such a cycle in Japan to prototype new products and processes, and done so by both retaining and diversifying core competences. It has related this to knowledge based theories of the firm and the interfacing of tacit and explicit knowledge in both the rise and decline of industrial districts. The chapter has reocgnised the strength in principle of the ‘Triple Helix’ model of industry- university-government synergies as forwarded by Leydesdorff and Etzkowitz, but demonstrated that this so far has achieved little in European practice. It has cited evidence that small and medium firms find municipal, local and regional governments of more use to them in considering innovation than the European Union. It suggests that this more local or regional role can be enhanced by learning up from HRM as surfacing and extending tacit knowledge, latent abilities and implicit skills in promoting innovative products and processes and achieving new innovation trajectories in the manner recommended by Perroux. It has drawn on management studies of bound- ary spanning on the lines of Guston (2010) and Mørk et al. (2011) within firms and institutions and shown that this has been feasible between researchers, firms and government institutions in enabling ‘platforms’ for the launch of entirely new products, and the creation of entirely new markets. Although this, in the US, was a national policy, the chapter has suggested that it can inform and synergise local and regional innovation systems. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 265 The Rise, Decline, and Regeneration of Industrial Districts The chapter has strongly criticised the inertial innovation agenda of the European Commission, and the degree to which this lacks such proactive policies to create new SMEs in advanced technol- ogy as well as the need for venture capital finance for small and medium firms and new high tech start ups. It also has indicated that such venture capital could be funded by bond issues rather than fiscal transfers, which has been recommended by the Economic and Social Committee of the EU, including both employers and trades unions and representatives of civil society. IMPLICATIONS FOR FUTURE RESEARCH This nonetheless leaves open key questions which less concern the case that some SMEs could gain from an enhanced HRM approach encouraged and exampled by local or regional development agencies or metropolitan authorities, than which among SMEs would be open to it. The first is- sue has been addressed in the paper, in that it is probable that this would tend to be in medium sized rather than very small firms. Even when firms of less than 10 people, such as the founding partnership of Steve Jobs and Steve Wozniak at Apple, or of Niklas Zennström and Janus Friis with Skype, have succeeded, this has been less driven by concern with HRM than with an intuitive drive to translate concepts into products. Another issue is that even in the firms of less than 250 people, there still may be less concern with HRM than simply ‘getting on with the job’ and which also relates to boundaries between them. Such as an engineer or production line manager, whether or not even titled as such, be- ing concerned with engineering and production, while a sales manager, if there is one rather than an owner entrepreneur assuming to do it, being primarily concerned with sales. This also relates to issues which this chapter has not addressed, and which merit further research, including power dynamics in small firms and the age and educational level of the entrepreneurs. This is not so much presuming that higher education is a necessary condition for openness to HRM. It is common knowledge that younger founders of successful start-ups may even have dropped out of higher education such as with Bill Gates at Microsoft and Mark Zuckerberg with Facebook while in the successful postwar phase of Italian industrial districts many of the entrepreneurs had none, but had been working in the industrial triangle of Milan, Turin and Genoa and brought their tacit knowledge and implicit learning back to the Third Italy with them. Rather it may have an inter-generational di- mension with both positive and negative effects. Founders of successful firms may want their offspring to follow them in managing them, and some do. Yet as founders, and often controlling shareholders, fail to allow them sufficient au- tonomy to diversify either products or processes or consider new thinking on how the firm should be managed. Or, never escaped from the mind sets in the sense of Senge (1990) that they knew all there was to know about how to manage them, yet then were perplexed when globalisation chal- lenged their survival. Which is what one of us found after being invited to design the Greater London Enterprise Board in that managers of medium sized firms in traditional sectors came to it simply wanting sufficient subsidies to survive and could not cope with, or therefore accept, the offer to profile the tacit knowledge, latent abilities and implicit skills of their own workers to achieve product or process innovation since, as with the managers of Lucas Aerospace, they saw this as a challenge to their own authority as managers. Which also could be perceived as an unwillingness to open the ‘black box’ by which they presumed that they knew how to manage already, yet also as fear of a Pandora’s box in which their right to manage could outcome in loss of control, even if most them, as a conse- quence, also thereafter lost their companies. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 266 The Rise, Decline, and Regeneration of Industrial Districts By contrast, we have found that one of the most successful medium sized firms in Portugal, whose core competence was in construction, achieved this in the first instance because its founder was prepared to delegate to two sons and allowed them a high degree of autonomy, including freedom to diversify into unrelated product markets, such as tourism and also biotechnology. Also that the sons themselves, and their senior managers, both en- gaged and attended courses in HRM commissioned from us by the company, and then commissioned another series of courses for middle managers. In MBA courses for managers in medium sized firms we also have found an openness to the potential of surfacing tacit knowledge when given an example such as that of the Lucas Aero- space Alternative Corporate plan since, while the surfacing of tacit knowledge as a concept is theoretical, the emerging products were ‘for real’. As also in their interest that there may be a tacit ‘referential coefficient’ in intuition, and that this should not be discounted as the basis for process or product innovation, which was welcomed by the vice president of a medium firm who admitted that he had relied on this in a recent acquisition even though, to gain the relevant bank finance, he could not admit as much rather than array a highly quantitative but purely hypothetical cash flow forecast from it. It also may be that there is ‘phoenix’ style regeneration potential for a medium sized firm in an industrial district facing a succession crisis if some of the family controlling it can recognise the potential for product and process innovation. As we learned from the outcome of one of our MBA courses when a son who had been the intended successor to its founding father was killed in a car crash, and when his sisters nominally took over control, yet recognised that they had no management experience. Whereas an operational manager who had been on the MBA course was able to persuade them that there was scope for innovation and diversification from identifying the tacit knowledge, latent abilities and implicit skills of its workers, which neither the found- ing father nor the son as intended heir ever had conceptualised. Which the sisters accepted and empowered him to do so. We suggest that such issues concerning control and succession in SMEs, and in recognising and recommending the case for ‘enhanced HRM’ as integral for local and regional development policies, merit further research in relation to the potential regeneration of industrial districts. 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Retrieved from http://mpra. ub.uni-muenchen.de/5408/ Teubal, M. (1997). A catalytic and evolution- ary approach to horizontal technology policies. Research Policy, 25(8). doi:10.1016/S0048- 7333(96)00886-4. Van den Belt, H., & Rip, A. (1987). The Nelson- Winter-Dosi model and synthetic dye chemistry. In W. Bijker, T. P. Hughes, & T. Pinch (Eds.), The Social Construction of Technological Systems. Cambridge, MA: MIT. Vinuela Jimenez, A., RubieraMorollon, F., & Cueto, B. (2010). An analysis of urban size and territorial location effects on employment probabilities: The Spanish case. Growth and Change, 41(4), 495–519. doi:10.1111/j.1468- 2257.2010.00536.x. KEY TERMS AND DEFINITIONS Boundary Spanning: Innovative synergies within and between firms and institutions, includ- ing public institutions and agencies. Bonds: Fixed interest borrowing potentially shifting savings into investments. Core Competences: Knowledge based techni- cal and human abilities and skills. Diversification: Introduction of alternative products, processes and skills. Enhanced HRM: Engaging ‘best practice’ human resource management such as surfacing and extending tacit knowledge and enhancing skill trajectories to promote innovative products and processes. Growth Pôles: Centres attracting new activi- ties and which can be introduced and fostered by public policies, including technopôles. Industrial Districts: Local economic systems of small and medium firms. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 279 The Rise, Decline, and Regeneration of Industrial Districts Innovation: Introduction of new products or processes and creation of new markets. Innovation Trajectories: Dynamic innovation and product clusters and skill extension. Macro: Aggregate and large, either for eco- nomic or social outcomes. Meso: Intermediate (Greek: mesos), such as for a global multinational company or for a region in the global economy wider than local or national economies. Micro: Small or medium, for either for a firm, or a local geographical area. Networking: Joint research and product devel- opment by firms and public institutions; reducing spatial and psychological distance. Tacit Knowledge: Less than conscious know- ing, including know-how. ENDNOTES 1 Volunteered to one of us by the head of plan- ning in the French Ministry of Economy and Finance, Jean Saingeour, in January 1966 with examples of such long-term planning to achieve 80% self-sufficiency in energy through nuclear power, its Plan Calcul na- tional computer programme, its TGV high speed rail network, and the supersonic Con- corde which never covered its development costs but was vital in developing skill tra- jectories in the southern French technopôle of Toulouse, and in enabling France to be a major player in the Airbus programme on a pan European basis, which first challenged and then overtook the US company Boeing. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 280 Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited. Chapter 14 Self-Managing Teams in Small and Medium Enterprises (SME) ABSTRACT Small and Medium Enterprises (SMEs) are looking for a sustainable and profitable business concept. They use a human resource model according to the situation and establish a democratic system with flexible work, focusing on responsibility and initiative and increasing the self-control of the team´s members. Self-managing teams have been used more and more in recent years in the business environment. They are relatively autonomous work groups whose members share responsibility and leadership to accomplish their independent tasks. Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge. Their characteristics include independent, autonomous decision making, shared responsibility, and shared leadership. Sometimes, self-managing teams are also responsible for personnel decisions within the team, such as working hours, the selection and contracting of members, dismissal, and even determining salaries. In sum, the authors propose self-managing teams (such as High Performance Practices) as a good human resource management in small and medium enterprises and show how they can help to create organizational effectiveness and competitive advantage in SMEs. INTRODUCTION The orders and flow of the chapter are: First, justification of need to forming SME´s team (self-managing teams, such as high performance practices, in SMEs as the key to compete in the environment given the above premises) and the theoretical framework human resource manage- ment in SME. Then, we studied work Teams (High Performance Practices) and the self-managing teams: definitions, negatives aspect, favoring results, corporate culture, characteristics and Self- managing teams and organizational effectiveness. Finally, conclusions and future research directions. Mercedes Rubio-Andrés San Pablo CEU University, Spain Santiago Gutiérrez-Broncano Castilla-La Mancha University, Spain Luis Varona-Castillo San Pablo CEU University, Spain DOI: 10.4018/978-1-4666-4731-2.ch014 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 281 Self-Managing Teams in Small and Medium Enterprises (SME) JUSTIFICATION OF THE NEED TO FORMING SME´S TEAM Various types of organizations must manage rap- idly changing operational contexts. To respond to these demands, organizations should relying more heavily on team-based work arrangements (Rosen, et. al.2010). Adaptability is crucially important to organizational success due to externally-induced organizational change and those organizations successful at adapting would be most effective in the marketplace (Terreberry, 1968). Through team working, organizations can flexibly adapt and react to turbulent and dynamic environments, and thereby focus their efforts to more efficiently handle subtasks resulting in overall organizational effectiveness (Richter, et. al. 2011). Therefore, organizations increasingly rely on teams to manage the complexity of modern work. So that, teams must be able to react quickly and accurate to the changing environment (Rosen et. al. 2010) (See Figure 1). Also, economic and technological factors have encouraged employers to adopt flexible work arrangements (FWAs) as a means to respond to the increasing competition, market volatility, economic recession and the changing needs of the workforce (Michie & Sheehan-Quinn, 2001; Stavrou, 2005). The degree and nature of product market competition have heightened considerably. Cost effectiveness and quality have become critical. At the same time, authors identify people time and again as being the key to finding and sustain- ing a competitive edge (Bacon, et. al 1996). An influential literature emanating from the United States (Beer et al., 1985; Kochan et al., 1986; Fombrun et al., 1984) has identified new ap- proaches to managing human resources. The broad message has been compounded by reflection on Japanese management practices (Schonberger, 1982; Oliver and Wilkinson, 1992; Pascale and Athos, 1982; Trevor, 1988). In Britain, the idea of human resource management (HRM) has come to be accepted as a very important - arguably the most important - area for debate and practice in the whole field of employment management, personnel management and industrial relations as broadly defined (Guest, 1989; Storey, 1992; Storey and Sisson, 1993). We propose self-managing teams (such as high performance practices) in SMEs as the key to compete in the environment given the premises. OBJECTIVES • To analyze the importance self-managing teams in SME. • To study definitions, background and char- acteristics of self-managing teams. • To research the distinctions between a work group and team-work. • To analyze the conditions for self-manag- ing work teams in SME. • To check the association with self-manag- ing sustainable, organizational effective- ness and therefore a competitive advantage in SME. • To study the new role external and internal leader and the difficulty of replace leader- ship functions in SME. • To analyze the negatives aspect of self- managing teams in SME. Figure 1. Environment factors informing teamwork EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 282 Self-Managing Teams in Small and Medium Enterprises (SME) CONCEPTUAL FRAMEWORK OF HUMAN RESOURCES IN SMEs Hamey suggests a theoretical framework of human resources in SMEs with the following significant factors: external influences and internal dynam- ics (See Figure 2). The first consist of market structure (product), suppliers, customers, industry, the value chain, the level of technology and in the regulations. As we have internal dynamics: the typology of the same employer or owner of the company, the management style, the presence of a joint trade, size and employees. High-performance human resource practices (and thus, self-managing teams) can help to cre- ate an organizational effectiveness and therefore a sustainable competitive advantage in SMEs. WORK TEAMS IN SMEs With organizations moving towards team-based structures, the last decades have seen an enor- mous boom of a variety of team-working forms. (Ritcher,et. al. 2011). Some of the distinctions team-based working is at the heart of many produc- tion and service organizations (Mueller, Procter & Buchanan 2000; Van Hootegem, et al., 2005), and also of course in SMEs. Distinctions between a Work Group and Team-Work First, one of the most basic distinctions is between a work group and a fully functioning team. A work group contains a set of people who work together to perform some task. It´s characterized by having members that interact to share informa- tion and take decisions, thereby facilitating one another’s professional development within their area of responsibility. Members of the group are not required to, and do not have the opportunity to carry out collective work that requires the efforts of all, resulting in a lack of synergy in the work they each carry out Figure 2. Open systems conceptual framework of factors influencing HRM in SMEs1 EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 283 Self-Managing Teams in Small and Medium Enterprises (SME) as there is little or no interdependency between the different functions. In a work group, the members share a common goal and are coordinated by a leader, but their performance is a function of individual effort which is evaluated by individual performance evaluations (Levi & Slem, 1995). In contrast, a team is a small number of people with complementary skills who are committed to a common purpose, set of performance goals, and approach for which they hold themselves mutually accountable (Katzenbach & Smith, 1993). Team Work This definition of team work still permits a wide variety of types. Work teams can be relatively permanent operating organizational units, such as production work teams; or they can be tem- porary organizations focused on a limited task such as research and development project teams or managerial task forces (Katzenbach & Smith, 1993). Teams can be part of an organization’s operation, or they can be used as a mechanism of evaluating and changing an organization such as Quality Circles and Total Quality Management teams (Lawler, 1986). Moreover, in some companies it is common for people to be members of five, ten, or twelve or more teams at a time (Martin & Bal, 2006; Zika- Viktorsson, Sundstrom, & Engwall, 2006). As noted by Milgrom & Roberts (1992), firms adopt this approach to organizing work to leverage their resources more effectively and to promote knowl- edge transfer—that is, to enhance both productiv- ity and learning. However, classic work on the productivity dilemma (Abernathy,1976) suggests that the routines put in place to enhance productiv- ity often hinder the practices that foster learning (Adler et al., 2009; Benner & Tushman, 2003), with learning and performance often working at cross-purposes—especially in teams (Bunderson & Sutcliffe, 2003; Singer & Edmondson, 2008). The problem will be to play the SMEs due to its reduce size and difficulty of creating multiples work teams. Although teams require interaction to perform a common task, this does not mean that team members have to be located in the same place. “Virtual teams” exist in which members interact entirely through electronic medium such confer- ence calls, electronic mail, and video conferences (Willis, 1991). There are a variety of factors which relate to the successful use of team work. The factors found can be grouped into the following factors support (Hat- man, 1986; Manz et al, 1990), human resources (Katzenbach & Smith, 1993; Hirschhorn, 1991) and team relations (Lawler, 1986; Carr, 1991). Besides, the creation of new work teams is the result of certain changes in the business environ- ment. These teams are better prepared to tackle the new challenges presented by today’s markets (Tushman & O´Reilly, 1997; de la Florida, 2002). Innovative teams result from the creation of new work teams: Multifunctional teams, Virtual teams, Open-innovation teams, Self-managing teams. SELF-MANAGING TEAMS (SMT) Self-managing team are a high performance prac- tices. Must first define the background in SMEs, several definitions, conditions and SMT such as high performance practices. Background Although the idea of using self-managing teams (SMT) at work has been around since the 1960s (under the name of autonomous work teams), there are few examples of successful SMT in the U.S., and most of the examples are with production and service workers (Manz, 1992). These work teams perform complex, but relatively routine tasks. Employees are cross-trained so that they can work on different parts of the production process. They EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 284 Self-Managing Teams in Small and Medium Enterprises (SME) also receive training on team work skills so that they can manage work assignments and internal relations. In most cases, these production SMT exist as part of an organizational development program which provides a protected or supportive environment for them (Levi & Slem 1995). In the 1990s, the focus of team work activi- ties began to change. For example, on the fac- tory floor, companies which had been successful developing teams continued their organizational change efforts by trying to make the teams more self-managing (Manz, 1992). So, organizations which have been successful at developing and using teams want to continue the organizational development process. To many of them, the next step is the use of self-managing teams (SMT) (Wellins & George, 1991). SMT provide a number of benefits beyond the use of standard work teams. Definitions The primary use of self-managing teams (SMT) has been to foster continuous improvement of work processes (Magjuka, 1991). Self-managing team is considered a work form that allows the optimization of both workers’ needs and technological requirements, thereby enhancing both organizational effectiveness and staff attitudes. Yang & Guy (2011) defined a self- managing team as a relatively autonomous work groups whose members share responsibility and lead- ership to accomplish their independent task. Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge (Grant, 1997; 2001). Self-managing teams are non-hierarchical groups of individuals with different and comple- mentary experience and knowledge (Lazear, 1998). Their objective is to develop a type of collective knowledge that requires the pooling of individual knowledge (Grant, 1997; 2001¸ Nonaka y Takeuchi, 1995). Self-management also shifts the responsibil- ity for team success to the team members. This requires the team members to handle the internal social relations of the team. Hence, any type of team may be self-managed in SMEs, but this type of management is usually reserved for teams that carry out the same type of functional task on a regular basis, with members that remain constant over a long period. Tasks are usually related or interdependent and they are used fairly regularly in manufacturing processed, although recently they can also be found in the provision of services. The team members offer similar functional experience and usually take turns in carrying out the different tasks for which the group is responsible. Conditions Most studies (Cohen & Bailey, 1997; Kirkman & Rosen 1999; Pearce & Ravlin, 1987) outline the following conditions as favouring self-managing results: • Establishing clear objectives. • Complex and important tasks. • Consistent members. • Access to relevant information. • Sufficient recognition and remuneration. • Strong support from superior management. • Excellent interpersonal skills between members. • High level of discretion over work processes. • Competent and instructive leadership. Self-Managing Teams Such as High Performance Practices There is an incongruence with respect to the effectiveness of organizational teams that is similarly reflected in the human resource man- agement (HRM) literature. High-performance human resource practices consist of a set of EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 285 Self-Managing Teams in Small and Medium Enterprises (SME) coherent practices that enhance employee skills, participation in decision making and motivation to put forth discretionary effort (Appelbaum, E. & Batt, R 1994). Although some do not consider team working an aspect of high-performance work systems (e.g. Huselid & Becker 1995), others do (e.g. MacDuffie 1995). Some even question whether team work- ing rather represents a management fashion to disappear in the course of time (cf. Abrahamson & Fairchild 1999; Allen & Hecht 2004). In any case, semi-autonomus teamwork allows the integration of worker needs, flexible adapta- tion to and coordination of the respective work, teamwork is considered more effective than other work forms such as traditional individual work. A series of quasi-experimental studies implement- ing team-based working conducted mainly in the 1970s and 1980s supported one of STS’s most basic tenets of superior effectiveness of (semi-) autonomous team working compared with tradi- tional work forms (see Pasmore 1982; Pasmore, et. al 1982; Pasmore 1988; Levine & Tyson 1990). MacDuffie (1995) says team working as part of strategic HRM appears effective if accompanied by complementary HRM practices. High perfor- mance practices (Lawler, 1986; Walton, 1985; Wood & Albanese, 1995) or high involvement practices (Huselid, 1995; Taylor et al., 2008), for example, Selective recruitment, Fixed contract- ing, Extensive training, Performance evaluation, Contingent compensation, Internal promotion, Teamwork, Shared information and Job security (Pfeffer 1994). NEGATIVES ASPECT OF SELF- MANAGING TEAMS IN SME However, there are also criticisms and negative aspects of this type of work, as it does not always produce the desired improvements in performance (Chaston, 1998). Hard to Create Authors Levi & Slem (1995), affirm self-managing teams are hard to create. All of the organizations in this study are advocating the development of self-managing teams and have tried to enact them, but they have had only limited success with their attempts to promote self-management in SMEs. Free-Rider Problem Taking as a reference the theory of social dilem- mas (Cabrera, 2002), one of the main problems created by this type of work group is that when it involves the voluntary contributions of differ- ent members of a collective, everybody benefits regardless of whether or not they have contributed to the success (Olson, 1965). Non-contribution may become the dominant strategy, meaning that no collective knowledge is gained (Cabrera, 2002), which would explain the resistance of other members to sharing their knowledge. This type of opportunist behaviour is based on lies, decep- tion and calculated effort, known as the free-rider problem, whereby team members benefit from the group effort (Lazear, 1998). Difficulty of Replace Leadership Functions Other problem with self-managing teams is that there are many leadership functions which are hard to displace with team work. The leader of a team handles administrative issues, sets the agenda and facilitates the team’s interactions, provides direction and goals, manages the team’s external relations, handles personnel matters like perfor- mance evaluations and rewards, and deals with personnel problems. In theory, all of these func- tions can be replaced through self-management. However, some of these functions are difficult to replace, especially those which deal with external relations and personnel issues. EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 286 Self-Managing Teams in Small and Medium Enterprises (SME) The idea of self-management is attractive to many employees in theory, but so is having a good leader to work under, learn from, and be rewarded by these practices. Programs to promote self-management often suffer because of limited training, difficulty in the relationship between the team and other parts of the organization, and a reward and performance evaluation system which is not appropriate. Conflicts in Self-Managing Teams The presence of conflict can have many negative effects on team performance. It can disrupt the coordination of activities, cause a lack of mutual monitoring and back-up behavior, inhibit com- munication, and consequently bring about a loss of trust and motivation. Thus, it is imperative to minimize conflict during plan execution. The first strategy is to prevent conflict. Once it has occurred, however, reactive conflict management is the process of working through task, process, and interpersonal disagreements among team members (Marks et al., 2001). Management of conflict during plan execution must occur as quickly as possible in order to reduce the amount of disruption to other processes. Reactive conflict management can involve many strategies, includ- ing negotiation and mediation. Hence, conflict is an danger. for example the frustration, can lead to poor performance, resis- tance when it comes to sharing knowledge, which reduces performance, and can also be psychologi- cally unhealthy for the individuals. Many factors can inflate or deflate emotional levels during plan execution, and generate conflicts such as hostility between members, frustrating task conditions, or failures in execution. Strategies such as team building activities, stress-relieve training or even joking and complaining, when used properly, can be effective for affect management. (Rosen, et. al 2011). Rewards Commitment to the team requires that the orga- nization develops rewards for successful team participation (O’Dell, 1989). These rewards can be based on the success of the team and/or the individual’s contribution to the team. Organiza- tional rewards require a performance evaluation system which measures both team success and an individual’s contribution to the team. This is important both for the individual contributor, and to provide feedback to the team on its performance (Hirschhorn, 1991). Rewards are another problem which exists in SMEs which may limit the development of team work (Ellis & Honig-Haftel, 1992). For example, R&D professionals are often individualists who would prefer to be rewarded for their individual efforts. Besides, the relation- ship of patent output to the reward systems for individual R&D scientists in high technology firms, when a subset of small firms was inves- tigated separately, non-monetary rewards were shown to be ineffective (Honig-Haftel&Martin, 1993). This may discourage their commitment to self-managing team work where their individual efforts are incorporated into the success or failure of the team. Rewarding professionals in many organizations leads to promotions into manage- ment; however, technical professionals may not be suited for the interpersonal aspects of manage- ment. Consequently, professionals and managers often have conflicting views about how well the organization rewards its professionals (Sankar et al., 1991). Performance Evaluations Like the problem with rewards, performance evaluations may be a problem for self-managing teams in SMEs. Professional work, in general, is difficult to measure and evaluate which makes performance evaluations difficult. These forms may make any performance evaluation seem unfair (O’Dell, 1989). EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 287 Self-Managing Teams in Small and Medium Enterprises (SME) Therefore, we propose to measure the perfor- mance evaluation of all self-managed team and not individual contribution. ADAPTATION OF CORPORATE CULTURE TOWARDS SELF- MANAGED TEAMS The attempts to create self-managing teams range from an organization-wide effort promoting a change in corporate culture to the creation of a few small self-managing teams to see how they work. Although there were pockets of success with these programs, self-management does not necessarily expand or “trickle down” even when it is successful. Rather than using self-managing teams as a tool to promote a change in corporate culture, it is more accurate to say that without an appropriate corporate culture it is difficult to create successful self-managing teams. Levi & Slem, 1995, come to the conclusion that the overall success of team work depends on corporate culture. A corporate culture which encourages employee involvement and partici- pation is a necessary support for team work and self-managing teams. A supportive corporate culture is related to a lack of resistance from managers about teams, better relations between teams and other parts of the organization, and the increasing use of teams in the organization. Self-managing teams are much more likely to be successful in organizations where the corporate culture and value system support empowerment and team work. Overall, corporate culture is the single largest predictor of the differences among the companies’ successful use of teams. Developing a corporate culture which supports teamwork is a long term process it is not some- thing which can be dictated by top management or announced as a new organizational program. Changing corporate culture requires a long term, consistent effort on the part of management to show that employee involvement and team work is valued and rewarded by the organization. This needs to be done by both communication and action. Corporate culture provides the foundation Once the organization begins to create a corporate culture which supports team work, the culture will support a wide variety of teams, and eventually the transition to self-managing teams. In summary, Figure 3 shows the evolution with Self-managing teams (individual work, group work, team work, R&D teams and SME perspectives), relevant concepts in function of the evolution, by different authors. CHARACTERISTICS OF SELF- MANAGING TEAMS In self-managing teams the members must com- plete their own tasks, control the result obtained and take responsibility for the innovation achieved. Therefore not only are suggestions made but also responsibility for implementing the chosen solu- tion and its results is a collective responsibility. The organization in charge defines that mission, the scope of operations and the available budget. All other responsibilities delegated to the team vary from one organization to another. Characteristics include independent tasks (Kirkman & Shaphiro, 1997), autonomous deci- sion making (Wellis et al, 1991), shared respon- sibility (Wall et al, 1986) and shared leadership (Hackman 1987; 2002). Sometimes, self-managing teams are also responsible for personnel decisions within the team, such as working hours, the selection and contracting of members, dismissal, and even determining salaries. According to the literature review, most important characteristics are. Cohesion in SMT Allen (1971), in his seminal work, relates the con- cept of proximity (cohesion) to that of “physical distance”, measured in terms of feet or meters. The EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 288 Self-Managing Teams in Small and Medium Enterprises (SME) measure considered by Allen is dyadic, in that it refers to pairs of individuals or, better, to pairs of physical locations that do not vary in reciprocal distance over time. Moreover, we argue that close physical proxim- ity of team members is also instrumental for the development of team cohesion and work norms of strong effort. If team members are in close vicin- ity, stronger social integration is likely (O’Reilly et al., 1989) as team members are more easily accessible for both task-related and also personal interaction. Team members in close proximity, by the higher likelihood of informal and spontaneous communication (Allen, 1971), will tend to interact not only on task-related matters, but also on social and personal matters, strengthening ties among team members leading to stronger team cohesion. Support for this notion comes from the strong Figure 3. Evolution with self-managing teams EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 289 Self-Managing Teams in Small and Medium Enterprises (SME) and positive relationship between interaction fre- quency and interpersonal attraction, an important component of cohesion (Zaccaro & Lowe, 1988). Also, Shaw (1981) describes a positive relation between physical proximity and the existence of cohesive groups “psychological distance”. Cohesion is likely to create stronger social norms regarding work effort as individual con- tributions to the team tasks can more readily be observed and are thus more identifiable in the team, reducing tendencies of social loafing (Latané et al., 1979). Furthermore, team members in proximity are more likely to develop a stronger sense of group identity (Scott, 1997), creating a commitment to the team and its goals (Hoegl & Parboteeah, 2003), and leading to increased effort on the common task (Locke & Latham, 1990). Ensley and colleagues remarked the success of a venture is often a reflection of its team’s ability to meld talent and ability in a creative and (Ensley, Pearson, & Amason,2002). Team Size: Smallest Self- Managing Teams Team size has been considered an important structural variable determining team processes (e.g., team collaboration, social loafing) and, subsequently, team performance (i.e.,the effec- tiveness and efficiency of task completion). But, teams in business organizations today are often too large (Hoegl, 2005). Research suggests that smaller teams provide for more direct and efficient intrateam communica- tion (Bray et al., 1978), greater effort by all team members (i.e., reduced social loafing; Latané et al., 1979), and, hence, a better utilization of all team members’ potential. What´s optimal team size in terms of a specific number? Research evidence does not provide an absolute optimal team size in terms of a specific number, nor is there any conclusive indication of an absolute optimal range. As scholars have pointed out, the right team size will certainly depend on: • Work to be performed (Hackman, 1987). • Size of the project task (Hoegl, 2005). • Teamwork requirements (Hoegl, 2005). • Task complexity and uncertainty (Hoegl et al., 2003). Also, team size affects teamwork, for example: • Several aspects of teamwork quality. • Sharing of technical and coordinative in- formation (Zenger & Lawrence, 1989). • Communication structure. • Social loafing phenomenon. • Performance. • Participating members in teamwork (Bray et al. 1978). • Effort, knowledge, skills, and experience to their full potential each team member. Diversity Hence, member´s team heterogeneity or diversity remains a highly controversial (Nielsen, S. 2010) Researchers have focused a great deal of at- tention on team diversity. Bettenhausen (1991) identified cultural differences as a critical area of concern for teams. Yet, three metaanalyses (Horwitz & Horwitz, 2007; Stewart, 2006; Webber & Donahue, 2001) have found relatively weak relationships between diversity and team performance. Reasons for weak relationships, as well as opportunities for refining diversity research, were advanced by Jackson, et. al (2003), who point out the need to examine less obvious but perhaps more critical types of diver- sity, to pay more attention to team settings and contexts, and to use more sophisticated multilevel methods of analysis. The first idea has resulted in some success, as Horwitz & Horwitz (2007) found task-related diversity to have stronger re- lationships with performance than demographic diversity does. So far, extensive efforts to link diversity with team performance have thus been relatively futile, EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 290 Self-Managing Teams in Small and Medium Enterprises (SME) even when the type of diversity has been more carefully scrutinized. Future progress related to diversity may thus rely on other opportunities identified by Jackson et. al.(2003) such as paying more attention to context and using multilevel methods. Empowerment The empowerment of human resources is inevi- table and without empowerment, neither manag- ers nor the organizations can be successful in the long run. Empowerment is too an inner motivation which depicts the staff active role in their orga- nization. Tomas & Welt house (1990) insisted that empowerment is a four-dimensional issue; consisting of competence, meaning, choosing and self-efficacy (reviewed by Spertizer 1995) On the other hand Canger & Kangungo thought that self- empowerment indicator is the personal efficacy (1988). In their studies have evaluated these four factors. According to Mishra et. al (1998) added reliability to these aspects too. To empower human resources, staff shall be treated the way they feel themselves as alive cells of organization body and by feeling meaningful and beneficial and trusted, they make their best in the given jobs and improve the efficiency of the organization. So in order to provide individual and organization goals, an environment of trust shall be prepared which gives the people sense of confidence and effectiveness which ensure them that they have the ability to influence or control the results of activities (Tohidi & Jabbari, 2012) Interdisciplinary No individual working alone could carry out the same tasks or produce the best innovations. For this reason companies turn to a combination of individuals with different and complementary skills and perspectives, deriving from this coop- eration the achievement of these improvements and innovations. (See Figure 4). SELF-MANAGING TEAMS AND ORGANIZATIONAL EFFECTIVENESS IN SME Over the past decade, human resource management theory has come under pressure to demonstrate its contribution to organizational performance (Hayton, 2004; Laursen, 2002; Soutaris, 2002; Stewart, 1996; Twomey & Harris, 2000). Morrison & Phelps (1999) have stated that the success of organizations today, especially technology firms, depends on the continuous improvement of the employees’ performance. In order to respond rapidly to market needs and increase profits, the best companies are con- stantly searching for proven practices that offer a competitive advantage. Yang,L. et al (2011). These companies generally avoid practices that do not provide some proven added value. Despite the fact that trade magazines are full of articles describing the successful applications of self-managing teams (Cordery et. al. 1991), some precautions must be taken. The results of these teams on the investigations carried out are not always consistent and do not reflect great im- provements in performance (Banker et al., 1996; Cohen & Ledford, 1994). Self-managing teams (such as High Per- formance Practices) as a good human resource management in small and medium enterprises (Way, 2002) and how they can help to create an organizational effectiveness and therefore a competitive advantage in SMEs. Studies supporting the importance of self- managed teams. In a recent review of survey studies examining the link between teamwork and organizational performance, Delarue et.al (2008) called for scientific enquiry in testing the effectiveness of teamwork. This study aims to EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 291 Self-Managing Teams in Small and Medium Enterprises (SME) respond to this call by systematicall y examining whether team working in organisations is related to organizational effectiveness. Appelbaum & Bailey (2000) conclude that team-based working leads to improvements in organizational performance on measures of both efficiency and quality. The advantages of self-managing teams are team members more committed to the work, an efficient management of labour issues, greater efficiency and job satisfaction, less employee turnover and less absenteeism. But, their greatest advantage is without doubt the improved knowledge of the group (Lazear, 1998). Besides, the company’s competitive advan- tage is better protected than a situation in which knowledge rests with just one individual (Wright et al., 1994). When the members learn to carry out multiple tasks the team’s flexibility increases when resolving problems, the work becomes more interesting and there is an opportunity to learn new skills. Efficient Organization Self-managing make the SMEs efficient because: Reduction in Staff Turnover: Studies have shown that employees are more attached to their work groups than to the larger organisation, and work–group attachment is a predictor of staff at- titudes such as satisfaction and intention to leave the organization (Riketta & van Dick 2005). In fact, researchs has shown that organizations us- Figure 4. Characteristics of the teams, according to the authors Elaboration: Team research EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 292 Self-Managing Teams in Small and Medium Enterprises (SME) ing certain flexible work arrangements (and are implicit in their self-management team) may ben- efit from substantial reductions in staff turnover (Baltes et al., 1999; Konrad, A.M & Mangel, R 2000; Perry-Smith, J.E & Blum, T.C 2000). Motivation can influence the willingness of an employee to follow in the SMEs, since there a positive association between motivation and self-managing. A Data: Estimates report turnover costs as high as $75,000 per employee (Abbott, De Cieri & Iver- son,1998). Stavrou (2005) cites that a departing employee is estimated to cost the equivalent of 150% of his/her annual salary, while work–family policies, such as flexible work arrangements, cost only 32% of one’s annual salary. In turn, flex- ible work are seen often as a method that might reduce turnover costs (Saltzstein, A.L. Ting, Y. & Saltzstein, H.2001). Therefore, cost reduction is an important reason for raising flexible work arrangements, still need self-managed teams. Simplification Organizational: Self-managing teams place the entire task under the control of the team members (Hackman, 1987). This reduces the need for managers, allows the organization to reduce the levels in its organizational hierarchy reducing the need for supervisor and middle level managers, and allows the remaining managers to focus on other tasks such as long range planning or external relations. CONCLUSION Although has been highlighted advantages of self- managing teams in SME, the implementation of these policies remains erratic across organizations (Glass & Estes, 1997; Golden, 2001; Hogarth et al., 2000). Besides, although the results confirm that self-managed teams can contribute to improving certain aspects of performance, the scale of im- pact seems much less than that suggested in many articles. Furthermore, in certain circumstances it appears that a move to self-managed teams in small service-sector firms may have a somewhat nega- tive impact on certain aspects of organizational capability. Probably, the only certain conclusion that can be drawn is that the effect of moving to- wards more autonomous work groups should not be expected to be the same for every organization. Hence perhaps the safest advice which should be offered to managers in SMEs is adopt a contin- gency approach of carefully examining the specific circumstances confronting the organization and to then determine whether the desired improvement goals can best be achieved through the creation of self-managed teams. (Chaston 1998) Studies supporting the importance of self- managing teams in SMEs, as a means to respond to the: complexity of modern work, Turbulent and dynamic environments, Increasing competition, market volatility, economic recession. We propose self-managing teams (such as high performance practices) in SMEs as the key to compete in the environment given the above premises. Self- managing team as a relatively autonomous work groups whose members share responsibility and leadership to accomplish their independent task. Are non-hierarchical groups of individuals with different and complementary experience and knowledge. Order for self-managing teams work properly in SMEs, need to have certain features: Size team, Teamwork quality, Communication, Coordina- tion and collaboration, Effort, Cohesion and proximity, Flexibility, Empowerment, Diversity Multidisciplinary However, there are also criticisms and nega- tive aspects of this type of work: Hard to create, Free-rider problem, difficulty of replace leadership functions, conflicts in self-managing teams and rewards for successful team participation. Besides, any type of team may be self-managed in SMEs, but this type of management is usually reserved for teams that carry out the same type of EBSCOhost - printed on 10/25/2020 2:29 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 293 Self-Managing Teams in Small and Medium Enterprises (SME) functional task on a regular basis, with members that remain constant over a long period. There is a benefit to the importance of the relationship between corporate culture and team work. Hence, the importance of corporate cul- ture as a primary support for team work is both a problem and a benefit. Corporate cultures are not easy to change. Self-managing teams have a close association with sustainable competitive advantage. Make the SMEs efficient because: Reduction in staff turnover and achieve simplification organizational Hence, in line with the overriding aim of the chapter “To analyze the importance self-managing teams in SME”, the contribution of the topic treated “self-managing teams in SME”, propose creates a new site of understanding. Finally, we recommendation: 1. To use the Self-managing teams to compete in the environment given the above premises: turbulent and dynamic, increasing competi- tion, market volatility, economic recession changing needs of the workforce. 2. To consider the characteristics of self- managing teams in SMEs, such as, size team, proximity, diversity and Empowerment an achieve a sustainable competitive advantage FUTURE RESEARCH DIRECTIONS • To find solves to avoid problems in per- formance of self-managing: free-rider problem and replace leadership function in SME. • Further research is needed to evaluate bet- ter the policy performance in self-man- aging teams and the rewards for success- ful team participation measuring too both team success and an individual´s contribu- tion to the team. • Also it´s important study the responsibility for team success to the team members. 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KEY TERMS AND DEFINITIONS
Cohesion (or Proximity): The close vicinity,
accessible for both task-related and also personal
interaction. Also “physical distance” and “psy-
chological distance”.
Diversity: Critical area of concern for teams.
Member´s team heterogeneity or diversity, cultural
differences in the work group.
High Performance Practices: Innovative
practices of human resource management which
improve the commitment and the performance
of the company.
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Self-Managing Teams in Small and Medium Enterprises (SME)
HRM: A way of implementing HRM strate-
gies, policies and practices in organizations, based
on external influences and internal dynamic. Is a
function within an organization. Provides direc-
tion for the people who work in the organization.
Interdisciplinary: combination of individu-
als with different and complementary skills and
perspectives, deriving from this cooperation the
achievement of these improvements and innova-
tions.
Self-Managing Team: They are non-hierar-
chical groups of individuals with different and
complementary experience and knowledge, to
develop a type of collective knowledge. They are a
semi-autonomus teamwork whose members share
responsibility and leadership to accomplish their
independent task, allows the integration of worker
needs, flexible adaptation to and coordination of
the respective work.
Work Teams: Some persons with comple-
mentary technical and personal skills, that interact
to achieve a common objective, the outcome of
which is a collective result that is greater than
the sum if the individual parts for which they are
all responsible.
ENDNOTES
1 Source: The authors based on Arthur and
Hendry´s (1992) model, supplemented with
adaptations from similar propositions from
McMahon (1996) and more recently Cassell
et al (2002) and Harney, B. and Dundon, T
(2006), pp. 54.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 15
DOI: 10.4018/978-1-4666-4731-2.ch015
Decision Making in SMEs:
Insights from Business Ethics
and Entrepreneurship
ABSTRACT
This chapter explores theories and concepts of ethical decision making in SMEs and how individuality
of entrepreneurs affects their organisations. In order to investigate the entrepreneurial ethical decision-
making process, the chapter crossbreeds the concepts of greed and power, cognitive moral development,
ethical ideologies, and individual psychological characteristics as determinant of ethical decision making.
Through discussion of relevant models, the chapter presents arguments on determinants of individual
ethical decision making as well as external factors that influence the decision-making process. In doing
so, it aims to provide a distinctive perspective on understanding decision making in SMEs through forming
a bridge between individual moral psychology and entrepreneurial decision making. This understanding
enables us to have an alternative reasoning when examining employment-related issues.
INTRODUCTION
Especially in micro and small sized enterprises,
the individuality of the entrepreneur is highly in-
fluential both for daily operations and for the long
term strategic decisions made for the company.
This also includes human resources practices
and related decisions; as in majority of micro or
small sized enterprises, it is the owner who is the
final decision maker in all relevant departments.
Employee related decisions may have ethical
implications within the areas of discrimination;
downsizing or termination; health and safety,
promotions and motivation.
This is because management and ownership
cannot be detached from each other and the en-
trepreneur’s preferences on self interest impacts
on the company for better or worse (Spence &
Rutherfoord, 2003; Smith & Oakley, 1994). When
at least 90% of all private enterprises in most of
the countries are SMEs and they are the primary
source of employment, it is crucial to understand
the decision mechanism of entrepreneurs who
run these companies (Tanova, 2003; Beardwell
et al., 2003). This chapter explores theories and
concepts of ethical decision making in SMEs and
how individuality of entrepreneurs affects their
organisations.
Gizem Öksüzoğlu-Güven
University of Mediterranean Karpasia, Northern Cyprus
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Decision Making in SMEs
It crossbreeds the concepts of greed and power
(Fassin, 2005; Gallo, 1998); cognitive moral
development (Kohlberg, 1968; Gilligan, 1982);
ethical ideologies (Forsyth, 1980; Rest, 1986)
and entrepreneurs’ psychological characteristics
(Shane, 2003; Trevino, 1986) in order to build a
bridge between individual moral psychology and
on entrepreneurial decision making. Nevertheless,
although individual ethical values correlate with
the decision-making processes; enough research
has been done to show that external factors play a
very crucial role in that process as well (Allmon
et al., 2000). Therefore, the chapter also critically
discusses organisational factors and entrepreneur-
ial environment (Hegarty & Sims, 1978; Wu, 2002;
Longenecker et al., 2006; Stead et al., 1990) and
how these can influence an individual decision
making process of an entrepreneur.
However, when examining external factors,
the claim is that the influence of the very same
external factors changes from one entrepreneur to
another since every individual’s social constructs,
experiences and expectations are different. This
is why, the main ideas that are put forward in this
chapter revolve around the moral individuality of
entrepreneurs and the discussions in this chapter
provide variety of perspectives on how moral
individuality impacts decision making in SMEs.
Furthermore, the chapter acknowledges that the
cognitive decision making process of entrepre-
neurs are limited due to human nature; therefore
expecting fully informed decisions on every
occasion is unrealistic (Bommer et al., 1987).
The chapter finalises the discussion of decision
making in SMEs by concluding with a theoreti-
cal framework that is useful for case analysis and
future research.
The objective of this chapter is to provide an
alternative approach to our understanding of how
to make employee-employer relationships more
effective in SMEs through critically exploring
factors influencing individual entrepreneur’s ethi-
cal decision making process and characteristics.
This chapter is informed both from individual
psychology and moral philosophy; thus, due to its
interdisciplinary nature, it is aimed to provide an
alternative perspective on employment relations
in enterprises through exploring the individual
entrepreneur.
BACKGROUND
Rooting from ‘ēthos’; original meaning of ethics
is character traits (Blackburn, 2005). Today, ethics
has a deeper meaning; it evaluates human conduct
and how human beings essentially supposed to
behave, particularly to each other (Honderich,
2005). We can say that business ethics deals with
the moral issues that emerge when we apply the
concept of ethics to the business environment
and practices.
According to Jones (1991) ethical decision is
the one which is both legal and morally acceptable
to the larger community (Jones, 1991, p.367). Con-
versely, unethical decision is defined as a decision
that is either illegal or morally unacceptable to the
larger community (Jones, 1991, p.367). However,
here, ‘unethical decision’ refers to a decision that
is morally unacceptable and ‘ethical decision’
refers to a decision that is morally acceptable.
These two particular definitions provided in this
paper exclude those decisions which are legal but
are morally unacceptable based on the notion of
‘ethical’.
Bommer et al., (1987) states that what is legal
is not necessarily ethical; ethical and legal are not
synonymous. However, legal dimension of ethics is
an important element in ethical decision-making.
Entrepreneurs do not act lawfully just because
of the legal consequences an unlawful behaviour
may lead to, but also because of society’s percep-
tion of ‘illegal’ and obedience to what is morally
required by the society. Business related crimes,
frequently cannot be prosecuted because it is dif-
ficult to understand the intricacies of the offence.
Moreover, usually since the harm is not physical
but rather economic, the case may be given low
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Decision Making in SMEs
priority in prosecution. This results in the evalu-
ation of the relatively light prosecution against
the relatively large personal or corporate financial
rewards. Thus, an entrepreneur who does not
perform a business-related crime restrained from
acting corruptly not because of the law’s existence
but because of the moral forces. (Bommer et al.,
1987). Nevertheless, albeit the difference between
the interpretations of moral and legal in defining
‘ethical decision’, they both play a crucial part
in the entrepreneurial decision-making process.
HR is an important aspect of businesses and
deals with number of crucial decisions daily and
strategically including training, development,
promotion, retirement, discipline and contem-
porary issues such as job security, discrimina-
tion and mobbing. (Romme et al., 2012) argues
that a firm’s organizational practices and future
paths are affected by the founder’s blueprints
of the employment model. Therefore, when we
are examining employment relations and human
resources at small businesses, it is crucial to
understand entrepreneurs as individuals; so that
their mark and influence on the organization can
be fully uncovered.
CONCEPT OF ETHICAL
ENTREPRENERUSHIP
SMEs are very crucial to the economy and employ-
ment of a country. For instance, we see a significant
increase from estimated 4.3 million in 2005 to
20.7 million in 2011 in number of SMEs despite
challenging economic conditions in 2011/12; serv-
ing as the backbone of EU economy by providing
employment for more than 87 million people (EU
Commission, 2005; EU Commission, 2012). Thus,
exploring entrepreneurs and their decision making
is crucial as they shape our societies.
In order to understand a company’s ethical
behaviour, many ethical decision making research-
ers examine individual attitudes of the decision
maker and their individual values (Wu, 2002).
Since in small businesses firms are more likely
to be managed by the owners, ownership and
management are not separated as in the case of
larger, multinational firms. As management and
ownership cannot be detached from each other
in SMEs, individual entrepreneur’s preferences
between individual interests and ethics impacts
on corporate business ethics both positively and
negatively (Smith & Oakley, 1994; Spence &
Rutherfoord, 2003; Wu, 2002, p.163). It is also true
that many SME owners are also human resources
manager of their companies and make decisions
in regards to their employees.
Karen Legge (1995) questioned ethicality of
human resources in 1995. Since then, although
significant research was done on this topic, this
fundamental question is still valid. Due to its
nature, human resource management has human
beings in the core of practice. Within the process
of interactions, number of ethical tensions arises
(Jack et al., 2012). One of the main arguments
emerges as a result of liberties of individuals.
Aristotelian ethics suggests that a leader needs
to provide a working environment for employees
so that they can realise and find opportunities to
fulfil their potentials rather than being told what
to do and do that unwillingly (Aristotle, 2000).
However, strength of individual entrepreneur’s
desires, self-expectations and pressures is a
crucial obstacle in providing what Aristotelian
ethics suggests.
Empirical studies suggest that SMEs lack the
motives to practice social responsibility (Thomp-
son & Hood, 1993; Wu, 2002). It should not be
ignored that there are factors exist that influence
ethical behavior of businesspeople; business is
about money, power and working with people and
people are not perfect (Fassin, 2005).
Greed and pursuit of profit; the nature of com-
petition and the desire to beat the other party in a
competitive environment; and the need to insure
or restore some standard of justice that may have
been violated have been identified as three major
dimensions that may drive individuals to unethical
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Decision Making in SMEs
practice (Fassin, 2005). Fassin (2005) argues that
one of the elements that business is associated with
is power, and it is the ultimate requirement for a
manager to run a business (Fassin, 2005). When
objectively examined power is neither something
bad or nor good but rather is about the way it is
possessed and it is utilised. If a company acts
responsively towards its society, this is a positive
utilisation of power (Gallo, 1998).
In both non-family owned SMEs and family-
owned businesses the power might be misused as
the owner runs the business. Since the owner has
the power in the sense as it is discussed above,
it gives him/her the control of company (Gallo,
1998). Any misuse of power, may result in the
form of lack of social awareness. Then the ques-
tion of why people misuse their power emerges.
Some people do always behave ethically in
their private and social lives; whereas others do
not. Therefore, it is questionable to what extent
it is sensible to expect same people that are not
behaving ethically in their private and social lives
to act ethically in their professional lives (Fassin,
2005). It is important at this point to mention that
as the individuals’ ethical attitudes are different
from each other as these depend on many vari-
ables and individual attitudes of entrepreneurs
largely affect the company’s ethical attitude.
There is a significant literature suggesting that
the size of a business influences business ethics.
This argument can also be supported through the
discussions presented up to this point, because an
entrepreneur’s influence is more significant when
the organization is shaped dominantly based on an
individual’s decisions (Fassin, 2005; Wu, 2002).
Forsyth’s (1980, 1981, 1992) studies which are
also discussed in this chapter, provide useful tools
to analyse ethical decision-making processes of
entrepreneurs.
There are people who cheat in sports and in
games. According to Lombardian doping game,
for players ‘winning is not everything, it is the
only thing`; therefore some competitors cheat
by using doping (Bird & Wagner, 1997, p.751).
Berentsen & Lengwiler (2003) suggested that the
doping problem in sport events is very similar and
can be applicable to business to promote further
understanding of competition in the business
environment (Berentsen & Lengwiler, 2003).
As in sports participants, managers strive for
success and the last thing they want to do is fail.
Failure in business, especially for new businesses
is a very likely incident and it can create a lot of
pressure on entrepreneurs, as having the second
chance is a very rare thing in the current market
system. Therefore, in order to succeed, all means
are ‘acceptable’ for them. Especially when psy-
chological sides of this issue are considered the
pressure that entrepreneurs experience can be
understand. (Fassin, 2005).
For example, acceptance of the failure and
admitting this to family, friends and community
is the main fear of business owners-managers
since the case of overnight transformation form
success to failure is very hard to cope with. It is
understandable considering this pressure, how;
even an ethical, honest businessperson can be
tempted to behave in an ethically questionable
way as an option. ‘Numerous rationalisations
lead to unethical behaviour from usually intel-
ligent, honest people who transgress the border
between right and wrong’ (Gellerman, 1986 cited
in Fassin, 2005). It is the belief of the most social
observers that in most of the societies, there is a
major negative moral change and businesspeople,
public figures and politicians engaged in ethical
violations and this is a commonality in world of
sports, religion, business, politics and academia
(Fassin, 2005). This can be related to the com-
petitive market forces of the current economic
systems. In many of the transition economies such
as Eastern-European countries, China and Russia
as a result of the absence of regulations, entrepre-
neurs built fortunes in considerably short times
without ethical considerations. Therefore, it can
be concluded that not only individual factors but
also economic and legal environments play a part
in the entrepreneurial decision-making process.
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Decision Making in SMEs
Following sections discusses all these various
forces impacting decision-making processes of
individual entrepreneurs.
Theoretical Understanding of an
Entrepreneur’s Moral Psyche
In order to understand entrepreneur’s decision-
making process, first the theoretical grounds of
ethical decision-making need be understood as
they provide a psychological angle to human
behavior.
Cognitive Moral Development (CMD) pro-
posed by Kohlberg (1968) and Expectancy Theory
of Porter and Lawler (1968) which is an extension
of Expectancy Model of Vroom (1964) constitute
the theoretical bases of ethical decision-making.
Expectancy Theory suggests that motivation is a
function of the subjective probability that effort
will lead to successful behaviour (expectancy); that
such success will lead to a number of positive and
negative outcomes (instrumentality) and finally
the combined value of those outcomes (valence)
(Knouse & Giacalone, 1992, p.370). Expectancy
theory is similar to utilitarianism in the sense that
in both concepts individual’s decisions are based
on rational choices. Their reasoning are based on
possible consequences and both have the drawback
of the identification and evaluation of all possible
consequences by an individual before a decision
is made which is a requirement for both systems
to work correctly (Knouse & Giacalone, 1992,
p,370). Rationality here refers to the best selection
of means to achieve an objective consistent with
the value system of the decision-maker (Bom-
mer et al, 1987, p.274). However the ability of
a human-being to identify and evaluate all the
consequences is limited.
Although Expectancy Theory is a widely used
framework for contemporary behavioural science,
Kohlberg’s CMD is still among the most cited
work in this area and as mentioned before it is one
of the key literatures in ethical decision-making
(Longenecker et al., 2006; McDonald & Pak, 1996;
Trevino, 1992). In his theory, Kohlberg defines six
stages of moral development, which are grouped
into three general categories.
1. Pre-Conventional (Pre-Moral): In this
category, individuals base their judgment of
right and wrong base on their own physical
needs, instead of societal standards. At this
category, individuals follow the rules mainly
as a result of fear of punishment.
2. Conventional Level: In this category main
determinant of an individual’s perception
of right or wrong is based on norms and
regulations of society.
3. Post-Conventional: An individual at this
category has the capacity of reflection,
responsibility, inner source of morality and
justice, and logical reasoning. Even though
(s)he accepts the legitimacy of the societal
rules, at times s/he questions the demands
of the society. (Bommer et al., 1987, p.273;
Knouse and Giacalone, 1992; Kohlberg,
1968; McDonald and Pak, 1996).
There were many studies in business ethics
regarding the consistency of the CMD, providing
evidence that age and education are positively
related with the increase of CMD (McDonald &
Pak, 1996; Robertson & Fadil, 1999). However,
Kohlberg is criticized with the claim that hierarchy
of moral stages is not universal and it can change
from one culture to another as opposed to his
proposition that moral development is universal
(McDonald and Pak, 1996; Robertson and Fadil,
1999). Also, Gilligan (1982) criticized Kohlberg’s
Theory because of his assumption that his theory is
applicable to both genders when he only conducted
his study on an all male longitudinal sample. In
her study on abortion decisions of women, Gil-
lian suggested that Kohlberg’s justice dimension
and moral reasoning is gender biased. (Gilligan,
1982). However, for instance, Derry (1989) found
no significant differences in the moral reasoning of
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men and women in a study of business managers
(Derry 1989 cited in McDonald and Pak, 1996).
Once an individual completed cognitive moral
development process, past experiences have a
significant influence on our decisions and the way
we shape our future. In employment relations past
experiences also are important informative source
points for individual entrepreneurs. Fern et al.
(2012) argues this on a macro scale and suggests
that over relying historical industry experiences
may also lead to replicating similar approaches
on the legacy firm (Fern et al., 2012).
‘When a person is behaving morally, what
must we suppose has happened psychologically
to produce that behaviour?’, Rest (1986) posed
this question and provided the Four-Component
Model to guide the analysis of an individual’s
moral decision-making process:
1. Recognition of the moral issue.
2. Making a moral judgment.
3. Resolving to place moral concerns ahead of
other concerns (establish moral intent).
4. Acting on the moral concerns. (Jones, 1991,
p.368).
During 1980s, with the work of Forsyth (1980,
1981, 1992) and Forsyth et al., (1982) cognitive
processes and their impact on ethical reasoning
and decision-making started to be the focus of
attention. From these studies a conclusion was
drawn stating that individuals’ moral judgments
are significantly different from each other. (Mc-
Donald and Pak, 1996, p.976).
Similar to Rest (1986), Forsyth (1980) devel-
oped taxonomy of ethical ideologies to provide a
framework to study individuals’ moral judgments
on the assumption that decisions in certain busi-
ness practices are influenced by individual moral
philosophies (Forsyth, 1980). Forsyth (1980)
model assumes that “individuals’ moral beliefs,
attitudes and values comprise an integrated con-
ceptual system or personal moral philosophy”
and they differ from person to person (Forsyth,
1980, p.461). According to Forsyth’s typology,
four ethical dispositions exists; subjectivism,
situationism, exceptionism and absolutism. Whilst
making ethical decisions, subjectivists decide ac-
cording to the circumstances, and therefore they
are considered as pure relativists. Situationists
are considered as ethical individualists and they
decide their act by using a combination of both
situations and personal principles. Exceptionists
are considered as pragmatists and they act accord-
ing to the moral rules but in special circumstances
they may change the application. Lastly, absolutists
believe that best possible outcome can be achieved
if universal rules of behavior are followed (Forsyth,
1980; Allmon et al., 2000).
Forsyth and Berger (1982) studied college
students’ ethical ideologies’ impact on their moral
behaviors; specifically in this test they looked at
the cheating tendencies (Forsyth & Berger, 1982).
The findings supported that even though there was
no difference in cheating behaviors in relation to
ethical ideologies; there were differences in moral
reasoning and the way students felt about their
moral misbehavior in relation to ethical ideologies
(Allmon et al., 2000; Forsyth & Berger, 1982).
Also, Forsyth’s (1981) research findings about
moral judgment and ethical ideologies suggested
that consequences of the situation and the respon-
sibility change the way people judge moral events
if they have different ethical ideologies. Forsyth’s
studies are considered as a good tool to analyze
an individual’s ethical ideology and it has been
applied by many scholars; for instance Allmon
et al., 2000 used Forsyth taxonomy in a study
where they examined determinant of perceptions
of cheating. Individual ethical values correlate
with the decision-making processes to an extent;
however enough research has been done to show
that external factors also play a very crucial role
in that process (Allmon et al., 2000).
As ethical ideologies have a significant in-
fluence on decision-making of individuals, it is
crucial to look at the individual ethical ideologies
and their differences in interpreting these social
factors into their business lives. Forsyth gave the
parallel philosophical standings of each ideology
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Decision Making in SMEs
as such; situationism is parallel with ‘utilitarian-
ism’ and ‘value pluralism’; subjectivism is parallel
with ‘egoism’; absolutism is parallel with deonto-
logical ethical system; and lastly exceptionism is
parallel with ‘rule-utilitarianism’ (Forsyth, 1992).
Utilitarianism is used to define the philosophical
ideology where an action is considered right only
if it conforms to the principle of utility meaning
performance of the act should be ‘more produc-
tive of pleasure or happiness, or more preventive
of pain or unhappiness’ (Mautner, 2005, p.636).
Value Pluralism is interchangeably used with
political pluralism and moral pluralism. It refers
to the view that there are many of the things in
question; as there are many different moral val-
ues and the value might be perceived in different
ways. Egoism considers individuals as ‘always
motivated by self-interest’ and rule-Utilitarianism
refers to the distillations of past experience about
the tendencies of actions that eliminate the need to
calculate consequences in every case (Blackburn,
2005, p.110; Boatright, 2000, p.37).
Historically, it is assumed that most of the
managers employ a utilitarian framework in their
analysis of ethical problems. The limitation of
‘comprehension of all’ by the decision-maker is
actually a counter-argument to utilitarian perspec-
tive. Utilitarianism advocates ‘generation of the
maximum good for the greatest number’ and being
a consequential theory, utilitarianism proposes that
a decision is made based on the evaluation of the
end-results and promoted by a concerted effort to
maximize outcomes. (McDonald & Pak, 1996).
As mentioned earlier limited capacity of human-
beings to interpret and evaluate all possible con-
sequences is discussed in section 4.4. Besides the
limitation of evaluation of all possible outcomes,
there is a question of whether managers solely rely
on a utilitarian framework to make decisions that
require ethical thinking or not. There are other
alternative paradigms in normative philosophy
where those can be employed during an ethical
decision-making process. These are:
• Hedonism: Extreme selfishness.
• Pragmatism: Whatever minimises
conflict.
• Salvation (a): Good works to earn
redemption.
• Salvation (b): Isolation, mediation and
devotion.
• Golden Rule: Based on faith, charity and
reciprocity.
• Divine Right: Maintenance of the
“pecking-order.”
• Egalitarianism: Push down the rich, push
up the poor.
• Paternalism: Protection and security.
• Physiocrats: Nature is sacred (McDonald
& Pak, 1996, p.974-977).
When we look at more recent work of schol-
ars, such as Shane (2003) it can be observed that
Shane’s (2003) work is parallel with Forsyth’s
(1980) and similarly, Shane states the connec-
tion between psychological characteristics and
decision-making. By organizing personal factors,
under the name of psychological factors provides
an explanation of the possible reasons of why
entrepreneurs decide to exploit opportunities
(Shane, 2003). As entrepreneurs go through the
decision-making of whether or not to exploit an
opportunity, they may at the same time, be faced
with a dilemma of whether to seek the opportunity
for their company’s and/or their own personal gain
or to behave ethically.
When entrepreneurs pursue certain opportuni-
ties for increase productivity, or profits employees
become consumed by the organizational goals
and results in ethical implications (Dale, 2008).
Shane (2003) grouped certain characteristics
under three main themes which influence individu-
als to make different decisions even though they
have same information and skills. These are core
self-evaluation, aspects of personality and motives,
and cognitive properties (Shane, 2003, p.96). Un-
der core self-evaluation, Shane (2003) listed locus
of control and self efficacy; these characteristics
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Decision Making in SMEs
especially locus of control is mentioned frequently
by other scholars as well such as; Longenecker et
al., (2006), Trevino (1986) and Stead et al., (1990).
Aspects of personality and motives expanded as
extraversion, agreeableness, need for achievement,
risk taking, and desire for independence. For the
third theme, overconfidence, representativeness
and intuition are mentioned as cognitive charac-
teristics. (Shane, 2003).
From the existing literature on individual
ethical decision making, when an entrepreneur’s
behavior and the process of making that decision
is investigated, we see that the person’s ethical
judgment is shaped by the way they were raised,
the way they rationalize contexts, motives they
have to behave in certain way. These also shape
their ethical ideology.
Therefore, when we examine an entrepreneur’s
ethical decision making process, we know that
their cognitive moral development has a signifi-
cant impact on how and why decide one way or
another. This is also true for their motives for that
particular behavior.
Employees have higher tendencies to behave
unethically when there is cultural erosion within
organization (Danley et al., 1996). Similarly,
Weaver & Trevino (2001) suggests that if em-
ployees believe they are treated justly, they have
lower tendency to behave unethically. Therefore,
we can conclude that an entrepreneur’s influence
on organisational culture which Romme et al.
(2012) refers to as founder’s blueprints and their
perception of justice have a significant influence
on employees perception and practice of ethics.
However an entrepreneur’s decision is not only
influenced by individual circumstances and but
also a decision or a behavior is as a result of an
interaction with external environment. The fol-
lowing section looks into external environment
originated factors that influence an entrepreneur’s
decision making.
Entrepreneur, Organisation and
the External Environment
In the preceding section we explored the moral
psychology of entrepreneurs as individuals. This
provided us an understanding of how their ethi-
cal rationality is shaped and factors that effects
their individuality when ethical decision making
is required. The following section helps us to
understand individual entrepreneurs within the
context of organisations and in interaction with the
external environment. We investigate how these
contexts when combined with their individual
ethical position, leads to an individual decision.
A competing model to the previously discussed
Rest’s (1986) model is offered by Trevino (1986).
Her model is based on person-situation interaction
and it begins with an ethical dilemma proceeding
to a cognitions stage. Moral judgments made in the
cognitions stage which is proposed by Kohlberg’s
CMD theory are moderated by individual factors
including ego strength, field dependence and locus
of control; and situational factors which include
elements of immediate job context, organizational
culture and characteristics of the work (Jones,
1991, p.368). Besides individual factors, Trevino
(1986) also considered organizational factors as
important influence on decision-making process
of an entrepreneur.
Another important series of studies that were
conducted to understand the way individual entre-
preneurs perceive and deal with ethical problems
is by Longenecker et al., (1989) who suggested
that entrepreneurial behavior may have association
with individualism and this is linked with entre-
preneurial behavior (Longenecker, et al., 1989).
According to their study, entrepreneurs show
their strong need of control, they are autonomous
thinkers who take independent actions in carrying
out directions given by others and they often do
not trust others (Hannafey, 2003). Longenecker
et al, (1989) observed what was stated previously
by Spence and Rutherfoord (2003), in smaller
firms, entrepreneur’s personality and attitudes are
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extensively reflected on the management practices
(Hannafey, 2003).
Ford & Richardson (1994) reviewed the empiri-
cal literature on ethical decision-making covering
the studies that have been done until 1992, and
O’Fallon and Butterfield (2005) covered the period
of 1996-2003. From these studies a list of factors
that influence the ethical decision-making process
are gathered (Ford and Richardson, 1994; O’Fallon
and Butterfield, 2005). They divided these factors
into two; individual and situational factors similar
to Longenecker et al. (2006). They have deter-
mined individual factors as; personal attributes;
religion, nationality, gender, age, education and
employment background, personality, beliefs and
values. Under situational factors, there are three
sub-categories; Referent groups, organizational
factors and industrial factors. Referent groups
are peer group influence, top management influ-
ence, codes of conduct, type of ethical conduct.
Organizational factors are organization effects,
organization size and organizational level. Lastly,
industry factors that are mentioned in these studies
are industry type and business competitiveness.
In their longitudinal study findings, which
examined ethical attitudes of small businesses and
large corporations for three decades, Longenecker
et al,(2006) stated the main influences on ethical
perceptions and behaviors are multidimensional,
made up of differences based on individuals,
organizational settings and the interplay of these
two (Longenecker et al., 2006). They stated that
this claim is supported by previous research such
as; Trevino’s (1986) ‘Person-Situation Interac-
tionist Model’ which was mentioned previously.
In their model, Longenecker et al., (2006) used
Rest’s ‘Four Component Model’ (1986) and
Kohlberg’s (1968) CMD to consider personal
variables as Kohlberg’s (1968) CMD is one of
the most important theories in the discussion of
ethical decision-making (Longenecker et al., 2006;
Loviscky et al., 2007).
Ford and Richardson (1994) and O’Fallon and
Butterfield (2005) studies provide most of the fac-
tors covered by the existing literature which show
the impact of individual factors, organizational
factors or both. However, besides individual and
organizational factors, as it was discussed through
Lombardian doping game example, external
factors such as competition and similar external
environmental factors are also as important as
much as individual and organizational ones when
an individual decides how to behave.
In terms of external environment, it was found
that besides personality, values and cultural
orientation, environmental rewards and punish-
ments, all contribute to ethical decision-making
(Hegarty & Sims, 1978). In 1990, Stead et al.,
(1990) developed a model of ethical behavior to
demonstrate the relationship between the factors
that influence a decision-making process. In the
initial stage, the relationship between individual
factors and its influence in the development of
an individual’s ethical philosophy and decision
ideology is presented. This relationship reflects
the influence of personality and background on a
person’s ethical beliefs and how and when those
beliefs are applied (Stead et al., 1990). It is very
likely that the interaction of ethical philosophy
and ethical decision ideology of an individual
influences his/her decision-making. Many stud-
ies including Frosyth’s (1980) Stead et al., (1990)
and Allmon et al., (2000) confirmed ethical
ideologies’ significant influence on individual
decision-making.
Another factor in Stead et al., (1990)’s Model
is ethical decision theory. When a person makes
certain decisions, these are usually reinforced,
mainly through rewards and punishments. Ethi-
cal decision theory is a result of this cause and
effect relationship of the ethical choices and the
reinforcement. Also, when an individual enters
into an organization, his/her ethical behavior is
influenced by certain factors such as; the manage-
rial philosophy and behavior within the organiza-
tion; the reinforcement system adopted; and the
job’s characteristics. As the experience at work
with reinforcements and management’s influence
combines, individual’s ethical decision-making
is influenced by all these factors.
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According to Wu (2002) literature of decision-
making models indicates how significantly the
ethical decision-making process can be influenced
by number of factors at one time (Wu, 2002).
Table 1 is a collective presentation of individual,
organizational and environmental factors that have
discussed in the literature. In number of circum-
stances, an entrepreneur’s individual factors may
lead to ethical HR issues such as; discrimination,
wrong employment policies and promotional
practices.
Limitations of Ethical Decision
Making
During the decision-making process, an entre-
preneur acquires and processes information. This
can be in the form of hard data (i.e. laws, stated
corporate policies) or in the form of soft data (i.e.
an individual’s self concept and peer group with
a range of information in between these states).
After acquiring and processing the information,
in order to make a rational decision the manager
synthesizes and analyses the information. During
the selective perception process, the manager
filters environmental factors that influence him/
her and the parameters of the situation which are
the two information inputs in the process. Then a
conceptual model is built which is repeated being
affected by the individual attributes and mediated
by the manager’s individual cognitive process.
(Bommer et al., 1987).
Human-beings can process only a limited
amount of information and as a result of this,
perception of information; style of information
processing and memory is affected.
Individual memory is affected in three ways:
1. Perception of information is selective;
therefore the decision-maker may or may not
choose the information that is most relevant
to the situation.
2. Information processing is mainly done
sequentially. Therefore, sequence in which
information is processed may bias a person’s
judgment and limit the evaluation of inter-
related elements.
3. The access to information which might
be relevant to the problem is limited, as a
result of limited memory capacity of human-
beings. (Bommer et al., 1987,p275-276).
Table 1. Individual and situational factors influ-
encing ethical decision-making process
Individual Factors Situational Factors
Age Environmental Factors
Aspect of Personality & Motives Cultural Environment
Attitudes Social
Beliefs Political Social Institu-
tions
CMD /Ethical Judgment Government and Legal
Core Self Evaluation Organizational Factors
Education Background Opportunity
Ego Strength Multiple Stakeholders
Employment Background Organization Effects
Entrepreneurial Act Organization Size
Ethical Decision History Organizational Level
Ethical Decision Ideology Codes of Ethics
Ethical Philosophy Reinforcement Systems
Field Dependence Peer-Group Reference
Gender Top Management Influ-
ence
Intentions Codes of Conduct
Job Satisfaction Type of Ethical Conduct
Knowledge Managerial Philosophy
Locus of Control Characteristics of the Job
Machiavellianism Industry Factors
Nationality Economic Conditions
Need For Achievement Business Competitive-
ness
Past Reinforcement of Ethical
Decisions
Industry Type
Personal Attributes Scarce Resources
Religion
Sex Roles
Social/Reputational Costs
Value Orientation
Work Experience
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Decision Making in SMEs
Therefore, the decision-making process models
discussed have the following serious limitation;
decision-makers cannot construct an internal
representation or model of the situation since they
cannot comprehend all the probabilities, alterna-
tives, consequences, values and the evaluation of
these (Bommer et al., 1987).
These limitations may show themselves as
negative human resource practices such as; mis-
determined training programmes, or downsizing
decisions which raises questions on ethicality of
the decisions made.
Solutions and Recommendations
Existing literature suggests that when we attempt
to understand an entrepreneur’s decisions, we
cannot focus only on one of the influencers and
ignore the complexity of the decision making pro-
cess. That would merely provide us a one faceted
understanding which would not be an accurate
depiction of how the process takes place in practice.
Due to nature, humans are complex beings and
complexity and multi-faceted structures are com-
mon when we examine interpersonal relationships
at work, competition in the market and the like.
This is also true for decision making processes.
Therefore, when entrepreneurs are examined, it is
crucial that all the factors presented in this chapter
and possibly others that emerge depending on the
context are all taken into consideration.
FUTURE RESEARCH DIRECTIONS
Especially in small businesses, the influence of
the entrepreneur is highly and in most of the cases,
explicitly dominant. Thus, when we examine hu-
man resources within SMEs context, it is always
promising to include an understanding of an
entrepreneurial perspective. Due to their scale, in
SMEs employees’ cognitive and decision making
processes are also promising to investigate the
extent of each factor’s as well as entrepreneur’s
influence on traditional human resources prac-
tices. This will contribute to gradual emergence
of new research fields as conducted research will
uncover new factors influencing decision making
processes, thus practices.
A phenomenon can only be understood fully,
if it is examined in its original context with as-
sociated agents. Previously suggested complexity
in humanity makes it a requirement that we use
variety of tools, multi-level analysis and acknowl-
edge the multi-dimensional structures. Therefore,
while conducting future research an interdisciplin-
ary lens is highly promising in providing new
momenta to our existing knowledge.
CONCLUSION
Rather than exploring entrepreneurial ethics in
the field of human resources by examining rel-
evant issues, this chapter provides an alternative
viewpoint focusing on entrepreneurial decision
making process which assists us to interpret the
reasoning behind issues that may emerge within
the field of HR. This chapter acknowledges that
every decision that is made in practice has a
process to complete before it exhibits itself in
action or behavior. Furthermore, regardless of
the field or issues examined, when a decision has
to be made, a moral judgement is existent in the
decision maker’s mind, either overt or covert. The
chapter also acknowledges that human resources
related problems may emerge when the long
term and short term strategies of an organisation
are dependent on an individual entrepreneur.
Therefore, entrepreneurial ethical decision mak-
ing process discussed in this chapter provides a
different angle to academics in the particular field
and a theoretical understanding to practitioners to
evaluate their decision making process with an
awareness of factors influence their moral judg-
ments. In the long run this awareness, if leads to
positive development can result in more effective
employee/employer relationships in SMEs.
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KEY TERMS AND DEFINITIONS
Business Ethics: Deals with the moral issues
that emerge when we apply the concept of ethics
to the business environment and practices.
Entrepreneur: Risk taking individual; that
forms, organizes and operates a business.
Ethical Decision: Is the one which is both legal
and morally acceptable to the larger community.
Ethics: Character traits; human conduct of
how human beings essentially supposed to behave.
Morality: It deals both with welfare of self
and others.
Power: It is the ultimate requirement for a
manager to run a business. It can be in monetary,
psychological, sociological or knowhow forms.
SMEs: Small and medium sized enterprises.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 16
DOI: 10.4018/978-1-4666-4731-2.ch016
Innovation Strategies in SME:
Global Perspective
ABSTRACT
Small and Medium Enterprises (SMEs) play a vital role in a country’s economic development. The
current trend of economic growth and rapid industrial development has made many countries open up
their economies to the world. In conjunction, governments the world over are devoting and designing
SME development plans to assist the SMEs in meeting new business challenges in the competitive global
business environment. The focus of this chapter is identifying and analyzing innovation strategies in
SMEs, drivers of innovation in SMEs from global perspective, and understanding the need of effective
HRM to drive innovation. This will help in getting an idea about the competitiveness facing SMEs in the
global business environment since challenges of SMEs in a globalized market together with economic
turmoil is the reality. Further, two mini-cases reflecting SME innovation strategies are provided for
better understanding.
INTRODUCTION
It is apparent that small and medium enterprises
(SMEs) play a vital role in the economic devel-
opment of a country. The governments all over
the world are devoting and designing the SME
development plans to assist the SMEs to meet
the new business challenges in the competitive
global business environment. There is no doubt
that economic activities are moving in the direction
of globalization. The system of production and
distribution is evolving worldwide. The important
role that international trade plays in connecting
countries around the world is clear. Globalization
creates new structures and new relationships, with
the result that business decisions and actions in one
part of the world have significant consequences
in other places. Underlying and reinforcing these
globalization trends is the rapidly changing tech-
nological environment, particularly in information
processing, and telecommunications. Changes in
telecommunications and data processing capa-
bilities make it possible to coordinate research,
marketing and production operation around the
world. Almost instantaneous communications
make it possible to trade financial instruments
twenty-four hours a day, and thus more return-
sensitive are location of resources within firms,
industries and countries.
Neeta Baporikar
Ministry of Higher Education, CAS – Salalah, Oman
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316
Innovation Strategies in SME
The growth of global markets stimulates
competition and forces governments to adopt
market-oriented policies, both domestically and
internationally. Modern technologies have greatly
reduced the cost of information and the capabilities
to participate in the global economy. In fact, there is
ample evidence that SMEs has not only flourished
in domestic economies, but that their international
presence has grown as well. An overview of SME
participation in the global economy reveals at
least three lines of activity: trade, technology,
and investment. The most commonly discussed
topic in SMEs international literature is their role
as exporters from their domestic jurisdictions to
foreign customers. The opportunities and chal-
lenges facing SMEs in this role are well known.
The second most prominent issue in the literature
is SMEs and technology, and particularly SME
supplier connections with larger Multi National
Enterprise (MNEs) in local markets. If small
firms face higher barriers to entry in international
operations than large firms, and have a more dif-
ficult time protecting their property rights, how
can small firms become international players?
When SMEs invest abroad, they generally seek
help from larger corporations. Gomes-Casseres
(1997) examines the use of strategic alliances by
SMEs. He asks three questions:
1. When do small firms use alliances to do
business abroad?
2. How do small businesses use alliances?
3. What effect do alliances have on firm’s
competitive performance?
Internationalization of the production and
distribution of goods and services, and the asso-
ciated trade and capital flows, has accelerated in
most countries during the past 15 to 20 years. This
process has been loosely described as “globaliza-
tion”. However, it has been broadly accepted as a
set of activities associated with the multinational
or direct foreign investing firm which integrates its
activities across national borders to maximize the
profits or interests of the group. More simply, it can
be the broader opening up of national economies
to the international marketplace (EPAC, 1995a;
1995b). It is believed that globalization is actually
not a new phenomenon since international trade,
foreign direct investment and associated movement
of capital, management and labor has been going
on for centuries. If globalization is defined as being
the broader opening up of national economies to
the international marketplace, then it has implica-
tions for small firms as well as large. Increased
participation of small firms in the international
marketplace can be seen as an important part of
globalization.
Central Bank of Malaysia (2003) findings
based on case studies done on 10 year or more
SMEs shows that the key success factors in the
globalize space environment are:
• Sound management capability and
integrity.
• Sound business cultures and entrepreneur-
ial spirit.
• Prudent financial management.
• High quality products and services.
• Effective program for human resource
development.
• Strong support from financial institutions
(in terms of lending and advisory services).
• Strong marketing strategies (including
good network with suppliers).
• Continuously looking for opportunities to
expand.
Similar findings are there in SMEs related
studies and research undertaken in India.
OVERVIEW OF SMALL AND
MEDIUM ENTERPRISES (SMES)
According to Small and Medium Industries De-
velopment Corporation (SMIDEC), an enterprise
is considered as an SME in each of the representa-
tive sectors based on the annual sales turnover or
number of full time employees. SMEs are divided
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Innovation Strategies in SME
into two sectors; manufacturing, manufacturing
related services and agriculture industries; and
services (Including ICT) and primary agriculture.
Specific criteria to a particular industry may be
laid down which is then adopted by all commer-
cial banks, ministries and government agencies at
federal and state levels. However, it is noted that
during the past 7 years, the definitions of SMEs
have changed frequently world over. The frequent
changes in the definition of SMEs have also af-
fected the formulation of long-term strategy for
SMEs development.
Definition of SMEs
Schools are divided when it comes to defining
SME. Each school has their own way of defining
SME and even country to country this definition
varies. A brief review of country wise definition
is done to get an understanding. Small and me-
dium enterprises (also SMEs, small and medium
businesses, SMBs, and variations thereof) are
companies whose headcount or turnover falls
below certain limits. The abbreviation SME oc-
curs commonly in the European Union and in
international organizations, such as the World
Bank, the United Nations and the WTO. The
term small and medium businesses or SMBs is
predominantly used in the USA.
EU Member States traditionally have their
own definition of what constitutes an SME, for
example the traditional definition in Germany had
a limit of 250 employees, while, for example, in
Belgium it could have been 100. But now the EU
has started to standardize the concept. Its current
definition categorizes companies with fewer than
10 employees as “micro”, those with fewer than
50 employees as “small”, and those with fewer
than 250 as “medium”. By contrast, in the United
States, when small business is defined by the
number of employees, it often refers to those with
fewer than 100 employees, while medium-sized
business often refers to those with fewer than 500
employees.
Both the US and the EU generally use the
same threshold of fewer than 10 employees for
small offices (SOHO).In most economies, smaller
enterprises are much greater in number. In the
EU, SMEs comprise approximately 99% of all
firms and employ between them about 65 million
people. In many sectors, SMEs are also responsible
for driving innovation and competition. Globally
SMEs account for 99% of business numbers and
40% to 50% of GDP.
In South Africa the term SMME, for Small,
Medium and Micro Enterprises, is used. Elsewhere
in Africa, MSME is used, for Micro, Small and
Medium Enterprises.
Breaking down the SME definition, Industry
Canada defines a small business as one that has
fewer than 100 employees (if the business is
a goods-producing business) or fewer than 50
employees (if the business is a service-based
business). A firm that has more employees than
these cut-offs but fewer than 500 employees is
classified as a medium-sized business.
Definition for SMEs is often considered to be an
obstacle for business studies and market research.
Definitions in use today define thresholds in terms
of employment, turnover and assets. They also
incorporate a reasonable amount of flexibility
around year-to-year changes in these measures so
that a business qualifying as an SME in one year
can have a reasonable expectation of remaining
an SME in the next. The thresholds themselves,
however, vary substantially between countries.
As the SME thresholds dictate to some extent
the provision of government support, countries
in which manufacturing and labour-intensive in-
dustries are prioritized politically tend to opt for
more relaxed thresholds. Furthermore, defining a
SME is itself a challenging task, as every country
has own definition for a SME. For instance in a
country like India as per the Micro, Small and
Medium Enterprises Development Act 2006,
enterprises are broadly classified into micro units,
small units, medium units & large units depend-
ing on the investment in plant and machinery. In
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318
Innovation Strategies in SME
India, the Micro and Small Enterprises (MSEs)
sector plays a pivotal role in the overall industrial
economy of the country. It is estimated that in
terms of value, the sector accounts for about 39%
of the manufacturing output and around 33% of
the total export of the country. In India, SMEs’
contribution to GDP is nearly 30%. Moreover,
in recent years the MSE sector has consistently
registered higher growth rate compared to the
overall industrial sector. The major advantage of
the sector is its employment potential at low capital
cost. As per available statistics, this sector employs
an estimated 31 million persons spread over 12.8
million enterprises and the labour intensity in the
MSE sector is estimated to be almost 4 times higher
than the large enterprises. However, compare that
to the EU where it is based on the parameters of
employment, turnover and asset size, and OECD
on employment and sales turnover has totally
different criteria for establishment.
With various definitions by various countries,
sometimes it becomes a difficult task for an indi-
vidual to understand importance of a SME. One
may not know the important role that SME plays in
developing any particular sector, economy of any
country, alleviating poverty, increasing employ-
ment, and, above all providing various items of
daily use at an affordable cost. Within the last few
years many developed and developing countries
have realized the importance of the sector. Fast
decision making due to less staff and more control
of an entrepreneur, availability of raw material at
your door step, as many SME’s have been started
in the area where availability of raw material is
not a hindrance, innovative products which cater
to the needs of a particular region and its vicinity,
are certain key factors making SME’s significant.
Furthermore, economic factors which con-
stitutes to the development of the sectors are as
follows:
• Addition of output of goods and services
to economy.
• Low capital cost for establishment.
• Reduction in income disparities.
• Admirable propagation ground for entre-
preneurial talent.
Year 2009 is a year to be remembered during
the 21st century. The world has seen worst financial
crisis in times gone by, making many developed
and developing economies to recreate a new policy
in terms of managing crisis. In addition to that,
increasing mercury of mother Earth has led to
change in climatic conditions across the globe,
inducing, whole Diasporas to re think about what
worst perhaps come, and how by adapting some
arduous measures, if applied, can give a better
environment to our future generations to live in.
SME’s at their end, with innovative ideas helped
to mitigate the situation.
Global Business Environment
and Challenges for SMEs
Several of the existing literature, including Saleh
& Ndubisi (2006); Samad (2007); Abu Bakar et
al. (2006); Aris (2006); Harvie (2004); Wang
(2003); Stuti (2005); Wafa et al. (2005); Ritchie &
Brindley (2000); Decker et al. (2006); Foon (2006);
and SMIDEC (2007), emphasize various chal-
lenges facing SMEs in a globalized environment,
for example from difficulty in facing recession,
barrier from global sourcing, low productivity,
lack of managerial capabilities, lack of financing,
difficulty in accessing management and technol-
ogy, heavy regulatory burden and others. In the
other study, Teoh & Chong (2008) found the bar-
riers to entrepreneurship namely lack of access
to credit and lack of access to formal business
and social networks. Besides, SMEs are dealing
with intensified global challenges, new emerg-
ing technologies in ICT and production process
as well as increasing factor costs, which affect
the export competitiveness. SMEs are classified
into three different categories according to their
capability and their success walking through the
challenges. Firstly, SMEs that is viable or able
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319
Innovation Strategies in SME
to become internationally competitive may gain
the benefit from the regionalization (McMahon,
2001). Secondly, SMEs those are less adaptable
to the globalization pressure. They are unlikely
to survive in the present situation without making
fast move to improve productivity, to conform
to international standards, to train and employ
skill management and professional staff to face
competitions. Lastly, SMEs that are protected
by the government from the globalization effect
(Samad, 2007).
Economic downturn has been a constant
challenge facing SMEs. Since the year 2007, the
world economy experienced several unfavorable
events such as boiling oil prices followed by sub-
prime credit crunch in the USA, which leads to
a financial distress to the financial market. Most
nations are currently showing a diminishing eco-
nomic growth and increasing costs of production,
which indicates that recession is unavoidable.
The common aftermaths of a recession are lower
expenditures by consumers, lower demand for
products and services, lower productions and
job cuts. SMEs, small in nature, are affected
in larger degree especially those involved with
trading and supplying products or services to
other businesses. Lower cash flows and limited
financing are the major challenges faced by the
SMEs during this bearish period. Other challenges
include – tendency of global sourcing, lack of
state government support, complex relationship
between multinational corporations (MNCs) and
SMEs, intellectual property and bankruptcy issue,
legal issues in global business, decision process
and R&D landscape and branding SME products
in the global market. However, evidence from
regional economies suggests that SMEs came
through the crisis better than large enterprises.
The avoidance of a future crisis could, therefore,
depend upon developing a competitive SME
sector that is able to compete in both domestic
and external markets. Harvie (2004) argues that
the SME sector has a crucial role to play in the
sustained recovery of the region arising from the
business opportunities created by the restructur-
ing process itself, the movement towards closer
regional economic integration, advances in infor-
mation and communications technology (ICT)
and more specifically the business opportunities
arising from the Internet.
INNOVATION STRATEGY
AND COMPETITIVENESS
OF SMES IN THE GLOBAL
BUSINESS ENVIRONMENT
Similar to the MNCs, SMEs are proven to play
a significant role in the economic stability and
growth of a nation. SMEs are an important segment
of the any economy. Most SMEs require support
or assistance from the government especially to
be more competitive in the global business envi-
ronment. The role of government is to encourage
companies to move to higher levels and gain com-
petitive advantage in the globalize space environ-
ment (Samad, 2007). This is possible only when
SMEs adopt innovation strategies. The purpose
of this chapter then is to explore how small and
medium-sized enterprises (SMEs) can enhance
their competitiveness with innovation strategies
that leverage their strengths and minimize their
weaknesses relative to larger enterprises. These
strategies can involve partnering with large en-
terprises rather than competing against them. To
achieve our purpose, we must first recognize that
a single set of recommendations is not appropriate
for all SMEs because their attributes and environ-
ments vary considerably. Second, there is a wide
range of innovation options that can serve dif-
ferent purposes at different times. No one option
is right for all SMEs, but innovation in products,
processes, or services of varying type and degree
can be appropriate for different SMEs in differ-
ent industry sectors or product life cycle stages.
Thirdly, we can’t discuss innovation for SMEs
without recognizing that they differ significantly
from large enterprises, and most of the exist-
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320
Innovation Strategies in SME
ing research on innovation was developed from
studying the latter. Lastly, given all of the above
qualifiers, we explore SME innovation strategies
that exploit a firm’s current capabilities and help
them develop potentially valuable new ones. In
doing, so we also identify the innovation drivers
the understanding of which would propel more
SMEs towards innovation and excellence and the
relevance of adopting effective HRM approach.
Generalizations about SMEs and
Innovation are Difficult to Make
SMEs vary in their interest and approach to in-
novation because of differences in their sources of
capital. Senior managers of privately held firms
(i.e., most SMEs) have much greater discretion in
strategic pursuits than do those in publicly held
firms (Nooteboom, 1994). Public stockholders
focus mainly on return on invested capital, which
narrows senior management’s range of acceptable
strategies (including innovation). Private capital
providers (personal, family, friends, and local
banks) do not have a similarly limited focus, which
allows more individual variation in behavior, i.e.,
preference for independence, informality, life-style
(Gray, 2002). Personality and emotions are allowed
to play a larger role in decisions made in privately
held SMEs. Research suggests that the age and
tenure of an SME CEO are negatively related to
his or her interest in innovation (Khan and Mat-
tapichetwattana, 1989). Research also suggests
that only 20% of SMEs are interested in growth
through acquisitions, geographical expansion or
innovation (Nooteboom, 1994). However, with
SMEs accounting for 99.7% of all firms in the
U.S., this represents a large number of entities
(U.S. Census Bureau, 2003).
Our focus in this chapter is mainly on estab-
lished small owner-managed businesses, mostly,
but not exclusively, in mature industries. These
businesses consume the majority of their owner
managers’ time. They are the primary source of
income for owner-managers and an extension of
their personality and family; their personal lives
overlap with their business interests (Carland et al.,
1984; Gray, 2002; Blumentritt and Danis, 2006).
Although they value growth and profitability, it is
not their major or sole preoccupation. Such firms
are to be distinguished from entrepreneurial start-
ups, especially those that are heavily science-based
and knowledge intensive. These firms are headed
by entrepreneurs who are primarily motivated by
opportunities for growth and profitability through
innovation in new products, processes, and mar-
kets. These entrepreneurs are already seeking
opportunities wherever they can find them.
They don’t need our help to stimulate their
interest in innovation, although they might benefit
from the guidance that we provide to owner-man-
agers of established businesses. SME innovation
behavior varies by industry sector. Chemical and
machinery industries are capital intensive, thereby
making SMEs in these industries very cautious
about innovations that require large capital in-
vestments. Thus, it is understandable that half
of the innovation in the chemical and machinery
industries is incremental (Huang et al., 2002).
Similarly, customers in food, textiles, and furniture
tend to be conservative, thereby leading firms
to be cautious about their innovation initiatives
(March-Chorda et al., 2002). Although innovation
tends to be incremental in textiles and food, it is
more radical in optics, ceramics, and chemicals.
Similarly, textile, lumber, wood and paper mills,
printing and publishing, and construction firms
rely heavily on equipment suppliers for process
innovation (Pavitt, 1984). The type of innovation
that SMEs pursue also depends on whether their
industry is emerging (where radical innovation
is more likely) or is mature (where incremental
innovation is more likely) (Nooteboom, 1994).
Apparel is highly seasonal and fashion oriented,
which prompts shorter and inexpensive innova-
tion efforts. In contrast, computers and electron-
ics have high product obsolescence rates; which
mean higher and more continuous investment
in incremental innovation (March-Chorda et al.,
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321
Innovation Strategies in SME
2002). Wright et al. (2005) suggest that the hostil-
ity of the environment influences innovativeness.
Firms operating in highly competitive (hostile)
markets are likely to be more successful innova-
tors by increasing the number of new product
introductions through incremental innovation in
order to meet customer needs. The study suggests
that the resources of firms embedded in highly
competitive markets would be better spent on
incremental innovations rather than radical ones
because of the cut-throat nature of the environ-
ment. In contrast, Khan and Mattapichetwattana
(1989) found that environmental hostility lessened
SME innovativeness. Few of the available SME
studies focus on U.S. firms, and it is likely that
countries differ significantly in institutional fac-
tors (e.g., government subsidies and support to
SMEs) that will affect their approach and interest
in innovation (Siu et al., 2006). Government plays
a much more prominent role in the economies of
most European and Asian countries.
The type of customers that SMEs serve also
influences the type of innovation they undertake.
SMEs that sell consumer products generally serve
a larger number of customers directly or through
distributors than do SMEs that sell products or
services directly to other businesses. They also
must devote more time and attention to market
research and advertising and generally have more
difficulty getting timely and accurate feedback
from their customers. SMEs that sell products to
other firms, such as equipment, components, or
instrumentation, generally have fewer customers
than those that sell consumer products. Pavitt
(1984) referred to such firms as specialized equip-
ment suppliers. Ashton et al. (2003) advise SMEs
to consider segmenting their markets to identify
small customers that lack the technical resources
needed to effectively install, use, or maintain op-
erations that are essential to their business. Also,
high-end specialty customers may value the SMEs
services more than low-end customers.
Types of Innovation
Suitable for SMEs
SMEs can introduce process innovation to enhance
the capability of their production processes or their
supply chain operations (e.g., increase reliability
or reduce cost). These innovations are developed
for their own use; in-house engineering is used
to customize them to suit specific applications.
SMEs also can introduce product innovations
into existing or new markets. Product innovation
can include the introduction of new functions,
enhanced performance, or added features to exist-
ing products. Innovation of this type is generally
incremental. The underlying technology can be
new to the firm, but is unlikely to be “new to the
world”. Radical innovations are relatively rare
events, of course, and enhance product perfor-
mance significantly or even create new product
categories or industries. Innovative technology
can be “pushed” by technical staff or “pulled” by
customers. In the former case, products may differ
significantly from the firm’s or its competitors’
existing products (Salavou, 2005). There is the
risk that technical staff will push too far ahead of
customers and lead to a product failure. Products
with “pushed” technology may require customers
to change behavior or perception significantly
before they are accepted and used. In the case of
technology “pull”, “lead-users” can be a significant
source of innovative ideas (von Hippel, 1988).
Lead-users are firms or individuals that are on
the very edge of the target market. They are gen-
erally very highly-specialized and sophisticated,
requiring different innovations than the average
customer. In fact, lead-users are so advanced
that they often modify existing or develop new
products to meet their own needs. Thus, they can
work collaboratively with the firm’s technical
staff to fix shortcomings of existing products and
to design new products to meet their needs (von
Hippel et al., 1999). However, caution should be
taken when using input from customers as they can
only suggest innovative ideas from what they’ve
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Innovation Strategies in SME
experienced. It is more important for firms to ask
customers what outcomes they value instead of just
looking for solutions (Ulwick, 2002). In addition,
taking ideas from lead-users can be dangerous as
lead users are often a step above common users
and may suggest ideas that are only considered
valuable to those in lead-markets, thus making
them harder to sell to common users.
Marketing innovation includes the use of new
channels of distribution and new advertising ap-
proaches for selling current or new products. SMEs
can expand their revenues by selling their current
products in new regional or international markets
or by expanding their existing product lines into
new segments of existing markets (Branzei and
Vertinsky, 2006). This kind of innovation, “ap-
plication innovation” involves applying existing
technology for new uses in new markets (Moore,
2004). Business model innovation involves cre-
ation of a value proposition that offers to satisfy
the same or different customer needs in new ways
by performing a function, solving a problem, or
creating an experience through the sale or lease
of a product and/or service. The value proposition
may be targeted to a select set of customers whose
needs are best met by the product or service. Inno-
vation of this kind may or may not require product
innovation. If it does, it is more likely to be a re-
configuration of existing technology that results
in a product or service that is better suited to the
needs of a set of customers that a larger company
overlooks. Christensen and Bower (1996) indicate
that large companies often dismiss innovations of
this type (which they call “disruptive”) because
their existing customers don’t value them or the
emerging market is too small to interest them.
Chesbrough and Rosenbloom (2002) indicate that
business model innovation, besides a new value
proposition and targeted customers, also requires
articulation of a value chain to produce the new
product or service, and a plan to establish and
maintain a competitive advantage over potential
competitors.
Moore (2004) suggests that different types of
innovation are important at different points in a
product’s life cycle. For example, Moore suggests
that niche strategies are useful for firms that offer
leading–edge technology to early adopters. He also
suggests that business model innovation is useful
after mainstream products have commoditized.
SMEs can offer customers customized products
perhaps supplemented with services. The same
SME is unlikely to be nimble enough to modify
its strategy to match the evolution of life cycle
stages, especially at its opposite ends. SMEs at the
front-end of the life cycle are likely to be science-
based firms (Pavitt, 1984), and if successful, they
might grow with their industry and become large
companies (e.g., electronics and software). SMEs
that focus on the middle or end of the life cycle
may be specialized equipment suppliers.
SME Strengths and Weaknesses and
Required Capabilities for Innovation
Yap et al. (2005) suggest that SMEs have smaller
top management teams, which means less func-
tional diversity in experience. Moreover, owner-
managed SMEs often favor placing family mem-
bers in senior management positions over hiring
outside professional managers, which can lead
to poor management decisions and generational
transition problems (Crosetto, 2004). They also
have less developed HRM practices (i.e., they
are at a disadvantage for reaching the labor pool,
which leads to poor recruiting, etc.) and less access
to materials and financial resources. The main
reason why SMEs may be weak in technical or
marketing capability is the number and quality of
their professional personnel. Assuming an SME
can attract appropriate personnel, there is the
question of senior management’s motivation to
invest resources in their continued development
through training, provision of research journals,
travel to conferences, and giving them challenging
assignments. SMEs often have limited financial
resources to invest in innovations that are expensive
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Innovation Strategies in SME
to develop, require long development cycles, and
long payback periods. They also cannot spread
R&D expenses over large sales volumes nor spread
the risk of failure across multiple projects. This
tends to make them more cautious about innovation
than larger enterprises. There is a strong correla-
tion between R&D expenditure and innovation
success in SMEs. Such expenditures are often
underestimated in SMEs because investments are
less in “R” and more in “D”, such as in design and
engineering tools (CAD), prototypes, customiza-
tion, etc. Further, SMEs often have an inadequate
knowledge of their competitors and their products.
They need to scan their environment regularly to
learn what their competitors are doing (Woodcock
et al., 2000; Camp, 1989; Frost, 2003). They also
need to compensate for their lack of resources by
partnering or networking with customers, suppliers
or even competitors (Freel, forthcoming; Vossen,
1998). A firm with strong marketing skills and
weak technical skills can partner with a firm with
a reverse set of strengths and weaknesses (Huang
et al., 2002). There is some evidence that SMEs
draw upon a greater variety of sources for infor-
mation and ideas than do larger firms (Bommer
and Jalajas, 2004). Firms vary in their ability and
interest in partnering. Rothwell and Dodgson
(1991) suggest that SMEs may prefer to partner
with other SMEs rather than with larger firms
because the latter’s culture is often bureaucratic,
has a longer payback horizon, and increases the
risk of intellectual property loss.
Although only a small proportion of SMEs
engage in innovation activities, those that do
so appear to have a higher yield for their effort,
especially in number of new patents issued (Noot-
eboom, 1994). This underestimates the yield,
however, because many SMEs don’t have the
legal resources to file for patents, would rather
rely on trade secrets, have minimal codification,
or stay enough ahead of competitors to allow for
an imitation lag. SMEs often carry out the new
product development (NPD) process less com-
pletely or thoroughly than do larger companies
(Woodcock et al., 2000). Most SMEs do not use
the entire thirteen new products development
“stage-gates” recommended by Cooper (1999).
Chorda et al. (2002) found that 54% of Spanish
firms use nine or less of Cooper’s recommended
thirteen stage-gates. Huang et al. (2002) found
that Australian SMEs undertook market-related
activities less frequently than technical activities,
and this distinguished successful from unsuccess-
ful new products. Lindman (2002) suggests that
SMEs that have close relationships with a limited
number of customers may be able to forgo mar-
keting steps because there is less need for market
research. SMEs in the Finnish metal working
industry (most with less than ten customers) do
market research and learn about their customer’s
needs by working closely with them. SMEs with
a formal written product development strategy are
likely to complete more NPD stages with higher
quality (Huang et al., 2002).
SMEs have fewer employees, each with mul-
tiple roles (Yap et al., 2005), but they may be
able to form cross-functional teams more easily
than large enterprises because their professional
specialization is less complete. Employees of
SMEs interact more often with their counterparts
and may have shared or swapped tasks with them.
This gives team members a clearer idea of their
respective contributions to the NPD process. The
downside of less specialization is difficulty in
keeping up with the latest knowledge in a given
specialty. Assuming that senior management has
a clear idea of what it wants its cross-functional
teams to do, there is less risk of disconnect between
levels due to bureaucracy, delays, and miscom-
munication. SMEs also vary in how much they
focus on learning (Salavou, 2005). Most SMEs
don’t focus on learning, but even if they do, they
vary in how much they codify their learning so
that it can be used for developing similar products
(Mosey, 2005). Many SMEs don’t recognize the
value of data, have minimal archives and don’t
learn from experience (Woodcock et al., 2000).
Uncodified or tacit knowledge has benefits and
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Innovation Strategies in SME
shortcomings for SMEs. On the one hand, it is
harder to identify what a firm is doing wrong if it
has not codified its NPD process. Similarly, tacit
knowledge plays a role in how SMEs learn from
other firms. They are more influenced by being in
direct contact with people (suppliers, customers)
whom they know well and trust (Lindman, 2002).
On the other hand, tacit knowledge is difficult
to imitate so other firms cannot easily appropri-
ate an SME’s intellectual property (Kogut and
Zander, 1992).
Dynamic capabilities are the specific knowl-
edge and skills that firms learn in order to carry
out specific activities, including formation of
effective cross-functional teams and conducting
an effective NPD process (Eisenhardt and Martin,
2000). They differ from “core competencies”
(Prahalad and Hamel, 1990) in that they need not
be rare or inimitable. For example, best practices
in NPD can be learned and easily transferred
between firms. Core competencies rely on lever-
age across NPD projects within a single firm for
competitive advantage, but conditions may change
too rapidly for this to happen. Instead, dynamic
capabilities allow existing sets of knowledge and
skills to be recombined and emergent requisite
skills to be developed to meet new opportunities.
The dynamic capabilities of particular concern
are those that accelerate internal learning (e.g.,
degree of codification and learning routines)
and networking capability (e.g., highly trained
personnel who know what to look for and where).
The choice of NPD projects feeds on itself to
strengthen current dynamic capabilities or develop
new ones (Branzei and Vertinsky, 2006). As part
of a strategy to develop dynamic capabilities for
NPD (e.g., technical, market, collaborative skills),
SMEs need to carefully consider the types of NPD
projects they undertake and the customers they
serve (Mosey, 2005).
WHAT INNOVATION STRATEGIES
SHOULD SMES PURSUE?
Based on the review and analysis above, we can
recommend specific focus areas for innovation in
which SMEs can apply their inherent advantages
and mitigate the influence of their shortcomings.
We postulate that SMEs need to pursue innovation
strategies that do not rely on scale in production
or marketing (Nooteboom, 1994). Product cus-
tomization and customer intimacy are ways to do
this, especially in delivery of industrial services.
Scale should be sought by geographical expansion
to similar (“narrow but deep”) product markets,
not by product-line diversification (Simon, 1996).
Large firms have more resources, but SMEs have
behavioral flexibility. SMEs need to play to their
strengths. SMEs should cultivate relationships
with a small number of captive customers (Lind-
man, 2002). Intimacy helps make up for lack of
resources for market research. This relationship
can be characterized as “relational” rather than
“transactional” (Siu et al., 2006). It is even sug-
gested that firms can “outsource” innovation to
customers by giving them tools to articulate their
needs, which can then be given back to the firm for
actual development and production (Thomke and
von Hippel, 2002). There is a paradox in customer
closeness and a risk, however, in that firm that
work closely with only a few customers begins
to depend mainly on their own internal resources
for ideas rather than seek new information from
the outside. Nevertheless, this level of customer
intimacy is especially appropriate for SMEs that
pursue industrial services to complement the sale
of their products.
Nooteboom (1994) suggests that SMEs pursue
product innovation strategies in emerging markets
and marketing innovation strategies in mature
niche markets. Moore (2004) also suggests that
business model innovation is a very effective
strategy in mature markets with products in late
life cycle stages. As we indicated earlier, we will
focus little attention on SMEs in emerging markets,
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Innovation Strategies in SME
other than to indicate that these SMEs are better
at quickly forming unique technology/market/
product combinations that exploit new technol-
ogy than they are at conducting fundamental
research (which large firms do better). SMEs in
mature niche markets should pursue price inelas-
tic customers who still want products that larger
companies have dropped or ignore. Pavitt (1984)
indicated that the specialized equipment suppliers
he studied tended not to diversify technologically
either vertically or otherwise. His explanation
was that their current market was stable enough
not to require them to moderate sales volatility
through diversification. Ledwith (2000) found
similar results in a sample of Irish electronics
firms. Cooper (1999) and Meyer and Roberts
(1986) advised such firms not to diversify into new
markets because they don’t have the resources for
it. If SMEs don’t diversify in this way, then what
paths of growth remain for them? They can add
new customers in their current market by offering
them variations of existing products, take market
share from competitors, or seek new revenue op-
portunities from existing customers by offering
them a more complete solution to their needs
(Simon, 1996). Any of these options are possible,
but we are going to focus mainly on the last one.
The possibilities for the last option include tak-
ing over activities in the value chain that either the
customer or another supplier currently performs.
For example, Flinchbaugh Engineering, a small
employee-owned company in Pennsylvania, now
operates transfer lines for customers such as Cat-
erpillar, SKF and Siemens that previously owned
these lines (Anonymous, 2006). It has mastered
lean manufacturing practices so well that it can
operate these lines more efficiently than its custom-
ers. Fine (1998) discusses how Johnson Controls
and Lear continued to acquire suppliers that first
made up car seats and eventually the entire car
interior including door panels and dashboards.
These companies now have much more leverage
over their customers, the automobile companies.
Few SMEs have the resources to pursue such an
acquisition strategy, but it illustrates the point.
Another option for SMEs is to perform industrial
services that their customers currently perform or
propose new services that will help them operate
more efficiently. The most well-known industrial
services are maintenance and provision of spare
parts. We will provide a much longer list of such
services in the next section of the report. If SMEs
are allowed to work closely with their customers,
they might be able to propose new services to
perform by observing “points of pain” (Gustafsson
and Johnson, 2003) that perplex and frustrate their
customers when they use their product or other
firm’s products. Lastly, new service revenue op-
portunities can be generated by thinking beyond
the sale of the product and about its installation,
operation and disposal. Gustafsson and Johnson
(2003) suggest viewing “products as services
waiting to happen”.
The next section enfolds what drives innova-
tion in successful SMEs. The discussion helps to
develop a clear understanding of the emerging
drivers of innovation from a global perspective.
It will also help other SMEs to chalk out a clear
path in globalized world.
Innovation is one of the principal challenges
to the management of SMEs. Innovation is criti-
cal to enable SMEs to compete in domestic and
global markets. The importance of innovation for
SMEs and startup firms is highlighted by vari-
ous researchers who argued that due to resource
shortcomings, scale diseconomies and question-
able reputation, innovation is the key competitive
advantage for SMEs. Large firms have the where-
withal (large scale of production and capacity,
infrastructure in marketing, finance and R & D)
to exploit new technology. On the other hand, the
argument in favor of small firms is that they have
flexibility in adjusting employees in innovation
related projects and a less complex management
structure in implementing new projects. SMEs are
well-known for their creativity and new product
development capabilities. This applies in particular
to SMEs that have the ability to innovate effectively
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326
Innovation Strategies in SME
and develop new products more rapidly than larger
firms. Indeed, there is little doubt that SMEs are
capable of effective innovation. However, many
SMEs still fail to see the opportunities and advan-
tages that are open to them, such as the flexibility
of customizing products to the requirements of the
consumer (O’Regan et. al., 2006). Devenport and
Bibby (1999) state that SMEs increasingly need to
develop their innovation capabilities beyond that
of technological innovation. This need comes from
increased agility in larger organizations, which
enables them to erode traditional SME niche
markets. Furthermore, increased international-
ization has encouraged some SMEs to operate in
more competitive global markets where continual
improvement is prerequisite to innovation, as
distinct from solely technological development.
Thus people, process and product dimensions
are included (Tidd et al., 2001). Porter and Stern
(1999), stress that such innovation involves much
more than just science and technology.
Bessant and Francis (1998) suggest that ef-
fective innovation must involve all areas of an
SME with the potential to impact every discipline
and process. Innovation can be transformational,
radical or incremental depending on the effect
and nature of the change. Afuah (1998) suggest
that innovations do not have to be breakthroughs
or paradigm shifts, though organizations should
strive for the larger innovation. Although there
are a number of studies on continual improvement
in SMEs (Gunasekaran et. al., 1996; Bessant and
Caffyn 1997; Bessant and Francis 1999), there is
a relative paucity of in depth studies of innova-
tion implementation (Humphreys, McAdam,
Leckey, 2005) and strategies applied by SME
entrepreneurs to attain innovation advantage. It
cannot be assumed that innovation implementa-
tion principles in large organizations are directly
transferable to SMEs.
Thus there is a need for the studies on how in-
novation is implemented and what are the strategies
adopted by SMEs? However, every organization
undergoes a unique process / activity before it
innovates. It means that if we want to study the
innovation strategies used by an organization, we
have to study every organization case by case as
a unique entity. Quantitative methodologies of
studying the innovation have only given limited
insight into what happens when people innovate
(Lowe, 1995). Govindarajan and Trimble (2005)
say that management of innovation is a rich and
complex problem. Statistical studies can point only
to a few broad directions. They can tell us some-
thing about which management decisions co-relate
with success, but little about why. Truly under-
standing what works and why, requires a multi-
year, qualitative, interpretive study. The study of
innovation resembles history or psychology more
than finance or economics. Furthermore, little
existing research based knowledge emphasizes
the very early stage of managing innovations. This
leaves the terrain uncharted. A unique research
agenda, in an academically unexplored region
required an unconventional research methodology
to get the desired outcome of understanding the
underlying strategies of innovation.
Operationally, SMEs for this research were
defied as organizations which are involved in
manufacturing and / trading activity with an-
nual turnover of more than Indian Rs. 10 Crores
(around US $ 200,000) and less than Indian Rs.
100 Crores (around US $ 20,000,000) and have
an employee strength of more than 30 and less
than 500. For the purpose of the research, 10
outperforming organizations irrespective of their
industry were selected based on the available data
with Mahratta Chamber of Commerce Industries
& Agriculture, Pune, India (MCCIA). The criteria
of selection for the outperformance were their
survival, growth and innovation orientation. The
survival criterion meant that the organizations
should have at least survived through the decade
of 2000 to 2010 or they should have been older
than that. The growth criterion was divided into
three sub-sections: financial growth, production
/ service category growth and human resource
growth. Innovation orientation meant the SMEs
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327
Innovation Strategies in SME
should have proved more innovation oriented than
the competing organizations in the region. (Num-
ber of patents applied, number of large customers
served, number of innovation activities carried out,
process innovation initiated etc.). Permission for
full access for observation and consultation was
taken from all organizations and complete confi-
dentiality of all captured information was assured.
10 studied organizations include: engineering,
auto components, machine and machine tools
manufacturing, submersible pumps, corrugated
box manufacturing, forging and castings, plastic
manufacturing and farm related products.
The approach adopted is Grounded Theory
(Glaser, B. & Strauss, A. 1967); hence, the re-
search is based on the grounded inquiry approach.
So it relies heavily on the observation, informal
discussions, notes made during the process. The
researcher carefully observed everything relevant
to the innovation process in the organizations.
Various stakeholders of SMEs were part of the
informal discussions as they are all key process
owners, to understand the underlying patterns and
innovation imperatives. A constant comparison
of inter and intra organizational emergent im-
peratives was also done throughout the study. To
better understand the context of research, various
websites, annual reports, product catalogs and
other relevant material pertaining to SMEs was
also studied. To capture the data, a special sheet
was developed. The sheet had space for notes
taking, memos making, coding, and analysis
for emergent categories. The sheet was exten-
sively used throughout the process. It also had
some handy things like operational definitions.
The complete study work was carried out from
May 2012 to December 2012. The strategies are
presented below in Table 1. They are observed
strategies used by outperforming Indian SMEs to
gain innovation advantage and are present across
all SMEs, maybe with varying degree.
Effective HRM: A Prerequisite
Now more than ever, a strategic approach to fos-
tering innovation is needed to achieve the core
objectives of SME policy. As countries emerge
from the downturn, and with other sources of
growth declining in importance and global chal-
lenges mounting, innovation needs to be har-
nessed more effectively. If policies to promote
innovation are to be effective, they need to take
account of the ways in which innovation takes
place today. To transform ideas and inventions
into innovation requires a range of activities,
including organizational changes, firm-level
training, testing, marketing and design. Hence,
effective human resource management (HRM) is
crucial as it is human beings who are the basis of
innovation and it is human who is at the core of
innovation process. While firms can access factors
of production across the globe, local knowledge
and capabilities, including proximity to research
and education institutions, continue to matter for
innovation. Co-patenting is more frequent with
inventors in the same region than in other domestic
or foreign regions. Some regions have become
global leaders in knowledge-intensive industries,
while others have built on traditional industries to
develop new and innovative activities.
Effective HRM in the broad sense is essential.
People generate the ideas and knowledge, that
power innovation, and they apply this knowledge to
result in technologies, products and services in the
workplace and as consumers. Innovation requires
the input of innovative individuals. Individuals
learn within a frame of reference. (Cavagnoli, Do-
natella, 2011). Building an institutional capacity
for breakthrough innovation requires cultivating
people with a talent for innovation and establishing
structures to provide them appropriate training and
enable them to share their knowledge. (Farrington,
et al. 2011). Commercializing breakthrough inno-
vation is a chronic challenge in mature industrial
companies. While breakthroughs do occur, their
project paths are frequently described as serendipi-
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Innovation Strategies in SME
Table 1. Observed strategies and discussion
Observed Strategy Discussion
Customer Centered
Technology Rather
Than Market Centered
Technology
Outperforming SMEs had this unique but distinctive characteristic of focusing on a very basic technology
which is centered on customer requirement rather than technology which is prevalent in the market.
This helped SMEs stay close to customer and away from costs associated with ‘technology fusses going
around in the market. Across the organizations, the key technology decision driver seemed to be customer
(internal as well as external) centered. Technology, for the context, is far broadly defined than its literal
meaning. It is always better to use the technology which adds value and which is ‘easy to use’ for its
employees and customers.
Indigenous Technology SMEs need to trust/focus on indigenous technology rather than technology which is adopted from
outside. This creates a strong sense of co-creation which is customary when it comes to development of
the technology required for the organizational growth. Examples are numerous where SMEs machines,
instruments, and software which are found to be made by the organizations for their own purpose in
collaboration with local/domestic manufacturers. This is not limited to machines. Testing equipments and
other supporting tools are also co-created many times. Rationale for this is interesting – the entrepreneurs
have deep confidence and trust in the technological competence of their employees/workers and further
they believed that co-creation helps them to create a machine which is developed to meet and perform
under local conditions. It also enables significant cost reduction by co-creating the technology and the
technology which is indigenously developed is not only low on cost, but, is equally or more sustainable.
Keeping Innovations Open The world may be talking about open innovation only after the release of the path breaking book on
open innovation by Chesbrough (2003). All major aspects of open innovation can be traced back to more
than 40 years in SMEs sector. It is quite surprising to find that the awareness about intellectual property
rights and their impact was very low and this ignorance promoted open innovations. Most of the co-
creations when kept open once they designed has resulted in significant multiplication and lot of other
organizations have benefited from this type of openness of innovation. There is hardly any doubt that
open innovation phenomenon is very active in SMEs. The matter of concern is the low awareness about
the importance of intellectual property.
Capture Process and
Implement The Voice Of
Stakeholders (Vos)
SMEs generally do not have resources like research and development departments and human resources
which can spearhead innovation activity. These scarcities of resources force SMEs to look at alternative
source of innovation. Hence it is necessary that SMEs effectively use Voice of Stakeholders (VoS) for
innovation. Voice of Customer (VoC) was always given priority as an innovation input as many of the
SMEs work customer or job specification basis. The key stakeholders identified in SMEs are not only
vendors, customers and employees, but also other stakeholders like universities and policy institutions.
SME management is also aware of the importance of this opportunity and almost all organizations have
mechanisms (formal as well as informal) in place to capture process and to implement these ideas.
Empowerment at Various
Levels
Getting ideas from stakeholders is the key success driver for SMEs. What differentiates these SMEs
from other organizations is the amount of empowerment given to these stakeholders. Along with
empowerment, the management needs to possess the virtue of honesty as it has to accept ideas,
implement them and bear the consequences. Hence, throughout the process, the top management needs
strong integrity.
Practice of Co-Creation Co-creation is a buzz word in contemporary innovation literature. There are various researches which
suggest that co-creation with customers has helped organizations earn value and obtain competitive
advantage. Effectively when used co-creation brings the competitive advantage. This co-creation is not
limited to the customer – vendor development. Co-creation is in its totality. SMEs not only co-create
products with customers, but also set a path, breaking process of co-creating beyond customers, with all
the stakeholders like vendors, employees and customers. This ensures that they become more competitive
and dynamic as organizations – which are the need of globalized era.
Top Management
Involvement
Innovation has to flow from the top. It has to be a board room activity and not confined to laboratories.
For various reasons maybe from personal learning.to cost control, one thing is clear that the top
management involvement significantly contributes to the development of innovation.
Purposeful Innovation When laboratories start innovation activity they may have a larger goal in place, but the path of every
experiment is not always clear. They use trial and error methods to evolve a product. SMEs, with their
limited resource capabilities, cannot afford to run such uncertain methods. They need to work on a
different model – which is ‘Object Oriented’ or ‘Innovation for Purpose’. Every innovation initiative
objectives/purpose could vary depending on the inputs/motivation for innovation. Example: It can be for
reducing cost and inventory to increasing customer satisfaction. Quantification and accountability is also
strong when the innovations are purposeful in nature.
continued on following page
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Innovation Strategies in SME
Observed Strategy Discussion
Incremental Innovations
Over Radical Innovations
There is a school of thought which believes that if innovations are not radical, they are not innovations.
The researcher appreciates that radical innovations have the power to transform organizational perfor-
mance and to create substantial value which leads the organization to a level which is above competition.
There are numerous examples of radical innovations which have transformed organizations like Apple,
3M and GE. However, SMEs’ is altogether a different case. They need to use small and incremental
innovations / enhancements to reduce the risk involved in the whole process. Obvious question comes;
do they get the desired results typically expected from an innovation project? The simple answer is ‘yes,
but in the longer run.’ One needs to look at this from the context of risk which they reduce by doing
incremental innovations. Such innovations have been successfully used by SMEs as a tool to keep the
innovation ball rolling even under difficult conditions. These innovations are easy to ideate, execute and
show returns quickly. As Govindrajan and Trimble (2005) suggest, continuous process innovations have
a small expense, length of each experiment is small and ambiguity of results is least. Thus, SMEs benefit
from these incremental innovations in the longer run.
Active Knowledge Manage-
ment
Knowledge Management (KM) may sound like a fuzzy management technique to most of the entrepre-
neurs of SMEs, but, in reality, all outperforming SMEs have basic knowledge management practices
in place. There are number of researches which suggest that strong knowledge management practices
serve as a strong base for good innovation practices. Every organization in the growth process generates
knowledge from its day to day experience, interactions and process execution. However, not all SMEs
effectively work to utilize the generated knowledge, which they need to do.
Emotional Process Imple-
mentation
Quality management practices and innovations complement each other. There are various researches
which suggest that good process implementation creates the right foundation for innovation. Organiza-
tions like Toyota, GE, and Motorola have successfully used good process management practices as a
launch pad for innovations. However, there is a caveat here raised by the researched entrepreneurs who
suggest that mere soulless process implementation adversely affect the idea generation process. Entrepre-
neurs in SMEs need to manage the equilibrium between process control, and innovations really well to get
the maximum advantage of both processes and innovations.
Robust Combination of
Product-Process-Technology
It is observed that the expertise of entrepreneurs on product quality is very strong. They are also very
well connected with the processes and the technology of the organization. It is evident that the entrepre-
neurs had a profound know-how of the product from its first raw material stage to its final stage and this
helps significantly to work on raw material innovations. These raw material innovations give noticeable
competitive advantage. It is clearly evident that SMEs have a complete knowledge of the product, process
and technology. In most of the cases, SMEs success could be attributed to this ability to know product,
process and technology well and make most out of the same. Here again, technology has to be taken from
the perspective of basic customer centered technology.
Lean and Transparent
Structure
SMEs generally scale to a level from a startup to significant innovation leadership. It is apparent that
such SMEs follow open, transparent and lean structures which promoted free communication across the
organizational hierarchies. Across these, people have complete freedom to innovate and share the same
with the top management. Though the reward system for the innovation can vary from organization to
organization, SMEs are more open to accept innovations from all the employees. It can also be concluded
that the person who is working on the process, can be made the most reliable source of innovation for that
process, by getting right the empowerment. Product and Process innovations cannot be executed from
management offices; they have to be driven from the shop- floor. SMEs advantage of having lean organi-
zation structures promotes innovations. Though it would be difficult in the context of large organizations
to apply such a structure, the outcome of the research strongly indicates that lean organization structures
relate positively with innovations. Hence, it is vital that an organization structure should promote idea
flows (good/bad/ugly) and, then, have its own mechanism to filter and selectively execute and reward the
idea.
Outsourcing and In-House
Balance
Intense outsourcing has been a prevailing phenomenon in globalized world and SMEs are no exception,
though they are very selective in the outsourcing done usual criteria being: the processes which are usu-
ally non-value adding, the process should not be critical for the product or the organization etc. SMEs
want to keep their key processes confidential as they consider them to be the key success factor. Thus, en-
trepreneurs considerably balance between in house competencies with regional competencies while taking
outsourcing decisions. This ability to strike the right balance helps SMEs to significantly gain competitive
advantages of scale and cost along with maintaining their core competence in critical products/processes.
Nurtured Human Resource Human resource employed in SMEs is usually nurtured over a period of time and SMEs rarely hire from
competitor organizations. This helps to create a long term and loyal human resource.
Table 1. Continued
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Innovation Strategies in SME
tous, rule-breaking, and led by mavericks. None of
these descriptors implies that breakthroughs occur
within a system designed to nurture, encourage,
or manage them. All imply that they occur in a
system designed for other objectives. (Farrington,
et al. 2011). Innovation requires a wide variety
of skills, as well as the capacity to learn, adapt or
retrain, particularly following the introduction of
radically new products and processes. Empower-
ing people to innovate relies not only on broad and
relevant education, but also on the development
of wide-ranging skills that complement formal
education. Opportunities to use and leverage
these skills throughout the economy and society
are vital. Indeed, large established companies are
designed primarily for operational excellence and
current customer satisfaction; objectives that tend
to create environments that are inimical to the
long cycle time and high risks of breakthrough
innovation (Farrington, et al. 2011).
A firm’s efficiency is also dependent upon
the abilities and how-know of the human capital
of its employees. This human capital consists of
education and training provided to employees.
Educated workers are not only more productive,
but they have more learning and innovative abili-
ties (Batra and Tan, 2003). Formal education is
the basis for forming human capital, and policy
makers should ensure that education systems
help learners to adapt to the changing nature of
innovation from the start. This requires curricula
and pedagogies that equip students with the ca-
pacity to learn and apply new skills throughout
their lives. Emphasis needs to be placed on skills
such as critical thinking, creativity, communica-
tion, user orientation and teamwork, in addition
to domain-specific and linguistic skills. Despite
the unprecedented rise in educational attainment,
these skills are rare. Improving teacher quality
is important for enhancing outcomes; this might
include better initial selection of teachers, ongo-
ing evaluation to identify areas for improvement,
and recognizing and rewarding effective teaching.
Universities, colleges and vocational training cen-
tres are essential nodes in the innovation system,
both producing and attracting the human capital
needed for innovation. These institutions act as
essential bridges between players – businesses,
governments and countries – in broader and more
open systems of innovation. They also contribute
to the local quality of life and thus can help to
attract the highly skilled from around the globe.
World-class institutions can be the anchor for
clusters of innovative activity.
The major policy challenge is to recognize the
essential role of universities in the innovation en-
terprise rather view them, as is all too commonly
the case, simply as providers of essential public
goods. This requires a greater focus of policy
makers on ensuring independence, competition,
excellence, entrepreneurial spirit and flexibility
in universities. Vocational education and train-
ing also play an important role in innovation,
by helping firms make incremental changes to
production processes and adopt technologies, and
by lifting the overall capacity to innovate. Policies
need to connect this training to the world of work,
including by engaging employers and workers in
curriculum development. The acquisition of skills
is a lifelong process; it does not end with formal
education. Schools lay a base for lifelong learn-
ing, but ongoing skills acquisition needs to be
encouraged. This involves recognizing all forms
of learning and making them visible, including
through qualification systems. Rewarding lifelong
learning and making it attractive may help to
enhance participation in the innovation process.
Entrepreneurs and SMEs play a particularly
important role in innovation by helping to turn
ideas into commercial applications. In the work-
place, individuals learn within the organizational
systems of rewards. Organizational innovation
depends heavily on this frame of reference for
fostering and maintaining the innovative capacities
of the firm (Cavagnoli, Donatella, 2011). Firms
less than five years old accounted for nearly all
of the increase in employment in the US private
business sector from 1980 to 2005. Success in
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Innovation Strategies in SME
entrepreneurship often comes with practice,
hence the importance of experimentation, entry
and exits. Yet, only a small part of the population
receives entrepreneurial education. Women can
also play a larger role in the innovation process.
Although more women than men now obtain
tertiary degrees, their participation in science and
engineering, as well as in entrepreneurship, lags
behind. Social and labour market policies, such
as tax and benefit systems, workplace practices
and policies relating to childcare, can give women
an incentive to enter the labour force. Specific
barriers to women’s involvement in science and
innovation include workplace practices (e.g. non-
transparent hiring and promotion) in scientific
institutions. The low participation of women – and
other underrepresented groups – in certain parts
of the innovation process limits diversity, which
is essential for innovation to flourish. However,
as habits can lead to innovation, habits can also
hinder innovation (Cavagnoli, Donatella, 2011).
Internationally mobile talent contributes to the
creation and diffusion of knowledge, particularly
tacit knowledge. To encourage this circulation of
knowledge, governments should invest in public
research to build absorptive capacity, open labour
markets to foreign students for further training,
and ensure that the tax regime does not penalize
mobile skilled workers. Cross-border higher edu-
cation should continue to be promoted as a means
to build international networks of knowledge.
The organizational structures and employment
policies that shape the workplace are essential
for determining how human capital translates
into innovation and productivity. Those SMEs
which have more capable workers are likely to be
more efficient (Hewitt and Wield, 1992; Lucas,
1993). Employee involvement and effective labour
management relations and practices help foster
creativity and innovation and raise productivity.
Though government do not play a direct role, it
is important to foster the conditions for learning
in organizations and to ensure that work place
policies are conducive to innovation and to mobil-
ity. People participate in innovation not only by
creating, diffusing or adapting technologies in the
workplace, but also as consumers. A critical mass
of users and consumers can support and encourage
innovation and the competitive process. They have
opportunities to influence the design, methods of
supply, introduction and uptake of new products
and services directly and they need to have the
skills to make decisions on innovative products.
Consumer policy regimes and consumer educa-
tion should improve the functioning of markets
by helping them to be active participants in the
innovation process.
Mini-Cases
The first “mini-case” illustrates how a supplier of
a commodity product changed its business model
to provide a complete service thereby satisfy-
ing previously unmet, indeed unvoiced, needs
of its existing customers. Additionally the data
accumulated from having a greater knowledge
of, customers’ behavior enables the company to
continually add value and build barriers against,
competitors.
Mini-Case 1: Greif Packaging, a supplier of metal
drums for shipping bulk chemicals, many of
which are toxic, realized that they had no
real competitive position and profit margins
were thin. An internal entrepreneur decided
to listen carefully to customers. He saw there
were unmet needs and new sources of value
to be accessed. Customers did not want to buy
and own steel drums, they wanted to move
toxic chemicals efficiently and safely; they
did not want to deal with all of the details
such as finding a licensed trucker, filling in
the government forms, washing, cleaning
and refurbishing the drums, etc. To meet its
customers’ actual needs, Greif converted its
business model to being a “trip leasing” com-
pany for specialty chemicals – the FedEx®
of problem chemicals. Now Greif solves the
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Innovation Strategies in SME
total trip problem for its customers – drum
supply, cleaning, refurbishing, regulatory
compliance, transportation, and tracking.
It built a new web application and became
an “(Internet-enabled company”. Although
Greif sub-contracts out most support func-
tions, it captures the value in the supply chain
and builds long-lasting client relationships.
Moreover, it buys support services in volume,
and its database of trip costing enables the
company to accurately quote on “trips” and
to provide customized and traceable service.
This shift has significantly improved Greif’s
profit margins and cash flow, which it can
direct to further innovations. The business
model also builds barriers against competi-
tors (Source: Warren and Susman, 2004).
Additionally, services can help to establish
“customer lock-in”. Customers, by foregoing
certain tasks, increase their dependence on their
suppliers. Switching costs therefore are increased.
The company may also innovate with entirely
new services. The latest information technology
standards and infrastructure can be used to provide
services that were not even conceived by customers
until their providers innovate. For example, using
advanced data collection and data mining tools,
coupled with real-time data collection over the
Internet may provide a whole new level of product
and service reliability. The second “mini-case”
provides an example.
Mini-Case 2: Taprogge GmbH, a family owned
business headquartered in Germany, has over
90% of the world-wide market for cleaning
condensers and heat-exchangers in power
plants. The company has a strong patent
position covering its unique invention of
using “scrubbing sponge balls” which are
randomly circulated through the condenser
tubes to remove scale build-up. Initially,
Taprogge supplied the equipment together
with sponge balls tailored for particular water
quality. The balls wear out, so the company
has an ongoing revenue stream once the
equipment has been installed. Recently the
company has moved towards a “total service”
business model starting with the installation
of the plant and taking responsibility for
its operation. The latest equipment has a
number of embedded sensors that monitor
the performance and relay the data over the
Internet back to a central office.
Analysis of these data enable the company
to predict possible performance deterioration
and ship parts followed, if needed, by a qualified
service engineer. Shutdown of a central power
plant may have an enormous economic impact.
Taprogge’s service model is therefore highly
valued by customers who are willing to pay for
the reliability and security that the company
provides. The responsibility for down-time now
shifts from user to supplier, which implies that
Taprogge must be able to support its claims and
be willing to enter into contracts that may contain
significant penalty clauses for failure to perform.
The company’s most valuable asset is a complex
database covering all operating parameters of
every installation. This is now enhanced by its
on-line monitoring systems that give it real-time
access to customers’ systems. These data enable
Taprogge to a) predict the behavior of a system in
most if not all locations and environments (“wa-
ter is not just water”), b) design new products,
systems and services more effectively, c) provide
fast turn-around service or even on-line help that
reduces service time and costs. This strategy is
particularly important when the product is custom-
ized. Again we see the power of using information
Technology innovatively to create added-value for
customers while building barriers to competitors.
The service business model improves customer
relationships. As mentioned above, the company
prides itself on reputation and reliability. It now
embodies customer contact on a regular basis
by using remote monitoring that gives a basis
for pre-emptive actions and regular interaction
with all customers either from the local office
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Innovation Strategies in SME
or from the German HQ. The importance of this
cannot be overemphasized. Two major advantages
thereby accrue – better service at lower cost and
the ability to detect problems early. Customers
initiated most of the new products by coming to
the company with an unrelated water problem,
and knowing that it will do its utmost to solve the
problem. In this way the company has built the
reputation as the “problem-solvers” in the sector
and this capability is promoted. (Source: www.
taprogge.com)
Recommendations
Based on our observations, we are neither advo-
cating a “best” innovation process to follow, nor
even that should a single process be followed
within an organization. Rather, we are asserting
that, regardless of what process is followed, the
chances of achieving a successful innovation can
be increased by adopting a framework wherein:
1. All agree to march to a single, reasonable
drumbeat. Not only is the alignment of goals
and expectations critical, but so is reaching
agreement on what reasonable goals and
expectation would be.
2. Don’t shoot the messenger! Communication
will not flow freely if fear of reprisal is pres-
ent at any level of the organization.
3. Face adversity. It makes the organization
stronger. Obstacles can often serve as the
impetus for innovation. The lack of support
from the parent company was seen by some
as a restrictor, but by others as a source of
motivation.
4. Maintain low profile. Sometimes, innovation
needs to take place “under the radar” to give
an idea a chance to grow and mature before
it is subjected to evaluation and judgment.
5. Rules are meant to be broken. The use of
uniform or company-wide metrics makes
some innovation efforts look less success-
ful than they really are – sometimes new
products and new ways of doing things also
require a different set of metrics.
6. Travel on the road less traveled. If the in-
novation effort needs to have a significant
impact on the brand, it needs to be either
disruptive or iconic in nature, or both. It may
also need to be as different from “business as
usual” that it needs to circumvent the usual
innovation process.
7. An ounce of prevention is worth a pound of
cure. It’s best to understand when an inno-
vation is different enough that it’s tough to
bet on. Reducing or managing expectations
upfront means a greater chance of being
pleasantly surprised by (and recognized for)
great success.
8. A square peg won’t fit into a round hole. By
understanding from the start the alignment
issues between a business and a promising
opportunity, it is possible that a business
opportunity that does not fit the company’s
strategic objectives can be spun off and al-
lowed to build slowly on its own. If it proves
to be successful enough, it can provide not
only money for its parent, but also such an
influx of executive talent and manufacturing
process innovation that the parent is able to
adopt some of the innovations and/or buy
back the spin-off.
9. The ugly duckling or the swan. It’s important
to avoid “false positive.” Take into account
the possibility of error in judgment in the
early stages of assessing an innovation
opportunity. Innovation efforts that don’t
measure up on internal evaluations might
succeed if they are allowed to go outside
and possibly find another business model or
a different market. It’s important to provide
an alternative path.
10. Last but not the least; develop an environment
that supports the growth and dissemination
of innovative technologies for and by SMEs
to take advantage of the knowledge-based
economy.
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Innovation Strategies in SME
The goal is to flag areas that might require
attention, and ultimately identify the “lynchpin”
drivers whose successful management could de-
termine the success or failure of the innovation.
By answering these questions derived from the
experiences of innovative efforts across the globe,
SME innovators can swiftly identify potential
problem areas before an initiative begins, and
begin thinking about how those issues might be
addressed. One might argue there is not always
sufficient information or time to answer questions
such as these, particularly prior to the beginning
of an innovation effort. But the simplicity of
this framework is its strength. It requires few re-
sources, and only a cursory review of what might
be involved in undertaking an innovation effort.
Moreover, the knowledge gained from applying
this framework is worth much more that the small
amount of time required doing it – especially in
cases where the framework’s application exposes
problems that could be corrected early in the
process much less expensively and more easily
that they could be corrected later. And in worst-
case scenarios, the knowledge gained from the
application of the framework could illuminate
certain failure – and that, too, is better understood
before significant resources are committed to a
project. It is hoped that this frame work, for all
its simplicity, will be a useful tool for innovators,
and especially help SMEs drive innovation in a
meaningful way.
FUTURE RESEARCH DIRECTIONS
Fierce competition in the global market has made
innovation and differentiation a necessity for
every company. Innovation is considered to be a
source of competitive advantage and economic
growth, and worthy of study under the conditions
of increased global competition, technological
change, fast-changing market situations and
continuous customer/client demand for quality
services (Damanpour & Schneider 2006). While
there has been much work on SMEs polices and
planning, strategic management, technology
strategy, new product development or marketing
which mostly aim at understanding the working
or causes or rationale of SME development, this
chapter is aimed at the market with an emphasis
on innovative strategies which are adopted by
SMEs through effective HRM which makes SMEs
central to the economic development both regional
and global. The focus herein is Indian SMEs and
based on the limitation of the current research, the
study provides few suggestions for future research.
First, future research could be conducted region
based; sector based so that comparative and best
practices lessons could be drawn. A survey-based
research in order to measure the competitiveness
of SMEs in facing the global challenges would
give finer and precise findings. SMEs registered
in with government portals might be used as the
sampling frame. Separate and comparative stud-
ies on SMEs listed in manufacturing activities
and service sector could be undertaken. Second,
the other data collection method such as in depth
interview with the owners or managers of SMEs
could also be employed in order to obtain more
accurate information pertaining to SMEs innova-
tion approaches, issues and challenges. Another
area of interest, innovation and sustainable de-
velopment in SMEs could focus on the study of
SME stakeholders as engines for innovation and
additional challenges of innovation in hybrid
companies could be undertaken.
CONCLUSION
In the nutshell, the chapter has given an overview
of challenges and competitiveness of SMEs in a
global business environment and the need for effec-
tive HRM. Strategic innovation is ‘a fundamental
reconceptualization of what the business is all
about that, in turn, leads to a dramatically different
way of playing the game in an existing business’
(Markides 1998). Similarly, innovation is all about
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Innovation Strategies in SME
commercialization, whether as the first mover or
the follower/imitator. The difference between these
two strategies is all about being ‘first to the market’
or taking a ‘wait-and-see’ approach. Many scholars
(e.g., Deshpandé et al. 1993; Capon et al. 1998;
Deshpandé & Farley 2002, 2004) describe the
first strategy as innovativeness. Though Meybodi
(2003) suggests that to stay ahead of competition
firms must develop competencies to innovate, and
introduce new products to the market quickly, it
was observed that surprising number of success-
ful innovations have resulted from a wait-and-see
approach. As argued by Smith (2006), there are
four circumstances when the follower/imitator
strategy has attractions. There circumstances are:
free rider effects, imitation costs, scope economies
and learning effects. Further more ‘organizations
do not select a particular culture-typically it just
emerges over time’ (Smith 2006).
To conclude, the innovative performance of a
SME depends to a large extent on how different
actors interact to each other as elements of a col-
lective system of knowledge (new and existing)
as well as the technologies used. These actors
are primarily governance mechanisms (e.g., cor-
porate, political and network); institutions (e.g.,
industrial, science and technology, financial; edu-
cational) and the people within them. Although
this chapter does not reflect the empirical study
of SMEs, it at least contributes an important study
by adding more literature regarding SMEs from
globalization perspective. The chapter uncovers
various emergent recommendations related to
strategies followed by SME entrepreneurs to attain
innovation advantage. These strategies are largely
dominated by constant shortage of resources which
SMEs often encounter. These outcomes also re-
flect an interesting phenomenon which suggests
that product innovation is an important source of
innovation, but not the only source. SMEs work
under limited facilities for product development
and innovate on various other avenues which, in
turn, result in a competitive advantage. This in
turn successfully differentiates the organization
in the marketplace. The outcomes reinforce the
power of focused alternate stream of innovations
to attain competitive advantage. They also empha-
size the important role played by the very basic,
but, largely neglected managerial aspects like the
organization structure, process implementation,
and top management involvement in the innova-
tion process. The research presented here is one
of the first grounded inquiry attempts to study the
innovation strategies applied by SMEs and cuts
across different innovation domains to identify
innovation strategies adopted by SMEs.
Note: Both the mini-cases which form the
part of the chapter are based on secondary data
and are compiled from published sources. They
are intended to reflect and illustrate the approach
and innovation strategies adopted by the SMEs.
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KEY TERMS AND DEFINITIONS
Challenges: Something that by its nature or
character serves as a call to make special effort,
a demand to explain, justify, or difficulty in a un-
dertaking that is stimulating to one engaged in it.
Competitiveness: The act of competing for
some honor, or advantage. Rivalry between two
or more persons or groups for an object desired in
common, usually resulting in a victor and a loser
but not necessarily involving the destruction of
the latter. The need for global competitiveness is
much important for any industry to sustain in this
competitive world and this helps the company
to retain its old customers as well to obtain new
customers, maintaining the profit level and also
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to be a leader in the market. Aspiring to be a
market leader or to be globally competitive helps
a company to grow. It also helps the company in
introducing new products to the world. E.g.: Apple
came up with the iPad and they were first to target
the people with the new product and thus were
able to get advantage, Similarly Google acquired
Motorola mobility holdings to become strong in
the cell phone segment too. When firm competes
with each other it does not benefit them alone but
a wide range of customers too.
Globalization: Globalization is the tendency
of businesses, technologies, or philosophies to
spread throughout the world, or the process of mak-
ing this happen. The global economy is sometimes
referred to as globality, characterized as a totally
interconnected marketplace, unhampered by time
zones or national boundaries. The proliferation
of McDonald’s restaurants around the world is an
example of globalization.
Innovation: To introduce something new;
make changes in anything established, to alter.
Innovation in an enterprise involves using re-
sources or technology in new ways to create a
more efficient organization and improve align-
ment between technology initiatives and business
goals. Many companies try to institutionalize the
process of innovation by creating innovation teams
from diverse segments of the company. Other
firms rely on individual employees to flourish in
an environment where innovation is encouraged.
Perspective: Is a way of regarding situations or
topics or a mental view or the state of one’s ideas;
prospective means concerned with or related to
the future and judging their relative importance.
It includes the proper or accurate point of view or
the ability to see with objectivity so as to try to get
some perspective on issues for better solutions.
Small and Medium Enterprises (SMEs): Is
a term for segmenting businesses and other orga-
nizations that are somewhere between the “small
office-home office” size and the larger enterprise.
Country to country this term may vary, but it is
usually based on the criteria of investment, number
of employees and turnover, etc.
Strategies: Strategy is the science or art of
combining and employing the means of war in
planning and directing large military movements
and operations. It refers to use of moves and tactics
or the science or art of a course of action to plan,
method, or series of maneuvers or stratagems for
obtaining a specific goal or result.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 17
Hierarchies and Holdings:
Implications of SME Entrepreneurship for
Enhanced HRM in Hospital Management
ABSTRACT
This chapter proposes that key features of New Public Management (NPM) in complex public service
organisations, such as teaching hospitals, are less new than a reversal to Weberian hierarchy, Fordist
concern with throughput rather than quality, Taylorist standardised performance criteria, and Foucauldian
surveillance. While this judgement is severe, it illustrates that such management models combined with
market or quasi-market criteria have been dysfunctional in the UK in near trebling administrative costs,
demotivating health professionals, and in the view of their professional associations, risk destroying the
principles of a national health service. It proposes that those concerned to counter this could draw on
more plural modes of management in public sector institutions such as holding companies as a model
for reforms in hospital organisation, which could enable a degree of relative autonomy for individual
services and units similar to that typical of small- to medium-sized firms. It distinguishes organisational
logic as the basis for economic efficiency from operational logic as the basis for social efficiency in
terms of psychological wellbeing of both health professionals and patients. It submits that doctors as
managers of staff in different services and units need relative autonomy for effective implementation of
Human Resource Management (HRM) practices at operational levels to be able to enhance purposeful
engagement and vocational commitment to health as public service as well to enable psychological con-
tracting into change. Informed by a case study within a socio-cognitive approach in a major European
teaching hospital, it then draws implications concerning the merits of a holding company model for
hospital organisation.
Teresa Carla Oliveira
University of Coimbra, Portugal
Stuart Holland
University of Coimbra, Portugal
João Fontes da Costa
Instituto Politécnico de Coimbra, Portugal
Francisco Edinaldo Lira de Carvalho
University of Coimbra, Portugal
DOI: 10.4018/978-1-4666-4731-2.ch017
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Hierarchies and Holdings
Services should be autonomous to the maximum
possible degree… This would be an
organisation which is a holding in the sense
that there are various enterprises within an
overall management framework (Felício, Couto,
& Caiado, 2012).
INTRODUCTION
As illustrated by Felício, Couto and Caiado (2012)
it is characteristic of successful small and medium
firms that their entrepreneurship combines a high
degree of self-direction, autonomy, openness to
innovation and purposeful engagement. By con-
trast, a stereotypical perception of public sector
institutions is that they offer jobs-for-life, reinforce
vested interests without concern for performance,
are hierarchical, bureaucratic, inflexible and in-
hibit innovation (e.g. Friedman, 1980; Lindbeck
and Snower; 1988; Le Grand, 1997).This chapter
claims that this case is overdrawn and, in key
cases, false. It illustrates flexibility and innova-
tion in public sector companies and institutions,
some of which started as small and medium firms
but then became global giants. It also draws on
evidence from state holding companies which
have allowed a high degree of autonomy to man-
agement at operational levels similar to that of
entrepreneurial SMEs. It recognises that large
firms and small firms clearly differ in key regards.
The bigger a firm – or institution – the greater is
the need for structured organisation, but also the
risk of inertial Weberian hierarchy and bureau-
cracy (Legge, 2005). Smaller firms and start-ups
driven by inspired entrepreneurs may have greater
flexibility and scope for innovation, such as Steve
Jobs and Steven Wozniak who founded Apple, yet
not initially develop a sustainable business model
while others such as Hewlett and Packard, started
by the two of them in a garage, then may devolve
so much that they lack sufficient coordination to
sustain initial success (Waters & Nuttall, 2012).
Inversely, change such as New Public Manage-
ment (NPM) in health services may presume to
be innovative, entrepreneurial and progressive
without recognising that new layers of manage-
ment introduced to monitor performance may re-
inforce hierarchy and bureaucracy (Leys & Player,
2011; Oliveira, 2011 a, 2011b). Such NPM also
may mirror the private sector in seeking a more
entrepreneurial culture yet fail to allow relative
operational autonomy for different services and
units, while market based performance criteria,
and the introduction of line managers to assess
this, may de-motivate health professionals and
encourage resistance to and attrition of an NPM
model (Bolton, 2004, Warwick, 2012).
This chapter first considers such outcomes
in British NPM health reforms and submits that
their implicit logical has been regress to Fordist
inflexibility, Weberian hierarchy and Foucauldian
surveillance through neo-Taylorist performance
criteria. Second, it relates this to attraction-
selection-attrition (ASA) models (Schneider,
1983, 1987, 1990, 2008) and extends both the
ASA model and how health professionals may
initially be attracted to the case for NPM yet then
be disillusioned by how its hierarchical logic dis-
regards variable performance needs for different
units and services to theories of breach of psy-
chological contract (e.g. Rousseau, (1989, 1995,
1998; Rousseau & Parks, 1993) and frustration
of purposeful engagement at work (Robertson
& Cooper, 2010). Third, it contrasts such hierar-
chical logic with holding companies in both the
private and public sectors and the greater degree
of relative autonomy that they allow for operating
management. Fourth it develops the case that for
distinguishing operational from organisational
logics at different levels of management and illus-
trates success in achieving this in a Scandinavian
teaching hospital. Fifth, it suggests an ‘enhanced’
HRM model which would allow greater relative
autonomy for managers of units and services within
a major organisation such as a hospital much as
may be the case for small or medium firms within
a private sector holding company.
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Hierarchies and Holdings
The chapter then presents case study evidence
from the introduction of NPM in a major European
teaching hospital, and reactions to this derived
from transcription and coding of a series of one-
to-one semi-structured interviews with doctors as
managers of units and services similar in size to
small and medium firms. It evidences that these
have different perceptions of what they need to
prioritise in order to gain either social efficiency
in terms of psychological wellbeing for patients,
and for health employees in terms of purposeful
engagement, or economic efficiency in terms of
performance, including clinical care, training,
research and innovation. It recognises that no
large organisation such as a hospital can grant
total rather than relative autonomy to different
departments, units and services, but suggests that
a holding company model can reconcile a coher-
ent organisational logic with relative autonomy
for diverse operational needs.
HIERARCHY AND NEW
PUBLIC MANAGEMENT
Throughout the western world, not least with age-
ing populations which themselves are evidence of
success in both health systems and from innova-
tive health technology, there has been increasing
demand for health services at the same time as
governments are seeking to reduce the costs of
health provision (Pollock, 2004; Leys & Player,
2011). Implicit within this are different paradigms
of health and hospital organisation, and different
perceptions of outcomes from change manage-
ment. Even before the financial crisis of 2008-9,
with tensions between public and private claims
on service delivery, there was a presumption that
health provision as a public service financed from
taxation no longer could be afforded without
radical management reforms. There also was a
perception within other European countries that
the New Public Management reforms on market
criteria in the British (and since devolution now
English) National Health Service (NHS) could
provide a template for such change (Oliveira &
Holland, 2007).
The UK NHS Reforms
From the 1980s, NPM in the then British NHS,
before devolution to Scotland and Wales, was sup-
posed to end bureaucratic public administration
and gain new efficiencies through the introduction
of market based performance criteria. Key claims
for NPM were (1) that bringing in ‘professional
managers’ from the private sector would end
bureaucracy; (2) that ‘outsourcing’ to the private
sector would offer a more competitive service; (3)
that internal markets or ‘quasi-markets’ would
increase both economic efficiency and quality
and choice for the public; (4) that general prac-
titioners would be empowered in countervailing
bureaucracy by being able to ‘contract’ from
hospitals, while (5) better financial control would
be gained by devolving responsibility to Health
Service Trusts for their own budgets (Pollock,
2004; Leys & Player, 2011).
Underlying this was what Seddon and
O’Donovan (2011) have criticised as an ideo-
logical import from economics of ‘public choice
theory’ which itself was a misnomer in that it means
introducing private choice and private market
criteria into a public service. They criticise such
theory on the basis that it is premised on a narrow
model of human behaviour which assumed that
public sector workers are solely self-interested
agents rather than gaining fulfilment from pur-
poseful engagement in what they do and from
valuing what they may be able to do for others,
as in health services. Such an approach has been
modelled by Gomes, Yasin and Yasin (2010) and
Yasin, Gomes and Miller (2011) in terms of stan-
dardised criteria that they recommend should be
adopted in health services including hospitals and
primary care units. Among the criteria that they
advocate should be adopted are both total quality
control (TQC) and continuous improvement (CI).
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Hierarchies and Holdings
Yet Gomes, Yasin and Miller show little ap-
preciation that when total quality control and
continuous improvement were adopted in Japan
after WW1, they were not demanded top-down
from higher level management but learned base-up
from operational levels, including empowerment
of individual workers and groups, such as being
able to ‘stop the line’ to prevent a fault going
through or stop the machining of parts to prevent a
lathe overheating (Womack, Jones & Roos, 1990;
Moriguchi & Ono, 2004; Yamaguchi, 2004). Nor
have Gomes et al. (2010) or Yasin et al. (2011)
recognised that the commitment to kaizen style
continuous improvement in Japan was a symbiosis
between what western social theory has deemed
both psychological and social contract in the sense
that it assured core workers lifetime employment,
and profit sharing, while kaizen in Japanese com-
bined two words – the kai of improvement and the
zen of mutual wellbeing (Oliveira, 2007). Nor has
kaizen in these dual senses been widely recognised
as central to human resource management.
Conflicting Rationalities
Apart from public choice theory, a shift from
trust in health professionals’ commitment to a
public service was influenced in the case of NPM
reforms in the UK by an adviser to Tony Blair in
the British Cabinet Office who submitted that they
were ‘knaves’ defending their own vested interests
(Le Grand, 1997). This paralleled the thesis of
Lindbeck and Snower (1998) that ‘insiders’ were
protected against competition by ‘outsiders’ for
their jobs and that this should be redeemed by
introducing ‘quasi markets’ into public health
services by out-sourcing. Yet, like Gomes et
al. (2010) or Yasin et al. (2011), Lindbeck and
Snower displaced that both Japanese continuous
improvement and much of the similar efficiency
of German firms was based on insiders informally
assured of jobs-for-life and therefore knowing
that if they proposed improvements in operational
efficiency this would not make them or their col-
leagues redundant (Oliveira & Holland, 2012).
Any health service that aims to be national, and
socially inclusive, must be concerned with how
to achieve volume delivery and either constrain
or reduce costs. However, a widely overlooked
outcome of NPM in the NHS in the UK was that
it increased rather than decreased costs. Pollock
(2004) has shown that, with the additional layers
of middle and line management needed to moni-
tor new performance criteria, administrative costs
near trebled from 5% to 14% from the later 1980s
to 2003. While the UK government belatedly
recognised as much, and insisted that it would
reduce the cost by efficiency gains, through NPM.
it failed to do so. In 2010 administrative costs still
were at 14% (Leys & Player, 2011).
There also have been conflicting rationalities
between government demands for new perfor-
mance criteria in the UK (English) National
Health Service and resistance to these from health
professionals persistently voiced by the British
Medical Association, the Royal College of Nurses,
the National Association of General Practitioners
and the Royal College of Midwives including the
claim that the undermining of trust, outsourcing,
and insisting on ‘quasi market’ or market inspired
performance criteria is ‘destroying’ the National
Health Service (Warwick, 2012). These claims
are the more dramatic since all four of these as-
sociations have been among the most ‘moderate’
in postwar British history, (Pollock, 2004; Leys
& Player, 2011).
A series of studies also has shown that health
service workers in the UK – at all levels – have
come to deeply resent the presumption that they
only were self-interested suppliers of health as
a commodity to be assessed by market criteria.
Nurses have resented the implication that they were
‘doing a job for clients’ rather than committed
to and valuing health care as a vocation (Bolton,
2004). Besides which, out-sourcing of routine op-
erations to private practitioners not only cost more
than in-house operations within the NHS but also
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Hierarchies and Holdings
undermined teaching and training and neglected
increased risk to patients. As in the case of requir-
ing an ophthalmic unit in the Radcliffe teaching
hospital in Oxford to outsource routine cataract
operations which meant that trainee surgeons could
not learn from them, with the cost of outsourcing
six times ‘in house’ costs. While also increasing
risk to patients in that while the Radcliffe never
performed a cataract operation on more than one
eye, to avoid the risk of total blindness if there
were an infection, the out-sourced private sector
surgeons routinely did so to gain great economic
efficiency (Monbiot, 2003).
Weberian Hierarchy
Weber’s (1947) paradigm of bureaucracy was
pre-Fordist in delivering a standardised services
rather than products in volume. But the parallels
between the operational and organisational logic
of his ‘ideal type’ of bureaucracy and that of
Fordism mass production are extensive, and for
largely the same reasons.
1. Weberian control is hierarchical, pyramidic
and from top-down, as with Ford, (Lacey,
1987.)
2. The hierarchy assigns specialist functions
at all levels of an organisation, including
operational levels, as with Taylor (1911.)
3. Explicit rules and actions govern all decision
making, and informal discretion is ‘out of
order’ (as with both Ford and Taylor.)
4. Weberian rules require that service to cus-
tomers or clients should not be personalised,
nor take account of individual or group needs
(as with Ford’s ‘any colour you like provided
it is black’.)
In effect, bureaucracy is inflexible, just as Ford-
ism was inflexible. Yet the best way of thinking
now of what Weber meant by bureaucracy could be
in terms of Veblen’s (1921) ‘technocracy’, echoed
later by Galbraith (1967), in which officials are
less bureaucrats in the current pejorative sense
than technical experts. An irony also of Weber’s
identification of bureaucracy as an ‘ideal type’,
in the sense of an archetype, was that, personally,
he deplored it. He criticised its hierarchical power
structure as oligarchic rather than democratic,
and ‘soulless’ in its denial of individualism. In
this regard he differed diametrically from Taylor
(1911) in lamenting its:‘[s]pecialists without vi-
sion, sensualists without heart; this nullity that
imagines that it has attained a level of civilisation
never before achieved’ (Weber, 1957, p. 182).
Weber claimed that ‘the big question’ was what
alternative could ‘keep a proportion of mankind
free from this parcelling out of the soul, from
this supreme mastery of the bureaucratic way
of life’ (Weber, ibid). In this regard he was ad-
dressing what his contemporary Robert Michels
(1915) identified as a tendency to an ‘iron law of
oligarchy’ in organisations, or what Weber him-
self called the ‘iron cages’ within bureaucracy,
concluding pessimistically that they would ‘defeat
democracy’ both in administration and in politics
and government, with political parties becoming
hierarchical in order to function effectively, while
ministers came and went and bureaucracies stayed
(Weber, 1957).
Weber’s presumption of soulless bureaucracies
nonetheless needs qualification in the sense that
Blau (1970) has challenged his not distinguishing
bureaucracy as an institution from bureaucrats as
a type. Few people consider nurses to be soulless.
Many have seen them as angels. By contrast a
programme for change management may well be
soulless if this implies intensification of the labour
process and Taylorist surveillance in a manner
that reinforces Weberian hierarchy. The passive
resistance to this in hospitals may simply take the
form of high levels of absenteeism. Or, inversely,
‘presenteeism’ when people turn up for work
who are not fit to do so and thereby may render
a whole team or unit unfit for work through cross
infections (Arnold, Cooper, & Robertson, 2005).
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Hierarchies and Holdings
Performance and Surveillance
Weber recognised that in bureaucracies explicit
rules must govern decision making and that this
required surveillance in the sense of performance
appraisal. Surveillance was integral to Taylor’s
(1911) time and motion studies and as a means
of discipline also has been analysed by Foucault
in his study translated into English as Discipline
and Punish (1977) even if this misses his stress
on surveillance itself in its edition in French as
Surveiller et Punir. Taylor’s time and motion
surveillance in many regards anticipated Fou-
cault’s stress on discipline, since he claimed that
workers ‘soldiered’ or shirked by using their tacit
knowledge to disguise how long it actually took to
do something and therefore designed tasks to be
reduced to a minimum, which could be monitored,
in order to prevent this (Taylor, 1911.)
Yet Taylor’s surveillance was the more formi-
dable because while Weber lamented the need for
it, and Foucault analysed it, Taylor intended it.
When he first tried to implement this as a manager,
workers resented it. They were determined that it
should not become a norm. Nor did Taylor initially
gain much support from other managers since his
claims for standardised performance criteria were
a not necessarily welcome challenge to entrepre-
neurs who valued their own discretion in how to
manage. He also was an obsessive to the point of
psychotic, since childhood, in daily measuring how
much time he needed to spend in a bathroom, or
to dress (Monin, Barry & Monin, 2003).
The variants of surveillance in relation to
different modes of ownership and control, from
Weber (1911, 1949) through Ford as an owner-
entrepreneur who hired Taylor (Lacey, 1987) and
to Sloan’s multi-divisional management model
for General Motors (Sloan, 1964) are illustrated
in Figure 1. In each case, as in NPM in health
service reforms, the organisational logic was in-
creased throughput. The operational logic, as in
NPM reforms was surveillance. All three modes
were both hierarchical and authoritarian.
Figure 1. Ford, Sloan, Weber and Surveillance
Source: Own formulation
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348
Hierarchies and Holdings
Citing Fiske (2010), Gruenfeld and Tiedens
(2010) and Tiedens et al., (2007), Halevy, Chou
and Galinsky (2010) have remarked on an am-
bivalence towards hierarchy combining explicit
antagonism coupled with an implicit preference
for hierarchical arrangements, and have sug-
gested that this plausibly reflects a common
recognition that power as a primary basis of hi-
erarchical differentiation is ‘simultaneously the
great corruptor and the great liberator’ ((Halevy,
Chou and Galinsky, p. 45). Yet they nonetheless
have claimed that hierarchy establishes a clear
chain of command from the person with the most
authority at a high level to those below.
Yet commands not only are authoritarian
but a chain of command may be highly inflex-
ible. There also are limits to the effectiveness of
top-down hierarchy, ultra-division of labour and
performance surveillance to a point at which they
may initially reach an efficiency peak but beyond
it ‘plateau’ as they did for Ford, General Motors
and Chrysler when faced with competition in the
US from Japanese and South Korean firms such
as Toyota, Honda and Hyundai (Shepardson,
2009) which had achieved economies of scope
rather than scale, and continuous improvement
at operational levels (Womack, Jones & Roos,
1990; Quinn, 2009;). For the following reasons:
1. Intensifying the labour process to increase
the volume of throughput and productivity
per worker tends to reduces quality and may
result in faults.
2. Authority can command compliance, but not
creativity, and may invoke attrition through
passive resistance by doing the least neces-
sary to avoid dismissal, or what Taylor (1911)
had aimed to eliminate in the first place.
3. Top-down operational design and surveil-
lance is inflexible, defining but also thereby
constraining operational practice.
4. Neither Fordist nor Weberian organisations
allow self-directed change at operational
levels and therefore tend to be inertial at
operational levels.
5. A hierarchical Fordist or Weberian institu-
tion cannot be a learning organisation rather
than demand personnel and performance
appraisal on what it has designated down.
6. Standardised performance criteria may
inhibit innovative methods of motivating,
and rewarding, continuous improvement in
methods of work organisation.
ATTRACTION, ATTRITION AND
PSYCHOLOGICAL CONTRACT
Attraction-Selection-Attrition
Hay (2002) has found that the best people in
organisations are most likely to leave if they are
dissatisfied with how their skills and talents are
being developed which we suggest may be the
case with NPM reforms in national health systems,
and result in some of the most experienced and
skilled health professionals ‘opting out’ for higher
rewards, or more autonomy, in private health
provisions. We suggest a relation of this also to
Schneider’s ASA attraction-selection-attrition
model (Schneider, 1983, 1987, 1990, 2008). Sch-
neider developed this in the context of personnel
selection and whether people initially attracted
to an organisation, and selected by it, then would
become disillusioned, and quit.
But we propose that the attraction-selection-
attrition model also has relevance to what manage-
ment model is selected in terms of health reforms.
For example, it may be that health professionals
recognise the need for change and initially support
it in principle. But then find that there is a divorce
between principle and practice, that demands for
standardised performance criteria neglect the de-
gree to which there are varying needs for effective
performance at different operational levels (Guest,
et al., 2011), and that their hierarchical top-down
control model denies the relative autonomy needed
for this. O’Reilly, Caldwell, Chatman, Lapiz and
Self (2010) have cited a number of studies indi-
cating that a crucial determinant of successfully
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349
Hierarchies and Holdings
implementing a new strategic initiative is whether
lower level leaders support the change. Stagner
(1969) reported that the degree of consensus
among employees about a change strategy was an
important determinant of subsequent profitability.
Guth and Macmillan (1986) reported that when
middle level leaders did not support the strategy,
they were sometimes able to sabotage it. Perhaps
most importantly, in a study of 196 managers
across 20 organizations, Wooldridge and Floyd
(1990) found that the more involved middle level
leaders were in formulating their organization’s
strategy, the more the organization’s performance
improved as a result of it. Middle managers may
not quit but may just ‘play along’ with the rheto-
ric of change management, while disregarding it
(Lok, 2010), which may outcome in attrition of
the change management model.
Psychological Contract, HRM
and Levels of Management
This also may prove to be the case with the con-
cept of psychological contract and its implications
for HRM (Guest & Bos-Nehles, 2012). Such a
contract is notable in that no one writes it down
rather than writes about it since, unlike an explicit
contract of employment, it is assumed and implicit.
Conway and Briner (2005) have drawn attention
to the increased interest in such a contract since
publication of the work of Denise Rousseau (1989)
which involved four ‘shifts’ in focus.
1. The first was from mutual expectations as-
suming reciprocal interests and trust to cases
in which an implicit ‘promise’ or commit-
ment was assumed to have been made by
the employer.
2. The second, with this, was a shift from what
might be assumed by employees in general
to an individual’s perception of what such
a promise or commitment might mean.
3. The third, implied by this, was a shift of
domain from mutual needs or mutual benefit
to concern with an individual employee’s
perception of it.
4. The fourth was a shift from mutual trust to
a focus on cases of perceived violation of
the presumed contract (Rousseau, 1989.)
As Conway and Briner (2005) have observed,
Denise Rousseau’s change of focus (e.g. Rous-
seau, 1989, 1995, 1998; Rousseau & Parks,
1993) influenced the direction of much research
on psychological contract such as doctor-patient,
student-teacher relationships where a patient or
student implicitly assumes that the relationship is
based on shared values and trust but then comes
to believe these have been breached.
Yet a contract implies two or more parties.
A contract, whether explicit or implicit, also is
concerned with reciprocal obligations and how
each of the parties regards this is relevant to
whether it is functional or dysfunctional (Guest,
1998b). Herriot and Pemberton (1997) also have
challenged Denise Rousseau’s (1989) one-sided
perception of psychological contract:
First coined by Argyris (1960), the psychological
contract may be defined as the perception of both
parties to the employment relationship, organiza-
tion and individual, of the obligations implied in
the relationship …. This definition is the classic one
of Argyris (1960) and Schein (1978), and differs
from that espoused by Rousseau and Parks (1993).
These latter authors maintain that the contract is
only in the mind of the employee; they therefore
have little to say about the contracting process
(Herriot & Pemberton, 1997, p. 45.)
We therefore suggest the more inclusive
definition of a psychological contract as implicit
reciprocal values and trust and suggest that while
these may initially have been assumed, it then
may be found by both individuals and groups
that this is not the case. As, for example, in the
introduction of Taylorist performance criteria in
NPM which was premised on distrust (Le Grand,
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350
Hierarchies and Holdings
1997), and displacing that health professionals
may be purposefully engaged and committed to
health as a public service, rather than a product,
and gain fulfilment from this when they have the
scope to initiate change at operational and group
levels that can enhance the quality of such service.
This raises issues not only of breach of psycho-
logical contract but at what level it can be achieved
and reinforced, which also relates to organisational
structures and levels and the role of HRM. For, in
line Hannah, Lord and Pearce (2011), it is more
likely that the smaller the group, as in an SME,
the greater is the chance of addressing complex
and diverse needs through high quality HRM,
rather than standardizing performance criteria.
In which it may be found in the case of a large
organisation such as a hospital that it is the health
professionals who are medical directors of units
and services are the most appropriate managers
to achieve and reinforce such a contract.
The Need for Diversity
Drawing on a case study from a three-year quan-
titative and qualitative project on the influence of
staff motivation, affect and well-being on patients’
experience of care in the NHS, funded by the UK
Department of Health, Peccei, Maben, Robert,
Adams and Murrells (2011) distinguished two
main forms of patient care performance:
1. In-role performance of tasks that are con-
sidered to be a normal part of employees’
job, with two main sub-sets:
a. Relational performance concerning
interactive aspects of the job.
b. Functional performance fulfilling key
job tasks.
2. Discretionary performance in the degree
to which employees engage in desirable
behaviours that are not explicitly required
by their job, again with two sub-sets:
a. Helping behaviours for patients that
go beyond job requirements.
b. Continuous improvement for the well-
being of patients.
Consistent with climate theory and research
such as that of Schneider et al., (2002), and recog-
nising that in large complex health organisations
climate may vary across organisational sub-units,
they considered both employee perceptions of the
climate for patient care in the organisation as a
whole and at the local level (i.e. in specific work
units). One of their main findings, is that while
a strong perceived climate for patient care at
organisational levels will have a positive general
effect, the local climate for discretionary patient
care was vital for specific positive effect. This is
consistent with our distinction between organisa-
tional and operational logics, the need for health
service delivery to avoid undue standardisation
of performance criteria, and the case for relative
autonomy at operational levels, which in turn
suggests support for health services in large com-
plex organisations such as a major hospital to be
organised on a holding company model.
Levels, Engagement
and Performance
This also is confirmed by findings from Truxillo,
Cadiz, Rineer, Zamboni and Fraccaroli (2011)
in an analysis of fitting the job and the work-
ers to promote job fulfilment, engagement and
performance. What they have found is that key
motivational characteristics relate to tasks, in
terms of autonomy, task variety, task significance
and feedback on the job, as well as to knowledge
and skills in terms of job complexity, problem
solving and skill variety. None of these imply
standardisation at operational levels in terms of
performance criteria rather than diversity of the
kind that is more typical of holding companies
than of Weberian hierarchies.
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351
Hierarchies and Holdings
HOLDING COMPANIES
Private Sector Holdings
and Conglomerates
Private sector holdings either can be financial
investment vehicles, or operating companies, or
both. They do not necessarily imply controlling
shares or participation in management decision-
making. In a conglomerate, a holding company
may have a majority or minority stake in a number
of other companies and may well intervene in
their management decision-making but without
standardisation of their performance criteria.
For example, Warren Buffet’s highly successful
Berkshire Hathaway is an American based con-
glomerate that wholly owns companies such as
Heinz yet also has significant minority holdings
in American Express, M&T Bank, Proctor &
Gamble and IBM among many other companies
(Schroeder, 2010).
General Electric, Siemens, Philips, Honeywell
and Hitachi are examples of operational holding
companies concerned to assure effective per-
formance, and can be ‘hands-on’ in seeking to
assure this. By contrast, some financial holding
companies simply are concerned with profits,
and may seek them from mergers and acquisi-
tions, including down-sizing to reduce costs, even
though many to most of these fail (Rein, 2009;
Siegenthaler, 2012).
The difference between a private sector holding
company and a vertically managed corporation
such as Ford or General Motors is that an opera-
tional holding allows for more diversity. Its top
management is concerned with performance and
profitability for the holding as a whole but not
necessarily for all of its operational holdings in the
short term. It may foster innovation in an entirely
new product or service while recognising that the
growth rather than innovation phase of a product
cycle may be indefinitely delayed (Vernon, 1966;
Holland, 1987) and allow cross subsidisation of
different activities (Chadha, 2009).
This is not to claim that a holding company
formula in the private sector guarantees suc-
cess. One of its most recent failures has been
in Hewlett-Packard which for some time was
regarded a paradigm of devolved management,
yet then ‘lost the plot’. Or, as Waters and Nuttall
(2012) have put it:
One of the arguments for conglomerates has
always been that if one part of the business is
losing money, others will be doing it better and
help or even out perform them. H-P, however, is
a conglomerate in which all the cylinders have
stopped performing at once.
Yet for H-P this was in terms of profitability
whereas it is near impossible for all cylinders in
a hospital to stop performing at once, rather than
that some may be functioning well, others less well
and others badly, which in turn again implies a
distinction between organisational and operational
logics as well the need for lateral learning between
units and services to gain from best practice, rather
than only top down standardised performance.
Entrepreneurial Public
Sector Holdings
Public sector holdings, like those in the private
sector, either may be financial or operational.
Sovereign wealth funds are financial holding
companies. They are not centrally concerned with
operational management of the firms or projects
in which they invest, rather than with profitability
and will reduce their holdings in operating com-
panies if they cannot assure a sufficient rate of
return, or are making losses. Thus Norway’s major
sovereign wealth fund was reducing its European
investments from over half to two fifths in 2012
(Reuters, 2012). Asia’s biggest sovereign wealth
fund, the China Investment Corporation, made a
loss on its private equity investments in 2011, has
cut its holdings of private securities to a quarter
from nearly half and is looking for longer term
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352
Hierarchies and Holdings
public rather than private sector investment outlets
(Business News, 2012.)
Public sector holdings, like those in the private
sector, can operate through either majority or mi-
nority shareholdings. A range of these in Europe
were surveyed by the contributors to Vernon’s Big
Business and the State (Vernon, 1974). Leading
examples cited were the German federal govern-
ment’s holding company VIAG, the Italian Indus-
trial Reconstruction Institute (IRI) and the Italian
National Hydrocarbons Agency (ENI). A key role
in these holdings is that while governments may
require them to fulfil strategic remits, they have
left operating management to the holdings. Both
the IRI and ENI holdings are examples that have
been highly successful whereas Italian companies
with higher profile such as Olivetti have declined
as major players in the Italian economy.
Thus, a financial sub-holding of the IRI group
– Finmeccanica – has diversified long-term in
aircraft, aerospace, automation, TGV trains, track
and signalling, and turbines and power generation.
In the 1960s it had some 30.000 employees and
was scarcely breaking even (Holland, 1972). But
by 2010 it had more than 70.000 of which some
10.000 are in the UK after its taking over much
of what remained of the British engineering com-
pany GEC, and the British helicopter company
Westland. By 2011 Finmeccanica was the second
largest industrial group in Italy and the largest Ital-
ian industrial group in advanced technology. The
company operates in more than 100 countries. The
government retains what amounts to a controlling
shareholding of 30% (Finmeccanica, 2011.)
ENI – From SME to Global Giant
The ENI national hydrocarbons agency started as a
small company in a country that had neither oil nor
gas, and was driven by the highly entrepreneurial
Enrico Mattei. After World War II he was given the
task of dismantling the Italian Petroleum Agency
AGIP a state enterprise established by the prewar
fascist regime. Unlike AGIP until then, which had
found next to nothing, ENI discovered methane gas
in the Po Valley and this was piped to be available
to some Italian industry. But whereas the methane
gas proved to be limited, Mattei’s entrepreneurship
was not. He used the technical staff of AGIP and
then ENI to set up both a consulting company
for intermediate and developing countries, and
then an operating company in drilling, refining
and petroleum retailing. Under his direction ENI
negotiated important oil concessions in the Middle
East as well as a significant trade agreement with
the Soviet Union offering such countries 75% of
the earnings from oil and gas. Such a formula
meant that ENI rapidly became a major interna-
tional player, challenging the global dominance
of the ‘seven sisters’ of the US majors such as
Esso and Anglo-Dutch Royal Shell despite Mat-
tei’s premature death in a plane crash (Posner &
Woolf, 1967; Firrao & Ubertalli, 2009.)
A key role in such success was that while the
government either required or approved strategic
initiatives by the IRI and ENI groups, such as
Mattei’s diversification of AGIP, it left operational
discretion to the management of ENI, IRI and their
sub-holdings. There was no top down concern to
standardise performance criteria. Managers of
the holdings and of individual firms were free
to determine their own performance criteria and
the pay levels of employees, much like small or
medium firm entrepreneurs. It is not surprising
that the management model came to be known as
Lo Stato Imprenditore – or The State as Entrepre-
neur (Holland, 1972; Amoroso & Olsen, 1978.)
INSTITUTIONAL, ORGANISATIONAL
AND OPERATIONAL LOGICS
We suggest that deepening analysis of the relation
between private and public sector entrepreneurship
can be informed by the concept of institutional
logics and a distinction of operational from or-
ganisational logics.
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Hierarchies and Holdings
Studies of institutional logics have included
the concept of trust in early thrift institutions
(Haveman & Hayagreeva, 1997); the transition to
market logics in health care organisations (Scott,
Ruef, Mendel & Caronna, 2000); similar pressures
for market logics in colleges and universities
(Gumport, 2000); institutional logics in con-
sumer research (Moorman, 2002), mutual funds
(Lounsbury, 2002, 2007), equity markets (Zajac &
Westphal, 2004), craft industries (Thornton, 2002),
accounting, architecture and publishing (Thornton
& Ocasio, 1999; Thornton, Jones and Kury, 2005)
and occupational prestige (Zhou, 2005.)
Institutions, Power and Logics
Yet institutional logics can be either explicit or
implicit, either inovative or defensive or destruc-
tive, such as the alleged higher professionalism
in mutual funds (Lounsbury, 2002, 2007) which
displaced sensing of risk by computer programmes
designed ‘to remove human error’ and thereby,
on narrowed parameters, paved the path to the
subprime crisis (Mandelbrot & Taleb, 2006;
Roubini, 2007; Tett, 2009.)
Thus the concept of institutional logic has force
but we also suggest that it can be enhanced by a
distinction between organisational and operational
logics. The concept of organisational logic is not
new. For instance John D. Rockefeller III, who
had some reason to know from his experience of
Standard Oil, claimed that ‘An organization is a
system, with a logic of its own’, stressing especially
the weight of tradition and inertia, (Rockefeller,
1973, p. 72) which can be deemed inertial insti-
tutional logic, as in a hierarchy,
What we also suggest is that a distinction of
institutional from organisational and operational
logics is relevant to analysis not only of hierarchy
and surveillance, as in Figure 1, but also to the
introduction of NPM in health systems. Thus a
National Health System is an institution, a hos-
pital is an organisation but that services or units
within a hospital have their own explicit or implicit
operational logics which are not standardised and
whose efficiency, and fulfilment health profes-
sionals in terms of motivation and behaviour,
may be constrained by insistence on standardised
performance criteria.
Operational Logics and
Learning Organisations
We also propose that a distinction between opera-
tional and organisational logics can redress what
has emerged as some disillusion with the concept
of ‘learning organisations’ and facilitate organi-
sational learning. For example, Legge (2005)
has claimed that the very concept of a learning
organisation is fraught with both with practical
and conceptual difficulties and cites Weick and
Westley (1996) as observing that:
Organising and learning are essentially antitheti-
cal processes which means the phrase ‘organi-
sational learning’ qualifies as an oxymoron. To
learn is to … increase variety. To organise is to
forget and reduce variety (Weick & Westley, 1996,
p. 440, cit. Legge, 2005, p. 20.)
Questioning whether senior management can
possibly have knowledge of a whole organisation
Legge (ibid) further claims that the concept of
organisational learning is a misnomer since it is
people that learn and to suggest that organisations
do so is to reify what is a human attribute. What
we suggest is that organisational learning can be
based on changes in operational logic and that one
of the most notable examples of this was change
management in the Karolinska teaching hospital
in Stockholm.
The Karolinska Case
The context was insistence of an incoming Con-
servative government in Sweden in the early 1990s
to reduce hospital costs by 15%. The general
manager of Karolinska, Jan Lindsten, brought in
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354
Hierarchies and Holdings
consultants to assess economic efficiency at all
levels and then cut wasted capacity and wasted
time in an entrepreneurial manner. He identified
that one of the key reasons for delay in surgery was
operational – a lack of anesthetists – and employed
more in a new unit that was on call at any time.
He also avoided operational waste in gaining a
reduction of under-utilisation of operating the-
atres by re-organising them into routine and fast,
slower intermediate and complex surgery. The
outcome was reduction of waiting lists in some
cases, such as for hip operations, from months to
weeks, and even days. With the further outcome
that since patients in the Stockholm area opted to
be treated at Karolinska, this increased its patient
flow by 20% and also its revenues since the gov-
ernment paid hospitals on the basis of the number
of patients treated (Kaplinsky, 1995; Oliveira &
Holland, 2007.)
Lindsten also gained support for this by opera-
tional job re-design and re-designation for senior
nurses to put them in charge of to enable ‘patient
path planning’ with the principle of ‘one day’
appointments for diagnosis. The one day prin-
ciple was that all relevant medical staff had to be
available for cross referrals, including at least one
consultant in any specialisation. The implicit logic
of the change was in ‘enhanced’ HRM in the sense
of gaining a leaner and more efficient utilization
of human resources but also to transform senior
nurses into the managers of such patient path
planning. Its explicit logic initially was resisted
by doctors who disliked the implication that their
time would be ‘managed’ by senior nurses until
it was made plain to them that the saving in time
also would be saving it for themselves, either to
reduce workload and improve work-life balance
or for research. Senior nurses also were at the
appropriate operational level to know what was
needed to ensure more effective patient path flow
(Kaplinsky, 1995). They were managing both
physical and human resources to achieve greater
economic efficiency ex ante at operational levels
rather than only ex post performance evaluation.
What Lindsten achieved at Karolinska was equiva-
lent to what recently has been conceptualised as
‘boundary spanning’ between different units and
services of an organisation (Scott, 1981; Mørk,
Hoholm, Maaninen-Olsson & Aanestad, 2012.)
LEVELS, ENGAGEMENT
AND THE ROLE OF HRM
Grant and Hofmann (2011) have found that role
re-definition and re-designation at operational
levels, such as was undertaken by Lindsten at
Karolinska in giving senior nurses responsibil-
ity for patient path planning, yields consistently
positive outcomes. Robertson and Cooper (2010)
have found that a eudaimonic sense of purpose-
ful engagement at work, rather than just ‘doing
a job’ not only improves the quality of a service
but also enhances both the hedonic wellbeing of
employees and of clients, with measurable health
gains. Pinder and McLean (2010) have claimed
that self-assessment rather than performance
assessment tends to be stronger for people who
consider their work to be a vocation than for those
who view their work merely as a job.
Schaufeli and Salanova (2011) have found that
purposeful engagement is higher when it is a team-
level experience at operational levels. Maslach
(2011) has found that in whatever way engage-
ment is assessed, level counts and it is enhanced
when there is a good team working environment
but that, when not matched by work-life balance,
may result in burnout and absenteeism either from
ill health or exhaustion and depression. Whitman,
van Rooy, and Viswesvaran (2010) have found
that the relation between personal fulfilment and
performance is stronger when both not only are
assessed but also enhanced at operational levels. In
a four country study on lifelong learning Oliveira
(2003) found that most learning is informal rather
than formal, including on-the-job learning rather
than formal training. In a wide ranging analysis of
team learning and performance in both the private
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Hierarchies and Holdings
and public sectors, van Woerkom and van Engen
(2009) found that teams in health care learned
more than teams in any other service area. Tucker,
Nembhardand Edmondson, (2007) nonetheless
have found that team learning depends on the type
of team, which can differ significantly within a
major institution such as a hospital.
HRM, Levels and Perception
Guest (1998a, 1999, 2003, 2004, 2011) and others
(e.g., Guest & Bos-Nehles, 2012; Guest, Paauwe
& Wright 2013), along with Bowen and Ostroff
(2004), have found that the links between HRM
and performance are complex, with managers’
perceptions of these varying at different levels.
Complexity also has been stressed by Hannah,
Lord and Pearce (2011), who relate this to Argyris
and Schön’s distinction of double from single loop
learning (Argyris & Schön, 1974, 1978, 1996).
What they submit is that the group is the basis of
learning and that groups will be diverse in what
they prioritise and what they know at varying
levels of consciousness is important for effective
service delivery.
Bowen and Ostroff (2004), with Guest and
Bos-Nehles (2012) and Guest, Paauwe and Wright
(2013), have set out the case for an organisational
climate enabling a strengthening of the effective-
ness of HR systems. Yet have recognised that
limited understanding of this is gained by collect-
ing information on HR practices without paying
sufficient attention to how they are perceived
and are – or are not – enacted by managers. They
also stress the need to identify individual level
operational climates to HRM outcomes. Guest and
Bos-Nehles (2012) have observed that although
research across organisations has found variance
in both perceptions of HRM and its effectiveness,
there has been less attention to variance within
them, which an issue that the case study reported
later in this chapter seeks to address.
Nishii, Lepak and Schneider (2008) have
submitted that perceptions of HRM practices by
employees have consequences for performance
at unit levels and that (1) where the perception
is that such practices are motivated by concern
for enhancing both service quality and employee
wellbeing this was positively related to employee
attitudes whereas (2), there was a negative relation
when the perception was that such practices were
focused on reducing costs and increasing output
in terms only of productivity. They further found
that these positive and negative attitudes tend to
become shared within units of a service organiza-
tion which implies the case for relative autonomy
in how the managers of such units should operate
HR practices.
Nishii, Lepak and Schneider (2008) therefore
are concerned with employee perceptions of HRM.
Bowen and Ostroff (2004), Guest and Bos-Nehles
(2012) and Guest, Paauwe and Wright (2013) share
this yet also are concerned understand managers’
roles in effective HRM implementation. Not least,
to gain a better understanding of how to achieve
effective HR implementation in the context of the
introduction of new public management there is a
need to look not only at what is being demanded
in terms of new performance criteria but whether
these help or hinder health professionals in im-
proving performance.
We suggest, with Robertson and Cooper
(2010), and in line with Legge (2005), that this
relates not only to leadership at different levels
but also to the scope and limits of concepts such
as organisational learning. For what govern-
ments intend organisations – such as hospitals,
universities, courts or local authorities – to learn
top down within the context of NPM is similar
to single loop learning. But this may fail to gain
double-loop learning up from diversity and com-
plexity at operational levels (Argyris & Schön,
1974, 1978, 1996). While, also, such double-loop
learning could imply allowing a degree of rela-
tive autonomy to leaders at group and unit levels
rather than seeking to impose a single top-down
HRM design.
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Hierarchies and Holdings
Limits to Line Management
One of the main reasons for the near trebling of
administrative costs following the introduction of
New Public Management in the British (then Eng-
lish) NHS was the introduction of line managers to
monitor the performance of health professionals.
In a case study of line manager involvement in the
English NHS, Currie and Proctor (2001) judged
that line managers can be positive contributors to
change when they have discretion in implementing
human resource practices within their own work
groups. Inversely, supporting the case for limits to
line management, Brewster & Söderstrom (1994)
suggest that top-down hierarchical pressure to per-
form leads to feelings of incompetence among line
managers and a reluctance to take responsibility
for devolved HRM activities when these include
performance evaluation. Harris (2007) and Har-
ris, Doughty and Kirk(2002) have found that line
managers disliked performance evaluation due to
this undermining trust at operational levels.
Redman (2001) has found a strong dislike of
surveillance and performance appraisal by line
managers. Renwick (2003) has reported feelings
amongst line managers of being ‘dumped upon’
to assess performance by criteria that bore limited
relation to their experience of group practice at
operational levels, which has been paralleled in
findings by Maxwell and Watson (2006) and
Watson, Maxwell and Farquharson (2007) De
Jong, Leenders and Thijssen (1999) have found
that because line managers are under pressure
to achieve short-term performance targets there
thereby is a tendency for them to displace longer-
term issues and initiatives. McGuire, Stoner and
Mylona (2008) also have found negative reactions
from line managers when they are called on to
monitor performance.
Whittaker and Marchington (2003) found
that line managers’ main concern is that a lack
of higher level support can detract from overall
effectiveness and suggest, as have Hailey et al.
(2005) that line managers’ competence may be
limited from a lack of training. But what may
be the case is that the concept of a line manager
rather than of a line or unit leader is misplaced.
For the ethos of a line manager is performance
assessment rather than performance improvement,
and especially where the improvement could be
both in terms of economic efficiency and social
efficiency, for example, in health in enhancing
the wellbeing of both patients and health service
employees. Whereas, in the case of health services,
the best assessors of what and how employees
may be able to contribute to both economic and
social efficiency in delivery to the public may be
medical professionals directing individual units
and services.
Thomas and Dunkerley (1999) have claimed
that two dominant discourses have underlain the
restructuring of public sector organisations – what
they deem a ‘New Right’ ideology of free markets,
consumer sovereignty, and individualism, and a
‘Post-Modern’ emphasis on change, discontinu-
ity and flexibility. They recognise that both dis-
courses are centrally critical of bureaucracy. But
they suggest that whether middle management
either is a problem or is a solution depends on
whether it has sufficient autonomy to be able to
take initiatives and to be entrepreneurial. This is
relevant to devolved HRM within complex public
service organisations.
THE CASE STUDY
Research Context
The case study was in a Portuguese university
teaching hospital with over 4000 employees (in-
cluding 1040 doctors, 1640 nurses and 1650
auxiliary staff) that in 2009 was reorganized by
statute from 42 disparate units to 7 management
areas and 2 autonomous services. While the
hospital itself was a large organization, each of
the 7 management areas and the 2 autonomous
services was equivalent to a medium sized firm
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357
Hierarchies and Holdings
while several of the formerly disparate units were
equivalent in size to small firms. The 2 autono-
mous services had been created in the first place
by highly self-directed medical professionals
comparable to founder-entrepreneurs of an SME
and retained their autonomy in terms of finance
and administration after the re-organization.
The doctors in charge of the management areas
and autonomous services were senior in terms
of professional status but middle rather than top
managers in terms of organisational hierarchy.
By 2013 the hospital was facing a major inte-
gration of its services with others in the region. In
addition, the government wanted some hospitals
to close small research units on the grounds of
diseconomies of scale and to concentrate research
funding in larger units. This was within the na-
tional context that the government, in May 2011,
introduced a range of new criteria to monitor the
performance of health professionals (Diário da
República, 2011) much on the lines of NPM in
health and hospital reforms in the UK.
As modelled in Figure 2, these included criteria
of which the central four were obligatory and the
outer three optional if the hospital was not a teach-
ing hospital, but obligatory for those which were.
Rationale and Methodology
This case study seeks to gain a more comprehensive
understanding from a managers’ point of view of
what they perceive is important to gain for higher
performance and in particular to gain information
from them of (1) what does or does not work in
for different groups and their operational needs;
(2) what workplace environment is important
both for higher performance and for purposeful
engagement at work and (3) whether NPM style
performance indicators aid or abet understand
achievement of this.
The research setting was useful for exploring the
degree to which initial attraction of some doctors
as managers to the case for organisational change
to increase economic efficiency was qualified
by their concern that standardized performance
criteria could not allow for diverse priorities in
different operational units and services. As also
their concern that preoccupation with quantita-
tive performance criteria and intensification of
the labour process could contradict qualitative
dimensions performance such as purposeful
engagement at work and lead to attrition, such as
burnout and absenteeism.
The methodology of the case study was a
grounded theory approach. As argued by Glaser
and Strauss (1967) and since developed by others
(Symon & Cassel, 1998, 2006; Shah & Corley,
2006), such a socio-cognitive approach, combined
with coding of transcripts of semi-structured
interviews, allows for evidence based iterative
approximation to understandings of doctors’
perceptions of the scope and limits of HRM in
specific organisational and operational contexts.
Figure 3 draws on the previous conceptual
framework and outlines the main criteria which
were assessed in the case study. It distinguishes
different levels of management and two main
groups of criteria relevant to a functional psycho-
logical contract: (1) psychological wellbeing and
social efficiency and (2) performance in terms of
economic efficiency.
Figure 2. NPM Performance Criteria
Source: Derived from Diário da República, 2011
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358
Hierarchies and Holdings
Psychological Wellbeing and Social Effi-
ciency: Identified by values, beliefs and personal-
ity (VBP) in terms of (1) eudaimonic dimensions
such as purposeful engagement, individual or
team autonomy and personal development, where
the purposeful engagement sub-dimensions relate
to learning, self-knowledge, sharing knowledge,
self-efficacy, team awareness and mutual respect;
plus (2) hedonic dimensions such as fulfilment
and positive affect in relation to work-life balance.
Performance and Economic Efficiency: Iden-
tified in terms of knowledge, abilities and skills
(KAS) related to (1) research, such as published
articles or conference presentations, (2) training,
whether internal or external, (3) clinical care
assessed by both the number and quality of con-
sultations and (4) innovation in methods of work
organisation.
Both main sets of criteria took account of or-
ganisational and operational context, individual
preferences and characteristics, as well as flex-
ibility, availability and accessibility.
Data Collection and Analysis
Data collection was by audio-taped fully tran-
scribed individual semi-structured interviews in
a normal work setting averaging 45 minutes with
12 senior doctors who are managing directors of
services and units. The units and management
areas of the doctors are identified in Table 1.
The main issues addressed with doctors in the
interviews were: (1) the challenge for them, as
health professionals, of also being managers of
units and services; (2) whether the aims of or-
ganisational reforms required by the government
were fulfilled in practice; (3) the degree to which
Figure 3. Conceptual Framework for Assessing Psychological Well-Being and Performance in Hospitals
Add Social Efficiency and Economic Efficiency
Source: Own Formulation
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359
Hierarchies and Holdings
‘NPM’ performance criteria enhanced or hindered
operational efficiency; (4) whether they had or
needed a degree of relative autonomy for HRM
practices at operational levels; (5) to identify
which criteria they would prioritise for both per-
formance and employee and patient wellbeing
and, (6) how highly they valued purposeful en-
gagement (eudaimonic wellbeing) and voca-
tional fulfilment (hedonic wllbeing) by those
health professionals whom they managed.
The managers’ discourse was analysed by
a coding system using MAXqda 11 based the
conceptual framework as modeled in Figure 3.
Examples of the discourse in relation to percep-
tions of economic (in)efficiency concerning
performance, as well and social (in)efficiency
concerning eudaimonic and hedonic dimensions
of psychological wellbeing are given in what
now follows.
EXAMPLES OF INDIVIDUAL
DISCOURSE IN RELATION TO THE
MAIN CRITERIA OF FIGURE 3
Economic Efficiency
Top-Down Reorganisation
Understandably a senior administrator was enthu-
siastic about the reorganisation and the manner
in which this enabled fortnightly meetings of the
heads of only seven services or management areas.
These Management Areas meet every other
week with the Council of Administration (Manage-
ment Board) in a manner which enables an ongo-
ing overview of the hospital. This is very positive.
Now, for example, we are able to contract
with the management areas, in meetings with the
service directors. With this, we are beginning to
see what really can be done not only in terms of
personalising services, but including them such
a way we can integrate better.
This also was recognised by some of the
medical directors of the former services and units,
such as that:
Clearly it helps… There is no doubt that this is
useful. Not having to talk with 42 services rather
than with 6 or 7 people helps a lot.
But that this does not of itself resolve the ques-
tion or responsibility since at unit level:
There is a doctor, a clinical director for each
area, an administrator each of this or that service,
a chief nurse or technical head. Which of them
actually is responsible for the unit?
Economic Efficiency and Mergers
It also was recognised by medical directors that
there was a case for the merger of the three hos-
pitals in the local area:
It makes sense to merge when you have a
hospital near to another one of which is short of
beds and the other has spare capacity.
Economic Inefficiency and Bureaucracy
But medical directors also were emphatic that the
reorganisation of a hospital into fewer units did
not redress whether such reorganisation still was
bureaucratic to a degree which inhibited either eco-
nomic efficiency. As one medical director put it:
The bureaucracy and time wasting claimed to
be needed for cost control is unbelievable. If I need
even a simple item like a cover for an examination
table I can need fourteen different signatures for
approval even before the order is made.
Economic Inefficiency and Costs
Central control of costs can raise them because the
people concerned have no idea of what is needed
for clinical safety. For example, I am obliged to
order new surgical instruments when practice has
shown that their sterilisation can mean their re-use
without patient risk.
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360
Hierarchies and Holdings
Overestimation of Technical Progress
But medical directors also stressed that no proper
estimates were made of technical progress in
equipment in relation to the quality of service
to patients.
Some technical progress is revolutionary,
such as a lithotripter for dissolving kidney stones
which removes the need for invasive surgery and
also time in the hospital. But in other cases the
costs of equipment may double but their clinical
gains are marginal – as little as 5 per cent – and
when such an increase is not needed for quality
diagnosis or quality patient care and means less
money for other more basic purchases..
Wrong Reliance on Bulk Purchasing
Some elementary principles are ignored, such
as bulk purchasing or not realising that a drug
company is simply re-pricing and rebranding a
product rather than offering something that has
clinical value
Social Efficiency
It was recognised by medical directors that top-
down overview was needed not only of one hos-
pital but of several hospitals in a region, not only
to avoid duplication of effort and resources but
also to achieve higher levels of social efficiency
in services within health areas.
Demography is variable and there is a deserti-
fication in some areas. If there is not an overview
of what different hospitals are doing, no one knows
well what is being done where. There is duplica-
tion between adjacent hospitals … while in others
there is out-contracting of services which could
be internalised.
Social Inefficiency, Waiting
Lists and Bottlenecks
Yet there was lament at the failure to address
waiting lists and bottlenecks.
If there is a waiting list, this is a bottleneck for
whichever hospital since patients are waiting for
diagnosis x or y, despite there being people who
are prepared to diagnose them on a Saturday or a
Sunday. Yet the proposal that they could do so was
made three years ago without any response to date.
Productivity Criteria Inhibiting
Patient Well-Being
The director of a service put the case, consistent
with Weberian hierarchy and Fordist and Taylorist
concern only with productivity that this could
inhibit patient well-being:
All the thinking still is top-down and dominated
by how many patients we treat. But the outcome
is dysfunctional. A report is written in radiology
that a woman needs a mastectomy. She then is
passed down as on a production line to surgery
without ever meeting the surgeon who will perform
the operation. No time is allowed for counselling
her because this would raise costs. Yet her psy-
chological well-being is vital to her chances of a
good recovery.
Table 1. Management Areas of the Interviewees
Managers Gender Unit Management
Áreas
1 F Gynacology Maternity
2 M Renal Medicine II
3 M Immunology Medicine I
4 M Obstetrics Maternity
5 F Radiotherapy Diagnostics
6 M Radiology Diagnostics
7 M Gastroenterology Medicine I
8 M Rehabilitation Diagnostics
9 F Pathology Diagnostics
10 F Human
Reproduction
Maternity
11 M Ophthalmology Autonomous
Ophthal
12 M Cardiology Autonomous
Cardio-Thoraxic
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361
Hierarchies and Holdings
Absenteeism and Burn Out
In one of the interviews, a manager with extensive
HRM experience volunteered that a key problems
for the hospital was absenteeism on such a scale
that the government had not addressed this and
that no one wanted to measure it.
Another medical director of a unit volunteered
that many staff could not operate at their potential
levels of clinical efficiency, talking of:
A ‘total burn out’, aggravated by the new focus
on productivity in terms of the number of patients
treated, with people who then neither have the
patience for nor are disposed to do anything more’.
Lack of Autonomous Decision
Making and HRM
Medical directors also deplored that centralised
decision-making was reducing autonomy in
decision-making.
What is needed is delegation of competences
and responsibilities in areas such as contracting
personnel, and to give rewards and incentives.
Eudaimonic Engagement
and Hedonic Fulfilment
Commitment and
Performance Appraisal
The same medical director also volunteered that
more criteria for performance appraisal did not
address such problems. What did was motivation
and group identity.
All evaluations are subjective…. What interests
me is not only whether a job is well done and
on time. I am interested in the degree to which
people are committed to excellent performance
by the service.
And, in a critique of the limits of top-down
performance appraisal consistent with the thesis
that there are limits to a hierarchical model as a
paradigm for health.
People are not machines. People are much more
complex than machines. It is different in manag-
ing a factory where the machines are supposed
to produce 50 vases by the end of the day and, if
they do not do so, someone has to be responsible
for that. A hospital is different. It is dealing with
people…
Lack of Psychological Contract
Another medical director when being introduced
to the concept of psychological contract responded
immediately that this was what was missing in
performance evaluation, was needed, and what
he was trying to achieve in relation to his own
unit and team working.
What is absolutely fundamental is to give
people positive and serious encouragement in
terms of terms of their mission, of which incen-
tives are part. To give them responsibility both
to produce and to communicate… to speak with
them, to show them…
The Case for Exclusivity
One of the most interesting outcomes of the
interviews with medical directors of units was
that psychological contract with a hospital could
be enhanced by exclusivity. As one of them put
it of competition between the public and private
sectors and the difficulty in such a context of
‘serving two masters’:
Someone cannot be a Colgate manager in the
morning and an Oréal manager in the afternoon.
People should be in one place and work in one
place only. The people with real responsibilities,
the directors of services, should have exclusive
contracts.
Exclusivity and Continuous
Improvement
The point also was raised that exclusivity was vital
for effective continuous improvement through
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362
Hierarchies and Holdings
operational learning and being able to retain such
learning to ensure that operational units were on
the frontier of both process and product innova-
tion in their area.
We must incorporate new technologies and
techniques if we are going to be up to date. For
instance the knowledge cycle in radiology is five
years. Five years from now knowledge will be
entirely different.
Values and Rewards
There was a common theme in the discourse of
doctors that, within recognised limits of their
operational budgets, they should be able to reward
in terms of pay.
There also was a common theme that pay was
an important factor in motivation but not the only
motivator. As a top administrator commented:
Some of the consultants in the hospital are paid
more than the President of the Republic. Money in
itself is not important to them. They never need to
think about it because they have enough already.
Also, as a senior medical director put it in
terms of pay and motivation:
It is obvious that a doctor may earn less in
the public than in the private sector. But this is
not because it means a higher level of fulfilment.
What I try to raise is awareness that one does
not need two homes with two swimming pools
and beach house with a boat and suchlike, rather
than a normal house or apartment and a place
in the country, perhaps with a swimming pool,
and maybe on the coast with a boat, yet then be
content with that.
Coded Discourse
Figures 4 through to 10 illustrate the outcomes
from discourse analysis of the priorities attributed
by heads of management areas and autonomous
services in terms of the two main domains of
Figure 3 – psychological wellbeing in terms of
social efficiency and performance in terms of
economic efficiency.
Figure 4 shows perceptions of the same im-
portance by integrated areas of management,
where the outstanding contrast in terms of self-
knowledge and self-efficacy is in the autonomous
units, both directed by men.
Figure 4. Eudaimonic engagement by management areas
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363
Hierarchies and Holdings
Figure 5 reports findings on hedonic fulfilment
by management areas. The managers of autono-
mous units give equal importance to fulfilment
with patients and with teams, while fulfilment
in gterms of satisfaction with superiors only is
priority for Maternity. It also is striking that sat-
isfaction with patients, rather than fulfilment for
them, is not a main issue in either the Medicine or
Diagnostics integrated areas, while for Diagnostics
team fulfilment is important.
Figure 6 summarises findings on the relative
importance of hedonic fulfilment and eudai-
monic engagement by management areas. Strik-
ingly, for the autonomous units they are equal,
whereas for the integrated management areas
eudaimonic engagement was more important than
hedonic fulfilment.
Figure 7 indicates the priority given to team
and individual autonomy by Areas of Manage-
ment. Team autonomy well exceeds individual
autonomy in Diagnostics, just does so for Medi-
cine, equals it for Maternity and is lower only in
the two autonomous units. This is not surprising
in that the leaders of both units are highly self-
directed individuals, much in the manner of en-
trepreneurs in small and medium firms and were
founders of these units after persuading the gov-
ernment to finance them.
Figure 8 reports priorities in terms of perfor-
mance by management areas. Clinical care ranks
highest for Maternity. Training and scientific
research ranks highest for Medicine as does or-
ganisational innovation. The low ranking of or-
ganisational innovation for the autonomous units
suggests that they already have achieved what
they need, or what their directors perceive that
they need, since they both are highly self-direct-
ed and entrepreneurial. Their low ranking of
priority in scientific research suggests that, since
already at the top of their professions, they do not
need academic recognition.
Figures 9 and 10 show the degrees of concern
with flexibility in terms of finance, functions and
time for the integrated management areas and the
two autonomous units. In the integrated manage-
ment areas, flexible time, availability and acces-
sibility is most important for maternity, which is
unsurprising in that while a birth may need to be
induced, a child may come at any time of day or
night. The same near self-evident outcome obtains
for diagnostics, which includes accident and
emergencies.
Figure 5. Hedonic fulfilment by management areas
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364
Hierarchies and Holdings
Flexibility in terms of time for the two au-
tonomous units is more important for cardiology
than ophthalmology which again is less than
surprising in the case of heart attacks. Func-
tional flexibility is more important for the latter.
But the striking outcome of Figure 10 is that fi-
nancial flexibility is unimportant for either, for
which the reason is that, being already autono-
mous, they both are self-financing.
Several of the above findings are of interest
in relation to the conceptual framework of this
chapter and that of Figure 3, not least in the de-
gree to which they demonstrate that eudaimonic
purposeful engagement in and commitment to
Figure 6. Hedonic fulfilment and eudaimonic engagement by management areas
Figure 7. Individual and team autonomy by areas of management
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365
Hierarchies and Holdings
health as a service ranks high throughout despite
it being dismissed by key architects of NPM and
the advocates of public choice theory. We now
turn to this in the discussion of findings and the
scope and limits of the research.
Discussion of Findings
One of the main findings from the case study is
that what doctors as managers of units and services
prioritised is not captured by the criteria which the
health reforms required in 2011 by the Portuguese
government required as obligatory (Figure 2).
Other than for professional attitude which could in
principle include eudaimonic purposeful engage-
ment at work, the government’s criteria were not
concerned with hedonic fulfilment or wellbeing
at work. By contrast concern with flexibility in
terms of working time, job function and finance,
which is typical of post Fordist models of work
organisation, flexibility did not feature in the
required criteria.
Figure 8. Performance by management areas
Figure 9. Flexibility in integrated management areas
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366
Hierarchies and Holdings
The main findings from analysis of the dis-
course of the medical directors of services and
units are as follows.
1. The reorganisation of the hospital into seven
management areas has facilitated dialogue
‘at the top’ but not as yet achieved the claim
of a senior administrator that this facilitates
first, second and third tier coordination at
middle and lower operational levels (Figure
3).
2. It is recognised by medical directors of
services and units that strategic coordina-
tion is desirable, and that this should not be
limited to a hospital itself but should extend
to hospital and health services within an area
or region to avoid duplication of effort and
under-utilisation of resources.
3. There was recognition of the organisational
imperative for economic efficiency but a
strongly held view that that implementation
of social efficiency through HRM practices
should as much as possible be devolved to
and decided at operational levels within
services and units, which is consistent with
the distinction of organisational from opera-
tional logics.
4. Medical directors of the integrated service
areas related this to the need for HRM de-
cisions concerning pay, bonuses and other
rewards to be devolved to unit level.
The directors of the autonomous units did
not need this since they already had relative
autonomy in these regards.
5. There also was a common view that top-
down performance evaluation did not address
either issues of burn-out and stress, nor the
need to avoid attrition of well trained and
highly skilled personnel, or their leaving for
the private sector, which is a confirmation
of the case for greater relative autonomy in
HRM practices.
6. The concept of psychological contract was
new to those interviewed yet, when suggested
in only its two words, gained a response from
the director of a unit with 120 employees,
and without the need for further elaboration,
or any reference to its literature, that ‘Yes,
that’s what missing’, while it was he who
suggested the case for a holding company
model as cited in the quotation from him at
the outset of this chapter.
Figure 10. Flexibility in autonomous management areas
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367
Hierarchies and Holdings
Implications of the Findings
The findings from the case study indicate that
initial support for change management is being
undermined by the government’s insisting on
standardised HRM performance criteria which do
not reflect diversity needed by medical directors
for effective patient care. Also that, while this
model can assess output in terms of performance,
it discounts psychological well-being and pur-
poseful engagement in work. Where there were
common rationalities in the findings these were
that performance clearly needed to be monitored
in terms of economic efficiency but that vertical
imposition top-down of performance criteria
was counter-productive and high in terms of op-
portunity cost.
A striking example of the limits of standardised
criteria concerning productivity was given by
manager 4 (M Obstetrics), who had been among
those who earlier had been prepared to recognise
the need for change management yet, by the time
of the introduction of the new performance criteria,
had entirely changed his mind. One of the cases
which he took was the claim of the government
that caesarean operations, for which doctors were
paid substantially more than for a natural birth,
should be reduced to not more than 35% and that
awards would be granted to those hospitals that
managed to do so, which had just occurred for
another in the region that had reduced them from
50% to 35%.
As he put it, this was entirely wrong-headed
because it took no account of context. His own unit
happened already to have achieved a level of not
more than 35% caesareans, but was recognised as
the lead unit in the region and therefore had to deal
with many cases referred to it by others hospitals
where complications could imply premature births
many of which also would be safer by a caesarean
rather than drug induced delivery. His unit’s 35%
score therefore was a greater achievement in terms
of quality of clinical care than that for a hospital
with more routine cases, while the latter probably
should be set a target of less than 35%.
In terms of organisational theory and HRM,
the findings support the case that New Public
Management may regress to and reinforce We-
berian top-down hierarchy rather than progress
beyond it; may intensify Taylorist performance
and Foucauldian surveillance at the cost of eudai-
monic commitment and hedonic wellbeing, and
thereby increase economic efficiency at the cost
of social efficiency in terms of the wellbeing of
both health professionals and patients.
The findings in Figures 4 to 10 support the case
of Hannah, Lord and Pearce (2011) in distinguish-
ing static and dynamic complex processes, and
that of Bowen and Ostroff (2004) that we gain a
limited picture by collecting information on HRM
policies without paying sufficient attention to the
how they are, or are not, enacted. They support
the case of Guest (2011) that there is a needto
recognise not only organisational but also unit and
individual level climates and cultures and that of
Nishii, Lepak and Schneider (2008) have found
that positive or negative perceptions of HRM
practices by employees have consequences for
performance at unit levels.
We suggest that they also support an exten-
sion of Schneider’s (1983, 1987, 1990, 2008)
ASA attraction, selection and attrition model
from personnel selection to what management
model is selected in terms of health reforms, and
also our earlier distinction of operational from
organisational logics in the context of institutional
logics. For a national health service such as that
in Portugal is an institution, while a hospital is
an organisation and the units and services within
it at operational. We submit that these distinc-
tions, with those between economic and social
efficiency, merit further attention in research
into the effects of NPM change management in
health services, as does the distinction between
hierarchical and holding company model of or-
ganisation in which there could be a high degree
of devolution of responsibility for performance
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368
Hierarchies and Holdings
assessment at unit level, and recognition of both
the common and diverse needs of the individual
units for purposeful engagement at work.
Scope and Limits of the Findings
The limits of the specific findings from the case
study may be fractal, but with wider implications
in suggesting that the presumption of NPM in its
paradigm model in the UK, and already critiqued
by others, is wrong in assuming that health profes-
sionals are concerned only with their own interests
rather than the welfare of society.
This chapter is primarily concerned with
models of organisation and HRM and the degree
to which NPM in health systems could learn up
from the degree to which a holding company model
could permit the kind of autonomy typical of SME
entrepreneurship. It suggests that the findings in
this regard are strong. A limit of the findings is that
they only concern the coded discourse of percep-
tions of NPM and what criteria are important for
middle doctors as managers of services and units.
This is being complemented now by coding of the
discourse of the senior administrators of integrated
service areas and junior doctors and nurses. Its data
base includes analysis of the discourse of men and
women as managers of different units and services
and needs complementing by analysis of whether
there are significance differences between them.
gender differences cannot be neglected and also
is being followed through in relation inter alia to
the . There also is a risk of stereotype of ‘think
manager–think male’ rather than ‘think female’
of Gartzia, et al (2012).
Implications for Further Research
The findings suggest that research for rethink-
ing new public management in health can and
should draw on holding company models and the
degree to which these can enable the directors of
services and unit to gain some of the autonomy
of small and medium firm entrepreneurs within
an overall strategic management framework.
The success of public sector holding companies,
and public enterprise, such as outlined earlier,
has been underestimated within management
studies in general and debates on the scope and
limits of New Public Management and should be
further explored. The potential for such a holding
company formula, allowing relative autonomy at
operational levels rather than hierarchical models
of new public management merits further research
not only in terms of performance criteria but also
extended roles for HRM at operational levels, with
the implication that these should be devolved to
health professionals such as directors or units and
services. While there is a high opportunity cost in
time for such middle to senior health professionals
there also is a case for further research into the
degree to which they would welcome management
workshops on the scope and limits of both NPM
and HRM, as we have found from their attending
them as an outcome of the case study.
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KEY TERMS AND DEFINITIONS
Enhanced HRM: Devolution of HRM roles
to managers of services and units rather than
imposing a standardised top-down template for
performance and rewards.
Entrepreneurship: Undertaking something,
associated with innovative thinking and practice.
Eudaimonic: Psychological dimensions of
wellbeing, such as purposeful engagement, relative
autonomy and personal development.
Hedonic: Psychological dimensions of wellbe-
ing, such as positive affect and vocational fulfil-
ment in effective delivery of something of both
personal and social value.
Hierarchy: Top-down pyramidic management
structures.
Holdings: Majority or minority shareholdings
in public sector or private companies allowing
relative operational autonomy.
Levels: Institutional, organisational and op-
erational such as a National Health Service as an
institution, a hospital as an organisation and its
units or services as operational.
New Public Management: Reforms based on
public choice theory with intensified performance
criteria embodying market or quasi-market values.
Organisational and Operational Logics:
Implicit or explicit rationales concerning organisa-
tion and operational performance.
Performance: Economic efficiency in terms
of productivity and costs.
Psychological Contract: Reciprocal values
and trust.
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377
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 18
DOI: 10.4018/978-1-4666-4731-2.ch018
HRM Evolution in SMEs:
Recruitment and Selection Case
ABSTRACT
The enormous business competitiveness at a global scale and the constant search for sources of competi-
tive advantage have led several scholars and practitioners to implement their studies to pay attention to
the potential of HRM in the success of companies. Portugal, like others European countries, is not set
apart from the question of HRM. However, it is rare and recent to find empirical literature on practice
of HRM in Portugal, and even more scarce to find literature that focuses on SMEs. This study clarifies
the situation of SMEs in the Portuguese context, serving as a basis for discussion on HRM in SMEs
in an international context. This chapter looks to understand the role of recruitment and selection on
Human Resource Management (HRM) at Small and Medium Enterprises (SMEs) in Portugal, as well as
contribute to a better knowledge of this area, still little studied. More particularly, it aims to understand
the level of implementation of recruitment and selection. Data was collected by questionnaire from 512
small and medium enterprises in Portugal, and from these, 3 hypotheses were formulated and tested
using the SPSS program. From this study, the authors conclude that HRM is not yet a reality in SMEs.
Recruitment and selection are the HRM practices more commonly used in SMEs, but in an informal way.
INTRODUCTION
Micro, small and medium enterprises (SMEs)
play a central role in the global economy. They
constitute an important source of entrepreneurial
skills, innovation and employment. The world
business community is made up mainly of SMEs.
For example, SMEs in the enlarged European
Union are around 23 million and provide approxi-
mately 75 million companies and 90% of the total
enterprises. The economic and social crisis that
has sparked crossed several public debates about
the importance of SMEs for the Portuguese busi-
ness. During recent years, millions of euros were
spent in European funds for SMEs modernization.
Programs like SMEs training or QI-SMEs are a
few examples. For decades, SMEs were seen as
companies with disqualified manpower, mainly
Pedro Ribeiro Novo Melo
University of Minho, Portugal
Carolina Feliciana Machado
University of Minho, Portugal
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HRM Evolution in SMEs
with a family organization and rudimentary fun-
damentals of management.
Today, in part due to the economic crises
that have plagued the world, this image tends to
change. Indeed, extinguishing mediocre compa-
nies, this crisis contributes to the development
of innovative and creative organizations, which
remain in the global market. The search for com-
petitive factors has led businessmen to invest in
their employees training, as well as in quality
processes, encouraging the formalization of all
critical business processes. Areas such as market-
ing or human resources (HR), once overlooked by
businessmen have, now, gained importance in the
business world.
Insert in a very dynamic and demanding global
economy, SMEs, in order to adapt and survive,
face the need for deep and constant changes, as
well as increase competitiveness and efficiency
of their main components. As a vital part of an
organization, HR can’t be away from these changes,
needing mechanisms, processes and practices
that make them more productive, motivated and
committed.
As a result of these challenges, human resource
management (HRM) policies and practices appear,
in order to convert HR in strategic ones or being
in line with corporate strategies. It emerges the
discussion of a strategic HRM, and a strategic
integration with business policies. It is relevant
to say that the approach of HRM impact on or-
ganizational performance, so far reported in the
literature, has been based in large companies
researches. Few studies address the idiosyncra-
sies of small businesses. Indeed, studies of HRM
in SMEs focus on HRM practices used in large
companies, but adapted to the size, resources and
culture of small businesses.
Nowadays, HRM is gaining visibility in SMEs.
There is a change of mentality within businesses
reflected in the increasing use of recruitment
and selection (R&S), investment in training and
development and greater relevance in the evalua-
tion of employee performance. In what concerns
Portugal, the role of HRM has gone through an
evolutionary process, like in other countries,
which has been described and analyzed by some
academics. However, little or nothing is known
about the HR function, as mentioned Cabral-
Cardoso (2006). HRM studies are rare and those
that exist are associated with large enterprises. The
choice of the subject and its relevance in part is
linked to the low investment in SMEs management
research. Although organizations are smaller in
size, it is interesting to note that HRM in SMEs
can be informal and less sophisticated or complex
and highly structured, allowing the researcher to
contact a wide variety of situations.
This study aims to contribute to a better un-
derstanding of R&S in SMEs, something over-
looked by the main studies, serving, mainly, as
a starting point for future research focusing on
specific HRM aspects in SMEs. It also intends to
establish a benchmark of action in what concerns
R&S practices that will enable researchers and
practitioners, with better conditions for the devel-
opment of a HRM model in SMEs. Specifically,
it aims to: (a) Identify the key studies; (b) Build
an explanatory model; (c) and, define modes of
action, for R&S in SMEs.
HRM IN SMEs
HRM concept appears in the US, in the 80’s, as-
suming as a distinct concept in philosophy and
approach to managing people in organizations
(Cabral-Cardoso, 1999). Following the changes
of paradigm in the business world, it appears
associated with a shift to a strategy based on
the commitment of workers, characterized by
a new approach in terms of quality, flexibility,
strength-of-work, enhanced teamwork, R&S, and
thoughtful and strong investment in training and
development (Cabral-Cardoso, 2004).
SMEs, an important source of entrepreneurial
skills, innovation and employment, have long been
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HRM Evolution in SMEs
the focus of government attention because of its
potential to generate income and employment.
Globalization has reduced the capacity of
growth and job creation of Western Europe and
North America’s economies (Audretsch and
Thurik, 2001). Wilkinson (1999) states that the
future trend, in terms of job creation and new
types of employment, will be dominated by SMEs,
which can improve the economy and act as the
main source of innovation. Innovation policies in
SMEs can be a stimulus to organizations growth
and competitiveness. However, these companies
heterogeneity makes it difficult to implement
innovation policies for them. The role of SMEs
in the economy of nations is quite high, which
requires awareness on business leaders, govern-
ments and managers to the constant improvement
of management models applied to this type of
organizations. One of the least-studied areas of
management in SMEs is HRM area. As stated
by Wilkinson (1999) more recently we can face
a substantial increase in the number of studies on
SMEs, but even these are based mainly on finance,
marketing and operational management features.
So, it is important to analyze organizational HR,
allowing them having a more pressing role in busi-
ness policies of SMEs, as a factor for innovation
and competitive advantage.
SMEs Definition
There is no agreed definition on SMEs (Storey,
1994). (See Table 1.) There are several criteria used
as the number of employees, volume of sales and
the resources or energy used (Cunningham and
Rowley, 2007). One of the most popular defini-
tions among researchers is based on the number of
workers. However, this definition has some disad-
vantages such as, being dependent on the business
sector and the non-specification of the employees
worked hours. An important point in the definition
of SMEs is the comparison between small and large
companies. This comparison appears in a variety of
organizational contexts. There are several authors
who identify some specific components in SMEs
in relation to other companies (for example, Cas-
sel et al., 2002; Wilkinson, 1999; Storey, 1994).
Storey (1994) presents some conjectures about the
difference between small and large companies.
One of them is the vast probability of evolution
and change in small companies. Small firms that
become larger pass through a number of stages of
change that influence the role, management style
and organizational structure. The author argues
that key dimensions, when SMEs differ from
large companies, are uncertainty, innovation and
business development.
A number of problems emerged when it was
assumed that small companies are the same as
large companies (Cassel et al., 2002). According
to the authors the traditional view which defend
that these organizations should be managed by
the same way that large organizations, but on a
smaller scale, fail to create an understanding of
the unique and distinctive processes and prac-
tices, and its impact on SMEs. Size of company
is often used to distinguish between a small and a
big company. The European Commission defines
SMEs, as enterprises that employ fewer than 250
persons and whose annual turnover does not exceed
50 million or total annual balance not exceed 43
million euros (European, 2006).
Table 1. SMEs definition
Category Members Annual
Turnover
Overall
Balance
Medium
enterprise
More than
250
More or equal
at 50 millions
of euros
More or
equal at 43
millions of
euros
Small
enterprise
More than 50 More or equal
at 10 millions
of euros
More or
equal at 10
millions of
euros
Micro
enterprise
More than 10 More or equal
at 2 millions
of euros
More or
equal at 2
millions of
euros
Source: European (2006)
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HRM Evolution in SMEs
The debate about a definition of SMEs seems
to be useless unless the company size is a variable
that influences performance. In practice, the size
of the company seems to be a discrete and con-
tinuous variable (Storey, 1994). Although con-
sidered a major factor, firm size is not sufficient
to explain the main models of industrial relations.
A variety of factors such as internal and external
influences (for example, property characteristics,
sector characteristics, technology and economic
indicators) explain behaviors (MacMahon, 1996).
Small organizations are open systems where
changes in the external environment have a sig-
nificant impact on the internal dynamics (Mac-
Mahon, 1996), the motivations and actions
(Storey, 1994). All organizations exist in an en-
vironment from which get the resources they need
to survive and in which they put the results of this
action (Cunha et al., 2007). However, SMEs by
their limited capacity in the collection of re-
sources and the difficulty in competing with the
other companies’ products require a strong con-
gruence between the external environment and
its internal dynamics. External forces tend to have
greater impact on small organizations than in large
organizations.
Informality usually characterizes SMEs,
especially on their work relations. According to
Storey (1994) research on companies indicate that
small organizations are better prepared to oper-
ate in a more informal and flexible environment
than larger companies. Organizational structure
of SMEs allows informality in employment rela-
tions and management practices. This is because
the manager is in the operational area, which
facilitates an open and informal communication.
Having an important role in the global econ-
omy, the extent of growth of SMEs is very large.
The difference between growth and consolidation
of the company is in the way some small com-
panies look for consolidation as out of business,
while others look at it as an opportunity to grow
(Fraza, 1998). The author notes that for many
fast-growing SMEs, the main problem is to find
and retain high quality employees.
According to Cassel et al. (2002), SMEs can
be divided into two groups: those that operate
independently in small businesses and those who
belong to a large organization. There is evidence
to show that the second group uses more formal
procedures about the specifics of human relations
(Cassel et al., 2002). An SME that belongs to a
large organization incorporates a more developed
organizational culture and more formalized man-
agement practices, because it has resources and
know-how that other SMEs usually do not.
The risk of many definitions of SMEs is a
perspective that there is homogeneity in the sector
and that all small companies have similar charac-
teristics (Wilkinson, 1999). More recently there
has appeared the notion that SMEs are complex,
diverse and influenced by multiple factors and
that a simple categorization does not necessarily
incorporates the diversity of experiences of SMEs
(Kotey and Sheridan, 2004).
Characteristics of HRM in SMEs
HRM in SMEs was, until recently, low recognized.
To this contributed a little research and studies
about SMEs (Reid and Adams, 2001). Recently,
however, research on practices of HRM in SMEs
increased considerably (Kok and Uhlaner, 2001).
A possible explanation for this phenomenon is the
important source of information and material of
studies about SMEs that provides management
researchers, with the development of new theo-
retical approaches (Cassel et al., 2002). Several
authors have suggested in their studies that HR
can be a source of competitive advantage (for
example, Barney and Wright, 1998; Cunningham
and Rowley, 2007). HRM have an important role
in implementing practices that benefit employees
both in performance and motivation. In most
cases, HRM practices benefit the modernization
and advancement of SMEs. A research in the US
proved that poor emphasis on HR in SMEs was
one of the reasons for businesses failure in the
studied companies (McEvoy, 1984).
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HRM Evolution in SMEs
SMEs have difficulty in implementing poli-
cies and practices of HRM. A study by Heneman
and Berkley (1999) confirmed that in 117 small
companies, only 15 had a HR department. One
reason for this is the difficulty in recruiting and
retaining employees due to limited financial
resources and reluctance to lead at great cost
or prohibitive practices. As noted Cardons and
Stevens (2004), in SMEs, where resources are
limited, the probability of having a department
with HRM professionals is very small.
Two aspects influence the definition of HRM
in SMEs: informality in small companies vs.
formality in large companies and HRM practices
of large companies adapted to small businesses.
The majority of small companies use informal
HRM practices. The definition of HRM in SMEs
involves a comparison with HRM in large compa-
nies, with most HRM studies developed in large
companies. The application of HRM practices in
small companies usually includes practices used in
large companies, but adapted to the size, resources
and culture of SMEs. Employment relations in
SMEs can be complex, contradictory and infor-
mal, rather than harmonious or autocratic (Ram,
1991). Opposite to large organizations, in SMEs
employees tend to develop a number of different
works (Kok and Uhlaner, 2001).
HRM practices in SMEs are frequently defined
as informal. There are contextual variables that
predict whether or not HRM practices exist in
firms and their level of formality, namely, firm
size, strategy, technology and structure (Jackson
et al., 1989). Until 1970, the major HRM research
focused on the development of effective HRM
practices in large organizations, studies that linked
HRM practices and performance of HR (Kok
and Uhlaner, 2001). Recently, studies examine
the impact of more formal HRM practices on
performance at the organizational level (for ex-
ample, MacDuffie, 1995; Huselid et al., 1995).
These authors research, analyze the impact of
innovative HRM practices when integrated with
organizational policies. They defend the “best
practices” model (Kok and Uhlaner, 2001).
Overall, firm size is related to the incidence of
HRM in the planning and the level of formalization
of HRM (for example Kotey and Sheridan, 2004;
Kok and Uhlaner, 2001). Although companies
size influence HRM practices, isn’t clearly the
only important factor, given the variation in these
HRM formalization practices. A study conducted
by Kok and Uhlaner (2001) proved the importance
of company size as an indication of a formal de-
velopment of HRM. Moreover, SMEs varies their
HRM practices. Another important conclusion is
that the main influence of HRM practices is the
evaluation of resources rather than the expecta-
tions of stakeholders, that is, investment and HR
planning are positively associated with labor
productivity (Koch et al., 1996).
Several studies about SMEs assumed them
as informally organized and with informal
HRM practices. But these characteristics are not
unanimous, with many exceptions to this model
/ standard. Apart from the variable size of the
company there are other contextual factors that
may influence HRM practices (Kok and Uhlaner,
2001). Looking through informal and formal
mechanisms, through which SMEs manage their
workers, will provide a better theoretical perspec-
tive and empirical practices of SMEs (Cardon
and Stevens, 2004).
SMEs along the years have been sidelined
from major studies on HRM. Departed from
the principle that HRM practices developed in
large companies would fit in small companies.
But this perspective is not quite correct. SMEs
have a specific characteristic that does not allow
an adjustment of practices and policies of large
companies. It is true that SMEs with links to a
large company are better able to implement some
HRM practices (Kok and Uhlaner, 2001), but
this is because they share political and organiza-
tional resources. Barber et al. (1999) suggested
that using only the existing models of HRM for
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HRM Evolution in SMEs
SMEs is not significant. HRM practices of large
companies haven’t had positive results (for ex-
ample the authors report that recruitment in large
companies is more formal and bureaucratic than
in SMEs). Instead, researchers should focus on
specific theories and practical strategies for SMEs
and focus on the multiple company and workers
characteristics (Cardon and Stevens, 2004). Ac-
cording to these authors there is not necessarily one
correct way to HRM that SMEs can adopt. For the
authors, researchers should explore the interaction
between HRM practices and other factors, and
their influence on individual and organizational
performance. Barney and Wright (1998) suggest
that the major challenge for HRM is to develop
systems of practices that create synergistic effects
with the aim to develop independent sets of best
practices.
SMEs are usually associated with family
businesses. This relationship isn’t always easily
communion. Family perspective is depreciative
in nature, that is, family businesses are seen as
dysfunctional and low capacity for innovation
and growth. For Ram and Holliday (1993) SMEs
are saturated with the ideology of family. The
concept of family is crucial to understand the
totality of social relations in SMEs, but is much
more complex and contested than is commonly
portrayed. For Wilkinson (1999) family style
is actually a form of authoritarianism with few
challenges to the company manager. Flexibility
is more similar to instability where there are few
procedures or systems to develop the work. Fa-
miliar communication is seen as a resource and
as a constraint to management through flexibility.
Family businesses have additional problems due
to family links in existing employees. This point
causes problems in business management. As
relate Holland and Boulton (1984), the relation-
ship between company management and family
increases the complexity of organizational and
management problems. Family business manag-
ers should consider their position in relation to
the family as well as their role in business. The
specifics of family business, as well the limited
organizational capacity don’t allow fast develop-
ment in the implementation of HRM policies and
practices (Reid and Adams, 2001).
Recruitment and Selection in SMEs
Recruitment is, perhaps, the most discussed topic
of HRM in the context of SMEs (Cardon and Ste-
vens, 2004). Although the majority of SMEs don’t
have a HR department, they have recruitment and
HR policies (Cardon and Stevens, 2004). A large
number of SMEs stated that recruitment has been
put into practice with great attention, as a way to
ensure they find the “right” person, using informal
dissemination and methods of recruitment by
word/opinion (Carroll et al., 1999). Recruitment
is problematic for SMEs due to limited budget
and material resources, lack of legitimacy as an
employer and also the large number of functions
that requires the employee to perform various roles
with responsibilities not very explicit (Cardon and
Stevens, 2004).
Empirical evidence suggests that SMEs have
enormous difficulties in attracting employees
with the knowledge they need (Carroll et al.,
1999). So the main challenge of recruitment in
SMEs is, indeed, attract and select candidates in
the absence of an HR professional or manager
experienced in this area.
The quality of manpower on the market, in-
cluding lack of basic competencies, particularly in
younger people (Carroll et al., 1999) makes very
difficult the task of recruiting in SMEs. The search
for experienced employees with specific skills is
critical for SMEs because they usually have lack
resources, or incentives aren’t attractive enough.
There are theoretical and empirical evidence
that shows the recruitment process in large com-
panies is different for small companies (Tanova,
2003).
Articles about recruitment usually recommend
a systematic procedure comprises four steps: an
assessment of the need to occupy the open va-
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HRM Evolution in SMEs
cancy, a functional analysis, a conducting of job
description and characteristics required of the
applicant (Carroll et al., 1999). SMEs do not have
this type of proceeding. There isn’t a formality
in the recruitment process. As stated by Barber
et al. (1999) recruitment in large companies are
more formal, bureaucratic and more resources are
used than in small companies. Small companies
use external recruitment, such as employment
agencies or educational institutions (Deshpande
et al., 1994).
Despite recognizing the importance of HRM
for SMEs, there is little research on the selection
of employees (Barrett and Mayson, 2006). SMEs
are companies with low material, financial and
HR, which makes it difficult the application of
HRM practices, at least formal practices. Gener-
ally speaking, R&S are applied to SMEs, but in a
different way from the more formal and procedural
perspective used by large companies (Cassel et
al., 2002).
The notion of “adaptation” is a recurrent
topic in the literature of R&S in SMEs (Carroll
et al., 1999). SMEs seek an employee to match
the function and not by qualifications or profes-
sional skills. As refer Carroll et al. (1999) in
SMEs individual selection interviews empha-
size the “adaptation” (fitting in), relegating, to a
secondary level, qualifications or registration of
professional experience. Another relevant aspect
in the selection process in SMEs is that “good”
workers aren’t selected because they can be seen
as a threat to the owner independence (Kotey and
Slade, 2005). This question is usually discussed
in small family businesses, which are controlled
by managers / owners with low skills, whose ones
see qualified HR as a threat to their authority
and competence. In recent years, with increased
training and competitiveness of businesses, this
problem tends to disappear.
The Case of HRM in
Portuguese SMEs
As in other European countries, Portugal has its
own peculiarities in people management. Despite
this, studies of HRM in Portugal are rare. Ac-
cording to Caetano and Vala (2007), available
data on HRM in Portugal are scarce and results
from activities carried out by the organism APG
(Portuguese Association of Human Resources
Managers and Technicians). Portuguese business
environment is composed essentially of SMEs,
which play an important role because they create
richness and employment (Duarte, 2002). This
reality limits the development of HRM in Portugal
(Cabral-Cardoso, 2006). The economy structural
conditions mainly composed of SMEs and fam-
ily run businesses without a personnel function
does not seem to be a favorable environment for
the growth of HRM in Portugal. When we try to
identify if organizations have an HR manager, the
size seems to be a crucial factor. At least 73% of
all HR directors are placed in medium and large
firms (Cabral-Cardoso, 2004).
Portugal has been experiencing a transition over
three decades. The country lived through a 20th-
century totalitarian regime, which had the ideal
key “proudly alone” (Cunha, 2005). According to
Cabral-Cardoso (2006), Portugal until 1960 can
be described as a poor society, largely agrarian,
ruled by a political elite from a small number
of well-established families. After the phase of
political and social turbulence experienced in the
60’s and 70’s, Portugal lived through profound
changes in management and managers. During
these three decades, Portugal has experienced
profound changes in their society and its business
community. Regarding the role and status of HR
managers, in recent decades there hasn´t been
major changes (Cabral-Cardoso, 2004).
Another study by Cabral-Cardoso (2004) iden-
tified two barriers to the implementation of the
HRM function in Portugal. The first barrier is the
“lack” credibility of a HR manager in organiza-
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HRM Evolution in SMEs
tions; the second is structural and relates the size
and type of organizational structure in Portugal.
These barriers stem from the low status of HRM
function and the common view in public opinion
that management can be performed by anyone
provided that gain some experience in the orga-
nization. This is reflected in the structure of the
Portuguese economy, composed mainly by SMEs
and family businesses without the distinction of
the function of personnel manager.
Despite all these constraints and limitations to
the development of HRM in Portugal, there has
been progress in the implementation of practices
that boost and valorize HR in organizations.
Organizations are beginning to include in its
organizational structure a HR department, which
allows more centralized management practices,
the greater credibility of HR managers, vision of
the manager as an expert in the area of people
management (Cabral-Cardoso, 2006) and also
better strategic integrated, more influence at the
top and HR policies aligned with the business
core (Cabral-Cardoso, 2004).
METHODOLOGY
This research focuses SMEs in Portugal. To analyse
HRM in Portuguese SMEs, particularly, R&S, it
was used a survey questionnaire, sent by email,
for a total of 512 companies.
Goals Definition
The enormous business competitiveness in the
world and constant search for sources of competi-
tive advantage has originated many academic and
professional studies to address on the potential of
HRM in business success. Since the vast major-
ity of Portuguese companies are SMEs and this
area stands a little neglected by academics and
practitioners, becomes relevant to analyse people
management developed in Portuguese companies.
This study aims to contribute to a better under-
standing of the real situation of HRM in Portuguese
SMEs, particularly, the practice of R&S.
So, we try to:
• Identify the main characteristics of R&S in
SMEs.
• Examine the relationship between HRM
and strategy.
• Assess the implementation level of R&S in
SMEs.
Sample
Sampling and in particular the sampling proce-
dures applies in various areas of knowledge and
constitute, often, the only way to get information
about a particular reality that know what matters.
Based on the extent of the study, SMEs at national
level and the object of the study, R&S, the sample
was selected from a convenience perspective,
from a database (target population) on the market.
The target population of the study was “the
1000th best SMEs ” Issue 284, December 2009,
from Exam magazine. The Exam magazine pub-
lishes every year a list of 1,000th’s best SMEs at
national level.
After collecting companies contact details, it
was found that there are a limited number of avail-
able emails. Further, a vast number of companies
didn’t have any website. These limitations reduced
our sample to 512 companies.
Variables and Data Collection
The next step was to build an instrument to facili-
tate data collection for research, applied to a vast
number of respondents. It was chosen the survey
questionnaire. Then, variables to be analysed were
defined, namely:
• Organization and strategy.
• R&S.
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HRM Evolution in SMEs
• Training and development.
• Performance appraisal.
• Compensation.
Surveys collected corresponded at 10.1% of
all companies. Although low these values are
within acceptable limits for this type and area
surveys. There isn´t a value acceptable response
rate for this type of study. It is true that the higher
the better, for a systematic analysis of data (Roth
and Bevier, 1998). One-third research of SMEs
on scientific journals, between 1991 and 1995,
had a response rate below 25% (Dennis, 2003).
Sample Characterization
After surveys collection, it appears that 62% of
companies belong, respectively, to manufacturing
sector (32%) and wholesale trade/retail (30%). The
remaining percentage is divided 7% in building
construction, 6% in transport sector, 4% in com-
munications, and electricity and gas. Finally, 2%
belongs to electromechanical sector, engineer-
ing, health, audit and agriculture, fisheries and
agroforestry. We didn’t find companies in the
extractive industries and banking.
About the number of employees for each
organization, we find that most of the surveyed
companies have less than 250 employees (72%).
Organizations with more than 250 employees ac-
count for 14% of the sample, 12% have less than
50 employees, and only 2% of firms have fewer
than 10 employees. Thus, according the Portuguese
National Institute of Statistics, 72% of companies
are considered medium-sized organizations, rep-
resenting, companies with less than 50 employees
(small organizations), and 16% of the sample.
It also appears that most respondents are HR
responsible of these companies (74%), 12% are
general directors or managers, 6% belong the
quality department, 4% the administrative area
and 2% are commercial managers and accountants.
In what concerns academic qualifications,
the great majority of respondents (75%) have a
graduate degree. The lowest level of educational
attainment represents 12% of the sample, (second-
ary level). This value has great relevance for the
study, as seems to anticipate the nonexistence of
HRM in some companies.
RESULTS AND DISCUSSION
This study attempted to understand the exist-
ing level of formalization, collecting a group of
elements that allow us to define the reality of
SMEs and understand what are the strengths and
limitations of R&S of HR in small organizations.
It is expected to contribute to the construction
of scientific knowledge about HRM in SMEs in
Portugal, especially the practice of R&S.
World business competitiveness and constant
demand for sources of competitive advantage
has led many academic and professional studies
to understand the potential of HRM in business
success. Since the large majority of Portuguese
companies are SMEs and this area is, still, a
little neglected by academics and practitioners,
it is important to analyse HRM and its specific
features. A question/problem arises:
Is there R&S, truly strategic, structured and
conceptualized or just informal and disconnected
from core business?
Several authors contribute to the achievement
of a possible answer to the problem. Cassel et al.
(2002) reported that the approach to HRM of SMEs
is fragmented and more reactive than proactive,
holistic and systemic. Cardon and Stevens (2004)
report that owners of companies are more con-
cerned with their systems of telephone networks
or the Internet platform than with the culture and
practices of HR managers. Cabral-Cardoso (2004)
states that the use of the designation HRM in
Portuguese firms means strategic integration, that
is, greater influence at the head of companies and
HR practices more aligned with the core business.
Commonly used in SMEs, R&S practices are
developed from an informal perspective being
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386
HRM Evolution in SMEs
more structured and formalized in large compa-
nies. Relating those who have a recruitment plan
in place with the number of employees, the as-
sociation isn’t significant (R Pearson correlation
of 0.48 at a significance level of 0.742): there isn’t
evidence that the greater the number of employ-
ees, the greater use of a recruitment plan. About
recruitment tools used, they are well defined for
operational employees (placement of ads: 68%;
personal contacts: 76%, spontaneous contacts:
80%), contrary to top managers (placement of
ads: 22%, employment agencies: 10%; personal
contacts: 30%). Few in SMEs, top management
is mainly composed by the administrator and
shareholders. For reasons of family surroundings,
top manager’s recruitment is perpetuated in the
company administrator family. Concerning selec-
tion, SMEs use mostly individual interview and
trial period, inexpensive methods for companies,
as they need few human and financial resources.
In the future, the picture doesn’t change consider-
ably, as individual interview and trial period will
continue to be the most widely used selection
methods.
Outsourcing is widely used by SMEs. It al-
lows reducing the costs and the need for a more
complex organizational structure. We tried to find
some evidence between dimension and the use of
outsourcing related to R&S (Table 2). There isn’t
evidence from outsourcing activities related to
R&S and company size.
In order to check if there is any link between
firm size and greater or lesser use of R&S, we
used statistical test Eta, a measure that allows
observing the association between variables. ETA2
represents the proportion of variation in the de-
pendent variable that is explained by the indepen-
dent variable (Pestana and Gageiro, 2000).
Calculating Eta for all previous points we
verified that there is an association relationship
between the variables “R&S plan in the company”
and “number of employees of the company” – Eta
equal to 0.241; ETA2 equal to 6%.
The association is weak (Pestana and Gageiro,
2000) because only between 0.6% and 15% of the
variation is due to firm size.
HRM debate in SMEs arises inevitably as-
sociated with the degree of formalization of
practices. The new interest in HR as strategic for
the organization tries to establish a HR framework
with an important role in organization wealth
creation, directly contributing to the implemen-
tation of operational and strategic goals (Becker
and Gerhart, 1996).
Many variables, like size, environment and
strategy, influence HR practices in SMEs (Kok
and Uhlaner, 2001). Crossing the variables “overall
business strategy” and “role of HR Manager”, it
can be observed that respondents, who define
HRM totally related to overall business strategy,
identify HR manager as a business partner. With
the purpose of testing correlation between compa-
nies that define HR manager as a strategic partner
and the level of implementation of the main HRM
practices, was used Spearman correlation coef-
ficient, which resulted in a negative association
in R&S. There is an association relation between
the variables “strategic partner” and “R&S” – S
= – 0.271, with a significance level of 0.18;
Results aren’t conclusive because correlations
are very weak with a significance level much
higher than 0.05 (Pestana and Gageiro, 2000).
Planning recruitment is a crucial phase for the
company strategy. A poor recruitment or lack of
planning can cause several operational and finan-
cial losses for the company. Financial because
there was an investment in an employee who isn’t
a company added value and operational because
Table 2. Comparison between external recruitment
and selection with company dimension
Company Dimension Recruitment and Selection
Less than 25 employees 0 percent
Less than 50 employees 2 percent
Less than 250 employees 22 percent
More than 250 employees 6 percent
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HRM Evolution in SMEs
company may need HR and didn’t anticipate
recruitment need to successfully fulfil deadlines.
According to Gomez-Mejia et al. (1995) HR plan-
ning is used by an organization to ensure the right
number and type of people need in future. Its non-
existence may lead to huge losses for companies.
In our research only 34% of respondents have a
recruitment plan against 66% who don’t have.
From these 34%, only 4% have a plan longer than
five years and 2% from four to five years. Most
respondents have a short-term plan (12% less
or equal to one year and 16% from one to three
years). One of the HRM practices characteristics
in SMEs is that they are informal, ad hoc and
disintegrated from business (for example Cardon
and Stevens, 2004; Barrett and Mayson, 2007).
Our results demonstrate these characteristics, as
most companies do not have an HR planning,
working in an ad hoc way.
HR managers have a great involvement in more
traditional practices such as R&S (84%), perfor-
mance evaluation (66%), training and development
(needs diagnosis, 72%; training activities planning,
68%; training design, program design and content,
64%; and training process evaluation, 80%), and
health and safety at work (84%).
Companies have a number of different re-
cruiting tools, which allow business access to a
diverse audience. Requirements in the search for
a top management employee are not the same as
for an operational employee, which is, usually,
simpler. So, it seems interesting to analyse the
different types of tools used for top management,
personal supervision, department directors and
operational employees. The most used tool for
top management is personal contacts (30%).
References (34%), placement of advertisements
(40%) and spontaneous applications (80%) are
the most used recruitment tools, respectively, for
personal supervision, department directors, and
operational staff. Top management need employ-
ees with great management skills, crucial for the
company survival, reason why is necessary to find
the best HR. For business becomes more reliable
recruit through personal contacts (30%), as well
as considering references (26%). An interesting
finding is that research in schools/universities, first
considered a privileged toll to this audience, is one
of the lesser used (4%). It may indicate the need
for employees with business proven track. About
supervision, commonly used tools are references
(34%) and personal contacts (32%). Companies
look employees with proven experience and trust,
reason why they seek them through their personal
contacts and references in business market or from
closed people. Recruitment of department direc-
tors makes use of placing ads (40%), references
(36%) and personal contacts (34%). The place-
ment of advertisements for directors recruitment
seems to be a common practice in companies, at
least seen the numerous advertisements placed
in newspapers and Internet for its signature. Fi-
nally, operational employees make a wide use of
spontaneous applications (80%), personal contacts
(76%) and references (72%). Recruitment through
spontaneous application seems to show a turning
point in the recruitment of SMEs. Increasingly,
companies are focusing on placing links on their
recruitment websites, which help companies
acquire a database that can be used at any time.
According to the literature, recruitment in SMEs is
informal, without a strategic perspective. A large
number of SMEs stated that recruitment has been
put into practice with great attention, in order to
find the “right” person, and through the informal
dissemination and methods of recruitment by
word / opinion (Carroll et al., 1999). This reality
seems to be present in the surveyed companies,
which place great emphasis on personal contacts
and references.
As recruitment, selection plays an important
role in finding the best employees. (See Table 3.)
According to Anthony et al. (1993) and Carrel et
al. (1995) selection is a process of choosing in-
dividuals who have the skills needed to perform
a particular function. For the best possible selec-
tion, companies use various selection methods.
Among the proposed selection methods, most
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HRM Evolution in SMEs
SMEs use individual interviews and experience
period in the groups of employees, but with
slightly different values. The individual interview
and the experience period are used, respectively,
for top management (36% and 26%), supervision
(44% and 36%), department directors (52% and
46%) and employees in general (90% and 82%).
Less used selection methods in SMEs are hand-
writing analysis, tests of integrity/honesty and
tests for drugs use.
In what concerns liable selection methods (See
Table 4) to be used in the future, the outlook isn’t
very different from that currently used. Changes
are the increased importance of structured forms
and knowledge tests. Companies will use more
individualized interviews (86%: sum of moder-
ate, high and very high probability), knowledge
tests (70%) and structured forms (68%). Selection
methods with little impact on SMEs will be use
of drugs tests (52%: sum of “no” and “limited”
probability), handwriting analysis (48%) and
integrity/honesty tests (32%).
Cassel et al. (2002) suggest that there is con-
siderable diversity in how HRM practices are
implemented in SMEs and their relative success.
SMEs have lower material, financial and HR,
which limits the implementation of HR practices.
Despite their diversity and limitations, several
authors claim the existence of conditions for HR
practices implementation.
Some HRM practices, like R&S, are more used
than others. (See Table 5.) These practices have
few implications in terms of resources, which
facilitates its implementation. Despite known
limitations, collected data show that 90% of the
companies have an HR department.
Although only 33% of companies consider
employees as very important in long-term plan-
ning, 66% didn’t have a recruitment plan, 16%
consider HR manager as a specialist administra-
tive, 76% use personal contacts in employees
hiring and 18% consider inappropriate selection,
we can conclude that there is some form of HRM,
even more informal or with more or less impact,
in the analysed SMEs.
CONCLUSION
R&S practices are commonly used in SMEs.
Research data prove it, with 84% of surveyed
firms using R&S. Although critic in company
strategy, only 34% of respondents reported hav-
ing a recruitment plan, with the other 66% saying
there is no HR planning. Regarding recruitment
tools used, these just seem to be well defined
for operational-level employees. In selection,
SMEs utilize, mostly, individual interview and
trial period employees. Selection methods less
used are handwriting analysis, tests of integrity/
honesty, and drug use tests. A major problem of
Table 3. Recruitment Tools (percent)
Top Management Supervision Department Directors Operational Staff
Ads 22 28 40 68
Employment Agencies 10 18 18 42
Schools/Universities 4 10 24 54
Personal Contacts 30 32 34 76
References 26 34 36 72
Spontaneous applications 10 12 16 80
Internet 8 12 18 48
Newsletter 2 6 6 20
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HRM Evolution in SMEs
SMEs is to compete with large companies on the
attractiveness and labor conditions. So, employee
retention becomes a challenge, and a commitment,
to business owners in order to use incentives and
improved labor conditions. Outsourcing is an un-
common practice in SMEs, only used in training
and development.
Although respondents understand the impor-
tance of HRM for their companies, its implemen-
tation on the ground is not very evident. R&S
practices seem to be more developed. In sum,
HRM in Portuguese SMEs is informally devel-
oped, without a business strategic integration.
Study Limitations
This research have faced limitations, some were
overcome, others not. One of them refers the
lack of theoretical studies on HRM in SMEs in
Portugal. At national level, studies are rare. An-
other one refers the reduced number of surveys
received (only 10.1% affirmative answers), which
conditioned the entire empirical analysis. We can’t
present absolute truths, as the small number of
surveys doesn’t allow us to extend the findings
to all Portuguese SMEs.
Table 4. Selection Methods (percent)
Top Management Supervision Department Directors Operational Staff
Structured forms 6 14 20 38
Individual interview 36 44 52 90
Knowledge tests 2 6 6 14
Tests of specific knowl-
edge
6 12 10 16
Tests about use of drugs 4 4 0 6
Personality tests 10 12 14 16
Integrity/honesty tests 0 4 6 4
Handwriting analysis 0 2 4 10
Experience period 26 36 46 82
Table 5. HRM Practices Used in Future (percent)
Without application Applies without HR
involvement
Applies with HR
involvement
Recruitment and Selection 6 10 84 *
Performance assessment 18 16 66 *
Job description 26 34 40 *
Career plans 46 * 22 32
Performance bonus 24 32 44 *
Staff plan 24 32 44 *
Safety and health at work 4 12 84 *
Competencies Management 20 22 52 *
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Recommendations for
Future Research
About future lines of research, it would be in-
teresting to approach other areas not studied, as
organizational change or labor relations. Another
area of analysis would be to understand the role of
quality processes in HRM implementation. SMEs
are increasingly focusing on quality certification
processes and procedures. One of the areas inter-
vened is HRM, which implies the formalization
of some procedures. It is important to understand
what are the steps given.
Another line of research would analyze the
main HRM practices in SMEs and its relation to
company’s business.
Finally, it would be interesting to deeper this
study, finding alternative methodology to collect
more empirical data.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 19
DOI: 10.4018/978-1-4666-4731-2.ch019
ABSTRACT
To be successful exporters, SMEs have to penetrate foreign markets rapidly, at low cost, maintaining
control of core technologies and products, while adapting product features to local customer requirements
and preferences. Entrepreneurs have to find and evaluate potential partners, overcoming differences in
business cultures and their ignorance of foreign accounting rules. Internationalization has deep and
relevant implications in effective human resources management. In fact, the expansion of the firms allows
the creation of new job opportunities both in the home country and abroad. This process could be seen
as a solution, or better as mitigation, for the current problem of unemployment that our society has to
face in this period of crisis. SMEs need to be supported in their expansion abroad. In Italy, public and
private agencies provide services to achieve this. The aim of this chapter is to analyze how they operate,
what services they provide, and how much they support enterprises. As a case study, the authors examine
services provided by Chinese agencies because China is one of the most active countries in international
markets. Italian and Chinese agencies are compared focusing on the existing standard services provided
and their customization according to specific domain needs. Finally, the authors present a global view
of today’s scenario to define future directions of current internationalized services.
Internationalization Services for
Small and Medium Enterprises:
A Case Study
Enrico Buggea
Politecnico di Milano, Italy
Roberto Castiglione
Politecnico di Torino, Italy
Tania Cerquitelli
Politecnico di Torino, Italy
Lorenzo Grosso
Politecnico di Torino, Italy
Giacomo Rontini
Politecnico di Milano, Italy
Arianna Scolari
Politecnico di Milano, Italy
Lei Xiang
Politecnico di Torino, Italy
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394
Internationalization Services for Small and Medium Enterprises
INTRODUCTION
In Italy SMEs (Small and Medium Enterprises)
represent the 99% of the total national enterprises.
However just 13% of them are active on interna-
tional markets, although extending their business
abroad should be undoubtedly better as shown later
(Cliti, 2012). To give explanation to this trend the
authors investigate customers (companies) needs,
requirements and main issues in extending busi-
ness abroad, comparing them with the services
that are actually provided by agencies and banks.
The comparison is focused on: (i) Existing services
offered by agencies including public institutions,
consulting agencies, private institutions and banks
to support SMEs in extending their businesses
abroad; (ii) Service customization and solutions
for specific domains and sectors to help SMEs
grow internationally.
This part is the core of the chapter and it is
structured as follows. The first section is devoted
to figure out the scenario of Italian SMEs and
their role in the internationalization market; the
second section analyses the agencies and services
available, with a close eye on China, one of the
most active countries in international markets in
the last 30 years due to the opening on foreign
markets and the growth of foreign direct invest-
ments. The third section is about classification and
main features of the considered type of services
and the analysed agencies are evaluated according
to this classification. The result of the comparison
gives a global view of the actual scenario.
The end of the chapter includes final com-
ments and suggestions in order to define possible
directions of improvement and enhancement of
actual services.
BACKGROUND
During the past decades SMEs have been the
backbone of the Italian entrepreneurial system
and have provided the main drive for its eco-
nomic development. Nevertheless their structural
weaknesses, SMEs remain the platform on which
the Italian economy should build new growth
processes. To become the driving force behind
the Italian production system, SMEs should
necessarily undertake strategies to increase their
degree of internationalization (Calcagnini &
Favaretto, 2011).
The reason why internationalization is such
a crucial topic is that among Italian SMEs the
performance of those which directly export on
foreign countries is much better in respect to
ones only oriented on the Italian market (Libero
quotidiano, 2012). About enterprises with 1-9
employees, the productivity of “internationalized”
ones is 38.4% more than others, while it is 26.6%
among enterprises with 10-19 employees and it
rises at 34.5% in firms with 20-99 employees.
The globalization has stressed the competitive-
ness or even the survival problems of small en-
terprises, mainly because significant competitive
factors, such as scale economies and technological
research/innovation, are generally not very devel-
oped within Italian SMEs (Cedrola et al., 2009).
Small enterprises are too often focused on product
and on use innovation (Von Hippel, 1988) rather
than on intangible resources such as knowledge
and information (Plechero & Rullani, 2007).
On this basis, it is clear that small sized com-
panies face significant difficulties in the interna-
tional competition (Ohmae, 1985) when focusing
on domestic markets or on personalized products
for the international markets.
It is imperative that all SMEs strive for re-
positioning themselves in competitive terms. The
entire nation is interested in supporting SMEs on
their difficult path towards rebuilding and the role
of banks in this context is fundamental. Banks are
responsible for assuring the adequate credit flows
to the firms that will be able to generate a new
phase of investments, necessary to foster profound
innovation in Italian production structure. Invest-
ments, aimed at incorporating new technologies
in the processes of SMEs, are necessary to fill
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Internationalization Services for Small and Medium Enterprises
the obvious productivity gap in their production
factors with respect to larger firms, but also invest-
ments to increase immaterial or intangible capital.
This kind of factors such as human capital, social
capital, the propensity to form networks, the ability
to express one’s qualities and to adapt products
to demand are not well managed by SMEs in
terms of key strategy. It is nevertheless true that
they appear to be fundamental elements so that
the small size of these firms does not remain an
insurmountable obstacle to their internationaliza-
tion prospects (Calcagnini & Favaretto, 2011).
Nevertheless the reorganisation carried out
by Italian manufacturing firms during the period
2003–2007, in the most recent economic crisis
the Italian economy has still characterized by a
production system highly skewed towards small-
sized businesses. This phenomenon has two im-
plications: (a) a large share of firms makes their
production decisions based on domestic demand;
(b) small-sized firms find competing internation-
ally more difficult than larger firms. The combined
effect of a compressed domestic demand and the
increased competition in international markets
explains the trends of the Italian GDP (Gross
Domestic Product) growth rates during the crisis
as discussed in (Calcagnini & Favaretto, 2011).
It’s crucial that Italian SMEs, even in a trouble
contest, aim in investing in growth and reach an
appropriate size in competitive international mar-
kets. For this reason a particular attention will be
reserved for small and medium size enterprises,
the living of the Italian industrial structure, ac-
cording to (Castellaneta, 2011).
In conclusion the core of the Italian industry
is a significant group of firms that are trying to
react to the economic crisis since 1929. They aim
to compensate for stagnant domestic demand by
looking for new foreign markets or by expanding
their existing ones. On the other hand the quest for
growing foreign markets is a complex one because
of the relatively small size of Italian businesses. To
deal with this challenge the Italian industry needs
increase the firms’ efforts to a more intensive use
of scientific and technological knowledge, more
skilled workers as well as increased equity among
their financial resources. Furthermore new busi-
ness models require a general upgrading of the
human capital; it means that business growth is
also linked to training, listening and to the capa-
bility of managing relationships.
Internationalization:
How and for Whom
Italian SMEs Business Activities
The greatest part of Italian small and medium
enterprises, especially those with less than 10
employees, are concentrated in the service sector
(almost 76% of all SMEs), (Studi confcommercio,
2009) particularly in real estate, information tech-
nology, research and other professional activities
(25.2%) and retail trade (16.5%) (Studi confcom-
mercio, 2009). Going up in size (from 10 to 249
employees) the share of SMEs in services (about
46%) decreases because the more widespread is
the presence of medium-sized enterprises in the
industrial sector. (Studi confcommercio, 2009)
SMEs Needs, Requirements and
Issues in Extending Business Abroad
All companies aim to reach good results in ex-
tending their business abroad. The achievement
of the objective depends on three main factors:
the products and their competitiveness in new
markets, the fulfilment of new potential custom-
ers’ needs and the capability of the company in
making profits. The first two factors are strongly
related to the product while the third one depends
on several boundary condition like the penetration
in foreign markets rapidly and at low cost.
Furthermore different business strategies
can be evaluated by entrepreneurs; building new
manufactures abroad requires lots of capitals and
a complete reorganization of the enterprise, while
spreading out technology and competences to
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Internationalization Services for Small and Medium Enterprises
foreign firms settled on the market, making profits
on property rights, means losing the control on
core technologies and products and it’s usually
what SMEs want to prevent. The preferable way
is founding foreign partners which deep know
requirements and preferences of the local custom-
ers, banking and tax legislation and can provide
a distribution network. However, SMEs often do
not have neither a dedicated export department
nor resources to analyze in depth the market. In
addition most of the time language is a barrier and
entrepreneurs are not fully independent in finding
and, most likely, evaluating potential partners.
Thus, it is clear that on one hand there is the
requirement from SMEs of being supported in
internationalization and on the other one there are
a few Italian companies able to extend their busi-
nesses abroad. Nevertheless in Italy both public
and private agencies exist that provide services
to help SMEs in extending their business abroad.
In the following sections is developed an analysis
on how they operate, what kind of services they
provide, and how much they support enterprises.
The Benchmark Analysis
Benchmarking is the process of comparing one’s
business processes and performance metrics to
industry bests or best practices from other indus-
tries and it is a fundamental and essential support
for management to analyze the financial results
of companies competing.
A benchmark analysis can compare results,
trends of companies competing with each other,
identifying key factors for success in the field
of membership, to understand the dynamics of
competition in the sector, identify the level of
competition in a specific sector and support the
strategic choices of enterprises. In this way, it is
highly intuitive to locate the position of competi-
tors and the drivers of sectors.
For example, the analysis allows:
• Identifying the most profitable competitors.
• Investigating the trend of profitability of
competitors.
• Comparing the cost structure.
• Identifying the critical success factors for
operating in the area (size, leverage poli-
cies, day credit, outsourcing, etc …)
• Identify the products and / or most profit-
able market segments.
• Identifying opportunities that the market
can offer.
• Highlighting any waste company.
In this work we applied a top-down approach.
After the identification of the active companies in
helping SMEs, we set the criteria to classify the
agencies and to evaluate their services. A survey
about companies for measures and practises is set
up and the “best practice” companies are visited
to identify leading edge practices. Finally new
and improved business practices are implemented.
Perform a Benchmarking
The target of the analysis is to underline the role
that different existing agencies play to facilitate
the internalization of small and medium com-
panies. Among Italian agencies in our study we
considered SACE (Sace, n.d.), Italian Chamber of
Commerce (Italian Chamber of Commerce, n.d.),
ICE (Ice, n.d.), Confindustria (Confindustria,
n.d.), Assocamerestero (Assocamerestero, n.d.),
Bank Intesa SanPaolo (Intesa Sanpaolo, n.d),
while about Chinese ones Bank of China and
Hongkong and Shangai Bank (HSBC) (HSBC,
n.d.) are considered. For each one the provided
services are evaluated to highlight their draw-
backs, benefits and limits according to the set up
criteria. This information is useful both to guide
us in the research of information and during the
agency comparison.
To analyse existing agencies we considered
the following criteria:
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Internationalization Services for Small and Medium Enterprises
• Possibility offered to companies in finding
counterparts both in Italy and in foreign
countries.
• Efficiency in evaluating potential partners.
• Effectiveness in helping companies to over-
come language and cultural limitations.
• Ability in sharing abroad account-
ing knowledge (e.g. tax laws, banking
legislation.)
• Introducing firms in participating in inter-
national tenders and in engaging people
locally.
• Each agency is analyzed singularly, focus-
ing on the geographical widespread and
the services offered.
Finally, a critical review is performed compar-
ing the existing agencies with the chosen criteria
and other additional ones, classifying them by
sector covered, service type and evaluating their
own main benefits and drawbacks. In addition an
analysis of the Chinese agencies has been included
in the evaluation, comparing them with the Italian
ones. These results are presented through a table
to have a global and final view of our benchmark-
ing analysis.
THE ITALIAN AGENCIES
Italian Chambers of
Commerce Abroad (CCIE)
CCIE – Camere di Commercio Italiane all’Estero
(Italian Chamber of Commerce, n.d.) – is the as-
sociation of the Italian Chambers of Commerce
Abroad, established to evaluate and develop
the Chambers activities, through increasing the
level of interest and awareness on the network
and its features among Italian and International
institutions and business organizations. It is the
association of Italian and local entrepreneurs and
professionals, recognized by the Italian Govern-
ment. In other words, it is the association of Italian
commercial chambers in the world. The CCIE are
established and developed basically in countries
with a considerable Italian presence. Nowadays
there are 75 Chambers in 50 countries with 140
points of presence and over 24.000 member com-
panies which 70% is about local firms interested
in different forms of mutual exchange with Italy.
Products and Services Provided
CCIE represents the Chambers’ requirements and
their service potentiality, seeking co-operative
strategic alliances with public and private entities
in order to foster knowledge and use of the Cham-
bers network, as well as promoting Chambers’
activities. Italian enterprises are facilitated both
in establishing contact with institutions and in
accessing to co-financing programs promoted by
the Ministry of Productive Activities and Unionca-
mere Interchamber Fund and in establishing busi-
ness relations, through an on-going information
and communication action, a constant monitoring
of the sector trends, as well as the publication of
user friendly country profiles.
One of the most important issues entrepreneurs
have to deal with developing internationaliza-
tion projects is the lack of knowledge about how
to approach new and not well-known markets.
CCIE, in cooperation with territorial Chambers
of Commerce, promotes training sessions and
professional updating courses for managers and
employees on management.
A huge amount of initiatives are organized
about information and communication. Annual
reports on sectorial business opportunity in host
countries as well as “Business Atlas” (assocam-
erestero.it), a practical and easy guide for eco-
nomic and travel information in countries where
Chambers operate, are edited and published. In
addition a continuous collaboration with Italian
press and media is active to establish relationships
with Italian business communities in the world and
to increase the visibility of Chambers’ activities,
services and projects among SMEs.
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Internationalization Services for Small and Medium Enterprises
Summary
The main drawback of CCIE (Italian Chamber of
Commerce, n.d.) is that it provides services only for
SMEs operating in Italy or only in countries with
Italian presence. Since CCIE is only a platform it
does not include financial and insurance services.
In particular it is an intermediary providing links,
guides and information while direct operational
support and tools are not provided.
On the other hand, CCIE provides a lot of
publications regarding the development of foreign
markets and studies regarding future scenario. The
main benefit is that, in the database, enterprises
are classified on the base of the industry sector
with the indication of complete personal data of
companies, e.g. location, owner, sector, contacts.
Intesa Sanpaolo
Intesa Sanpaolo (Intesa Sanpaolo, n.d.) is the
banking group formed by the merger of Banca
Intesa and Sanpaolo IMI and it is among the top
banking groups in the euro zone, with a market
capitalisation of 18.2 billion euro. Especially in
Italy, it is the leader in all business areas (retail,
corporate and wealth management) but, what is
more, the international network of specialist that
support enterprises is widespread 29 countries,
in particular in areas where Italian companies are
most active, as the Middle East, the North Africa,
the United States, Russia, China and India.
Products and Services Provided
The services offered could be summarized in 3
macro classes: commercial banking, support to
research and innovation in products and processes
of companies (as the purchase of new technologies
on the market), the improvement of the information
systems and finally internationalization services.
About commercial banking, Intesa Sanpaolo
offers specific services:
• Cash management, comprising domes-
tic and international payment; SEPA
payments; products supporting the opti-
mization of cash flows and the manage-
ment of liquidity (cash pooling and cash
concentration.)
• Trade and export finance to support the in-
ternationalization of companies, including
into emerging markets.
• Factoring for efficient management of
trade receivables (sale, administration and
collection of receivables, and the recovery
of bad debts.)
These services are offered with the support of
three Intesa Sanpaolo Group companies, which are
Leasint, Mediofactoring and Microcredito Italiano
(www.group.intesasanpaolo.com) .
In particular, Leasint offers leasing for a wide
range of activities as vehicles (private, commercial
and industrial), aero-naval and railway means of
transportation (yachts, planes, helicopters and
trains), real estate (the acquisition and the con-
struction of new buildings), equipment machinery
and renewable energy sources.
Mediofactoring, improves corporate relation-
ships with its clients and suppliers for the growth
of their business, optimising the management of
working capital, liquidity and developing specific
solutions for companies operating in tourism,
shipping, public healthcare, oil & gas and utility
sectors.
Mediocredito Italiano, provides a specific fund-
ing, called International+, in order to support the
international expansion plans of SMEs.
Specific for SMEs, the agreement between In-
tesa Sanpaolo and Piccola Industria Confindustria
(Intesa Sanpaolo, n.d.) provides a new plafond of
10 billion for services and investments in different
six areas: the development of “human capital”
(education and employment), the growth in size
(corporate finance transactions and streamlin-
ing organizational), energy efficiency and eco-
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Internationalization Services for Small and Medium Enterprises
sustainability, internationalization, innovation,
enterprise networks and other forms of alliances.
About the dedicated internationalization ser-
vices, the international network in about thirty
countries makes Intesa Sanpaolo a point of ref-
erence for seeking out opportunities in markets
abroad, providing support to customer trade trans-
actions through International Trade Services (e.g.
international cash management, international cash
pooling for the optimal management of treasury
flows, trade and structured export finance as let-
ters of credit and finally international factoring,
for converting export receivables on important
volumes of goods and services into cash available
to the customer).
Direct investments in new markets are sup-
ported through financing provided locally, in-
ternational guarantees, coordination with public
institution and, through Banca IMI, the offer of
M&A and structured finance services.
For SMEs, it is offered a service, called Trade
Esplora, to increase knowledge of international
markets.
The Internet Banking platform offers the access
to web information about the foreign countries,
regarding the political and institutional framework,
rules, customs and tax, contractual obligations
and a list of potential partners or suppliers. It
also includes the Atlas of countries, which con-
tains economic, tax and more specific business
information on individual markets (field studies,
regulations for the import / export, customs for-
malities), related to 185 countries.
Summary
Intesa Sanpaolo (Intesa Sanpaolo, n.d.) offered,
with a direct connection between companies, a
complete range of financial and management
services, being the Italian bank playing the most
important role in international commerce. More-
over, it gives support to important development
projects as the construction of new branches, the
creation of distribution networks and the acquisi-
tion of brand names or of other companies.
SACE – Servizi Assicurativi per
il Commercio Estero (Insurance
Services for International Trade)
SACE S.p.A. – Servizi Assicurativi per il Com-
mercio Estero (Sace, n.d.) is an Italian insurance
and financial group active in export credit, credit
insurance, investment protection, financial guar-
antees, sureties and factoring.
The Group enhances the growth of over 25000
clients in more than 180 countries, providing more
stable cash flows and transforming counterpart
insolvency risks into development opportunities.
SACE is present in Italy with locations capable
of independently managing the demand, assess-
ment and issue process for insurance coverage for
amount up to EUR 20 million. Bank branches,
which have an agreement under the finance
program dedicated to SME internationalization
projects, are another important contact channel
between businesses and the areas in which they
operate. According to 2011 SACE Annual Re-
port (Sace, n.d.) Russia is the first host country
in SACE portfolio with a statement of EUR 5.2
billion, followed by Turkey, Saudi Arabia and
Brazil. Other overseas markets with high potential
are Asia, Sub-Saharan Africa, Central Europe and
the Commonwealth of Independent States.
In 183 countries throughout the world, any-
where a company decides to export or invest, it
can count on managers who are experts in the
local business environment and on analysts spe-
cialized in assessing the risk profile of markets
and counterparties.
Products and Services Provided
SACE Group provides a wide range of insurance
and financial products and services for companies
as well as for banks for their daily business in
Italy and abroad.
The main Credit Insurance services against
non-payment by customers are Supplier Credit
Policy (SCPs) which protects single exports with
deferred payments of over 24 months without
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Internationalization Services for Small and Medium Enterprises
amount limitations against both the pre-shipment
risk and the non-payment by a foreign customer,
Civil Works Policy which keeps the company in-
demnified against the risks that could arise during
the execution of civil works or plant engineering
projects or during the credit period, due to politi-
cal and/or commercial events through a maximum
coverage indicated by the insured.
Credit Insurance covers contracts with a value
up to EUR 500.000 and deferred payments of up
to 36 months (SMEs).
Investment Protection helps Italian companies
protect their foreign investment. The package
includes services like Political Risk Insurance
which protects overseas investment against politi-
cal risk – such as nationalization, embargo or civil
unrests – which may cause loss of the invested
capital and Contractual Guarantees which en-
able the company to bid for civil works, supply,
service and maintenance contracts in Italy and
abroad by guaranteeing to the public authority
or private counterpart that the relative contract
will be signed and all obligations will be met. In
addition, advisory services aim to help identify
the best growth opportunities abroad and to as-
sist in the negotiation process with the foreign
counterparties in order to close the deal, while
Corporate Credit Risk allows the assessment of
foreign buyer’s credit-worthiness in order to close
the deal faster and with more safety.
Summary
The main benefits of SACE S.p.a. (Sace, n.d.)
are high competitiveness for SMEs through the
greater financial stability provided by the Credit
Insurance (certainty that you will be paid) and the
financial guarantees in respect of loans granted
to the company by banks in order to support its
internationalization plans or export business.
The main drawbacks are the lack of direct
loan since, unlike other foreign agencies, SACE
cannot distribute directly loans but it needs to be
intermediated by banks in order to finance Italian
companies’ business; this represents a competitive
drawback for the Italian companies that want to
expand their business abroad, since the cost of
intermediation has significantly increased after
the crisis. Furthermore no support for specific
sectors (Exim Bank provides special services for
green business, medical sector exporters) is given
as well as no coverage of currency fluctuation risk
(unless Ksure.)
Chamber of Commerce
The Chamber of Commerce (Camera di Commer-
cio, n.d.) is a public agency that provides services
for enterprises of a specific reference territory
in order to protect their interests. In Italy there
is also an organization of all Chambers called
Unioncamere.
The mission of the Chamber of Commerce
is to foster the growth of the local economy and
to enhance it through effective and targeted ini-
tiatives, thus playing the role of spokesman for
companies registered in. Thus Chamber of Com-
merce has a role in promoting and stimulating the
local entrepreneurial system.
Among the services, it provides some advices
for enterprises which are going to begin an inter-
nationalization program, extending their activity
out of Italy. There are no limitations about the
country in which Italian companies could extend
their business. Since there is a good cooperation
between European agencies, there are lots of
information available about foreign enterprises
and their economical and financial situation. In
order to present business opportunities in less
known countries, which could be good for Ital-
ian companies, several Chambers of Commerce
organize open meetings with enterprises and
representatives of public and private institutions,
e.g. a meeting has been organized in April 2012 by
Emilia Chamber of Commerce to show Colombia’s
business opportunities.
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On the other hand, problems come up when
enterprises look for information about the eco-
nomical situation and the growing-up businesses
of possible counterparts in specific countries.
Products and Services Provided
Two different kinds of services can be distin-
guished: free of charge services and fee ones. In
particular Chambers of Commerce do not provide
proper services for free but just information, e.g.
about taxes, International contracts, transports
and payments and insurances. Publications and
news abroad are available on the websites of each
Chamber of Commerce.
Several more useful opportunities are pur-
chasing services, e.g. getting access to Kompass
Extranets, a database of 2 million companies in
70 countries around the world where possible
counterparts can be found, depending on the pur-
pose of companies about creating an international
consortium or a partnership in the development
of specific projects or longer collaborations and
joint ventures. According to EBR (European Busi-
ness Register) requirements, registered companies
have to show data about office holders, financial
statements and acts.
Chambers of Commerce offer also services
which are just partially free of charge, e.g. the
Foreign Desk; it allows companies in looking
for potential partners, in checking their credit-
worthiness and in obtaining specific supports,
as in logistic.
To obtain customized investments and insur-
ance plans, Chambers of Commerce refer to other
agencies as SIMEST and SACE.
Finally, assistance to participate in interna-
tional tenders for companies operating in specific
sectors (e.g. infrastructure, environment and edu-
cation) is provided.
Summary
Chamber of Commerce (Camera di Commercio,
n.d.) has on its website a list of a huge number of
services useful for internationalization enterprises,
not distinguishing between services provided for
SME and for big companies. However, behind
the name of the service there is always a link to
another agency or there is a telephone number and
an address about a place to refer to obtain further
information and consulting.
In conclusion, it is not easy to get if the support
for internationalization projects of enterprises is
really efficient and useful.
ICE – Agency for the Promotion
Abroad and Internationalization
of Italian Companies
ICE (Ice, n.d.) is the government organization
which promotes the internationalization of Italian
companies. After the suppression of the old agency,
it was established by Law December 22, 2011 n.
214 as an entity with legal personality under public
law in line with the strategies of the Ministry for
Economic Development (Garioni, 2011) that is
the agency providing the internationalization of
Italian enterprises is rising again and it is ICE.
While ICE provides information, support and
advice to Italian companies to promote cooperation
in industrial, agricultural, distribution and service
sectors, to increase their presence in international
markets, Italtrade (Italtrade, n.d.) is the portal
of the agency addressed to foreign companies
operating in international trade and interested in
expanding their business in Italy.
The starting point of the internationalization
is the selection of markets to which export the
products. Choosing the most appropriate mode
of entry in the target country is one of the most
difficult decisions to face. Having connection
worldwide, ICE helps companies to select the most
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Internationalization Services for Small and Medium Enterprises
attractive alternatives, taking into account both
the explicit features of the markets and the risks
to be faced and the obstacles to be overcome. It
provides many services like recognition of busi-
ness opportunities, events, and statistics that are
specific to the selected country and a number of
funding opportunities, embarking on a successful
way of exports.
In addition to its Rome headquarters, ICE
operates all around the globe, in about 87 coun-
ties, from a large network of Trade Promotion
Offices linked to Italian embassies and consul-
ates and working closely with local authorities
and businesses.
Products and Services Provided
The Agency operates to improve, facilitate and
promote Italian economic and trade relations with
foreign countries, with particular attention to the
needs of small and medium sized enterprises,
associations and groups. It works to develop the
internationalization of Italian firms, and the sale
of Italian goods and services in international mar-
kets, and to promote the image of Italian products
in the world.
Foreign counterparts can post a request or of-
fer for goods or services destined to Italian firms.
All forms submitted will be addressed to Italian
companies through a database of business op-
portunities in which requests and offers of foreign
companies, divided by product sector and country,
are kept for a period of three months.
ICE and Italtrade provide a wide range of
facilities helping Italian and foreign businesses
to connect with each other, most of them free of
charge, e.g. identification of possible business
partners, bilateral trade meetings with Italian
companies, official participation in local fairs and
exhibition and support to companies in overcom-
ing language limitations until the final report on
the results to the clients.
In performing its activities, the Agency works
closely with the regions, chambers of commerce,
industry, handicrafts and agriculture, business
organizations and other public and private, un-
der the guidance and strategic planning of an
institutional cabin director for the promotion and
internationalization of companies. ICE can help
firms in knowing foreign markets, in fact, on the
website, there is a huge collection of data on dif-
ferent useful aspects, e.g. market guides, which
contains information on the overall economics, the
risk of the country, the commercial interchange,
investment flows, customs, tax and corporate rules
and an analysis of opportunities for Italian products
with details of promising sectors in each market;
in addition summary information on projects,
funding for major international organizations ac-
cording to the recipient country and by sector, to
follow the “life cycle” and the stages of progress
of each project are given.
The agency offers also on-site research and
pre-selection of management, administrative and
technical staff, with the aim to provide, if possible,
a list of suitable candidates, including making the
final choice.
Summary
The agency analysed, despite offering very use-
ful services, suffers of many limitations. The
main benefits are the provision to Italian and
international companies of a huge collection of
data and statistics on various aspects related to
internationalization and the help to companies
in finding its counterpart from the stage of selec-
tion to the final choice through meetings, visits,
fairs and seminars. Not negligible aspect is the
gratuitousness of most of the services.
As far as drawbacks concern, ICE is influ-
enced by all political decisions and governmental
changes due to its connection with the Italian
Government and it is not offering any kind of
insurance and financial option.
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403
Internationalization Services for Small and Medium Enterprises
Confindustria
Confindustria (Confindustria, n.d.) is the main or-
ganisation representing Italian manufacturing and
services companies. A total of 149,288 companies
of all sizes – employing a total of 5,516,975 work-
ers – are voluntary members of the organisation.
The fundamental value underlying Confindustria’s
activities is the belief that free enterprise and
free economic activity, within the framework of
a market economy, are key factors for the growth
and development of society as a whole.
Confindustria stands for the needs of Italy’s
industrial system in dealing with the Parliament,
the Government, the Unions, but also with the
international organization. It has a predominant
role in Italy with his eighteen regional sites, and
ninety-nine local associations. For supporting
Internationalization, Confindustria has direct
cooperation with both Italian and international
political institution and economic, social and cul-
tural organisations, e.g. international community
“Affari Internazionali”, Assafrica&Mediterraneo
(Confindustria Assafrica & Mediterraneo, n.d.),
Afrimeds Business Development Srl, Business
Med, CDE – Centre for Development of Enter-
prise.
Directly or indirectly, by this associations,
Confindustria offers representation and commu-
nication services.
Products and Services Provided
The main feature of Confindustria is that it does
not offer any kind of service directly, but has a
principal role as intermediaries and mentor. To
promote internationalization among Italian com-
panies that want to find counterpart in foreign
countries, Confindustria has build the so-called
“Business Partnership” by which members compa-
nies can get in touch with members companies of
the counterpart in foreign country. These agencies
are located in different part of the world and divided
by geographical criteria: Assafrica (Confindustria
Assafrica & Mediterraneo, n.d.), AfrimedsBD
and CDE (for African, Mediterranean and Middle
East countries), BusinessMED (Turkey, Algeria,
Cyprus, Egypt, Jordan, Israel, Lebanon, Malta,
Morocco, Palestine, Syria and Tunisia).
Confindustria addresses all the companies
working in the area and supports them when
facing difficulties and finding business partners.
The reliability of its members is guarantee by the
participation to the network. In fact Confindustria
does not make any selection of counterpart, but
ensure for them: one would assume that a com-
pany joined in foreign agencies is a reliable one,
and keep trust on it. Even for the operative part,
Confindustria delegates to other specific institu-
tion (e.g. SACE for credits and insurance).
The other important role played by this agency
is as source of information. It keeps constant
contact with Embassies, Entrepreneurial Asso-
ciations, Chambers of Commerce, National and
International Institutions both in Italy and in all
the targeted Countries.
By the support of newsfax, newsletter and coun-
try guides, Confindustria offers to his affiliates
a constant updating on the political, economical
and financial framework; it updates Agenda on
fairs, exhibitions and relevant events and, in ad-
diction, has a system of investment opportunities
and tenders alerts; however these applications
must be sent by the specific organization that
provides them.
The agency fosters industrial and trade coop-
eration in the countries of reference by support-
ing projects, investment and the creation of joint
ventures; it arranges vocational training courses
for entrepreneurs, tailored to operate in the area
countries.
All registered members can require specific
supports concerning business regulation about
rates and standards, technical barriers, customs
legislation and regulation, free trade agreements,
illegalities on unfair trade practices, distortions in
import markets, international rules on intellectual
property protection.
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Internationalization Services for Small and Medium Enterprises
Summary
The main benefits of the services provided by
Confindustria are the reliability of institutional
organizations (260 Federation and territorial
association) which helps the specialization, the
opportunity of targeted Markets researches, the
availability of professional communities that make
effective information flows, share knowledge,
skills and experience, by direct contact and seri-
ous studies of competence and the planning of
periodic meetings and effective system of internal
information.
Unfortunately there are no information about
the quality of the services offered and the success
of these among companies.
Comparison among Italian Agencies
All the Italian agencies examined have their
strengths and weaknesses, and in relation to the
needs of the firms they might be adequate or not.
Finding a counterpart is a service provided by all
agencies, but the effectiveness and the complete-
ness of service vary a lot.
The main limitation is that most of agencies do
not offer directly neither financial and management
support nor insurance services, a part from the only
bank taken into account, Intesa Sanpaolo. Some
of them act just as an intermediary, being active
not in the actual process of internationalization
but only in the exchange of information between
companies (e.g. CCIE, Chamber of Commerce,
ICE, Confindustria), while others offer them
straight connections (e.g. Intesa Sanpaolo, SACE).
A huge database of data is made available to
companies as well as links to additional suitable
facilities. Some agencies, e.g. CCIE, Intesa San-
paolo, ICE, Confindustria, have peculiar aspects
such as gratuitousness or support for specific
sectors.
Finally ICE suffer because of its connection
with government bodies, which could be a deal
for the agency and for customers as well.
A summary of services provided by Italian
agencies is shown in Table 1.
Table 1. Summary of services provided by Italian agencies
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405
Internationalization Services for Small and Medium Enterprises
THE CHINESE AGENCIES
Chinese Banks
This section analyses the services offered by the
two main Chinese banks in helping SME (small
and medium enterprises) doing international
trade. They are Bank of China and Hongkong
and Shanghai Bank. Then a comparison of their
services with Italian banks’ relative services is
discussed. During the comparison, some sugges-
tions will also be put forward.
Bank of China
As the most internationalized and diversified
bank in China, Bank of China provides full range
of financial services in China’s mainland, Hong
Kong, Macau and other 31 countries. It mainly
operates the commercial banking business in-
cluding corporate banking, personal banking and
financial market business
Products and Services Provided
International Trade Settlement
Regarding International Trade Settlement, Bank
of China offers issuance, advice, confirmation,
import and examination of documents about letters
of credit, like Intesa San Paolo Corporate in Italy.
International Trade Financing
Bank of China provides a kind of short-term fi-
nancing, making advance payment on behalf of
importer with valid certifications and commercial
bills under import letter of credit (L/C) or inward
collection. A written guarantee on shipping, is-
sued by the bank which will bear joint liability, is
presented by the importer to the carrier or its agent
for picking up the goods in the case of arrival of
cargo prior to the shipping documents. Shipping
Guarantee is commonly used under L/C with full
set of documents of title to goods.
In trade finance, Bank of China allows a seller
to obtain financing and to receive immediate funds
in exchange for a sales document not drawn under a
letter of credit. The bank will send the sales docu-
ments to the buyer’s bank on behalf of the seller.
Furthermore loans are issued by Bank of China
at the request of the beneficiary of L/C (exporter)
to finance their purchase, production and shipment.
Information Services
Performing business information survey, the bank
can provide a business information report upon
the request of the customer by cooperation with
external credit investigation companies, or get
information such as the basic background, credit
status, payment ability, bad record of relevant
companies through domestic and overseas institu-
tions of Bank of China.
To verify the bill of lading and to make enqui-
ries about the ship’s route, statues and shipment
of goods a marine survey is provided.
Since with the development of economic glo-
balization, trade activities, especially international
trade, are characterized by wide coverage, com-
plicated procedures, and high level of difficulty
in operation and frequent changes, consultancy
service allows customers, which may encounter
various difficulties when selecting trade counter-
party, in determining settlement method, designing
financing package and taking precautions against
potential risks. Bank of China is a specialized bank
offering trade finance services. Bank of China
dedicates to help, based on customers’ operation
features and specific requirements, customers with
their trade problems with a package of consultant
services.
Like Intesa Sanpaolo, Bank of China offers
business information survey and consultancy
service but in addition Bank of China offers an
extra service about marine survey.
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406
Internationalization Services for Small and Medium Enterprises
The Hongkong and Shanghai
Banking Corporation Limited (HSBC)
Operating in over 60 countries and territories,
HSBC offers global connectivity and a strong local
presence for clients with international advisory,
financing and trading needs. HSBC (HSBC, n.d.)
has high-quality research and analysis to investors
around the world. With 600 staff in 22 developed
countries, covers economics, currencies, equities,
fixed income, and climate change.
Products and Services Provided
Advisory
HSBC’s Global Advisory business provides
financial advice on a wide range of mergers and
acquisitions and capital raising activities such as
mergers, acquisitions, divestitures, joint ventures,
financial restructurings, and equity and debt
capital raisings.
Financing
HSBC provides solutions in the financing and
investment in physical and financial assets and
provides structures and coordinates almost any
type or scale of corporate flow and even financing.
A specific kind of market, Debt Capital Mar-
kets, allows getting money from different ways,
helping companies to diversify their sources of
funds and to gain access to a global network of in-
stitutional investors, while Equity Capital Markets
is used to raise equity capital for the companies.
Financing services for export are provided
as well as ship broking and consultancy: having
people on the spot in Hong Kong, London, Athens
and Shanghai provides valuable intelligence and
feedback on shipping markets demand, prices,
and deal flows. Owners and charterers depend on
HSBC information flow to keep up to date with
market intelligence and developments.
Investing
From HSBC Global Asset Management Access,
a wide range of equity, fixed income, liquidity
and alternative investment products are available.
The management can help to capture some of
the exciting opportunities of the world’s faster-
growing economies. In addition, liquidity funds
are provided to achieve competitive investment
returns as well as liquidity by investing in a di-
versified portfolio.
Online Services
HSBC manages investments of companies and
keep track of their cash flows with secure online
services. A range of online tools that boost ef-
ficiency and give flexibility to carry out trades
or do business from anywhere in the world are
also offered.
Research and Analysis
HSBC delivers high-quality research and analysis
to investors around the world. With 600 staff in
22 developed countries, it covers economics, cur-
rencies, equities and fixed income.
Securities Services
Corporate Trust and Loan Agency supports cus-
tomers’ business with a wide and diverse range of
trusts and loan products for debt capital, escrow,
structured finance, project finance and Islamic
finance. In particular Islamic securities services
meet the Islamic securities services needs accord-
ing to HSBC Amanah Securities Services. HSBC
offers comprehensive, full-service solutions aimed
at helping investment managers in accomplishing
their financial goals while adhering to Shariah
principles.
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407
Internationalization Services for Small and Medium Enterprises
To reduce the risk and to keep financial assets
safe, servicing the associated portfolios, fund
services and global custody services are offered.
Trading and Sales
HSBC bestows credit which is the trust which
allows the bank to provide money to company,
and the company does not need to reimburse
immediately, but instead repay or return those
money at a later date. A specific team, the Money
Markets team, helps to meet short-term financial
needs through cash loans and deposits, certificates
of deposit and commercial paper.
To stimulate foreign exchange, emerging
market opportunities are captured with foreign
exchange (FX) knowledge, delivered from HSBC
vantage points in fast-growing regions.
Transaction Banking
Client Access: Regardless of your organization’s
size, location or internal structure, our suite of
Client Access solutions offers a flexible range
of options from basic connectivity to robust
integration.
Trade and Supply Chain
Provides the service to introduce efficient chan-
nels.
COMPARISON BETWEEN ITALIAN
AND CHINESE ECONOMIES
Different Economic Background
First of all, here are some basic economic statistical
graphs, to give a general idea of the differences
between Italian and Chinese economic conditions:
• GDP: For Italy it is $2.2 trillion in 2011;
for China it is $7.3 trillion in 2011. In
Figure 1, it is showed that before 2000
GDP of Italy is higher than that of China,
however, GDP of China nowadays is far
above Italian.
• GDP Growth Rate: For Italy, from 1999
GDP growth rate was around 2%, and even
became minus in 2009. For China, yearly
GDP growth rate in last decade was around
10%. In Figure 2 it is clear that Italian GDP
growth rate is always low, while China is
during a rapid growing period.
• GDP Per Capita (Current US$): For
Italy, it is $36115 in 2011. For China, It is
$5429 in 2011. Thus, the Figure 3 indicates
that though the Italian GDP is much less
than Chinese nowadays, the GDP per capi-
ta of Italy is about 7 times of Chinese, it
implies higher consumption ability as well
as higher production costs.
• Cost to Export (US$ Per Container): For
Italy it is $1,245 in 2011. For, China it is
$545. In Figure 4, it is obvious that consid-
ering the cost of export, Italian is more
than twice of Chinese. Thus, the overall
cost for Chinese SME going abroad can be
significantly lower than Italian. But, be-
cause of the low level of technology devel-
opment, the Chinese export goods are al-
ways with less value-added, especially for
SME family firms.
COMPARISON ITALIAN VS. CHINESE
AGENCIES
Geographic Range
The ranges of most Italian and Chinese agencies
are around 50 countries, except for those which
aims at information providing, like ICE. The
broadest one is SACE, whose services spread
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408
Internationalization Services for Small and Medium Enterprises
Figure 2. Italian and Chinese GDP growth rate. Focusing on the last decade, the average value of Chi-
nese GDP growth rate is around 10% per year, while Italian one manage not to be below 0%. In other
words, Chinese standard of living is getting better year by year, while the Italian one is the same or is
getting a little bit worse. (GDP growth rate, n.d.)
Figure 1. Italian and Chinese GDP trend over last 50 years. The Chinese GDP overtook the Italian
one in 2000, but it is impressive the increasing difference between the trends of the two countries in the
last decade: while Italian trend barely grew up, the slope of Chinese one is steeper year by year (Gross
National Income, n.d.)
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409
Internationalization Services for Small and Medium Enterprises
Figure 3. Italian and Chinese GDP per capita. Italian average value is about 7 times Chinese one. This
datum is related to many aspects, e.g. the highest cost of Italian labour, which means higher production
costs for companies operating in Italy (GDP per capita, n.d.)
Figure 4. Italian and Chinese cost to export. Italian cost to export is more than the double than Chinese
one but the per cent effect on the final cost of goods is lower than expected since the value of products
exported by Italian firms is usually higher in respect to the one of Chinese companies (Cost to export, n.d.)
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410
Internationalization Services for Small and Medium Enterprises
over all the countries in the world (over 180). For
these two Chinese banks, Bank of China is 30
countries and HSBC is 60 countries. Compared
with Intesa SanPaolo’s 30 countries and CCIE’s
50 countries, the difference is not too big. HSBC
is mainly located in Hong Kong and Shanghai, the
business centres of Asia; consequently this might
be the reason why it is a little broader than others.
Logistic
From a logistic point of view, the services provided
by Italian and Chinese agencies are very differ-
ent. In particular, both Chinese agencies provide
relevant services, while Italian agencies do not
have those kind of service. The following are ship-
ping logistic services of two Chinese banks. First,
shipping Guarantee refers to a written guarantee,
issued by the bank which will bear joint liability,
and is presented by the importer to the carrier or
its agent for picking up the goods in the case of
arrival of cargo prior to the shipping documents.
Shipping Guarantee is commonly used under let-
ter of credit with full set of documents of title to
goods. In addition, Ship broking and consultancy
are the two main facets of the service. Having
people on the spot in Hong Kong, London, Athens
and Shanghai provides valuable intelligence and
feedback on shipping markets demand, prices, and
deal flows. Owners and charterers depend on our
information flow to keep up to date with market
intelligence and developments.
While Italian companies are focused on expor-
tation mainly in Europe, on the other hand Chinese
enterprises export products to Europe, North
America, Japan and Australia: in other words, in
China the shipping logistic services are of great
significance. But, if Italian companies want to sell
products to other countries outside Europe, like
South and North America and Asia, a high quality
shipping logistic service is, definitely, required.
Specific Sector Services
By considering specific sector services, HSBC
does the best job. Compared with other agencies,
its services are much more specified according to
different business sectors. In Italy, the only mere
example of this diversification is Mediofactoring,
an Intesa SanPaolo corporate company, which
has also developed specific sector services for
companies operating in tourism, public healthcare,
oil & gas and utility sectors.
On the other hand, taking Chinese industry
sectors for example, clients operating in specific
industry fields expect their advisers to align and
distribute their products and services. Segmenting
their talent and other resources on an industry/
sector-specific basis allows them to match their ex-
pertise with business customers’ financial services
and banking needs. What is more, the industry
sector could be further specified, and it includes
autos, building materials, chemicals, clean tech,
consumer, healthcare, industrials, infrastructure,
media, real estate, retail, telecommunications,
transport, shipping services and offshore, etc. In
addition, in each specified sector, there are more
specified segments according to different kinds of
products. For example, the resources and energy
group’s specific sectors of specialization are:
power and utilities; metals and mining.
According to this, we can see the services of
HSBC are very detailed and specified. This ensures
the professional of clients in each service. So, in
our opinion, it is beneficial for Italian agencies
to specify their services. At the beginning, the
specified part can be some business field that
Italian companies have great competitiveness, like
fashionable dress, food, mechanical and etc. Then,
if it is successful, they can broad it to other fields.
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411
Internationalization Services for Small and Medium Enterprises
Customized Services
In the services of HSBC, some specific require-
ments of clients are taken into consideration. Take
the religious custom for example, it has Islamic
securities services, which aims at meeting Islamic
securities services needs with HSBC Amanah
Securities Services. It offers comprehensive,
full-service solutions aimed at helping investment
managers accomplish their financial goals while
adhering to Shariah principles. This gives a hint
that, regarding different clients, if possible, it is
better to provide more customized services to each.
Final Comparison
The analysis of the data and services offered by
Italian and Chinese agencies or banks highlights
how the latter offer a more comprehensive and
rich service to the firms while the former have a
narrow view on the business environment. Italian
agencies are not as complete as Chinese ones,
in fact each of them neglect a particular service
for example logistic, financing and insurance,
language assistance or information sharing, thus
offering a limited serve.
FUTURE RESEARCH DIRECTIONS
The following step, after the benchmark analysis,
is a collection of information among small and
medium enterprises which actuated international-
ization policies in the past years about needs and
issues found in dealing with unknown markets,
counterparts, clients and so on. Performing a series
of frontal interviews and questionnaires would
help to figure out which services actually offered
by agencies are useful and which ones are useless
and to individuate the main lacks, according to
them, which could make the internationalization
process simple, efficient and flexible fulfilling
the variety of requirements each company aims
to satisfy.
The result of this process could be a feedback
for traditional agencies such that they can improve
the services offered but also a starting point for
building a completely new platform, e.g. exploit-
ing the latest web-based social and aggregation
networks, in a user friendly perspective.
CONCLUSION
At the end of this benchmark analysis, a summary
of the main services provided by agencies and
then a comparison among them can be performed
according to the evaluation criteria set up.
Financial services are just offered by banks
analyzed, e.g. Italian Intesa Sanpaolo and Chinese
Bank of China and HSB. About insurance services,
in Italy they are provided by Intesa Sanpaolo and
by Sace while Chambers of Commerce do not
provide this kind of services but they refer to third
parts, e.g. SACE.
A widely diffused service offered by Italian
agencies, e.g. CCPIT, CCIE, Camera di Commer-
cio di Torino, Confindustria and ICE, is about the
opportunity for costumers to be part of a network
of companies operating in the same sector but in
different countries as well as the possibility to
have access to a database of registered enterprises
where it is possible to search a counterpart or other
information regarding the economical background
of the countries. The con of this last service is due
to the fact it’s fee. Further information, e.g. basic
countries information, market guides, statistical
analysis, are offered on demand by CCIE, SACE,
ICE, Confindustria, Camera di Commercio di
Torino and CCPIT.
The chance for a company to obtain advices by
experts at the proper windows, otherwise called
advisory service, is provided by almost all the
agencies with the exception of CCIE.
All Italian agencies, but Confindustria, publish
on their showcases, on their web pages, public
tenders announced by international institutions,
e.g. UE.
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412
Internationalization Services for Small and Medium Enterprises
As far as logistic shipping assistance concerns,
it is a peculiarity of Chinese HSBC and Bank of
China while among Italian agencies Chamber
of Commerce is the only one to propose a basic
logistic assistance.
Finally security services are only offered by
Intesa Sanpaolo among Italian providers while
Bank of China offers guarantees about financial
transfers and HSBC about goods transfers.
A considerable outcome is that Chinese banks
provide a huge variety of specific services for
specific sectors, while the majority of Italian
agencies offer services tied for general sector; the
exceptions are CCIE and Confindustria, providing
a database organized in different sections accord-
ing with business sectors.
Focusing on the circuit, which is in some cases
direct in others indirect, for Italian Chambers of
Commerce, CCIE and Confindustria is relevant
to underline the almost totally absence of services
directly provided, because they point to services
given by other agencies. Furthermore services
directly provided by the same agencies are basic
and the support they offer to companies is useful
only at the very beginning and just finalized to
give preliminary information; the service of in-
surance promoted by SACE, as example, which
seems to be directly provided by the agency, is,
on the contrary, indirectly supported by banks.
Finally it is possible to classify the different
agencies on the base of the kind of ownership.
Bank of China is one of the “Big Four” state-
owned commercial banks of the People’s Republic
of China and it was founded by the Government
of the Republic of China; while HSBC is a British
multinational private financial company head-
quartered in London, but today it remains the
largest bank in Hong Kong and one of the most
important in China.
Regarding the Italian agencies, the majority
are public owned with the exception of SACE,
which was born as a public economic corporation
and in 2004 it became Sace S.p.A.
In Table 2 is shown a summary of services
provided by agencies.
Table 2. Summary of services provided by each agency, Italian as well as Chinese
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413
Internationalization Services for Small and Medium Enterprises
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Chapter 20
DOI: 10.4018/978-1-4666-4731-2.ch020
Entrepreneurship
Readiness in Turkey:
Profiles from Istanbul-
Kayseri-Van Provinces
ABSTRACT
The target group of the study is composed of the entrepreneurs having business in manufacturing and
services in Istanbul (Marmara Region), Kayseri (Central Anatolia Region), and Van (Eastern Anatolia
Region), Turkey. Istanbul is a first degree developed city, Kayseri is a second degree developed city,
and Van is a fifth degree developed city. A questionnaire having three parts was developed to collect
data for the study. The first part of the questionnaire was about the factors influencing the decisions of
establishment of a new business, the second part was about the personality characteristics, and the third
part was about the demographic features of the entrepreneurs. One-hundred-seventy-eight questionnaires
were collected from the companies in the targeted regions, and their results are analyzed statistically.
INTRODUCTION
In the literature, many definitions of entrepreneur-
ship can be found describing business processes.
Entrepreneurship is first used in middle age and
derived from the word “entreprendere” and means
one who does business. Later, the definition is
broadened to the new meanings. Early this century;
risk taking, pursuing opportunities, innovation and
the process of running a business was added to
the definition of entrepreneurship (Öztürk, 2008).
The role and importance of public administration
in improving the entrepreneurship in Turkey is a
multi-dimensional subject interacting with various
variables (Öktem, Aydın and Ekinci 2007), and one
can observe that some provinces are better than
others in terms of potentials and prospects. So,
Leyla Tulunay
Hacettepe University, Turkey
Semra Güney
Hacettepe University, Turkey
M. Kemal Öktem
Hacettepe University, Turkey
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Entrepreneurship Readiness in Turkey
what can be done and how can be done to support
entrepreneurship requires a good deal of analysis.
Entrepreneur is defined as the one who dis-
covers, evaluates, and exploits opportunities for
creating goods and services (Shane and Venkata-
raman, 2000).
The other three words derived from the ‘en-
treprendere’ are ‘entrepreneurship entrepreneurial
and entrepreneurial processes’. These concepts are
related with each other. Entrepreneurs are the one’s
who undertakes the projects for the conception
of entrepreneurship. Entrepreneurship is what to
entrepreneurs does. Entrepreneurial process is a
continuous process which entrepreneur is in by
creating new values as a result of new project
(Wickham, 2001).
Entrepreneurship necessitates the presence of
opportunities as well as enterprising individuals
who wish to take advantage of them (Venkatara-
man, 1997). Shane and Venkataraman (2000)
suggest that entrepreneurship involves the study of
(a) the sources of opportunities, (b) the processes
of discovery, (c) evaluation and taking advantage
of the opportunities as well as (d) the group of
individuals who discover, evaluate and exploit
these opportunities.
Entrepreneurship is widely defined as a process
by which individuals pursue opportunities without
regard to the alienable resources they currently
control (Hart et al., 1995). It may also be defined
as a human activity aimed at a long-term economic
and social prosperity of an enterprise, and at fill-
ing of market niches (Salka., 2006).
The entrepreneurial process is one in which
the entrepreneurs acquire and develop resources,
and where the new venture outcome is to a large
extent determined by the nature of the resources
the entrepreneurs are able to acquire (Arild, 2005).
In spite of the two major attempts in 1950s
and 1980s to improve private sector contributions,
most of Turkey’s output is produced by state-
owned companies in Turkey (Kozan et al., 2006).
However, SMEs represent more than 99 percent
of the total number of Turkish enterprises in the
manufacturing sector and provide 76.7 percent
to the total employment. They contribute to 10
percent of exports and constitute 26.5 percent of
investment and 38 percent of value added in Tur-
key (KOSGEB, 2005). Ozsoy, Oksoy, and Kozan
(2001) found that Turkish small businesses have
to rely on family sources rather than government
loans or private institutions for financial support.
The success of a small business depends on the
initiatives of the individual entrepreneur to create
a viable business. Therefore, discovering the fac-
tors that motive the individual to go on entrepre-
neurial career becomes important in stimulating
entrepreneurship.
Theoretical Framework
The literature reviewed on entrepreneurship
research reflects the multifaceted nature of this
subject. For years; researchers have attempted to
capture the uniqueness of an entrepreneur. Re-
search on entrepreneurship has been conducted by
academics from a wide array of disciplines having
diverse perspectives on defining entrepreneurs.
Scholars researching entrepreneurship represent
the disciplines of psychology, economics, an-
thropology, history, sociology and management
(Dobransky, 2002).
According to Vesper (1980) this idea can be
stated as the following: According to an economist,
an entrepreneur is one who brings resources, labor,
materials and other assets into combinations that
make their value greater than before, and also one
who introduces changes, innovations and a new
order. According to a psychologist, such a person
is typically driven by certain forces- need to obtain
or attain something, to experiment, to accomplish
or perhaps to escape authority of others. Accord-
ing to a businessman, an entrepreneur appears
as a threat, an aggressive competitor, whereas
to another businessman the same entrepreneur
may be an ally, a source of supply, a customer,
or someone good to invest in. The same person is
seen by a capitalist philosopher as one who creates
wealth for others as well, who finds better ways
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Entrepreneurship Readiness in Turkey
to utilize resources and reduce waste, and who
produces jobs others are glad to get.
Regardless of the background of the researcher
studying entrepreneurship; there is agreement
that personality is a key area in understanding
entrepreneurs.
Role of Personality in
Entrepreneurship
It is generally agreed by most researchers that
an individual’s personality plays a considerable
role in his or her becoming an entrepreneur.
Personality characteristics of entrepreneurs have
been researched extensively (Brockhaus, 1982;
Brockhaus & Horwitz, 1986; Furnham, 1992;
Gartner, 1989,1990; Hornaday, 1982; McClel-
land, 1961,1987; McClelland, Atkinson, Clark, &
Lowell, 1976; Miner, 1997; Stewart, Watson, Car-
land, & Carland, 1999). A number of researchers
support the study of entrepreneurial personality,
and suggest that the personalities of entrepreneurs
can be highly influential in the organizations they
create (Ibrahim & Goodwin, 1986; Kets de Vr-
ies, 1985). Some researchers concluded that only
a few essential characteristics are responsible
for one’s proclivity for entrepreneurship. These
characteristics include achievement motivation,
risk-taking propensity and innovation (Stewart,
Watson, Carland, & Carland 1999).
In contrast, other researchers argue that there
are several different types of entrepreneurs, each
supporting a distinct list of characteristics (Hor-
naday, 1982; Miner, 1997 and Vesper, 1980).
Early contributions to the study of personality
related to entrepreneurs may be found in Mc-
Clelland’s (1961) pioneering research on ‘need
for achievement’. This study led to the develop-
ment of a psychological motivation theory that
ultimately became the foundation research in
business management and entrepreneurship. This
human motivational theory holds that people are
motivated by three principal needs: (a) the need
for achievement, (b) the need for affiliation, and
(c) the need for power.
As simply stated by McClelland and Winter
(1969), the Need for Achievement is the urge to
improve. It means doing a job well and maintain-
ing a certain self-imposed standard excellence.
Individuals, who have a high need to achieve,
seek challenging situations in which they can set
moderately difficult goals that can be achieved
realistically (McClelland, 1961). Achievement-
motivated people prefer a moderate degree of risk
because they believe that their skills and efforts
will influence the outcome. Those who score
high on need for achievement instruments are
typically interested in receiving feedback on their
accomplishments. They like assuming personal
responsibility for solving problems that are in
their control. People who are in need to achieve
are often innovative; thus finding creative ways
to make a new product or service. McClelland
hypothesized that entrepreneurs display a higher
need for achievement than those in other profes-
sions, and concluded from his studies that indi-
viduals exhibiting a higher need for achievement
would be more inclined to choose entrepreneurial
occupations.
McClelland maintained that individuals with
a high need for achievement also have a moderate
risk-taking propensity. Individuals with a moderate
risk threshold tend to take calculated risks to start
businesses that are in their control. Entrepreneurs
have long been thought of as being risk takers,
in comparison to other business persons, to such
a high degree that the term ‘risk taking’ is often
included in definitions of ‘entrepreneur.’ Brock-
haus (1982) defined risk-taking propensity as
the perceived probability of received the rewards
associated with success of a proposed venture,
which is required by an individual before he will
subject himself to the consequences associated
with failure; the alternative situation provides
fewer rewards as well as less severe consequences
than the proposed venture. Risk tolerance is de-
scribed as one’s willingness to accept possible loss
in order to realize future gain (Wonderlic, 1995).
Researchers (Timons, Smollen, & Dingee,
1985) support the argument that entrepreneurs
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Entrepreneurship Readiness in Turkey
take calculated risks. In addition, they assert
that successful entrepreneurs convince others
to share the risk with them, thereby minimizing
their personal risk. Miner (1997) argues that the
expert-idea-generator type of entrepreneur gener-
ally avoids taking risks. However, this behavior
tends to change when a stronger motive drives
the entrepreneur to take risks. Research on char-
acteristics of successful entrepreneurs suggest
that, entrepreneurs may exhibit more risk taking
propensity in the early stages of enterprise growth
when there is less accumulated financial wealth at
stake; and as the entrepreneur matures in venture
experience, they better calculate risk and have the
necessary skills to minimize its adverse effects.
Risk taking is a major aspect in initiating one’s
business venture.
Personal Characteristics
of Entrepreneurs
Age: The period between ages 25 and 40 is the
time when most entrepreneurs decide to start a new
business venture (Brockhaus, 1982; Cooper, 1992;
Furnham, 1992). New ventures may be initiated
at this time because individuals have obtained
sufficient experience and education. Also, they
are young and have not incurred the responsi-
bility of a family or other financial obligations
(Furnham, 1992).
Bird (1989) suggests that there are three types
of entrepreneurial careers, each related to a differ-
ent age of actual inception. The three types are as
follows: (a) Early 20s age group who begin their
entrepreneurial careers within one year of gradua-
tion; (b) Late 20s to early 30s age group, who are
employed by someone else but anticipate starting
a business; and (c) Mid 30s age group, who did
not plan on selecting entrepreneurship as a career
but started a business later in life. The latter type
is the most frequent pattern followed in starting
new business ventures. Overall, research on age
indicates that it is better to start a business at a
young age possibly because of their high energy
level and motivation related to youth and the
resiliency to recover if the business fails.
Gender: Male entrepreneurs have been re-
searched extensively. Traditionally, there have
been fewer female entrepreneurs and because
of their tendencies to operate smaller business,
they have not been as visible (Bird, 1989). In
addition, women had more difficult time acquir-
ing proper funding to start new businesses, and
fewer resources have been allotted for women’s
businesses in comparison to men’s. However, the
number of self-employed women has increased
considerably over the past years.
Research on entrepreneurship has been
conducted by academics from a wide array of
disciplines having diverse perspectives on their
definitions of entrepreneur. It is generally agreed,
however, that an individual’s personality plays
a considerable role in his or her becoming an
entrepreneur.
The literature indicates that particular per-
sonality characteristics have been associated
with entrepreneurship (Brockhaus & Horwitz,
1986; Fasiska & Fasiska, 1987; Furnham, 1992,
Gartner, 1989; Hornaday, 1992; Miner, 1997;
Wonderlic, 1995).
There are different types of factors influencing
the entrepreneurs’ decision on running their own
business or not. These factors can be categorized in
4 groups; namely demographic, social, psychologi-
cal and other factors. Demographic factors include
age, marital status, gender and education. Family
environment and cultural environment compose
the social factors. Self-actualization and gain social
status and need for achievement, affiliation, and
power are listed in psychological factors. Taking
over a family business and earning high profits
are included in other factors.
Researches indicate that the entrepreneurs’
level of education is higher than that of the general
public (Brockhaus, 1982; Gasse, 1982). The role
of education of the entrepreneur has changed with
the worldwide economic shift toward innovation
and high technology.
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419
Entrepreneurship Readiness in Turkey
METHOD
The persons who set up their own business are
assumed to be an entrepreneur in this study.
Questionnaire was conducted to the participants
face to face and it was guaranteed that the only
owners of the ventures answered it. In the study,
random samples of 195 persons/owners/manag-
ers each of them are members of the chamber of
commerce and industry of Istanbul, Kayseri and
Van provinces and employed minimum 5 and
maximum 500 people. Targeted provinces are
located in different geographic areas of Turkey,
each having different social-economic level of
development. Participants received and filled a
three part questionnaire, first part for getting an-
swers of 25 questions about the factors influenced
their decision on to set up a business; second part
composed of 11 questions for describing one’s
personality characteristics and the other for an-
swering a few questions about their demographic
features and their venture properties.
Reliability measures using “Cronbach alphas”
were calculated for each part of the questionnaire.
The reliability coefficient is 0.86 for first part of
the questionnaire falling with factors influencing
the entrepreneur decision on to set up a business
and 0.75 for the second part falling with personal-
ity characteristics.
With a response rate of 91.3%, study is based
on 178 completed questionnaires: 79 entrepreneurs
from Istanbul, 61 entrepreneurs from Kayseri and
38 from Van.
Data were gathered from 178 owner charac-
teristics of gender (19,7% female; 80.3% male),
age (34.3% younger that 30; 37.1% aged between
31-40 and 28.7% aged between 41-5),marital
status (72.5% married and %25.8 single), place of
birth (14.6% village, 5.6% town, 18.5% district,
30.9% city and 30.3% metropolis), place where
entrepreneurs spent most of their life (1,7% vil-
lage, 1.7% town, 6.2% district, 38.8% city and
51.7% metropolis), education (4.5% primary
school degree, 7.9% secondary school degree,
41.6% high school degree, 5.6% vocational high
school degree, 37.6% university degree and 2.8%
graduates school/ doctoral degree), age when
entrepreneurs set up their first business (74.7%
aged under 30 and 25.3% aged between 31-40),
entrepreneurs status (9.0% director, 1.7% owner,
1.7% marketing director, 87.6% manager) and
business characteristics of year of business founda-
tion (6.2% founded in 1981-1990, 24.7% founded
in 1991-2000 and %69.1 founded after 2001),
corporation type (15.7% joint-stock company,
52.8% limited company, 4.5% unlimited company
and 27.0% partnership company), management
(39.9% family members, 36.0% family members
and professionals, 13.5% professionals and 10.7%
others), size as measured by the number of em-
ployees (24.7% employs 1-10 employee, 54.5%
employs 11-50 employees, 10.1% employs 51-
100 employs and 10.7% employs more than 100
employee) represented industrial sectors (62.4%
manufacturing and 37.6% services).
“Likert-type” 20 items were asked to the re-
spondents to indicate their degree of agreement
on each of the statement on a 5-point scale rang-
ing from 1=Strongly Disagree, to 5= Strongly
Agree. After the questionnaire was applied, the
collected data were analyzed through a statistical
software program. After analyzing the results 9
items were eliminated as most of the people are
tend to be agreeing with these items naturally.
A point is given to the each answer (Strongly
Disagree holds for -2 point, Disagree holds for
-1 point, Not decisive holds for 0 point, Agree
holds for 1 point and Strongly Disagree holds for
2 points) and all of the answers points are added
to get an entrepreneurial personality score (EPS)
(Table 1). EPS is adopted from an existing scale
used in Turkey before. EPS scores differences
are analyzed in terms of provinces and some of
the demographic features. Desire for to learn and
problem solving skills got the highest mean in the
items used to calculate entrepreneurial personal-
ity scores.
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Entrepreneurship Readiness in Turkey
25 pre-identified factors were asked to the
participants to indicate their degree of effective-
ness in influencing the decision of set up a busi-
ness on a 5-point scale ranging from 1= not ef-
fective to 5= very effective. ‘To gain success and
to be well known’ had got the highest mean score;
whereas to follow family’s profession got the
lowest mean score.
ANALYSIS AND RESULTS
80.3% of the participants are male and rest is
female. Most part of the sample is composed of
male participants. Analyzing the entrepreneurs
according to gender in Turkey; labor force par-
ticipation rate of women entrepreneurs is highly
lower than the men’s. Also, research question-
naire is conducted to the participants in industrial
zones of the cities. Women entrepreneurs’ rate
is low in industrial zones too. Consistent with
Allen et al. (2007) and Minniti (2005), we found
a significant difference between the numbers
of men versus women entrepreneurs in Turkey.
The number of men entrepreneurs is more than
double of the number of women, particularly for
the established entrepreneurs. The average male/
female ratio is 4.07, which is higher than the
developing countries (1.26). Hence, the women
participation in entrepreneurial activity in Turkey
is almost a quarter of number of women in the
other developing countries.
When comparing the entrepreneurs according
to their place of birth, it could be concluded that
most of them, immigrate to places more developed
than their current place. Entrepreneurs’ educa-
tional level is higher than it is expected. Most of
the participants have got the high school or the
university degree. The importance of education
on entrepreneurship has been excessively men-
tioned in the literature. The studies of Minniti and
Bygrave (2004) and Minniti (2005), have shown
that the influence of education on the likelihood
to become an entrepreneur is not strictly linear.
Most of the entrepreneurs (74.7%) set up their
own business before they are 30. Researchers
(Hisrich, 1985; Bird, 1989) state that most of the
entrepreneurs decide to set up business at the age
of 25-40. Analyzing the age of entrepreneurs, early
stage entrepreneurs are most frequently between
25 and 34 years-old. For Turkey, this finding is
consistent with previous research that concludes
early stage entrepreneurs are in the 25-34 age
groups in the developing countries and in the 35-
44 age groups in the developed countries (Bosma
et al., 2007).
Results show that 87.6% of the entrepreneurs
are working at their own business as manager.
This is due to their high level of energy and de-
sire to control and manage their own business by
themselves. All of the managers are also owners
of their own enterprises.
%69.1 of the targeted enterprises was founded
after 2001. It could be concluded that most of
the enterprises are founded after 2001 economic
crises in Turkey. They were several opportunities
in the market; entrepreneurs took advantages of
these opportunities. However, this issue should
be examined in another survey in detail.
The literature indicates that particular person-
ality characteristics have been associated with
entrepreneurship (Brockhaus & Horwitz, 1986;
Fasiska & Fasiska, 1987; Furnham, 1992, Gartner,
1989; Hornaday, 1992; Miner, 1997; Wonderlic,
Table 1. Mean and standard deviations of EPS
according to provinces
Province Number Mean Std.
Deviation
EPS Kayseri 61 11,08 4,97
Van 38 11,63 5,92
İstanbul 79 14,13 4,88
Total 178 12,55 5,31
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421
Entrepreneurship Readiness in Turkey
1995). Entrepreneurial Personality Scores (EPS)
of the entrepreneurs are calculated according to
entrepreneurs’ characteristics.
Most of the entrepreneurs targeted in this
research stated that they have got the following
characteristics respectively; diversifying produc-
tion, orienting and directing their employees in
accordance with the companies objectives, re-
searchers, high communication skills, high self
confidence, problem solving, pursuing opportu-
nities, having long term objectives related with
their work, focusing on work, affecting people,
calm down when face with difficulties, risk taking.
Simple mean score (Table 1) showed that the
total EPS, differ from city to city. F-tests of the
means were performed, EPS (Table 2) varies
from city to city (F=2.96, p=.001). According
to the post hoc Table 3, there is a significant dif-
ference between Istanbul-Kayseri and İstanbul-
Van, whereas no meaningful difference between
Van-Kayseri. As predicted, Istanbul has got the
higher score than the other cities. On the other
hand, other two cities have got similar scores,
which is unexpected.
F-tests of the means were performed and no
significant differences found between EPS with
age, gender, marital status, place of birth, place
of grown up, education level, ranking number
amongst the one’s sisters/brother, age when they
set up their first business and whether entrepre-
neurs worked somewhere else before or not
variables.
Simple mean score (Table 4) showed that the
total Entrepreneurial Personality Scores (EPS),
differ according to place where entrepreneurs
spent most of their life. F-tests of the means were
performed, EPS (Table 5) varies according to
place where entrepreneurs spent most of their life
(F=4.94, p=.004). According to the post hoc
Table 6, there is significant difference between
District- City and City-Metropolis.
As regards the factors influencing one’s deci-
sion on setting up a business, self actualization
has the highest score amongst the other. F-tests
of the means were performed according to the
factors. It found that there is a significant differ-
ence between factors according to the cities. Means
of factors are generally high for Istanbul accord-
ing to the other two cities, which are expected.
On the other hand ‘Job Creation’ factor is high
for Van unlike the others.
DISCUSSION
There are a few important findings from this
research. First, the results from entrepreneurial
characteristics indicated that some personality
characteristics are associated with entrepreneurs.
Most of the entrepreneurs reported that they hold
most of the listed characteristics. The literature
indicates that particular personality characteris-
tics have been associated with entrepreneurship
(Brockhaus & Horwitz, 1986; Fasiska & Fasiska,
1987; Furnham, 1992, Gartner, 1989; Hornaday,
1992; Miner, 1997; Wonderlic, 1995) which is
parallel with our research findings.
Istanbul is the most developed city in Turkey
and it is the hearth of Turkish economy. In the
scope of this information, it is normal that EPS
of the entrepreneurs in Istanbul have got the high
scores unlike two other cities.
Kayseri is another developed city in Turkey
and has got a long time entrepreneurial skills and
knowledge dating back to centuries ago. Habitants
of Kayseri have got knowledge in entrepreneurship
Table 2. “Anova test” for EPS according to
provinces
Sum of
Squares
Df Mean
Square
F Sig.
Between
Groups
359,878 2 179,939 6,798 ,001
Within
Groups
4632,166 175 26,470
Total 4992,045 177
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422
Entrepreneurship Readiness in Turkey
and trade. They are famous for their commercial
intelligence in Turkey, and also, process of indus-
trialization in Kayseri began in 1930. Where as
industrialization process in Van began very late
compared with the Kayseri and Istanbul. Kayseri
is more developed and has higher levels than Van
in socio economic, cultural, and sociological is-
sues. It is unexpected that there are no significant
difference in between Kayseri and Van EPS. After
analyzing the industrialization process of Van, this
unexpected result partially could be explained.
First industrial zone in Van established in 1998
and other prompting activities for set up a business
are widespread after 2000. Most of the enterprises
are established (34.2% in 1998-200, 52.6% after
2001) after these dates. It could be concluded that
entrepreneurs pursued those opportunities when
running a business.
Table 3. Post-hoc table for EPS according to provinces
(I) Province (J) Province Mean
Difference (I-J)
Std. Error Sig. 95% Confidence Inverval
Lower Bound Upper Bound Lower Bound Upper Bound Lower Bound
Kayseri Van -,54961 1,06325 ,606 -2,6480 1,5488
Istanbul -3,04462(*) ,87692 ,001 -4,7753 -1,3139
Van Kayseri ,54961 1,06325 ,606 -1,5488 2,6480
Istanbul -2,49500(*) 1,01569 ,015 -4,4996 -,4904
Istanbul Kayseri 3,04462(*) ,87692 ,001 1,3139 4,7753
Van 2,49500(*) 1,01569 ,015 ,4904 4,4996
* The mean difference is significant at the .05 level.
Table 5. “Anova Test” for EPS according to place of where the entrepreneurs spent most of their life
Sum of Squares Df Mean Square F Sig.
Between Groups 422,144 4 105,536 3,995 ,004
Within Groups 4569,901 173 26,416
Total 4992,045 177
Table 4. Mean and standard deviations of EPS according to place of where the entrepreneurs spent
most of their life
Place of where the
Entrepreneurs Spent
Most of their Life
Number Mean Std. Deviation
EPS Village 3 15,66 0,58
Town 3 15,00 3,46
District 11 14,82 5,34
City 69 10,70 5,38
Metropole 92 13,49 5,02
Total 178 12,55 5,31
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423
Entrepreneurship Readiness in Turkey
LIMITATIONS
As a field study, this research is not without
limitations. First, it is only conducted in only 3
provinces of Turkey, each from different geo-
graphical areas. Second, it is difficult to reach the
founders of enterprises if they are not working in
the enterprises. Third, enterprises in industrial
zones are generally included due to the time and
budget limitations. Despite the limitations, this
research has important research implications.
Research raises conceptual issues regarding the
entrepreneurial characteristics and factors influ-
encing the entrepreneurial decision according the
different geographic areas.
However, for the further studies, it can be sug-
gested that some important factors which shapes
an entrepreneurial personality such as need for
achievement, locus of control, risk taking propen-
sity, tolerance for ambiguity, innovativeness and
self-confidence could be investigated. Addition-
ally, it would be better making analysis by using
current statistics of GEM TURKEY 2010 Report
(Global Entrepreneurship Monitor).
Table 6. Post-hoc table for EPS according to place of where the entrepreneurs spent most of their life
(I) Place of
Where the
Entrepreneurs
Spent Most of
Their Life
(J) Place of
Where the
Entrepreneurs
Spent Most of
Their Life
Mean
Difference
(I-J)
Std. Error Sig. 95% Confidence Interval
Lower
Bound
Upper
Bound
Lower
Bound
Upper Bound Lower
Bound
Village Town ,66667 4,19648 ,874 -7,6162 8,9496
District ,84848 3,34763 ,800 -5,7590 7,4559
City 4,97101 3,03118 ,103 -1,0118 10,9539
Metropolis 2,17754 3,01535 ,471 -3,7741 8,1291
Town Village -,66667 4,19648 ,874 -8,9496 7,6162
District ,18182 3,34763 ,957 -6,4256 6,7893
City 4,30435 3,03118 ,157 -1,6785 10,2872
Metropolis 1,51087 3,01535 ,617 -4,4407 7,4625
District Village -,84848 3,34763 ,800 -7,4559 5,7590
Town -,18182 3,34763 ,957 -6,7893 6,4256
City 4,12253(*) 1,66861 ,014 ,8291 7,4160
Metropolis 1,32905 1,63968 ,419 -1,9073 4,5654
City Village -4,97101 3,03118 ,103 -10,9539 1,0118
Town -4,30435 3,03118 ,157 -10,2872 1,6785
District -4,12253(*) 1,66861 ,014 -7,4160 -,8291
Metropolis -2,79348(*) ,81851 ,001 -4,4090 -1,1779
Metropolis Village -2,17754 3,01535 ,471 -8,1291 3,7741
Town -1,51087 3,01535 ,617 -7,4625 4,4407
District -1,32905 1,63968 ,419 -4,5654 1,9073
City 2,79348(*) ,81851 ,001 1,1779 4,4090
* The mean difference is significant at the .05 level.
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424
Entrepreneurship Readiness in Turkey
IMPLICATIONS
Based upon the research findings, some of the
suggestions proposed in the study are as follows:
Each of the entrepreneurial characteristics and
each factor influencing the one’s decision on set-
ting up a business could be searched in detail to
get new findings. Moreover, entrepreneurs from
different geographic areas could be searched and
according to findings and results, new strategies to
develop the entrepreneurship in those areas could
be determined. Findings of this research could be
used in other researches taking into considerations
of limitations.
According to research results; persons hav-
ing entrepreneurship skills regardless of their
geographic place set up their own business un-
der appropriate circumstances. As a developing
country, Turkish Government is making new
investments especially in non-developed areas.
Research showed that under appropriate circum-
stances, people could run a business regardless of
their place. Government may set the people hav-
ing entrepreneur skills in non-developed parts of
Turkey and create opportunities for these people
to give them a chance for taking advantages of
opportunities such as setting up their own business.
Thus, reindustrialization of economy in different
provinces would be activated resulting in higher
socio-economic levels.
Research results indicate that socio-economic
history of provinces does not have too much effect
on the entrepreneurial decision under the same
circumstances. There are no big differences in
entrepreneurial personality scores of people liv-
ing in cities with different socio-economic and
cultural level. If the entrepreneurs pursue suitable
opportunities, no matter where they live; there is
a high chance that they will succeed in running
their own business and contribute to the develop-
ment of economy.
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About the Contributors
Carolina Feliciana Machado received her PhD degree in Management Sciences (Organizational
and Politics Management/Human Resources Management) from the University of Minho in 1999, and
Master degree in Management (Strategic Human Resource Management) from Technical University of
Lisbon in 1994. Teaching in the Human Resources Management subjects since 1989 at University of
Minho, she is since 2004 Associated Professor with experience and research interest areas in the field
of Human Resource Management, International Human Resource Management, Training and Develop-
ment, Management Change, and Knowledge Management. She is Head of Human Resources Manage-
ment, Master and Head of Human Resources Management Work Group at University of Minho, as well
as Chief Editor of the International Journal of Applied Management Sciences and Engineering (IJAMSE).
Pedro Manuel Ribeiro Novo de Melo is an Invited Professor at School of Economics and Manage-
ment, University of Minho, and School of Management at the Polytechnic Institute of Cávado and Ave,
where lectures courses of Organizational Behavior and Human Resource Management. He has a Master
degree in Human Resource Management from the University of Minho. Presently, he is a PhD student in
Business at University of Minho. His main areas of interest are organizational behavior, human resource
practice and its relationship with the strategy, with special emphasis on SMEs. In recent years, he has
focused his studies on the characterization and development of HRM in Portugal.
* * *
Neeta Baporikar, Professor (Strategic Management and Entrepreneurship), is currently on an aca-
demic assignment with Sultanate of Oman, Ministry of Higher Education (MOHE), as Head, Scientific
Research Department Salalah College of Applied Sciences. With more than a decade of experience in
industry, consultancy and training, she made a lateral switch to research and academics in 1995. Dr.
Baporikar holds D.Sc (Management Studies) USA, PhD in Management, University of Pune, India,
with MBA (Distinction) and Law (Hons.) degrees. Apart from this, she is also an External Reviewer
Oman Academic Accreditation Authority, Accredited Management Teacher, Qualified Trainer, Doctoral
Guide, and Board Member of Academics and Advisory Committee in accredited B-Schools. Reviewer
for international journals, she has to her credit several refereed research papers and authored books in
the area of Entrepreneurship, Strategy, Management and Higher Education.
Josh Bendickson is a PhD candidate in the Rucks Department of Management at Louisiana State
University. Josh has prior experience working in education, business development, and talent acquisi-
tion. He currently teaches principles of management at LSU. With diverse research interests including
strategy, international business, human resource management, and entrepreneurship, Josh has presented
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About the Contributors
manuscripts at various conferences over the past few years including but not limited to Academy of
International Business, Academy of Management, Southern Management Association, United States
Association for Small Business and Entrepreneurship, and the International Council for Small Business.
In addition to these pursuits, Josh was recently published in the Journal of Management History.
Enrico Buggea was born in Novara, Italy, in 1989. He began his studies in Industrial Engineering at
Politecnico di Milano in 2008 and obtained his bachelor degree in July 2011. Now he is attending MSc
in Business Engineering in the same university. In October 2011, he joined Alta Scuola Politecnica,
double degree program in partnership among the most prestigious technical institution in Italy, namely
Politecnico di Milano and Politecnico di Torino. During his career, Dr. Buggea gained in international
experience studying in Belgium, at Louvain School of Management; in Maryland, at James Clark En-
gineering School attending courses in Master in Project Management; and at IESE Business School for
short-term intensive courses.
Kenneth Cafferkey is Assistant Professor at the Graduate School of Business, Universiti Tun Abdul
Razak, Kuala Lumpur. Kenneth received his PhD from the National University of Ireland, Galway. He
previously held Postdoctoral positions at Dublin City University (DCU) and University College Dublin
(UCD). Kenneth teaches and researches in the areas of high performance work systems, strategic human
resource management, international human resource management, and human resource management in
healthcare. He has presented his work at leading international conferences, including a plenary paper at
the 2009 Industrial Relations Association Conference.
Burcu Özge Özaslan Çalışkan is an Assistant Professor of School of Transportation and Logistics
at Istanbul University. She received her Ph.D. in 2011 from the University of Istanbul with a major in
Human Resource Management. Previously, she earned her M.Sc. in Human Resource Management of
School of Business Administration, Istanbul University in 2006, B.Sc in School of Business Admin-
istration, Istanbul University in 2003. Professor Özaslan Çalişkan’s research interests lie primarily in
occupational health and safety management, with additional interests in human resource management,
organizational behaviour, labour relations, and logistics management.
Roberto Castiglione was born in Caltagirone, Italy, in 1989. He began his studies in Mechanical
Engineering at the University of Catania in 2008 and obtained his bachelor degree in July 2011. During
the three years, he was part of Scuola Superiore di Catania, a parallel path that provides worthy students
with several cultural opportunities. In October 2011, he moved to Politecnico di Torino to continue his
studies with a master degree in the same field. At the same time, he is part of Alta Scuola Politecnica, a
project that gives students the opportunity to follow additional courses and the possibility to work on a
long-term task. Currently, he is at INSA Lyon for his master project on system monitoring in collabora-
tion with Brüel & Kjær Denmark.
Luis Varona Castillo is a Professor in the Department of Business Economics at the University CEU
San Pablo (Spain). Ph.D. in Economics from the Universidad Pontificia Comillas-ICADE, has suggested
an econometric model of the determinants of firm survival in the case of Spain, period 2004-2008. He
completed a Master Portfolio Management Finance at the Instituto de Estudios Bursátiles-IEB (2011)
and Master of ESADE Business School to Management Functions (2006). The main research areas are:
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About the Contributors
Business Economics with business creation, business survival, cluster of companies and local economic
development; finance, valuation, portfolio management and financial markets. He also has experience in
the development, monitoring and evaluation of development cooperation. He was a financial manager and
business consultant. He is a partner in the firm Luvarconsultores SL., and collaborates with the company
R&B Prop Traders SL., as Director of Research and Finance. Dr. Varona has a visiting academic at the
University of Unisinos, The Wharton School and London School of Economics and Political Science.
Tania Cerquitelli has been an assistant professor at the Dipartimento di Automatica e Informatica
of the Politecnico di Torino since October 2011. She got the master degree in Computer Engineering
and the PhD degree from the Politecnico di Torino, Torino, Italy, and the master degree in Computer
Science from the Universidad De Las Américas Puebla. Her research interests include the design of
innovative algorithms to efficiently perform large-scale data mining, novel and efficient data mining
techniques for sensor readings, and innovative algorithms to extract high-level abstraction of the mined
knowledge (e.g., generalized association rules). She has been a teaching assistant in different databases
and data mining courses at the Politecnico di Torino since academic year 2004-2005.
Anil Chandrakumara is the Director of Master of International Business Degree program of the
Sydney Business School of the University of Wollongong, Australia. He holds a PhD from the Sheffield
University Business School in the UK and his research interests lie in international organizational be-
haviour and HRM and International business strategy, governance, and leadership. Anil has gained more
than 23 years of experience in undergraduate and postgraduate level teaching, research, management
consultancy, and governance in several universities and countries in the UK, Australia, and Sri Lanka.
His work has been presented at conferences around the globe and published in a number of internation-
ally refereed journals, conference proceedings, textbooks, monographs, and course manuals. He has
been a professional and academic member of the Australia New Zealand Academy of Management and
the Academy of Management, USA.
Luis Contente has a master’s degree in Industrial Engineering and Management from the Technical
University of Lisbon (Instituto Superior Técnico) in Lisbon, Portugal.
João Fontes da Costa graduated in Sociology at the University of Coimbra and thereafter obtained
a PhD in management at the same University. He is currently an Assistant Professor in Human Resource
Management at Coimbra’s Polytechnic Institute and a researcher at the Coimbra Centre for Innovative
Management (CCIM) in the Faculty of Economics of the University of Coimbra and also at the Centre
for Health Studies and Research at the University of Coimbra (CEISUC). He also has over 15 years of
experience as an HRM manager in national and multinational organizations.
Francisco Edinaldo Lira de Carvalho is a PhD Student in Management Science, Faculty of Econom-
ics, University of Coimbra, and a Technical Consultant and Manager in Public Hospitals Brazilian, as
well as a Teacher in the area of Public Administration and researcher in Human Resource Management,
Strategic Management, and Health Systems.
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About the Contributors
Nil Selenay Erden is a Ph.D. candidate in Organizational Behavior at Marmara University, Turkey.
She also received her Bachelor of Science in Organizational Behavior from Marmara University. She
holds a business school degree from Istanbul University Faculty of Business Administration. Since
2010, she works as a research assistant in Istanbul University Faculty of Business Administration, at
the Department of Organizational Behavior. Her research interests include investigating the impact of
national culture on organizational culture, relationships between organizational characteristics and at-
titudes towards job, sources of conflict in small-medium enterprises, enhancement of communication
skills, and attributional style in organizational settings.
Pedro Jiménez Estevez is a full time Assistant Professor of Department of Business Administration
of University of Castilla-La Mancha. Professor Jiménez holds a Spanish Degree and Ph.D. in Business
Administration (University of Castilla-La Mancha). He has had different responsibilities as Head Mas-
ter of Centre of University Studies of Talavera de la Reina, Dean of the Faculty of Social Sciences of
Talavera de la Reina. Nowadays, he teaches some subjects in the Degree in Business Administration in
the Faculty of Social Sciences, and he is also part of the staff of the Master in Strategy and Marketing at
University of Castilla-La Mancha. Dr. Jiménez has researched different themes as politics of dividends,
innovation, organizational knowledge, and human resources.
Maria Carmen Galang is Associate Professor at the Peter B. Gustavson School of Business, teaching
primarily human resource management and cross-national management, and currently the Director of the
PhD Program, Sardul S. Gill Graduate School, both at the University of Victoria. Born in the Philippines,
she obtained her Bachelor of Science and Masters degrees from the University of the Philippines, and
her PhD from the University of Illinois at Urbana-Champaign. Her work experience prior to academia
includes the management of human resource departments in firms in the construction, insurance and
garment manufacturing industries in the Philippines. She has published papers related to comparative
and cross-cultural human resource management and power and politics in organizations in International
Journal of Human Resource Management, Human Resource Management, Human Relations, among
others. She has added as her current research interest acculturation of migrants.
Lorenzo Grosso is attending his Master of Science in Mechanical Engineering, enrolled in a double
degree programme at Politecnico di Torino and Politecnico di Milano. During his career, Dr. Grosso
gained in international experience, studying for one year in Sweden at Royal Institute of Technology,
as well as in multidisciplinary skills, taking part in a variety of academic projects, social initiatives and
internships. Lorenzo Grosso was born on October 1st, 1989 in Biella. He got his high school diploma
in a Second Level College of Science in 2008 and his Bachelor of Engineering degree at Politecnico di
Torino in 2011. He will earn his Master of Science in 2013.
Semra Güney is a full Professor at Hacettepe University Department of Business Administration,
Ankara, Turkey. She graduated from Hacettepe University, Department of Business Administration. She
obtained her doctorate at the same department. Her current research areas include leadership, entrepre-
neurship, human resource management, social psychology, and business ethics. She has two published
books titled Entrepreneurship and Family Business.
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About the Contributors
Santiago Gutiérrez-Broncano has been a full time Assistant Professor in the Department of Busi-
ness Administration of the University of Castilla-La Mancha since 2010, and previously, he was IT at
University Rey Juan Carlos. Professor Gutiérrez holds a Spanish Degree in Business Administration
(University of Alcalá), a Master Degree in Organizational Development (IADE – Autonomous University
of Madrid), and a Ph. D. in Business (San Pablo CEU-University). His main teaching areas are Human
Resource Management and Strategy. He is also part of the staff of the Master in Strategy and Marketing
at University of Castilla-La Mancha and other postgraduate programs in several universities. Currently,
Dr. Gutiérrez´s research focuses on Innovative Practices of Human Resource Management and Family
Businesses. He has worked in some projects of research and consultancy.
Brian Harney is a Lecturer in Strategy and HRM at Dublin City University Business School and a
Deputy Director of the Leadership, Innovation and Knowledge (LInK) research centre. Brian’s research
explores HRM in smaller firms and the relationship between strategy and HRM. Brian is the co-author
of three books and has published in journals such as the Human Resource Management Journal and
International Journal of Human Resource Management. Brian is an Academic Fellow of the Centre
for International HRM, University of Cambridge, and facilitates on SME development programmes for
Enterprise Ireland and as part of the EU PLATO network.
Stuart Holland currently is co-director of the Coimbra Centre for Innovative Management (CCIM)
at the Faculty of Economics of the University of Coimbra and a member of the Centre for Health Stud-
ies and Research at the University of Coimbra (CEISUC). He graduated in history and political theory
and then gained a doctorate in economics at Oxford, has taught at Oxford, Sussex, Roskilde, and the
European University Institute in Florence, been an adviser to several governments and international
institutions and for some time was a member of the House of Commons. He has published over a dozen
books on politics and political theory, regional theory and policy, economic theory, development eco-
nomics, public enterprise and planning, economic integration and issues of global governance, as well
as many papers and reports.
Xiang Lei was born in Chaohu, China, in 1988. He began his university study since 2006 in Hefei
University of Technology in China, and in 2010, got his bachelor degree of Vehicle Engineering. After
that, from 2010 to 2011, Xiang Lei worked as a Chassis Design Engineer of Dongfeng Motor Company
in Wuhan, China. In September 2011, he got admission of Politecnico di Torino in Italy to pursue Mas-
ter degree of Automotive Engineering. In the meantime, Xiang Lei was involved in ASP (Alta Scuola
Politecnico) program, which is held by Politecnico di Milano and Politecnico di Torino together. He
joined the ASP project named “Banking Business Customer Internationalization.”
Pamela John Liana is an Assistant Lecturer in Business Studies, based at the Open University of
Tanzania in Morogoro Region Centre. Her primary teaching and research interests are in marketing and
applied concept in SMEs management. She holds a first degree in Business Administration with option in
Marketing and MSc Entrepreneurship Development both from Mzumbe University, Morogoro, Tanzania.
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About the Contributors
Eric Liguori is an entrepreneur, entrepreneurial advocate, researcher, and educator on faculty at
California State University, Fresno. Dr. Liguori researches primarily on the topics of entrepreneurial
self-efficacy, entrepreneurship education, and entrepreneurial ecosystems, though he often does work
in other related areas. His record for scholarship includes over 20 peer and/or editorially reviewed pub-
lications, including publications in the Journal of Small Business Management, Journal of Managerial
Issues, Journal of Management History, and the Encyclopedia of New Venture Management.
Carlo Mari (Ph.D.) is an Associate Professor of Marketing at the Department of Economics, Uni-
versity of Molise (Italy). He teaches undergraduate and graduate courses in marketing management
and social marketing. His research interests include consumer behavior, qualitative research methods,
family business, and marketing education. Prior to starting an academic career, he worked in automotive
industry as an organizational analyst and assistant product manager. He published in international and
Italian academic journals. He is currently a member of the Association of Consumer Research.
Olimpia Meglio (Ph.D.) is an Assistant Professor of Management at University of Sannio (Italy),
where she teaches Service Management. She has also been visiting scholar at Copenhagen Business
School and ESADE Business School. Her research interests revolve around Mergers and Acquisitions,
performance construct measurement, process research methods, and intergenerational transition in family
business. Her works appeared in international journals, such as Scandinavian Journal of Management,
as well as in international and Italian handbooks.
Jeffrey Muldoon is a PhD candidate in the Rucks Department of Management at Louisiana State
University. His research interests include organizational behavior and management history. His work
has appeared in the Journal of Management History and Stress and Health. He has been educated at
Gettysburg College and the University of Connecticut.
Felix Adamu Nandonde is a PhD student in the Department Management at International Business
Centre, University of Aalborg, Denmark. During the writing of this chapter, he was in Tanzania and
is an Assistant Lecturer in marketing in Department of Agricultural Economics and Agribusiness at
Sokoine University of Agriculture, Tanzania. He holds a first degree in Business Administration with
option in Marketing from Mzumbe University in Tanzania and MSc Food Marketing from the University
of Newcastle upon Tyne. He has been widely involved in SMEs development, consultancy and training
in Tanzania.
Lindsay Newport is a native of Baton Rouge, La. She is a two-time graduate of the Manship School
of Mass Communication at Louisiana State University where she earned BA and MA degrees in ad-
vertising and public affairs/political communication. Her areas of interest include marketing strategy,
research methodology, and the intersection of the two. She currently resides in Richmond, Va. where
she works as an analyst for The Martin Agency, a top-tier advertising agency that works with some of
the world’s most well-known brands.
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About the Contributors
Gizem Öksüzoğlu-Güven is currently an assistant professor at University of Mediterranean Karpasia,
Northern Cyprus, and she is the director of Entrepreneurship and Business Development Centre. Before
taking on her current position, she worked as a lecturer at Brunel University, UK. She completed her PhD
in Business Ethics from Brunel University where she studied on a full scholarship while working as a
graduate teaching assistant during her studies. Before she started her PhD, she also worked as a part-time
lecturer at Leeds University Business School for a short period. She also holds an MA in Human Resource
Management from the University of Leeds, UK and she received her BBA in Business Administration
from Eastern Mediterranean University, North Cyprus. She has memberships to the relevant professional
bodies such as Higher Education Academy, UK and she takes on various responsibilities in number of
academic journals. Her existing publications and current research interests are in business ethics, social
responsibility, entrepreneurship, social identity, and research methods.
Mustafa Kemal Öktem is Lecturer at Hacettepe University, Faculty of Economics and Administrative
Sciences, Department of Public Administration (Ankara/ Turkey), his B.Sc. is on Public Administration at
Middle East Technical University, 1985; his M.Sc.is on “Human Resorces Planning in the Turkish Central
Administration: Ministries” at Hacettepe University, Social Sciences Institute, 1990; and his Ph.D. is on
“Importance of Organizational Culture on Information Technologies-Organizational Structure Interac-
tion” at Hacettepe University Social Sciences Institute, 2002. He has published a number of articles in
the Turkish Public Administration Journal and several other academic publications. His area of research
interests include “public personnel issues,” “e-government,” “governance,” and “public service ethics.”
Teresa Carla Oliveira graduated in psychology at the University of Coimbra and thereafter gained
a PhD in organizational psychology at the University of London. She is director of the Coimbra Centre
for Innovative Management (CCIM) in the Faculty of Economics of the University of Coimbra where
she teaches and directs programmes in organisational psychology and management. She is also a mem-
ber of the Centre for Health Studies and Research at the University of Coimbra (CEISUC). She has
undertaken a range of HRM case studies in the private, public and social sectors, including financial
and health services. Her published articles have included: the role of intuition and power dynamics in
personnel selection; tacit rules and implicit norms in managerial behaviour; performance indicators for
purposeful engagement and employee wellbeing at work; critical assessments of the concepts of human
and intellectual capital, and critiques of New Public Management.
Intan Osman is Associate Professor of Organization and Gender Studies at Women’s Development
Research Centre (KANITA), previously a faculty member at the School of Management, Universiti
Sains Malaysia (USM). She has taught and supervised students at the undergraduate, masters and PhD
levels; was a short-term adult continuing education tutor, Faculty of Business and Management, Stirling,
Scotland; and a visiting scholar at Taskent Technical College, Uzbekistan; Nihon Fukushi University,
Nanzan University, Japan; Northern Sumatra University, Indonesia and summer instructor, Faculty of
Management, University of Lethbridge, Canada, serving as Chair of the Burns Endowment Fund in Fall
2013. Her area of research includes Human Resource Effectiveness, Women in Microcredit & Homestay,
Success Factors in SMEs, Leadership, and Violence against Women. Currently, Intan is collaborating
in research on Work Study and Cooperative Education programmes with University of Lethbridge and
University of Victoria, and heads USM’s community engagement project, Empowering Single Mothers
through Entrepreneurship.
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About the Contributors
Pramila Rao is an Associate Professor of Human Resource Management (HRM) in Marymount
University, Arlington, VA, since Aug 2005. She graduated from George Washington University, Wash-
ington D.C., in May 2005 with a major in Human Resource Management and minor in International
Business. Her dissertation titled “Executive Staffing Practices in US-Mexico joint ventures” is an in-
ternational empirical research, which has been published as a book. Some of her subject research has
been published in Employee Relations, Cross-Cultural Management, The Business Journal of Hispanic
Research, International HRM Best Practices Series of Routledge, Journal of Indian Business Research,
among others. She has authored two editions of a book published by McGraw Hill on 20 debatable HRM
topics titled Taking Sides: The Clashing views of Human Resource Management. She is also the author
of HRMex: Human Resource Management in Mexico: Perspectives for Scholars and Practitioners. Her
subject research interest focuses on HRM practices in a cross-cultural context with special focus on
Mexico and India.
Giacomo Rontini was born in Ravenna, Italy, in 1989. He received the Bachelor of Science in Elec-
trical Engineering at Politecnico di Milano in 2007. Currently, he is attending the Master of Science
in Electrical Engineering at Politecnico di Milano and, at meantime, he is attending ASP programme
(Alta Scuola Politecnica), a double degree programme between Politecnico di Milano and Politecnico
di Torino, in which he is developing the project “Banking Business Customer Internationalization.”
Mercedes Rubio Andrés is a full time Assistant Professor in the Department of Business of the San
Pablo-CEU University. Professor Rubio holds a Spanish Degree in Business Administration (University
of Alcalá), a Master Degree in Strategic Management (IADE – Autonomous University of Madrid) and
a Ph. D. in Business (San Pablo CEU-University). His main teaching areas are Strategic Management
and Human Resource. She is also part of the staff of the Master in Business Research at San Pablo-CEU
University. Currently, Ph. D. Rubio´s research focuses on Management Innovative Teams and News
practices of Human Resource. She has participated in several international conferences and published
several papers in different journals.
Arianna Scolari participated as an author of this book chapter working as a member for a Multidis-
ciplinary Project titled “Banking Business Customer Internationalization”: a definition of new ways of
interaction among small-medium enterprises to create an environment that allows companies to access
to services that facilitate their business extension abroad while pursuing her double degree from Po-
litecnico di Milano and Politecnico di Torino at the Alta Scuola Politecnica. Arianna Scolari earned his
Bachelor of Engineering degree in Management Engineering from Politecnico di Milano in 2011. While
a graduate student at Politecnico di Milano it is expected that her Master of Science degree in Manage-
ment Engineering will be conferred in October 2013. Ms. Scolari has been the recipient of honors and
awards including the Alta Scuola Politecnica Scholarship and the Erasmus Scholarship received during
her participation in the Erasmus program at Eindhoven University of Technology.
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About the Contributors
David Starr-Glass is a senior mentor with the International Programs of SUNY Empire State Col-
lege, and is currently attached to their unit in Prague in the Czech Republic. He teaches a wide range of
courses in business administration, including cross-cultural management and organizational behavior, and
also serves as a supervisor for undergraduate dissertations. He has earned master’s degrees in business
administration, organizational psychology, and online education. His research interests include cross-
cultural aspects of organizational culture and human resource management, and he publishes regularly
in both the business administration and distance education literature.
Pua Eng Teck is an associate professor attached to the Bank Rakyat School of Business & Entre-
preneurship (BRSBE) and is Acting Director of Center for Executive Education (CEE) at Universiti
Tun Abdul Razak. Dr Pua possesses unparallel diversified 23 years of working experience. He began
as General Manager in engineering project management, was a Regional Sales Manager for Ohaus /
Mettler Toledo group for over 9 years and spent 6 years as a Regional Marketing Manager for Rhodia/
Rhone-Poulenc, an international reputable specialties chemicals organization. Dr. Pua has a vast inter-
national business and strategic marketing management skills-set pertaining to networking with dealers
and distributors including managing SME’s sector. He has consulted, developed and executed numer-
ous training programs for international companies including managing SMEs and resource planning in
the area of internationalization business ventures. Key areas of focus include Entrepreneurship, Family
Business Management, Small Business Management, and Cross-Cultural Management.
Leyla Tulunay is a teacher at a secondary school. She is graduated from Middle East Technical
University, Department of Computer Education and Instructional Technology, 2003, and she obtained
her M.Sc. Degree at Hacettepe University, Social Sciences Institute, Department of Business Admin-
istration, Management Organization and Organizational Behavior Branch, 2010, and her thesis is on
entrepreneurship and factors affecting the entrepreneurial behavior. Her research areas are entrepreneur-
ship, educational psychology, and learning.
Mark Weaver is the Ben May Chair of Entrepreneurship in the Mitchell College of Business at the
University of South Alabama. Dr. Weaver is a past president and fellow of both the United States As-
sociation of Small Business and Entrepreneurship and the International Council of Small Business. His
research interests include strategic alliances, entrepreneurship education, and local business climate,
though he is widely published in many related areas.
João Zambujal-Oliveira has a Msc degree in Economics at New University of Lisbon (FE) and
received a MBA in Management Science from the Technical University of Lisbon (ISEG). In 2007, he
achieved his Ph.D. in Management Science from the Technical University of Lisbon (ISEG). Before
coming to the Department of Engineering and Management at Technical University of Lisbon (IST),
João Zambujal-Oliveira was hired as a systems engineer at banks, insurance companies and consulting
firms, and as assistant professor of Management at University of Madeira in Funchal.
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Index
A
ad hoc 2-4, 150, 387
Aguinaldo 50, 73
B
Boundary Spanning 238, 240, 245-248, 250, 260,
262-264, 278, 354, 373
Business Ethics 111, 301-305, 312-314
C
capita (GDP) 168
career expectations 134
Chinese Agencies 393, 397, 405, 407, 410-411
Cohesion (or Proximity) 299
Competitiveness 13, 28, 66, 73, 105, 123, 187, 225-
226, 239, 246, 253, 261, 263-264, 269, 272,
298-299, 309, 315, 318-319, 334, 338-340,
377-379, 383-385, 394-395, 400, 410
Conflict Management 148-149, 154, 159-160, 163,
165, 286
Contact Raising 393
Contextual Theory 32, 43
Core Competences 225, 238-239, 250, 264, 274, 278
Customized Services 411
D
Diversification 87, 240, 250-252, 266, 278, 324-325,
352, 410
Diversity 69, 76, 84, 191, 212, 217, 289-290, 292-
293, 296-297, 299-300, 322, 331, 336, 340,
350-351, 355, 367, 380, 388
driving force 168, 170, 394
E
Econometrics Analysis 200
economic development 17-18, 28-29, 33, 56, 69,
183-184, 186-188, 190, 195, 198-199, 201,
223, 267, 269, 272, 275-277, 315, 334, 394,
401
Enhanced HRM 238-240, 245, 248, 257-258, 260,
262, 265-266, 278, 342, 376
Entrepreneur-Founder 76, 78-85, 95
Entrepreneurial Orientation 68, 79-80, 82, 87, 89-
92, 94-95
Entrepreneurial Personality 415, 417, 419, 421,
423-425
Entrepreneurship in Turkey 415, 426
Entrepreneurship Readiness 415
Equal Opportunity 202, 205, 212, 221
Ethical Decision 301-303, 308-312, 314
Eudaimonic 354, 358-359, 361-365, 367, 376
European Union 59, 167-168, 180, 182, 240, 247,
257, 264, 273, 317, 377
F
Factors Influencing the Entrepreneurship’ Decision
415
Familiness 98, 100, 110, 112
Family Business 69, 88, 96-112, 114-115, 119, 125,
127-128, 130-137, 142-147, 152, 154, 159-162,
164, 220, 237, 313, 382, 418
Family Human Capital 98-99, 101, 104-105, 112
Family Relationships 109, 131, 144-145
Family’s Involvement in the Business 97, 112
Financial Services 235, 405, 410-411
Foreign Counterpart 393
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503
Index
G
Geographical Widespread 397
Globalization 53, 57, 91, 126, 159, 185, 267, 269,
271, 274-275, 277, 315-316, 319, 335, 341,
379, 394, 405
Greed 301-303, 373
Growth Pôles 244, 264, 278
H
Hedonic 354, 358-359, 361, 363-365, 367, 376
Hierarchy 48, 175, 292, 305, 342-344, 346, 348,
353, 357, 360, 367, 370, 373, 375-376
Highly Skilled Jobs 195, 200
High Performance Work Practices 96, 112
Holdings 341-342, 351-352, 376
homogenous phenomenon 131
Hong Kong 86, 173, 257, 339, 405-406, 410, 412
HR professional 1, 7-11, 13, 16, 25, 382
Human Capital Uniqueness 28, 33, 40, 43
Human Capital Value 28-29, 33, 37-38, 43
Human Resource Management (HRM) 1, 53, 59,
74, 95, 113, 115, 117, 238, 281, 284, 327, 342,
377-378
Human Resources Department 165
Human Resources Functions 166
I
Individualistic Orientation 73
Indulgent versus Restrain 73
Industrial Districts 238-243, 245-246, 248, 251-258,
260-261, 264-268, 273, 276-278
Innovation Trajectories 239-240, 244, 259-260, 262,
264, 278
Insurance 16, 168, 210, 213, 241, 398-404, 411-412
Interdisciplinary 92, 290, 300, 302, 311
intergenerational transitions 131-132, 136-138, 142
Internationalization 70, 316, 326, 393-404, 411,
413-414
Italian Traditional Agencies 393
J
Job Analysis 118-119, 154-155, 159, 164, 166
L
labour turnover 6, 17, 225, 227, 230, 232
life cycle 16-17, 45, 120, 149, 163, 258, 268, 319,
322, 324, 402
Logistic 401, 410-412
Long Term Orientation 73
M
Malaysia 1-3, 8, 10-13, 15-18, 20, 22-23, 28-32, 35,
39-40, 42-43, 53, 173, 316, 335-337, 339-340
Masculinity 45, 48, 52, 56, 60, 73, 141
Morality 305, 314
Moral Psychology 301-302, 308
multi-authored account 132, 136, 142
multi-dimensional subject 415
N
Nepotism 96, 99, 104, 112, 114-115, 117, 125, 153-
154, 156, 158, 160, 162, 166
Networking 40, 57, 64, 68, 83, 92, 236-237, 239,
246, 259-262, 279, 323-324
New Public Management 342-344, 355-356, 367-
368, 376
O
occupational health 167-175, 177-181
Organisational and Operational Logics 350-353, 376
Organizational Commitment 21, 68, 81, 88, 96, 102-
104, 106, 109-112, 163-165
organizational outcomes 4, 6, 9, 14, 68, 97, 104, 165
P
Payroll 54, 125, 202, 209, 214-215, 220-221
Philippines 1-3, 8, 10-13, 15-16, 20, 22-23, 244
Portugal 183, 185, 188, 196, 198-199, 238, 254,
261, 266, 269-271, 273-275, 278, 337, 342,
367, 370-371, 377-378, 383-385, 389
positive effect 1, 7, 10, 12-13, 17, 31, 114, 188, 194,
350
post hoc 421
Power Distance 45, 48, 52, 56, 60, 73
Process Approach 132, 142-143
Psychological Contract 217, 343, 348-350, 357, 361,
366, 370, 372, 376
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504
Index
R
Regional Development 128, 183-184, 187, 191, 196-
198, 200, 239, 245, 248, 259-260, 263-266,
268-270, 277-278
Resource Based View 33, 37, 43, 64, 92, 112, 199,
220, 236
Resource Poverty 29, 43, 117
revenue opportunities 325
S
scholarly journals 131
Self-Managing Team 283-284, 286, 300
smaller firms 18, 21, 28-29, 32, 42, 54, 58, 113, 116,
119, 124, 175, 205-206, 211, 240, 261, 308,
343
Start-ups 72, 183-184, 186-188, 190-196, 199-200,
219, 239-240, 245, 247-248, 252, 259, 263,
265, 320, 343
Strategic Configuration 74, 76-78, 80-83, 85, 95
Strategic Human Resource Management 1, 3-4, 7,
9, 12-13, 18, 23-24, 44-45, 68, 87, 92, 94-95,
107-108, 160, 201-202, 217-221, 295, 390
Strategic Orientation 8, 68, 74, 76, 78-80, 82, 85,
91, 94-95, 121-122
Succession 60, 97, 99-100, 105, 112, 131-135, 142,
144-147, 152, 159, 161, 164, 266, 373
Succession Plan 131-132
Synergism 75, 95
T
Tacit Knowledge 40, 100, 143, 238-239, 243, 245,
248-251, 259-261, 264-267, 271, 278-279, 295,
323-324, 331, 347
theoretical framework 46, 280, 282, 302, 416
Training and Development 44-46, 49, 53-54, 57-58,
61, 63-64, 66, 68, 100, 120-121, 125-126, 129,
152, 157-158, 163, 202, 205, 210-213, 215,
221, 299, 378, 385, 387, 389
U
Uncertainty-Avoidance 48, 52, 56, 60, 73
Universalistic Theory 31-32, 43
W
Work Teams 280-284, 294-295, 297-300
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Title Page
Copyright Page
Advances in Human Resources Management and Organizational Development (AHRMOD) Book Series
Editorial Advisory Board and List of Reviewers
Table of Contents
Detailed Table of Contents
Preface
Introduction
The Antecedents and Consequences of Strategic HRM in Malaysian and Philippine SMEs
Human Capital in Malaysian SMEs
Effective Human Resources Management Practices in Small and Medium Enterprises
The Synergistic Potential of Human Resource Management in Small and Medium Enterprises
Managing Human Resources in Family Businesses
HRM Practices and Problems in Family-Owned SMEs
Intergenerational Transition in a Small Family Business
The Role of Human Resources Practices in Conflict Management
Occupational Health and Safety in SMEs
The Impact of the Entrepreneur’s Educational Level on the Employment Creation by New Small and Medium Enterprises
Placing SMEs at the Forefront of SHRM Literature
How SMEs in the Car Maintenance Services Industry Recruit Employees from the Dense Forest of Hopeless Unemployed Youths
The Rise, Decline, and Regeneration of Industrial Districts
Self-Managing Teams in Small and Medium Enterprises (SME)
Decision Making in SMEs
Innovation Strategies in SME
Hierarchies and Holdings
HRM Evolution in SMEs
Internationalization Services for Small and Medium Enterprises
Entrepreneurship Readiness in Turkey
Compilation of References
About the Contributors
Index

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AN: 752426 ; Kennedy, Narelle, Roos, Goran.; Global Perspectives on Achieving Success in High and Low Cost Operating Environments
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Global Perspectives on
Achieving Success in High
and Low Cost Operating
Environments
Göran Roos
Swinburne University, Australia
Narelle Kennedy
The Kennedy Company Pty Ltd., Australia
A volume in the Advances in Business
Strategy and Competitive Advantage
(ABSCA) Book Series
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Global perspectives on achieving success in high and low cost operating environments / Goran Roos and Narelle Kennedy,
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ISBN 978-1-4666-5828-8 (hardcover : alk. paper) — ISBN 978-1-4666-5829-5 (ebook) — ISBN 978-1-4666-5831-8 (print
& perpetual access) 1. Industrial policy. 2. Costs, Industrial. 3. Manufacturing industries. 4. Regional economic dispari-
ties. 5. Economic development. I. Roos, Goran. II. Kennedy, Narelle, 1953-

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Titles in this Series
For a list of additional titles in this series, please visit: www.igi-global.com
Global Perspectives on Achieving Success in High and Low Cost Operating Environments
Göran Roos (Swinburne University, Australia) and Narelle Kennedy (The Kennedy Company Pty Ltd., Australia)
Business Science Reference • copyright 2014 • 300pp • H/C (ISBN: 9781466658288) • US $195.00 (our price)
Revolutionizing Enterprise Interoperability through Scientific Foundations
Yannis Charalabidis (University of the Aegean, Greece) Fenareti Lampathaki (National Technical University of
Athens, Greece) and Ricardo Jardim-Goncalves (Centre of Technology and Systems (CTS) – UNINOVA, Portugal)
Business Science Reference • copyright 2014 • 351pp • H/C (ISBN: 9781466651425) • US $215.00 (our price)
Developing Business Strategies and Identifying Risk Factors in Modern Organizations
Madjid Tavana (La Salle University, USA)
Business Science Reference • copyright 2014 • 309pp • H/C (ISBN: 9781466648609) • US $185.00 (our price)
Information Quality and Governance for Business Intelligence
William Yeoh (Deakin University, Australia) John R. Talburt (University of Arkansas at Little Rock, USA) and
Yinle Zhou (IBM Corporation, USA)
Business Science Reference • copyright 2014 • 478pp • H/C (ISBN: 9781466648920) • US $235.00 (our price)
International Business Strategy and Entrepreneurship An Information Technology Perspective
Patricia Ordóñez de Pablos (Universidad de Oviedo, Spain)
Business Science Reference • copyright 2014 • 306pp • H/C (ISBN: 9781466647534) • US $185.00 (our price)
Implementing IT Business Strategy in the Construction Industry
Goh Bee Hua (National University of Singapore, Singapore)
Business Science Reference • copyright 2013 • 354pp • H/C (ISBN: 9781466641853) • US $185.00 (our price)
Chaos and Complexity Theory for Management Nonlinear Dynamics
Santo Banerjee (Politecnico di Torino, Italy)
Business Science Reference • copyright 2013 • 449pp • H/C (ISBN: 9781466625099) • US $185.00 (our price)
Integrated Operations in the Oil and Gas Industry Sustainability and Capability Development
Tom Rosendahl (BI Norwegian Business School, Norway) and Vidar Hepsø (Norwegian University of Science
and Technology, Norway)
Business Science Reference • copyright 2013 • 457pp • H/C (ISBN: 9781466620025) • US $185.00 (our price)
Cultural Variations and Business Performance Contemporary Globalism
Bryan Christiansen (PryMarke, LLC, USA)
Business Science Reference • copyright 2012 • 418pp • H/C (ISBN: 9781466603066) • US $185.00 (our price)
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Table of Contents
Foreword10.4018/978-1-4666-5828-8.chfwd……………………………………………………………………………………………………………………………. xiv
Preface10.4018/978-1-4666-5828-8.chpre………………………………………………………………………………………………………………………………. xvi
Section 110.4018/978-1-4666-5828-8.chs01
Responses for National Economies10.4018/978-1-4666-5828-8.chs01
Chapter 110.4018/978-1-4666-5828-8.ch001
Manufacturing.in.a.High.Cost.Environment:.Basis.for.Future.Success.on.the.National.Level……………110.4018/978-1-4666-5828-8.ch001
Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch001::1
Chapter 210.4018/978-1-4666-5828-8.ch002
Competing.from.a.High.Cost.Economy:.What.is.the.Challenge.to.Australian.Public.Policy?………….5210.4018/978-1-4666-5828-8.ch002
Ian Marsh, University of Tasmania, Australia10.4018/978-1-4666-5828-8.ch002::1
Chapter 310.4018/978-1-4666-5828-8.ch003
Foundations.for.Industrial.Rejuvenation:.Lessons.from.International.and.National.Experience……….7210.4018/978-1-4666-5828-8.ch003
John Spoehr, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch003::1
Section 210.4018/978-1-4666-5828-8.chs02
Responses for Sectors, Clusters, and Regions10.4018/978-1-4666-5828-8.chs02
Chapter 410.4018/978-1-4666-5828-8.ch004
The.Role.of.Local.and.Regional.Institutions……………………………………………………………………………11210.4018/978-1-4666-5828-8.ch004
John Tomaney, University College London, UK10.4018/978-1-4666-5828-8.ch004::1
Chapter 510.4018/978-1-4666-5828-8.ch005
Putting.Clusters.to.Work……………………………………………………………………………………………………….12210.4018/978-1-4666-5828-8.ch005
Rodin Genoff, Rodin Genoff & Associates, Australia10.4018/978-1-4666-5828-8.ch005::1
Graeme Sheather, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch005::2
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Chapter 610.4018/978-1-4666-5828-8.ch006
Confronting.the.Productivity.Challenge.in.the.High.Cost.Economy:.Evidence.from.the..
Australian.Oil.and.Gas.Industry…………………………………………………………………………………………….15310.4018/978-1-4666-5828-8.ch006
Jerad A. Ford, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::1
John Steen, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::2
Martie-Louise Verreynne, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::3
Bradley Farrell, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::4
Gerald Marion, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::5
Seelan Naicker, 4Sight Group Pty Ltd, Australia10.4018/978-1-4666-5828-8.ch006::6
Chapter 710.4018/978-1-4666-5828-8.ch007
Strategic.Roadmapping.as.a.Policy.Tool.for.Meso-Level.Industrial.Transformation:.The.Case.of.
Cellulosic.Fibre.Value.Chain.in.the.Green.Triangle,.South.Australia………………………………………….17210.4018/978-1-4666-5828-8.ch007
Toni Ahlqvist, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::1
John Kettle, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::2
Ville Valovirta, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::3
Nafty Vanderhoek, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::4
Section 310.4018/978-1-4666-5828-8.chs03
Responses for Enterprises and Workplaces10.4018/978-1-4666-5828-8.chs03
Chapter 810.4018/978-1-4666-5828-8.ch008
Business.Innovation:.Beyond.Technology……………………………………………………………………………….20910.4018/978-1-4666-5828-8.ch008
Don Scott-Kemmis, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch008::1
Chapter 910.4018/978-1-4666-5828-8.ch009
Design-Led.Innovation:.Overcoming.Challenges.to.Designing.Competitiveness.to.Succeed.in..
High.Cost.Environments……………………………………………………………………………………………………….24110.4018/978-1-4666-5828-8.ch009
Sam Bucolo, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch009::1
Cara Wrigley, Queensland University of Technology, Australia10.4018/978-1-4666-5828-8.ch009::2
Chapter 1010.4018/978-1-4666-5828-8.ch010
The.Effects.of.Six.Sigma.Quality.(SSQ).on.Innovation.and.Organisational.Ambidexterity.in.a..
High.Operating.Cost.Environment…………………………………………………………………………………………25210.4018/978-1-4666-5828-8.ch010
Milé Terziovski, Curtin Graduate School of Business, Australia10.4018/978-1-4666-5828-8.ch010::1
Chapter 1110.4018/978-1-4666-5828-8.ch011
Managerial.Practices.in.a.High.Cost.Manufacturing.Environment:.A.Comparison.with.Australia..
and.New.Zealand…………………………………………………………………………………………………………………26810.4018/978-1-4666-5828-8.ch011
Renu Agarwal, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::1
Christopher Bajada, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::2
Paul J. Brown, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::3
Roy Green, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::4
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Chapter 1210.4018/978-1-4666-5828-8.ch012
Supporting.Entrepreneurship.in.High.Cost.Economies:.What.Can.Governments.Do?…………………..29010.4018/978-1-4666-5828-8.ch012
Allan O’Connor, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::1
Graciela Corral de Zubielqui, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::2
Mushui Huanmei Li, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::3
Manjula Dissanayake, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::4
Chapter 1310.4018/978-1-4666-5828-8.ch013
Manufacturing.in.a.High.Cost.Environment:.Basis.for.Success.on.the.Firm.Level……………………….39310.4018/978-1-4666-5828-8.ch013
Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch013::1
Conclusion10.4018/978-1-4666-5828-8.chcon………………………………………………………………………………………………………………………… 481
Compilation of References10.4018/978-1-4666-5828-8.chcrf…………………………………………………………………………………………………. 483
About the Contributors10.4018/978-1-4666-5828-8.chatc……………………………………………………………………………………………………… 555
Index10.4018/978-1-4666-5828-8.chidx………………………………………………………………………………………………………………………………… 563
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Detailed Table of Contents
Foreword10.4018/978-1-4666-5828-8.chfwd……………………………………………………………………………………………………………………………. xiv
Preface10.4018/978-1-4666-5828-8.chpre………………………………………………………………………………………………………………………………. xvi
Section 110.4018/978-1-4666-5828-8.chs01
Responses for National Economies10.4018/978-1-4666-5828-8.chs01
Chapter 110.4018/978-1-4666-5828-8.ch001
Manufacturing.in.a.High.Cost.Environment:.Basis.for.Future.Success.on.the.National.Level……………110.4018/978-1-4666-5828-8.ch001
Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch001::1
This.chapter.explores.the.current.state.of.flux.in.manufacturing..It.examines.the.forces.that.drive.frag-
mentation.and.dispersion.of.value.chains.on.the.one.hand.and.those.that.drive.concentration.and.in-
tegration.of.value.chains.on.the.other..These.forces.are.underpinned.by.changes.in.technology,.wage.
costs,. business. environment,. importance. of. economies. of. scale. for. production,. need. for. interaction.
with.customers.and.input.providers,.needs.for.skills.in.the.manufacturing.workforce,.and.the.workings.
of.industrial.commons.and.economic.complexity..Analysing.these.changes.at.the.level.of.the.firm,.this.
chapter.puts.the.competitive.focus.on.the.creation.of.value.more.than.on.cutting.costs.(although.both.
are.important)..The.policy.environment.must.provide.both.carrot.and.stick.to.ensure.that.firms.align.
with.these.developments..In.this.dynamic.world,.an.effective.policy.response.requires.a.shift.from.any.
single.dominating.economic.lens.(e.g..neo-classical,.neo-Keynesian,.neo-Schumpeterian,.evolutionary).
to.a.situation-specific.approach.10.4018/978-1-4666-5828-8.ch001
Chapter 210.4018/978-1-4666-5828-8.ch002
Competing.from.a.High.Cost.Economy:.What.is.the.Challenge.to.Australian.Public.Policy?………….5210.4018/978-1-4666-5828-8.ch002
Ian Marsh, University of Tasmania, Australia10.4018/978-1-4666-5828-8.ch002::1
The.starting.point.for.this.chapter.is.that.Australia.is.a.high-cost.economy.with.a.fading.resources.boom.
and.a.diminished.domestic.manufacturing.sector..The.chapter.explores.the.fresh.challenge.that.these.
structural.developments.present.to.public.policy..It.argues.that.this.requires.a.shift.from.the.dominant.
neo-classical.policy.paradigm,.which.has.to.date.provided.the.intellectual.muscle.for.a.transformation.
of.Australia’s.political.economy..The.chapter.makes.the.case.for.policies.framed.to.foster.innovation.
and.knowledge.as.the.approach.needed.for.Australia.to.succeed.in.an.environment.characterised.by.the.
new.international.distribution.of.manufacturing,.the.impact.of.new.technologies,.and.the.prevalence.of.
global.supply.chains..To.realise.innovation-based.economic.renewal.requires.capacities.for.much.more.
targeted.interventions.that.engage.business.at.cluster,.sectoral,.and/or.regional.levels..The.chapter.con-
cludes.by.considering.the.obstacles.to,.and.the.possibilities.for,.policy.change.10.4018/978-1-4666-5828-8.ch002
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Chapter 310.4018/978-1-4666-5828-8.ch003
Foundations.for.Industrial.Rejuvenation:.Lessons.from.International.and.National.Experience……….7210.4018/978-1-4666-5828-8.ch003
John Spoehr, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch003::1
Drawing.on.a.body.of.research.examining.the.economic.and.social.effects.of.downturns.and.major.man-
ufacturing.plant.closures.in.Australia.and.South.Australia.in.particular,.this.chapter.investigates.how.
industrial.rejuvenation.strategies.can.help.to.minimise.the.negative.impacts.on.the.workforce.and.sup-
ply.chains.affected..The.chapter.identifies.key.lessons.from.the.national.and.international.literature.on.
industrial.rejuvenation.and.the.management.of.major.closures..Industrial.rejuvenation.is.a.multi-faceted.
strategy.that.seeks.to.manage.pressures.and.complex.change.in.response.to.local,.national,.and.global.
conditions..The.chapter.focuses.on.the.evidence.about.the.strategic.options.for.industrial.rejuvenation.
available. to. government. in. partnership. with. industry,. trade. union,. and. community. stakeholders.. The.
chapter.concludes.by.drawing.out.some.broad.strategic.implications.for.the.design.of.more.integrated.
rejuvenation.and.regeneration.policies.10.4018/978-1-4666-5828-8.ch003
Section 210.4018/978-1-4666-5828-8.chs02
Responses for Sectors, Clusters, and Regions10.4018/978-1-4666-5828-8.chs02
Chapter 410.4018/978-1-4666-5828-8.ch004
The.Role.of.Local.and.Regional.Institutions……………………………………………………………………………11210.4018/978-1-4666-5828-8.ch004
John Tomaney, University College London, UK10.4018/978-1-4666-5828-8.ch004::1
This.chapter.explores.the.ways.in.which.regions.that.are.remote.from.the.main.concentrations.of.eco-
nomic.wealth.and.power.can.achieve.development.in.a.high.cost.environment..The.role.of.effective.in-
stitutions.in.creating.the.conditions.for.economic.development.has.become.a.major.field.of.scholarship..
Recently,.these.insights.have.been.applied.to.the.urban.and.regional.scale..This.chapter.pays.particular.
attention. to. the. role. that. regional. and. local. institutions. play. in. shaping. patterns. of. economic. perfor-
mance,.especially.in.high.cost.environments..The.chapter.examines.ways.in.which.this.new.thinking.
is.informing.regional.policy..It.provides.some.case.studies.of.regions.that.have.succeeded.in.the.high.
cost.environment.of.Europe..It.concludes.by.stressing.the.importance.of.effective.and.adept.local.and.
regional.institutions.in.ensuring.the.prosperity.of.cities.and.regions.10.4018/978-1-4666-5828-8.ch004
Chapter 510.4018/978-1-4666-5828-8.ch005
Putting.Clusters.to.Work……………………………………………………………………………………………………….12210.4018/978-1-4666-5828-8.ch005
Rodin Genoff, Rodin Genoff & Associates, Australia10.4018/978-1-4666-5828-8.ch005::1
Graeme Sheather, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch005::2
This. chapter. illustrates. the. effect. of. clusters. on. company. performance. through. rigorous. mapping. of.
the. patterns. and. strength. of. relationships. between. companies. applied. in. the. Aalborg. region. of. Hub.
North,.Denmark..This.case.study.has.been.selected.from.similar.industry.cluster.projects.undertaken.
between. 1999. and. 2013. in. Midjutland,. Denmark,. Dalarna,. Sweden,. mining. regions. in. Queensland,.
and.the.Playford.industrial.region.in.South.Australia..A.conceptual.methodology.and.suite.of.tools.that.
have.translated.cluster.theory.into.bottom.up.business.outcomes.for.companies.participating.in.these.
cluster.projects.demonstrates.how.a.deeper.understanding.of.clusters.can.contribute.to.the.economic.
development.of.industrial.regions..The.methodology.and.findings.described.in.this.chapter.pioneer.new.
insights.and.ways.to.analyse.emerging.cluster.developments.10.4018/978-1-4666-5828-8.ch005
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Chapter 610.4018/978-1-4666-5828-8.ch006
Confronting.the.Productivity.Challenge.in.the.High.Cost.Economy:.Evidence.from.the..
Australian.Oil.and.Gas.Industry…………………………………………………………………………………………….15310.4018/978-1-4666-5828-8.ch006
Jerad A. Ford, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::1
John Steen, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::2
Martie-Louise Verreynne, University of Queensland, Australia10.4018/978-1-4666-5828-8.ch006::3
Bradley Farrell, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::4
Gerald Marion, Ernst & Young, Australia10.4018/978-1-4666-5828-8.ch006::5
Seelan Naicker, 4Sight Group Pty Ltd, Australia10.4018/978-1-4666-5828-8.ch006::6
This.chapter.reports.research.findings.into.the.productivity.challenge.facing.the.Australian.oil.and.gas.
industry..This.industry.has.been.experiencing.cost.overruns.indicating.a.productivity.decline.that.puts.
future.projects.and.investment.at.risk..Using.world-class.survey.methodologies.developed.by.the.Centre.
for.Business.Research.at.Cambridge.University.and.adapted.for.the.oil.and.gas.industry,.an.evidence-
based.view.on.business.decisions.and.conditions.is.provided.and.linked.to.performance..While.many.of.
the.productivity.challenges.facing.the.Australian.oil.and.gas.industry.are.beyond.immediate.manage-
rial.control,.this.research.shows.that.key.productivity.drivers.are.in.the.realm.of.the.firm.to.influence..
The.research.reported.in.this.chapter.shows.that.improvements.in.innovation,.collaboration,.and.deeper.
competitive.capabilities.are.the.best.levers.to.lift.business.productivity.and.to.build.a.growth.pathway.
for.the.future.for.this.industry.10.4018/978-1-4666-5828-8.ch006
Chapter 710.4018/978-1-4666-5828-8.ch007
Strategic.Roadmapping.as.a.Policy.Tool.for.Meso-Level.Industrial.Transformation:.The.Case.of.
Cellulosic.Fibre.Value.Chain.in.the.Green.Triangle,.South.Australia………………………………………….17210.4018/978-1-4666-5828-8.ch007
Toni Ahlqvist, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::1
John Kettle, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::2
Ville Valovirta, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::3
Nafty Vanderhoek, VTT Technical Research Centre, Finland10.4018/978-1-4666-5828-8.ch007::4
This.chapter.illustrates.the.use.of.strategic.roadmapping.as.a.policy.tool.for.regions.or.industry.sectors.
to.formulate.a.strategy.to.renew.and.transform.their.industrial.base.when.faced.with.structural.decline,.
diminishing.opportunities,.and.intensifying.competitive.pressures..This.approach.is.illustrated.by.the.
case.study.of.the.forest.and.wood.products.industry.in.the.Green.Triangle.region.in.the.southeast.of.
South. Australia,.both. the. road. maps. produced.and. the. staged.policy. recommendations.made.for. im-
mediate,.short,.and.long-term.action..The.chapter.concludes.by.summarising.the.key.arguments.for.the.
use.of.strategic.roadmapping.as.policy.tool.for.industrial.transformation,.and.identifying.some.future.
avenues.for.strategic.roadmapping.in.the.forest.and.wood.products.industry.and.in.manufacturing.in-
dustry.in.general.10.4018/978-1-4666-5828-8.ch007
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Section 310.4018/978-1-4666-5828-8.chs03
Responses for Enterprises and Workplaces10.4018/978-1-4666-5828-8.chs03
Chapter 810.4018/978-1-4666-5828-8.ch008
Business.Innovation:.Beyond.Technology……………………………………………………………………………….20910.4018/978-1-4666-5828-8.ch008
Don Scott-Kemmis, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch008::1
This.chapter.presents.the.case.for.a.wider.understanding.of.innovation.beyond.technology.and.beyond.
novel.products.and.processes..It.examines.the.dynamics.of.Business.Model.Innovation,.which.refers.
to. fundamental. changes. to. the. total. formula. for. business. success.. New. approaches. to. value. creation.
and.appropriation.through.business.model.innovation.are.particularly.vital.in.times.of.turbulence.and.
realignment.faced.by.firms.in.high.cost.operating.environments..Business.model.innovation.can.create.
new. and. sustainable. sources. of. competitive. advantage. for. firms,. securing. their. survival. and. growth..
The.chapter.discusses.the.evidence.for.the.role.of.business.model.innovation.in.the.growth.of.leading.
firms.and.in.the.restructuring.of.markets..It.provides.an.overview.of.the.frameworks.for.characterising.
and.analysing.business.models..The.options.for.different.types.of.business.models.likely.to.be.success-
ful.in.high.cost.environments.are.described.10.4018/978-1-4666-5828-8.ch008
Chapter 910.4018/978-1-4666-5828-8.ch009
Design-Led.Innovation:.Overcoming.Challenges.to.Designing.Competitiveness.to.Succeed.in..
High.Cost.Environments……………………………………………………………………………………………………….24110.4018/978-1-4666-5828-8.ch009
Sam Bucolo, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch009::1
Cara Wrigley, Queensland University of Technology, Australia10.4018/978-1-4666-5828-8.ch009::2
This.chapter.focuses.on.demonstrating.the.role.of.Design-Led.Innovation.(DLI).as.an.enabler.for.the.
success. of. Small. to. Medium. Enterprises. (SMEs). within. high. growth. environments.. This. chapter. is.
targeted.toward.businesses.that.may.have.been.exposed.to.the.concept.of.design.previously.at.a.product.
level.and.now.seek.to.better.understand.its.value.through.implementation.at.a.strategic.level.offering..
The.decision.to.engage.in.the.DLI.process.is.made.by.firms.who.want.to.remain.competitive.as.they.
struggle.to.compete.in.high.cost.environments,.such.as.the.state.of.the.Australian.economy.at.present..
The.results.presented.in.this.chapter.outline.the.challenges.in.the.adoption.of.the.DLI.process.and.the.
implications.it.can.have..An.understanding.of.the.value.of.DLI.in.practice—as.an.enabler.of.business.
transformation.in.Australia—is.of.benefit.to.government.and.the.broader.design.community.10.4018/978-1-4666-5828-8.ch009
Chapter 1010.4018/978-1-4666-5828-8.ch010
The.Effects.of.Six.Sigma.Quality.(SSQ).on.Innovation.and.Organisational.Ambidexterity.in.a..
High.Operating.Cost.Environment…………………………………………………………………………………………25210.4018/978-1-4666-5828-8.ch010
Milé Terziovski, Curtin Graduate School of Business, Australia10.4018/978-1-4666-5828-8.ch010::1
This.chapter.explores.the.effect.of.Six.Sigma.Quality.(SSQ).on.innovation.and.organizational.ambi-
dexterity.in.a.high.operating.cost.environment..Multiple-cross.case.analysis.revealed.that.SSQ.seems.
to.align.very.well.with.process.innovation,.where.the.organisation.has.a.well-defined.process.output.
to.control..However,.some.tension.exists.between.SSQ.and.product.innovation,.particularly.in.terms.of.
the.time.expectation.for.SSQ.to.deliver.results..Furthermore,.the.study.shows.that.SSQ.could.have.a.
positive.impact.on.organizational.ambidexterity.in.a.high.operating.cost.environment,.as.long.as.man-
agement. recognizes. that. innovation. approaches. require. their. own. formula. for. success.. Management.
needs.to.establish.a.team.that.could.manage.the.tension.between.“getting.it.right.the.first.time”.as.part.
of.managed.innovation.and.“learning.from.failure”.as.part.of.entrepreneurial.innovation.10.4018/978-1-4666-5828-8.ch010
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Chapter 1110.4018/978-1-4666-5828-8.ch011
Managerial.Practices.in.a.High.Cost.Manufacturing.Environment:.A.Comparison.with.Australia..
and.New.Zealand…………………………………………………………………………………………………………………26810.4018/978-1-4666-5828-8.ch011
Renu Agarwal, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::1
Christopher Bajada, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::2
Paul J. Brown, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::3
Roy Green, University of Technology, Sydney, Australia10.4018/978-1-4666-5828-8.ch011::4
This.chapter.explores.the.management.strategies.adopted.by.manufacturing.firms.operating.in.high.ver-
sus.low.cost.economies.and.investigates.the.reasons.for.differences.in.the.management.practice.choices..
The.study.reported.in.this.chapter.identifies.a.subset.of.countries.that.have.either.high.or.low.labour.
costs,.with.USA,.Sweden,.and.Japan.being.high,.and.India,.China,.and.Brazil.being.low.labour.cost.
economies..The.high.labour.cost.manufacturing.firms.are.found.to.have.better.management.practices..
In. this. chapter,. the. authors. find. that. Australia. and. New. Zealand. manufacturing. firms. face. relatively.
high.labour.cost.but.lag.behind.world.best.practice.in.management.performance..The.chapter.concludes.
by.highlighting.the.need.for.improvement.in.management.capability.for.Australian.and.New.Zealand.
manufacturing. firms. if. they. are. to. experience. a. reinvigoration. of. productivity,. competitiveness,. and.
long-term.growth.10.4018/978-1-4666-5828-8.ch011
Chapter 1210.4018/978-1-4666-5828-8.ch012
Supporting.Entrepreneurship.in.High.Cost.Economies:.What.Can.Governments.Do?…………………..29010.4018/978-1-4666-5828-8.ch012
Allan O’Connor, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::1
Graciela Corral de Zubielqui, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::2
Mushui Huanmei Li, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::3
Manjula Dissanayake, University of Adelaide, Australia10.4018/978-1-4666-5828-8.ch012::4
This.chapter.sets.out.the.findings.of.a.comprehensive.literature.review.that.addressed.three.objectives:.
to. review. internationally. recognised. and. accepted. methodologies. of. entrepreneurial. human. and. firm.
characteristics.data.collection.and.analysis;.to.formulate.the.contemporary.view.and.latest.research.on.
entrepreneurial.characteristics.and.how.these.characteristics.contribute.to.a.model.of.entrepreneurial.
firm.behaviour;.to.examine.developments.in.the.literature.that.explain.to.what.extent.human.character-
istics.influence.and.predict.the.performance.of.firms..The.implications.of.this.work.are.that.firms.with.
high.potential.in.either.innovation.or.market-based.growth.opportunities.need.to.have.the.right.environ-
mental.settings.in.terms.of.social,.political,.regulatory,.economics,.and.technology.for.firms.with.a.high.
success.potential.to.realise.this.potential..The.concept.of.stage.progression.and.the.relationship.between.
the.characteristics.of.the.individual,.the.firm,.and.the.opportunity.provide.the.elements.of.a.framework.
through.which.to.consider.government.support.programs.and.interventions.10.4018/978-1-4666-5828-8.ch012
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Chapter 1310.4018/978-1-4666-5828-8.ch013
Manufacturing.in.a.High.Cost.Environment:.Basis.for.Success.on.the.Firm.Level……………………….39310.4018/978-1-4666-5828-8.ch013
Göran Roos, Swinburne University, Australia10.4018/978-1-4666-5828-8.ch013::1
This.chapter.draws.on.an.overview.of.contemporary.literature.to.distil.the.best.ways.for.manufacturing.
firms.to.adapt.to.and.succeed.in.high.cost.environments..Parts.of.global.value.chains.will.move.back.to.
sophisticated,.economically.complex,.high.operating.cost.environments.like.the.US.and.the.European.
Manufacturing.Belt..However,.the.firms.that.participate.in.these.value.chains.will.look.different..The.
forces.that.impact.the.structure.and.location.of.manufacturing.activities.will.also.impact.the.individual.
firm,. and. this. chapter. discusses. how. this. will. result. in. successful. firms. becoming. so. called. “Hid-
den.Champions.”.A.successful.transformation.into.tomorrow’s.Hidden.Champion.will.result.in.fewer.
employees.with.higher.capability,.producing.a.higher.level.of.output.of.which.a.very.high.share.will.
be.produced.and.delivered.digitally..These.firms.will.participate.in.smaller,.more.concentrated.value.
chains.serving.a.global.market.but.operating.both.competitively.and.collaboratively.in.agglomerations.
like.clusters..These.agglomerations.will.be.located.in.jurisdictions.with.high.economic.complexity.and.
with.a.deep.and.broad.industrial.commons.and.with.a.supportive.policy.regime.10.4018/978-1-4666-5828-8.ch013
Conclusion10.4018/978-1-4666-5828-8.chcon………………………………………………………………………………………………………………………… 481
Compilation of References10.4018/978-1-4666-5828-8.chcrf…………………………………………………………………………………………………. 483
About the Contributors10.4018/978-1-4666-5828-8.chatc……………………………………………………………………………………………………… 555
Index10.4018/978-1-4666-5828-8.chidx………………………………………………………………………………………………………………………………… 563
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xiv
Foreword
It’s not about the big companies eating the small; it’s about the agile ones eating the slow. This is the
reality of the present and future global business world and it will only intensify.
Agile companies are value-driven, knowledge-oriented, collaborate, act in clusters, and consider
innovation, fast rejuvenation, and flexible change as the norm.
Slow companies are cost-driven, volume-oriented, act reactively in isolation, and avoid change as
much as possible.
Global Perspectives on Achieving Success in High and Low Cost Operating Environments is the first
book that draws together in one place the leading thinking on how to be agile, both from a theoretical and
practical point of view. The authors are eminent academics, experienced practitioners and consultants with
the insights to reveal the critical issues relating to one of the key challenges brought on by globalisation.
Succeeding in a high operating cost environment is a challenge for most OECD countries as well as
for countries with a rapidly increasing cost level, like China. This challenge is greater the more rapidly
the cost level has increased. The examples in this book are grounded in Australia, one of the countries
with the fastest increase in cost levels over the last six years. The results of being slow to adapt to this
new cost environment at the firm level can be seen by the challenges faced in the automotive industry, the
pharmaceutical industry, and forest-related industries. The eventual successful adaptation by some of the
firms in the industries mentioned would have happened faster if there had been a greater understanding of
what it takes to succeed in a high cost-operating environment – these insights are provided by this book.
Hence, this book is very important, describing both the theory behind the dynamics and requirements,
based on practical cases, as well as practical advice on how to manage this challenge.
The book not only describes the firm level but also discusses similar issues at industry and cluster
level, which have implications also for regional economic development. The book also discusses the
macro or national level and illustrates the dynamics and challenges faced by nations aiming to maintain
and increase their citizens’ present standard of living. Maintaining this standard of living will not be pos-
sible unless a clear economic and industrial policy is implemented and pursued over long periods of time.
These three levels (micro, meso, and macro) are covered in 13 chapters, each providing an important
contribution to what it takes to succeed.
I recommend anyone active in the industrial world today or active at regional, cluster, or national
levels to read this book in order to better understand the complexity of the different business systems,
and to increase their knowledge of how to think and act in different situations.
In addition, this should be recommended reading for university students as well as all people active
in the media industry who are responsible for reporting economic and industrial issues in a complex
global world.
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xv
Peter Holmstedt
RISE Research Institutes of Sweden AB, Sweden
Peter Holmstedt, PhD, is Professor of Industrial Production at KTH, Stockholm, Sweden (Royal Institute of Technology),
Senior Advisor at RISE Research Institutes of Sweden, and acting business angel in the Swedish Innovation System. He was
previously the President and CEO of RISE Research Institutes of Sweden AB, President and CEO of Innovationsbron AB
(early stage venture capital), and President and CEO of the Electrum foundation at Kista Science City. Dr. Peter Holmstedt is
a member of the Boards of STINT (internationalization of universities), AMFA Bank AB, Gullers Group AB, and KTH Hold-
ing AB. He received his PhD at KTH in Flexible Industrial Production 1998, and in 2004–2005, he was the Vice President of
External Relations at KTH. He has served 15 years in the Swedish export industry, for example at Scania (heavy trucks) and
Atlas Copco (mining and industrial technology).
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xvi
Preface
INTRODUCTION
This book shows that the gravitational forces driving economic activities towards ever-lower costs and
narrower specialisations, resulting in a significant hollowing out of manufacturing industry, can be
combated by advanced high-cost economies. This trajectory does not need to be accepted as a natural
and inevitable course of events.
Competing in a high-cost environment is a completely different proposition to competing in a low-cost
environment. This is particularly true for manufacturing industry, which is confronting both intense and
growing global competition and fundamental shifts in the very nature of manufacturing itself.
The operating environment in many countries has moved, or is moving, from a relatively low or
medium cost-operating environment towards a high cost-operating environment, with the continuous
emergence of new competing locations. This development changes the basis for competition for many
firms, industries, states, and nations from one focused on imitation and efficiency to one of innova-
tion and effectiveness. This requires an associated move from an economic policy lens based on the
mechanistic models of neo-classical theory to the more organic models of evolutionary economics and
innovation theory.
To date, this journey has not been well described in the literature, and there is very little guidance
for action by firms, industries, regions, or economic policymakers forced to make this journey. This
collection of expert papers seeks to address this.
COMPETING ON VALUE, NOT PRICE
The contributions in this book present evidence that open, often small, high-cost economies can succeed
and prosper provided they compete on value, not price. In these circumstances, strong competitive capa-
bilities and productivity performance are equally as possible for low and medium technology industries
as they are for high technology industries.
This book draws on evidence from studies and research projects in traditional high-cost environments
(like Switzerland, Germany, Sweden, Finland, and Norway) that are also high-performing countries, and
contrasts this with the experience in low-cost jurisdictions. It pays special attention to the experience
of Australia, as a country that has made the journey from a low- to high-cost environment very rapidly.
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xvii
The book presents a collection of chapters addressing contemporary issues on what it takes for busi-
ness enterprises to succeed in a high-cost environment and the policy actions that facilitate this success.
It explores the basis for success in high-cost environments at three levels: the macro level of national
policy; the meso level approaches taken by industries, regions, clusters, or sectors; and the micro-level
actions by enterprises and workplaces.
An enduring theme across the book is that a high-cost environment creates a new context for the
competitiveness of firms, industries, and nations. Competitiveness from cost advantages and economy-
wide efficiencies alone will not work for high-cost environments. Rather, competitiveness is generated
by responding to demand in superior ways compared to competitors—in business offerings, quality, and
responsiveness to specialised customer needs and tastes. Creating value in the eyes of the customer is a
critical ingredient for competitiveness.
The authors in this book also make the case for the importance of understanding and capitalising on
knowledge as a factor of production decisive to business success, especially in high-cost environments.
THE POWER OF KNOWLEDGE
The importance of the knowledge economy is based on the richness and mastery of both stocks and
flows of productive knowledge accumulated, accessed, and put to use effectively by both countries and
companies. It is not restricted just to economic activities in high tech sectors or to workers with high
levels of technical, conceptual, and analytic skills. Knowledge underpins competitiveness when rich and
diverse sources of economically useful knowledge are acquired, held, refreshed, absorbed, combined,
and applied to productive ends.
Knowledge is a vital intangible asset that provides increasing returns, and which grows rather than
diminishes with use. Collaboration for greater access and use of productive knowledge is the flipside
of the push towards increasing specialisation and divisions of labour. Capitalising on knowledge as an
asset is central to the ability of high-cost economies to thrive against low-operating-cost environment
competitors.
COLLABORATION DRIVES INNOVATION AND COMPETITIVENESS
In fact, evidence of strong connections and collaborations are consistently cited by authors as an essential
ingredient for successful performance in high-cost environments. Collaboration is an important driver
of competitiveness, innovation, and productivity whether in knowledge sharing and problem solving
initiatives between businesses and universities and researchers; relationships and engagement between
firms in supply chains and clusters; public-private partnerships for policy development or service deliv-
ery; co-design and co-production with customers; effective cross-disciplinary and multi-sector problem
solving teams using open innovation and living laboratory methods; collaborative firms reporting bet-
ter productivity gains; or harmonisation of national and regional policy-making by robust engagement
between national and local institutions.
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xviii
A FOCUS ON CLUSTERS, REGIONS, AND SECTORS
Evidence is presented in this book that a single focus on economy-wide framework conditions is likely
to be a flawed strategy for high-cost environments. Attention to approaches taken in specific industries,
clusters, and geographic regions illuminates and extends the pathways available for success in high-cost
economies.
In particular, the authors emphasise the critical importance of place-based policies. Prosperity invari-
ably follows from the concentration of economic activity, making such locations magnets for growth.
The benefits of economic agglomeration are particularly important in high-cost economies as they are
one way of offsetting the adverse effects of a high-cost base, but this can put locations that are remote,
small, or declining at a double disadvantage.
This book argues, however, that if regional and local institutions are potent, informed, and active,
the rules of economic concentration can be stretched. This allows for every region, city, or district, no
matter how peripheral or remote, to build their own untapped internal capabilities and resources into a
viable economic base, and thereby make a significant contribution to national economic prosperity and
social cohesion.
In particular, a region’s innovation capabilities and its human capital of know-how, skills, and rela-
tionships are especially crucial because they provide a distinctive and sustainable advantage that serves
to embed otherwise mobile investments in the region.
In high cost economies, it is imperative that the focus shifts from external transfers to reduce re-
gional disparities to the improvement and leveraging of “home-grown” capabilities that drive regional
competitiveness.
These arguments are extended by an examination of levers for growth and productivity in particular
industry sectors and illustrated by a close analysis of their dynamics, including the effects of unlocking
the connections between firms in clusters to secure new sales and lucrative joint ventures; the demon-
strated productivity improvements from a mutually-reinforcing combination of collaboration, accumulated
innovations, and deep competitive capabilities; and opportunities opened up by strategic foresight and
technology roadmapping initiatives.
THE IMPERATIVE OF INDUSTRIAL REJUVENATION
Industrial rejuvenation policies have a central role in the fate of high-cost economies. By definition,
industrial rejuvenation deals with the problems and casualties of high-cost economies. Finding the best
policy response is likely to be contested, controversial, and difficult for governments to meet often con-
flicting community expectations. This book explores the experience in Australia and internationally of
industrial rejuvenation approaches and their impact, and charts a course from the lessons learnt.
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xix
INNOVATION BY ENTERPRISES AND WORKPLACES
The contributors to this book draw out a variety of significant insights into how business enterprises
and workplaces can themselves stare down intense and growing low-operating-cost global competition
and secure their future success. They highlight cases of firms understanding the wider dimensions of
creating value for existing and prospective customers, embarking on innovation through: transformative
changes in business models, by action on design, by attention to world-class quality, and by mapping and
securing their place in new technology and industry frontiers; the creation of distinctive capabilities to
serve emerging industries with good growth prospects; understanding the dynamics of entrepreneurship
and entrepreneurial individuals and firms; and boosting management and workforce skills to be resilient
and agile for the future.
STRUCTURE OF THE BOOK
The chapters are grouped into three sections and cover the following topics:
Section 1: Responses for National Economies
Manufacturing in a High Cost Environment: Basis for Future
Success on the National Level by Göran Roos
This chapter explores the current state of flux of manufacturing. It examines the forces that drive
fragmentation and dispersion of value chains on the one hand and those that drive concentration and
integration of value chains on the other. These forces are underpinned by changes in technology, wage
costs, business environment, importance of economies of scale for production, need for interaction with
customers and input providers, needs for skills in the manufacturing workforce, and the workings of
industrial commons and economic complexity.
The current momentum is in favour of the forces that disperse value chains. The swing back towards
concentration of value chains sees high cost economies entering the next structural shift. This is result-
ing in increasing back-shoring or re-shoring of activities to those high cost operating environments that
have maintained a high economic complexity emerging out of a deep and broad industrial commons.
Analysing these changes at the level of the firm, this chapter puts the competitive focus on the creation
of value more than on cutting costs (although both are important). The policy environment must provide
both carrot and stick to ensure that firms align with these developments. In this dynamic world, an ef-
fective policy response requires a shift from any single dominating economic lens (e.g. neo-classical,
neo-Keynesian, neo-Schumpeterian, evolutionary) to a situation-specific approach. The chapter concludes
with identifying the domains in which policy actions must be taken to secure the industrial future of a
high cost jurisdiction.
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Competing from a High Cost Economy: What is the Challenge
to Australian Public Policy? by Ian Marsh
The starting point for this chapter is that Australia is a high-cost economy with a fading resources boom
and a diminished domestic manufacturing sector. The chapter explores the fresh challenge that these
structural developments present to public policy. It argues that this requires a shift from the dominant
neo-classical policy paradigm, which has to date provided the intellectual muscle for a transformation
of Australia’s political economy.
The chapter makes the case for policies framed to foster innovation and knowledge as the approach
needed for Australia to succeed in an environment characterised by the new international distribution of
manufacturing, the impact of new technologies, and the prevalence of global supply chains. Consequently,
it argues for a new conception of the economic role of the state and new capacities for Federal-State
collaboration.
To realise innovation-based economic renewal requires capacities for much more targeted interven-
tions that engage business at cluster, sectoral, and/or regional levels. This is an alternative approach to
the arm’s length philosophy that currently prevails.
In exploring these issues, this chapter sketches public policy measures that have been adopted in a
variety of jurisdictions to catalyse innovation. It continues to illustrate dilemmas in their adoption in
Australia’s present public policy system. The chapter concludes by considering the obstacles to, and the
possibilities for, policy change.
Foundations for Industrial Rejuvenation: Lessons from
International and National Experience by John Spoehr
Drawing on a body of research examining the economic and social effects of downturns and major
manufacturing plant closures in Australia and South Australia in particular, this chapter investigates
how industrial rejuvenation strategies can help to minimise the negative impacts on the workforce and
supply chains affected.
The chapter identifies key lessons from the national and international literature on industrial reju-
venation and the management of major closures. Industrial rejuvenation is a multi-faceted strategy that
seeks to manage pressures and complex change in response to local, national, and global conditions.
The chapter focuses on the evidence about the strategic options for industrial rejuvenation available to
government in partnership with industry, trade union, and community stakeholders.
There are significant implications for policy development in the close linkage between industrial
rejuvenation and concepts of urban and regional regeneration. The emergence of the regional innovation
systems agenda and its relevance as a strategic response to industrial decline and dislocation is reviewed.
So too is the literature on smart specialisation in the European Union, together with a discussion on the
relevance to rejuvenation strategies of integrated and inclusive innovation and problem solving processes.
The chapter discusses notable international case studies of rejuvenation and regeneration such as
Bilbao and Manchester. It pays particular attention to the impacts of major industrial dislocations and
closures in Australia and the UK. The chapter concludes by drawing out some broad strategic implica-
tions for the design of more integrated rejuvenation and regeneration policies.
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xxi
Section 2: Responses for Sectors, Clusters, and Regions
The Role of Local and Regional Institutions by John Tomaney
This chapter explores the ways in which regions that are remote from the main concentrations of eco-
nomic wealth and power can achieve development in a high cost environment.
The role of effective institutions in creating the conditions for economic development has become
a major field of scholarship. Recently, these insights have been applied to the urban and regional scale.
This chapter pays particular attention to the role that regional and local institutions play in shaping pat-
terns of economic performance, especially in high cost environments.
The chapter outlines new thinking evident worldwide on place-based city and regional development.
The essence is a move away from traditional approaches that emphasise provision of large-scale infra-
structure, attraction of footloose investors, and the disbursement of transfer payments designed mainly
to compensate for the effects of industrial restructuring and low growth. The new approaches emphasise
the identification and mobilisation of a region’s internal skills and innovation capacities that have been
unrecognised and under-utilised. Such approaches stress the importance of integrating policies for land
use, innovation and business support, skills, and infrastructure.
The chapter examines ways in which this new thinking is informing regional policy. It provides some
case studies of regions that have succeeded in the high cost environment of Europe. It concludes by
stressing the importance of effective and adept local and regional institutions in ensuring the prosperity
of cities and regions.
Putting Clusters to Work by Rodin Genoff and Graeme Sheather
This chapter illustrates the effect of clusters on company performance through rigorous mapping of the
patterns and strength of relationships between companies applied in the Aalborg region of Hub North,
Denmark. This case study has been selected from similar industry cluster projects undertaken between
1999 and 2013 in Midjutland, Denmark, Dalarna, Sweden, mining regions in Queensland, and the Play-
ford industrial region in South Australia.
A conceptual methodology and suite of tools that have translated cluster theory into bottom up business
outcomes for companies participating in these cluster projects demonstrates how a deeper understanding
of clusters can contribute to the economic development of industrial regions.
The methodology and findings described in this chapter pioneer new insights and ways to analyse
emerging cluster developments.
Confronting the Productivity Challenge in the High Cost Economy: Evidence
from the Australian Oil and Gas Industry by Jerad A. Ford, John Steen, Martie-
Louise Verreynne, Bradley Farrell, Gerald Marion, and Seelan Naicker
This chapter reports research findings into the productivity challenge facing the Australian oil and gas
industry. This industry has been experiencing cost overruns indicating a productivity decline that puts
future projects and investment at risk.
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xxii
Using world-class survey methodologies developed by the Centre for Business Research at Cambridge
University and adapted for the oil and gas industry, an evidence-based view on business decisions and
conditions is provided and linked to performance. While many of the productivity challenges facing the
Australian oil and gas industry are beyond immediate managerial control, this research shows that key
productivity drivers are in the realm of the firm to influence.
The research reported in this chapter shows that improvements in innovation, collaboration, and deeper
competitive capabilities are the best levers to lift business productivity and to build a growth pathway
for the future for this industry. This is illustrated by case examples of organisations that are successfully
implementing such productivity-enhancing strategies.
Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation:
The Case of Cellulosic Fibre Value Chain in the Green Triangle, South Australia
by Toni Ahlqvist, John Kettle, Ville Valovirta, and Nafty Vanderhoek
This chapter illustrates the use of strategic roadmapping as a policy tool for regions or industry sectors
to formulate a strategy to renew and transform their industrial base when faced with structural decline,
diminishing opportunities, and intensifying competitive pressures.
Strategic roadmapping is an approach that uses foresight analysis combined with collaboration pro-
cesses to engage stakeholders in identifying future higher value-added pathways and helping them to
initiate transformation through innovation and the adoption of new technologies.
This approach is illustrated by the case study of the forest and wood products industry in the Green
Triangle region in the southeast of South Australia, both the road maps produced and the staged policy
recommendations made for immediate, short, and long-term action.
The chapter concludes by summarising the key arguments for the use of strategic roadmapping as
policy tool for industrial transformation, and identifying some future avenues for strategic roadmapping
in the forest and wood products industry and in manufacturing industry in general.
Section 3: Responses for Enterprises and Workplaces
Business Innovation: Beyond Technology by Don Scott-Kemmis
This chapter presents the case for a wider understanding of innovation beyond technology and beyond
novel products and processes. It examines the dynamics of Business Model Innovation, which refers to
fundamental changes to the total formula for business success.
New approaches to value creation and appropriation through business model innovation are particu-
larly vital in times of turbulence and realignment faced by firms in high cost operating environments.
Business model innovation can create new and sustainable sources of competitive advantage for firms,
securing their survival and growth.
The chapter discusses the evidence for the role of business model innovation in the growth of leading
firms and in the restructuring of markets. It provides an overview of the frameworks for characterising
and analysing business models. The options for different types of business models likely to be successful
in high cost environments are described.
The chapter concludes with guidance for firms seeking to design and implement business model
innovation as a competitive strategy.
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xxiii
Design-Led Innovation: Overcoming Challenges to Designing Competitiveness
to Succeed in High Cost Environments by Sam Bucolo & Cara Wrigley
This chapter focuses on demonstrating the role of Design-Led Innovation (DLI) as an enabler for the
success of Small to Medium Enterprises (SMEs) within high growth environments.
This chapter is targeted toward businesses that may have been exposed to the concept of design
previously at a product level and now seek to better understand its value through implementation at a
strategic level offering. The decision to engage in the DLI process is made by firms who want to remain
competitive as they struggle to compete in high cost environments, such as the state of the Australian
economy at present.
The results presented in this chapter outline the challenges in the adoption of the DLI process and the
implications it can have. An understanding of the value of DLI in practice—as an enabler of business
transformation in Australia—is of benefit to government and the broader design community.
The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational
Ambidexterity in a High Operating Cost Environment by Milé Terziovski
Australian organisations are struggling to develop strategies to compete with products and services
produced in low-operating-cost environments.
Despite the huge success of the Six Sigma Quality (SSQ) methodology implemented by Motorola,
General Electric, and many others, the emphasis on efficiency and effectiveness through SSQ has left
some leading innovative organizations such as 3M in a state of confusion. A controversial 2007 Business
Week article claims that creativity can be affected as a result of SSQ being ingrained in a company’s
culture. Therefore, this chapter explores the effect of SSQ on innovation and organizational ambidexter-
ity in a high-operating-cost environment.
A case study protocol was developed from the literature to gather qualitative data from four large
Australian organisations, in a high-operating-cost environment: Securency, Qantas, Rio Tinto, and Cat-
erpillar Underground Mining. Multiple-cross case analysis revealed that SSQ seems to align very well
with process innovation, where the organisation has a well-defined process output to control. However,
some tension exists between SSQ and product innovation, particularly in terms of the time expectation
for SSQ to deliver results.
Furthermore, the study shows that SSQ could have a positive impact on organizational ambidexterity
in a high-operating-cost environment, as long as management recognizes that innovation approaches
require their own formula for success. Management needs to establish a team that could manage the ten-
sion between “getting it right the first time” as part of managed innovation and “learning from failure”
as part of entrepreneurial innovation. Based on the findings, the report concludes that managers need
to exercise caution when implementing SSQ in a high operating cost environment.
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xxiv
Managerial Practices in a High Cost Manufacturing Environment:
A Comparison with Australia and New Zealand by Renu Agarwal,
Christopher Bajada, Paul Brown, and Roy Green
This chapter explores the management strategies adopted by manufacturing firms operating in high
versus low cost economies and investigates the reasons for differences in the management practice
choices. Labour costs and other institutional differences are expected to inform management practice
choices and how they are implemented by firms; however, there are few detailed studies that explore
these issues in any depth.
In this study, the emerging World Management Survey (WMS) dataset is used to consider these is-
sues. The WMS dataset allows this study to extend the work of Bloom and Van Reenen, who developed
a novel method for evaluating better versus worse managed firms on 18 dimensions of management
practice. The study reported in this chapter identifies a subset of countries that have either high or low
labour costs, with USA, Sweden, and Japan being high, and India, China, and Brazil being low labour
cost economies. The high labour cost manufacturing firms are found to have better management practices.
In this chapter, the authors find that Australia and New Zealand manufacturing firms face relatively high
labour cost but lag behind world best practice in management performance.
The chapter concludes by highlighting the need for improvement in management capability for Aus-
tralian and New Zealand manufacturing firms if they are to experience a reinvigoration of productivity,
competitiveness, and long-term growth.
Supporting Entrepreneurship in High Cost Economies: What
Can Governments Do? by Allan O’Connor, Graciela Corral de
Zubielqui, Mushui Huanmei Li, and Manjula Dissanyake
Entrepreneurship in high-cost economies plays an important role in re-focusing an economy as it transitions
from scale-based production-centred firms to smaller, flexible, and globally connected knowledge-based
businesses. Equipping a population with the skills for this transition is a critical role of government.
This chapter sets out the findings of a comprehensive literature review that addressed three objectives:
to review internationally recognised and accepted methodologies of entrepreneurial human and firm
characteristics data collection and analysis; to formulate the contemporary view and latest research on
entrepreneurial characteristics and how these characteristics contribute to a model of entrepreneurial firm
behaviour; to examine developments in the literature that explain to what extent human characteristics
influence and predict the performance of firms.
The implications of this work are that firms with high potential in either innovation or market-based
growth opportunities need to have the right environmental settings in terms of social, political, regulatory,
economics, and technology for firms with a high success potential to realise this potential. The major
challenge for government is to find ways and means of helping the firms that want and need assistance
whilst leaving alone the firms that do not. The concept of stage progression and the relationship between
the characteristics of the individual, the firm, and the opportunity provide the elements of a framework
through which to consider government support programs and interventions.
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xxv
Manufacturing in a High Cost Environment: Basis for
Success on the Firm Level by Göran Roos
This chapter draws on an overview of contemporary literature to distil the best ways for manufacturing
firms to adapt to and succeed in high cost environments.
It is likely that global value chains will move back to sophisticated, economically complex, high-
operating-cost environments like the US and the European Manufacturing Belt, but the firms that
participate in these value chains will look different. The forces that impact the structure and location
of manufacturing activities will also impact the individual firm. These firms will need to have continu-
ously high productivity growth driven by effective and efficient managerial competence, capability and
managerial practices, high-performance work systems, increasingly higher-quality general labour and
capital inputs, deployment of key enabling technologies, increasing R&D capital formation, continuous
innovation to both create and appropriate value, continuous improvement through learning by doing,
using, and interacting, effective firm structure given the industry structure and ecosystem in which the
firm operates, optimal absolute and relative firm size, effective absorption of productivity spillovers
allowing for acquisition, assimilation, transformation, and exploitation of knowledge, approaches that
embrace both competition and cooperation, access to flexible input markets, operating in an environment
of simultaneous deregulation and smarter regulation, and high and dynamic demand.
This chapter discusses how this will be done and concludes with an explanation of how this results
in firms becoming so-called “Hidden Champions.”
Success in the above challenges will result in fewer employees with higher capability in tomorrow’s
manufacturing firms, producing a higher level of output of which a very high share is being produced
and delivered digitally. These firms will be in smaller, more concentrated value chains serving a global
market but operating both competitively and collaboratively in agglomerations like clusters. These ag-
glomerations will be located in jurisdictions with high economic complexity and with a deep and broad
industrial commons and with a supportive policy regime.
Göran Roos
Swinburne University, Australia
Narelle Kennedy
The Kennedy Company Pty Ltd., Australia
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Section 1
Responses for National
Economies
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1
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 1
DOI: 10.4018/978-1-4666-5828-8.ch001
Manufacturing in a High
Cost Environment:
Basis for Future Success on
the National Level
ABSTRACT
This chapter explores the current state of flux in manufacturing. It examines the forces that drive
fragmentation and dispersion of value chains on the one hand and those that drive concentration and
integration of value chains on the other. These forces are underpinned by changes in technology, wage
costs, business environment, importance of economies of scale for production, need for interaction
with customers and input providers, needs for skills in the manufacturing workforce, and the workings
of industrial commons and economic complexity. Analysing these changes at the level of the firm, this
chapter puts the competitive focus on the creation of value more than on cutting costs (although both
are important). The policy environment must provide both carrot and stick to ensure that firms align
with these developments. In this dynamic world, an effective policy response requires a shift from any
single dominating economic lens (e.g. neo-classical, neo-Keynesian, neo-Schumpeterian, evolutionary)
to a situation-specific approach.
THE STRUCTURAL CHANGE
OF MANUFACTURING:
PAST-TO-PRESENT
Like all industrial activities, manufacturing is in
a constant state of flux. Historically, change was
driven by the mutual interaction of technology
development and change in consumer demand.
But with the reduction in trade barriers, consum-
ers were able to access a wider choice of products
and receive value in different ways, beyond the
performance of products when used.
Three different dimensions of value in the
eyes of customers can be identified: Instrumental
Value is the value of a product doing what it is
supposed to do when put to use; Intrinsic Value
is the appreciation of a product for what it is in
itself, regardless of if its use e.g. the value of a
Göran Roos
Swinburne University, Australia
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2
Manufacturing in a High Cost Environment

coin to a coin collector is neither its face value nor
its resale value but rather its value as a coveted
object; Extrinsic Value is the value to the owner
of others appreciating the owned object e.g. the
value of a policy to a politician may lie in the fact
that it is appreciated by the electorate, rather than
in the outcome it delivers or that it is good as an
action in its own right.
The above mentioned trade barrier reduction
resulted in more choice and thereby the provision
of many customers and consumers with higher total
value-for-money by adding up contributions from
all three value dimensions (instrumental, intrinsic
and extrinsic)1. E.g. same functionality different
brand, same functionality higher collectability,
higher functionality with higher desirability, etc.
From the producers’ perspective, this provides
benefits in terms of increased economies of scale
due to increased volumes from larger markets,
as well as potential for increased earnings due to
maximising differing price levels and price elas-
ticity in different markets. In addition, producers
benefit from learning more from the rapidly in-
creasing volumes of products in different markets.
This provides for more rapid growth of firms
that serve export markets than for those that only
serve the domestic market. Hence, a structural
change has occurred that favours larger firms over
smaller ones. Such firms have greater bargain-
ing power and scale, demonstrated in particular
by their ability to extract more value from their
suppliers.
In summary, reduced trade barriers led to
greater consumer choice and new understandings
of value, resulting in economies of scale from
serving larger markets which in turn drove exports
and larger businesses with more bargaining power.
The next structural shift happened when firms
started to realise that labour costs differed across
countries and locations. This provided opportuni-
ties for reducing costs and led to the relocation of
activities, most commonly production activities
or service activities, to lowest cost jurisdiction or
location, and hence offshoring was born.
The next structural shift was enabled by the
rapid development of information and commu-
nication technologies (ICT) which provided the
tools for coordination of activities on a scale and
complexity previously not possible. Through de-
ploying ICT, transaction cost could be reduced to
a level where the firm was now able to sub-divide
its operations into many discrete unit operations
that could be dispersed, not only geographically,
but also organisationally, leading to the birth of
outsourcing. This development has resulted in the
fragmentation, or dispersion of value chains which
is a key characteristic of manufacturing at present.
The forces that drive fragmentation and disper-
sion of value chains that are normally discussed
under the heading of globalisation are not the only
forces at play. There are also forces that drive value
chains towards concentration and integration and
these will be discussed below. It is the balance
between these two sets of forces that determines
the structure of value chains at any given time and
this balance is continuously changing. We are now
probably at the peak of imbalance between these
two sets of forces. It is interesting to note that in
spite of the present imbalance being in favour
of the fragmenting and dispersing forces, more
than two-thirds of global manufacturing activity
takes place in industries that tend to locate close
to demand (George et al., 2014), be this demand
in growing economies like China or resurging
economies like the US.
The practicalities of the present situation can
be illustrated by some insights from the Swedish
economy where (SCB, 2013):
• In the period 2009-2011 6,200 jobs (equal
to 1.3% of the workforce), where lost due
to operations being offshored. This equates
to about 1 in 250 jobs. Out of these the ma-
jority (60%) were in services and construc-
tion and not in manufacturing.
• Measured on the company level 308 com-
panies or 13% had offshored some part of
their operations in the period.
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3
Manufacturing in a High Cost Environment

• For all three sectors, offshoring has pri-
marily related to support activities rather
than core activities. Within the service
sector 80% of the firms that offshored,
offshored support activities compared to
70% in manufacturing. This is a trend shift
compared to the period 2001-2006 when
most of the activities that were offshored
were core activities. Looking closer at the
support activities that are being offshored
it becomes clear that a high proportion is
management and administrative functions.
• 30% of the firms that offshored services,
offshored R&D and 40% of those that off-
shored support functions, offshored ICT
services.
• It is worth noting that 86% of the firms that
offshored have offshored within the group
i.e. the location has changed but the owner-
ship and control is unchanged.
• The Swedish economy is starting to see an
increase in firms bringing activities back
to Sweden. 69 firms or 3% brought previ-
ously offshored activities back to Sweden
during the period and the two most com-
mon reasons for this decision are strategic
and problems with local suppliers in the
offshored jurisdiction.
• The conclusion is that the Swedish econ-
omy has passed through the first wave of
offshoring when core activities were being
offshored and has passed into the second
wave where support activities are being
offshored. Observing the types of activi-
ties being offshored it is clear that the
Swedish economy is in the end of the sec-
ond phase of offshoring and also observ-
ing the increase in bringing activities back,
the Swedish economy is in the early part
of the third phase – the backshoring phase.
Figure 1 shows the firms’ reasons for off-
shoring and backshoring.
This pattern is repeated in other OECD coun-
tries. Kinkel & Maloca (2009) note that every
fourth to sixth offshoring activity is followed
by a backshoring activity within the following
four years, mainly due to lack of flexibility and
quality problems at the foreign location and this
makes the authors conclude that backshoring
may be a short-term correction of prior location
misjudgements, rather than a long-term reaction
to slowly emerging local development trends. It
is clear that there is a trend towards backshoring
and that some of this trend falls under the heading
of correcting prior decisions that turned out to be
erroneous whereas others fall under the heading of
responding to changing relative competitiveness
of the home and offshored location. In a recent
article by Bryson & Mulhall (2014) it was noted
that 15% of companies in the UK were returning
production to the UK and that the underlying
reasons are:
• Firms are shifting production onshore, as
offshore cost savings were not as great as
anticipated. Labour increasingly accounts
for a small proportion of a product’s manu-
facturing costs. This means that for many
products wage inflation combined with es-
calating shipping costs will reduce the sav-
ings gained from outsourcing to locations
such as China.
• The production of products outside the
home market can lead to long product-
delivery cycles; speed and closeness to
market are becoming significant drivers of
success.
• There have been concerns with the quality
of products supplied by producers located
in low-cost locations.
• There have been problems related to the
loss of intellectual property.
• Firms are reluctant to tie up valuable capi-
tal in large overseas shipments. Managers
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4
Manufacturing in a High Cost Environment

Figure 1. Reasons for offshoring and backshoring in the Swedish Economy 2009-2011 (SCB, 2013, p.
27 & p. 30)
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5
Manufacturing in a High Cost Environment

have begun to seek alternative local suppli-
ers willing to supply small batches.
• Companies are beginning to appreciate
the benefits of co-locating design and de-
velopment with production managers and
assembly workers. This enables a close
dialogue between design, development and
manufacturing.
• During the 20th century, labour played an
important role in where goods were manu-
factured. This century, energy will play a
much more important role and may dis-
place labour costs as the most important
factor. Energy costs are involved in the
shipment of products from low-cost loca-
tions to the UK and also in fabrication.
Similar findings can be found in Holz (2011);
Leibl et al. (2011); Corbet (2012); Dholakia et al.
(2012); Kinkel (2012); Liao (2012); Oppigård
(2012); Chu et al. (2013); Ellram (2013); Ellram
et al. (2013); Fratocchi et al. (2013); Gray et al.
(2013).
The structural changes have been and are
continue to be impacted by government policy in
different jurisdictions. Policy enacted by different
jurisdictions is very much a consequence of the
economic lens through which the world is viewed,
and in the high cost operating jurisdictions there
are basically three economic lenses at work, as
well as the constitutional systems which impact
the relative power balance between citizens,
politicians and the crafting and implementing
side of the bureaucracy. The economic lenses are
illustrated in Table 1.
The challenge in the prevailing policy land-
scape is expressed by McCraw (2007) as the
contradiction between on the one hand the very
high interest in innovation, entrepreneurship, and
creative destruction and on the other hand that the
public policy debate remains guided and framed
by the neoclassical and neo-Keynesian economic
doctrines.
In the evolutionary economic perspective,
government has a critical role as relates to market
failure due to technological development. The key
elements of a policy that responds to technology
related market failures have been outlined by
Tassey (2013) and are shown in Figure 2:
In addition it is critical that any industrial policy
relating to manufacturing recognises the complex
ways in which service and manufacturing tasks
are combined in production systems (Bryson et al.
2013). This complexity combined with the impor-
tance to a jurisdiction of mastering and controlling
manufacturing is central to policy-making but is,
as already pointed out by Cohen & Zysman (1988),
obscured by the popular myth that economic
development is a process of sectoral succession
e.g. agricultural is followed by manufacturing
which in turn is followed by services and so on.
This is a myth because it is factually incorrect
and a function of, among other things, a static
definition of value creating activities supported
by public statistics using these static definitions.
As an example today’s agricultural production
in countries like the US, Australia, Denmark,
Holland, Sweden etc is more efficient than ever
due to replacing labour by capital and continu-
ous upgrading of technology and knowledge. As
will be discussed elsewhere in this chapter high
value service jobs are overwhelmingly comple-
ments to manufacturing and not substitutes for
manufacturing, so if manufacturing is lost these
service activities will be also be lost. It is critical
that policy-making is underpinned by an in-depth
understanding of how these evolving sectors with
their complex linkages look today and how they
are likely to look tomorrow.
THE STRUCTURAL CHANGE
OF MANUFACTURING
INTO THE FUTURE
Future structural development will be driven by
continued technological development, continued
shift in patterns of consumer and customer demand,
rebalancing of economic forces that act towards
further geographic and organisational dispersion
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6
Manufacturing in a High Cost Environment

Ta
bl
e
1.
S
um
m
ar
y
of
k
ey
c
ha
ra
ct
er
is
tic
s
of
th
e
m
os
t c
om
m
on
e
co
no
m
ic
le
ns
es
u
nd
er
pi
nn
in
g
in
du
st
ry
r
el
at
ed
p
ol
ic
y
(M
et
ca
lfe
, 1
99
4;
D
op
fe
r
et
a
l.,
2
00
4;
H
au
pt
m
an
n,
2
00
4;
A
tk
in
so
n
&
A
ud
re
ts
ch
, 2
00
8;
A
ud
re
ts
ch
&
L
in
k,
2
01
2)

N
eo
cl
as
si
ca
l
N
eo
-K
ey
ne
si
an
N
eo
-S
ch
um
pe
te
ri
an
E
vo
lu
ti
on
ar
y
(I
s
so
m
et
im
es
c
lu
st
er
ed
w
it
h
th
e
N
eo
cl
as
si
ca
l a
nd
s
om
et
im
es
w
it
h
th
e
N
eo
-S
ch
um
pe
te
ri
an
v
ie
w
)
O
ri
gi
n
A
da
m
S
m
ith
: A
n
In
qu
ir
y
in
to
th
e
N
at
ur
e
an
d
C
au
se
o
f t
he
W
ea
lth
o
f
N
at
io
ns
(1
77
6)
Jo
hn
M
ay
na
rd
K
ey
ne
s:
T
he
G
en
er
al

T
he
or
y
of
E
m
pl
oy
m
en
t,
In
te
re
st
, a
nd

M
on
ey
(1
93
6)
Jo
se
ph
A
lo
is
S
ch
um
pe
te
r:
C
ap
ita
lis
m
,
So
ci
al
is
m
, a
nd
D
em
oc
ra
cy
(1
94
2)
T
ho
rs
te
in
V
eb
le
n:
W
hy
is
e
co
no
m
ic
s
no
t
an
e
vo
lu
tio
na
ry
s
ci
en
ce
?
(1
89
8)
.
G
ui
di
ng
P
ri
nc
ip
le
s
•
T
he
a
cc
um
ul
at
io
n
of
c
ap
ita
l
dr
iv
es
e
co
no
m
ic
g
ro
w
th
.
•
E
co
no
m
ic
g
ro
w
th
is
a
ch
ie
ve
d
by

m
ax
im
is
in
g
al
lo
ca
tiv
e
ef
fi
ci
en
cy
.2
•
T
he
e
co
no
m
y
is
a
m
ar
ke
t
de
te
rm
in
ed
b
y
pr
ic
e
si
gn
al
s
an
d
al
l
m
ar
ke
ts
a
re
th
e
sa
m
e.

•
T
he
e
co
no
m
y
te
nd
s
to

eq
ui
lib
ri
um
.
•
In
di
vi
du
al
s
an
d
fi
rm
s
ar
e
ra
tio
na
l m
ax
im
is
er
s
an
d
re
sp
on
d
to

in
ce
nt
iv
es
.
•
D
em
an
d
dr
iv
es
e
co
no
m
ic
g
ro
w
th
.
•
E
qu
ita
bl
e
di
st
ri
bu
tio
n
of
w
ea
lth
is

cr
iti
ca
l.
•
M
an
ag
in
g
th
e
sh
or
t-
te
rm
b
us
in
es
s
cy
cl
e
is
th
e
pr
im
ar
y
ob
je
ct
iv
e.
•
In
no
va
tio
n
dr
iv
es
e
co
no
m
ic
g
ro
w
th
.
•
T
he
m
aj
or
d
ri
ve
rs
o
f e
co
no
m
ic
g
ro
w
th

ar
e
pr
od
uc
tiv
e
ef
fi
ci
en
cy
a
nd
a
da
pt
iv
e
ef
fi
ci
en
cy
.
•
Sp
ur
ri
ng
e
vo
lv
in
g
an
d
le
ar
ni
ng

in
st
itu
tio
ns
is
th
e
ke
y
to
g
ro
w
th
.
•
T
he
e
co
no
m
y
te
nd
s
to
w
ar
d
ch
an
ge

ra
th
er
th
an
to
w
ar
d
eq
ui
lib
ri
um
.
•
In
di
vi
du
al
s
an
d
fi
rm
s
ar
e
no
t r
at
io
na
l
m
ax
im
is
er
s.

•
Sm
ar
t p
ub
lic
-p
ri
va
te
p
ar
tn
er
sh
ip
s
ar
e
th
e
be
st
w
ay
to
im
pl
em
en
t p
ol
ic
y.
•
U
se
s
ev
ol
ut
io
na
ry
m
et
ho
do
lo
gy
to

st
ud
y
th
e
ex
pe
ri
en
ce
a
nd
in
te
ra
ct
io
n
ba
se
d
tr
an
sf
or
m
at
io
n
pr
oc
es
se
s
fo
r f
ir
m
s,
in
st
itu
tio
ns
, i
nd
us
tr
ie
s,

em
pl
oy
m
en
t,
pr
od
uc
tio
n,
tr
ad
e
an
d
gr
ow
th
.
•
St
ud
ie
s
in
no
va
tio
n
w
hi
ch
is
d
ef
in
ed

as
th
e
se
le
ct
io
n
an
d
ac
cu
m
ul
at
io
n
of

pr
ob
le
m
s,
id
ea
s
an
d
so
lu
tio
ns
w
ith

hi
gh
er
s
ur
vi
va
l v
al
ue
fo
r t
he
g
ro
up
o
f
or
ga
ni
sa
tio
ns
, t
he
o
rg
an
is
at
io
n
or
th
e
in
di
vi
du
al
, t
ha
n
th
e
al
te
rn
at
iv
es
c
an

pr
ov
id
e
at
a
g
iv
en
c
os
t.
•
Fo
cu
se
s
on
tr
an
sf
or
m
at
iv
e
no
n-
eq
ui
lib
ri
um
p
ro
ce
ss
es
o
pe
ra
tin
g
fr
om

w
ith
in
th
e
gr
ou
p
of
o
rg
an
is
at
io
ns
,
th
e
or
ga
ni
sa
tio
n
or
th
e
in
di
vi
du
al
a
nd

in
st
ig
at
ed
b
y
ag
en
ts
w
ith
b
ou
nd
ed

ra
tio
na
lit
y.
T
he
se
a
ge
nt
s
m
ay
le
ar
n
fr
om
in
te
ra
ct
io
ns
a
nd
e
xp
er
ie
nc
e
an
d
th
is
le
ar
ni
ng
a
nd
th
e
as
so
ci
at
ed

tr
an
sf
or
m
at
io
n
pr
oc
es
se
s
ar
e
a
fu
nc
tio
n
of
th
e
di
ff
er
en
ce
b
et
w
ee
n
ag
en
ts
a
s
w
el
l
as
th
e
ag
en
t’s
a
bs
or
pt
iv
e
ca
pa
ci
ty
.
•
D
ra
w
s
on
th
e
pr
in
ci
pl
es
o
f c
um
ul
at
iv
e
an
d
ci
rc
ul
ar
c
au
sa
tio
n
as
w
el
l a
s
ev
ol
ut
io
na
ry
p
sy
ch
ol
og
y
an
d
co
m
pl
ex

sy
st
em
s.

•
A
s
in
N
eo
-S
ch
um
pe
te
ri
an
th
in
ki
ng
,
ad
ap
tiv
e
ef
fi
ci
en
cy
is
s
ee
n
as
a
k
ey

co
nt
ri
bu
to
r t
o
ec
on
om
ic
e
ff
ic
ie
nc
y.
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
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7
Manufacturing in a High Cost Environment

N
eo
cl
as
si
ca
l
N
eo
-K
ey
ne
si
an
N
eo
-S
ch
um
pe
te
ri
an
E
vo
lu
ti
on
ar
y
(I
s
so
m
et
im
es
c
lu
st
er
ed
w
it
h
th
e
N
eo
cl
as
si
ca
l a
nd
s
om
et
im
es
w
it
h
th
e
N
eo
-S
ch
um
pe
te
ri
an
v
ie
w
)
K
ey
P
ol
ic
ie
s
•
E
nc
ou
ra
ge
s
av
in
gs
.
•
A
vo
id
p
ol
ic
ie
s
th
at
d
is
to
rt

al
lo
ca
tiv
e
ef
fi
ci
en
cy
.
•
R
ed
uc
e
ar
tif
ic
ia
l b
ar
ri
er
s
an
d
im
pe
di
m
en
ts
to
m
ar
ke
t
eq
ui
lib
ri
um
, p
ar
tic
ul
ar
ly
b
y
en
su
ri
ng
th
at
p
ri
ce
s
ar
e
al
ig
ne
d
w
ith
c
os
ts
.
•
C
ut
ta
x
ra
te
s
on
in
di
vi
du
al
s,

es
pe
ci
al
ly
h
ig
h
ea
rn
er
s
to
in
cr
ea
se

pr
od
uc
tiv
ity
.
•
R
ed
uc
e
pu
bl
ic
s
pe
nd
in
g.
•
In
cr
ea
se
g
ov
er
nm
en
t s
pe
nd
in
g
to
k
ee
p
th
e
ec
on
om
y
gr
ow
in
g.

•
Im
pl
em
en
t c
ou
nt
er
cy
cl
ic
al
f
is
ca
l
po
lic
ie
s.

•
Im
pl
em
en
t p
ro
gr
es
si
ve
ta
xe
s.

•
St
ro
ng
re
gu
la
tio
ns
.
•
Ta
x,
e
xp
en
di
tu
re
, a
nd
re
gu
la
to
ry

po
lic
ie
s
to
b
oo
st
in
no
va
tio
n,
s
ki
lls
,
in
ve
st
m
en
t i
n
ne
w
e
qu
ip
m
en
t,
co
m
pe
tit
io
n,
a
nd
e
nt
re
pr
en
eu
rs
hi
p.
3
•
Su
pp
ly
s
id
e
po
lic
ie
s
th
at
d
ri
ve
fa
ct
or
s
lik
e
kn
ow
le
dg
e,
s
ki
lls
a
nd
in
ve
st
m
en
t.
•
D
em
an
d
si
de
p
ol
ic
ie
s
th
at
d
ri
ve
fa
ct
or
s
lik
e
gr
ow
th
a
nd
in
no
va
tio
n
–
na
m
el
y,

ne
w
k
no
w
le
dg
e,
n
ew
s
ki
lls
a
nd
n
ew

ca
pi
ta
l e
qu
ip
m
en
t.
•
D
em
an
d
si
de
p
ol
ic
ie
s
lik
e
pr
oc
ur
em
en
t
an
d
cl
us
te
r p
ol
ic
ie
s
th
at
d
ri
ve
in
no
va
tio
n.

•
Po
lic
ie
s
th
at
e
nd
ow
th
e
m
ar
ke
t w
ith

in
te
r-
or
ga
ni
sa
tio
na
l a
rr
an
ge
m
en
ts
in

or
de
r t
o
ac
hi
ev
e
co
or
di
na
tiv
e
ef
fi
ci
en
cy

in
c
as
es
w
he
re
th
er
e
is
n
ot
c
om
pl
et
e
kn
ow
le
dg
e
ab
ou
t t
he
c
ha
ra
ct
er
is
tic
s
of

ne
w
p
ro
du
ct
s
an
d
pr
oc
es
se
s.
•
Po
lic
ie
s
to
s
tim
ul
at
e
va
ri
et
y
th
ro
ug
h
in
no
va
tio
n.

•
Po
lic
ie
s
th
at
s
tim
ul
at
e
in
no
va
tio
n
to
ge
th
er
w
ith
v
ar
ie
ty
in
th
is
in
no
va
tio
n
by
d
if
fe
re
nt
a
ct
or
s.

•
Po
lic
ie
s
th
at
p
re
ve
nt
s
el
ec
tio
n
pr
oc
es
se
s
fr
om
re
du
ci
ng
th
e
va
ri
et
y
an
d
he
nc
e
en
su
re
s
ec
on
om
ic
e
vo
lu
tio
n.

•
Po
lic
es
th
at
fo
cu
s
on
o
rg
an
is
at
io
ns
a
nd

sy
st
em
s
of
o
rg
an
is
at
io
ns
th
at
d
ev
el
op

th
ei
r o
w
n
un
de
rp
in
ni
ng
k
no
w
le
dg
e
do
m
ai
n.

•
Po
lic
ie
s
th
at
in
cr
ea
se
th
e
ec
on
om
ic

co
m
pl
ex
ity
a
nd
b
ro
ad
en
a
nd
d
ee
pe
n
th
e
in
du
st
ri
al
c
om
m
on
s.

•
Po
lic
ie
s
th
at
e
nc
ou
ra
ge
th
e
fo
rm
at
io
n
of
c
lu
st
er
s
an
d
pr
ec
in
ct
s.

•
C
lu
st
er
s
th
at
in
cr
ea
se
th
e
ef
fe
ct
iv
en
es
s
of
th
e
na
tio
na
l o
r r
eg
io
na
l i
nn
ov
at
io
n
sy
st
em
.
K
ey
p
ol
ic
ie
s
no
t t
o
en
ac
t
•
Po
lic
ie
s
to
s
pu
r f
ir
m
s’

pr
od
uc
tiv
ity
o
r i
nn
ov
at
io
n
ar
e
in
ap
pr
op
ri
at
e
be
ca
us
e
th
ey

“d
is
to
rt
”
th
e
m
ar
ke
t.
•
C
ar
ef
ul
a
ro
un
d
un
re
gu
la
te
d
fr
ee
tr
ad
e.
•
Po
lic
ie
s
th
at
b
ui
ld
b
ar
ri
er
s
to

in
no
va
tio
n
lik
e
e.
g.
p
ro
cu
ri
ng
o
ff
-t
he
–
sh
el
f p
ro
ve
n
so
lu
tio
ns
.
•
Po
lic
ie
s
th
at
p
ic
k
in
di
vi
du
al
f
ir
m
s
as

w
in
ne
rs
.
•
A
vo
id
p
ol
ic
ie
s
th
at
tr
y
to
o
pt
im
is
e
ou
tc
om
e
w
ith
re
sp
ec
t t
o
so
m
e
ob
je
ct
iv
e
fu
nc
tio
n.
T
he
s
ea
rc
h
fo
r r
at
io
na
lit
y
w
ith
re
sp
ec
t t
o
ill
d
ef
in
ed
p
ro
bl
em
s
ca
n
re
su
lt
in
in
fe
ri
or
c
ho
ic
es
, d
ue
to
th
e
lim
ita
tio
ns
in
th
e
co
m
pe
te
nc
e
to
im
pr
ov
e
co
m
pe
te
nc
e.

•
Po
lic
ie
s
th
at
e
nc
ou
ra
ge
o
ff
-t
he
s
he
lf

pr
oc
ur
em
en
t o
f p
ro
ve
n
so
lu
tio
ns
In
S
um
m
ar
y
•
L
ib
er
al
N
eo
cl
as
si
ca
l e
co
no
m
ic

do
ct
ri
ne
m
in
im
is
es
th
e
ro
le

of
in
no
va
tio
n
in
g
ro
w
th
a
nd

go
ve
rn
m
en
t’s
c
ap
ab
ili
ty
to
s
pu
r
in
no
va
tio
n
an
d
la
rg
el
y
co
un
se
ls

po
lic
ym
ak
er
s
to
m
an
ag
e
th
e
bu
si
ne
ss
c
yc
le
, r
ed
uc
e
al
lo
ca
tio
n
in
ef
fi
ci
en
ci
es
, a
nd
s
up
po
rt
g
re
at
er

fa
ir
ne
ss
.
•
T
he
fo
cu
s
of
K
ey
ne
si
an
e
co
no
m
ic
s
is

on
re
st
or
in
g
ec
on
om
ic
o
ut
pu
t t
o
le
ve
ls

co
m
pa
tib
le
w
ith
fu
ll
em
pl
oy
m
en
t.
T
he

m
ai
n
po
lic
y
ta
rg
et
is
th
e
(a
gg
re
ga
te
)
de
m
an
d
si
de
o
f t
he
e
co
no
m
y.
T
he

m
ai
n
po
lic
y
in
st
ru
m
en
ts
a
re
f
is
ca
l a
nd

m
on
et
ar
y
po
lic
y.
T
he
p
ol
ic
y
fo
cu
s
on

ag
gr
eg
at
e
de
m
an
d
as
su
m
es
th
at
s
up
pl
y
w
ill
re
sp
on
d
to
d
em
an
d.
T
hu
s,
th
er
e
is

lit
tle
a
tte
nt
io
n
pa
id
to
th
e
ro
le
o
r i
m
pa
ct

of
in
no
va
tio
n.
4
•
N
eo
-S
ch
um
pe
te
ri
an
e
co
no
m
ic
s
is
a
bo
ut
fa
ci
lit
at
in
g
in
ve
st
m
en
t i
n
kn
ow
le
dg
e-
cr
ea
tin
g
ac
tiv
iti
es
, s
uc
h
as

re
se
ar
ch
a
nd
e
du
ca
tio
n,
a
nd
to
e
nc
ou
ra
ge

ag
en
ts
o
f c
ha
ng
e,
o
r e
nt
re
pr
en
eu
rs
, t
o
in
no
va
te
. T
hi
s
le
ad
s
to
a
w
id
e
ra
ng
e
of

po
lic
y
ta
rg
et
s
an
d
in
st
ru
m
en
ts
w
ith
a

ba
la
nc
e
be
tw
ee
n
su
pp
ly
a
nd
d
em
an
d
si
de
.
•
E
vo
lu
tio
na
ry
e
co
no
m
ic
s
on

th
e
m
ic
ro
ec
on
om
ic
le
ve
l i
s
ab
ou
t
un
de
rs
ta
nd
in
g
th
e
pr
oc
es
s
th
at
d
es
cr
ib
es

ho
w
a
n
ag
en
t (
us
in
g
hi
s
co
gn
iti
ve
a
nd

im
ag
in
at
iv
e
ca
pa
bi
lit
ie
s
as
w
el
l a
s
hi
s
in
te
ra
ct
io
ns
w
ith
o
th
er
a
ge
nt
s
bu
t
w
ith
in
a
s
et
tin
g
of
b
ou
nd
ed
ra
tio
na
lit
y)

or
ig
in
at
es
, a
do
pt
s,
a
da
pt
s
an
d
re
ta
in
s
a
no
ve
l g
en
er
ic
r
ul
e.

•
E
vo
lu
tio
na
ry
e
co
no
m
ic
s
on
th
e
m
es
o-
ec
on
om
ic
le
ve
l i
s
ab
ou
t d
yn
am
ic

re
pl
ic
at
io
n
Ta
bl
e
1.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

8
Manufacturing in a High Cost Environment

N
eo
cl
as
si
ca
l
N
eo
-K
ey
ne
si
an
N
eo
-S
ch
um
pe
te
ri
an
E
vo
lu
ti
on
ar
y
(I
s
so
m
et
im
es
c
lu
st
er
ed
w
it
h
th
e
N
eo
cl
as
si
ca
l a
nd
s
om
et
im
es
w
it
h
th
e
N
eo
-S
ch
um
pe
te
ri
an
v
ie
w
)
an
d
di
ff
us
io
n
of
g
en
er
ic
r
ul
es
. T
hi
s
cr
ea
te
s
a
ba
ck
dr
op
o
f c
on
tin
uo
us
c
ha
ng
e
w
hi
ch
le
ad
s
to
a
c
on
tin
uo
us
n
on
–
eq
ui
lib
ri
um
s
ta
te
o
n
th
e
m
es
o
le
ve
l.
•
E
vo
lu
tio
na
ry
e
co
no
m
ic
s
on
th
e
m
ac
ro
ec
on
om
ic
le
ve
l i
s
ab
ou
t t
he

an
al
ys
is
o
f c
om
pl
ex
s
tr
uc
tu
re
s
an
d
th
e
as
so
ci
at
ed
p
ro
ce
ss
es
. T
he
m
ac
ro

le
ve
l s
tr
uc
tu
re
is
d
et
er
m
in
ed
b
y
se
lf
–
or
ga
ni
sa
tio
n
an
d
se
lf
-o
rd
er
in
g
si
nc
e
ra
tio
na
lit
y,
c
ho
ic
e
an
d
be
ha
vi
ou
r i
s
go
ve
rn
ed
b
y
bo
un
de
d
ra
tio
na
lit
y
an
d
he
nc
e
no
n-
ex
is
te
nt
in
th
e
ra
tio
na
l s
en
se
.
T
hi
s
co
m
pl
ex
s
tr
uc
tu
re
h
as
a
n
al
m
os
t
no
n-
de
te
rm
in
ab
le
b
eh
av
io
ur
s
in
ce
it
is

m
ad
e
up
o
f t
he
s
ur
fa
ce
-s
tr
uc
tu
re
a
nd

th
e
de
ep
-s
tr
uc
tu
re
th
at
d
if
fe
r f
ro
m
e
ac
h
ot
he
r
E
m
pi
ri
ca
l s
up
po
rt

fo
r
•
M
ar
ke
ts
a
re
im
po
rt
an
t,
es
pe
ci
al
ly

at
th
e
m
ic
ro
ec
on
om
ic
le
ve
l.
•
H
el
pi
ng
to
e
ns
ur
e
th
at
p
ri
ce
s
us
ua
lly
m
at
ch
c
os
ts
c
an
b
e
im
po
rt
an
t t
o
pr
om
ot
in
g
al
lo
ca
tiv
e
ef
fi
ci
en
cy
, e
sp
ec
ia
lly
w
he
n
th
er
e
ar
e
lit
tle
o
r n
o
co
m
pe
ns
at
in
g
be
ne
fi
ts
to
p
ro
du
ct
iv
ity
o
r
in
no
va
tio
n.

•
Ta
x
ra
te
s
at
to
o
hi
gh
a
le
ve
l c
an

lim
it
in
ce
nt
iv
es
.
•
B
ud
ge
t d
ef
ic
its
a
t t
oo
h
ig
h
a
le
ve
l
•
Fa
ir
ne
ss
a
nd
e
qu
ity
a
re
c
or
ne
rs
to
ne
s
of
th
e
su
st
ai
na
bi
lit
y
of
w
es
te
rn

de
m
oc
ra
ci
es
, a
nd
s
oc
ie
tie
s
in
w
hi
ch

in
co
m
e
in
eq
ua
lit
y
is
to
o
hi
gh
e
xp
er
ie
nc
e
lo
w
er
e
co
no
m
ic
g
ro
w
th
th
an
m
or
e
eq
ui
ta
bl
e
so
ci
et
ie
s.
5
•
M
ac
ro
ec
on
om
ic
fa
ct
or
s
ar
e
m
or
e
im
po
rt
an
t t
ha
n
m
ic
ro
ec
on
om
ic
o
ne
s
in

de
te
rm
in
in
g
em
pl
oy
m
en
t l
ev
el
s.

•
Fu
ll
em
pl
oy
m
en
t h
as
b
en
ef
ic
ia
l e
ff
ec
ts

on
p
ro
du
ct
iv
ity
a
nd
in
no
va
tio
n.
•
M
os
t o
f t
he
th
eo
ry
.
•
T
he
c
o-
ev
ol
ut
io
n
of
a
n
in
du
st
ry
o
n
th
e
on
e
ha
nd
, a
nd
o
f p
ro
gr
es
si
on
in
th
e
un
de
rly
in
g
kn
ow
le
dg
e
do
m
ai
n
on
th
e
ot
he
r h
as
b
ee
n
pr
ov
en
.
•
B
ou
nd
ed
ra
tio
na
lit
y
in
d
ec
is
io
n
m
ak
in
g
ha
s
be
en
w
el
l e
st
ab
lis
he
d.

•
Pr
of
it
sa
tis
fi
ci
ng
ra
th
er
th
an
p
ro
fi
t
m
ax
im
is
in
g
as
a
b
eh
av
io
ur
h
as
b
ee
n
sh
ow
n
to
b
e
pr
ev
al
en
t.
•
O
th
er
w
is
e
lik
e
th
e
N
eo
-S
ch
um
pe
te
ri
an

le
ns
, m
os
t o
f t
he
th
eo
ry
h
as
fo
un
d
em
pi
ri
ca
l s
up
po
rt
.
Ta
bl
e
1.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

9
Manufacturing in a High Cost Environment

N
eo
cl
as
si
ca
l
N
eo
-K
ey
ne
si
an
N
eo
-S
ch
um
pe
te
ri
an
E
vo
lu
ti
on
ar
y
(I
s
so
m
et
im
es
c
lu
st
er
ed
w
it
h
th
e
N
eo
cl
as
si
ca
l a
nd
s
om
et
im
es
w
it
h
th
e
N
eo
-S
ch
um
pe
te
ri
an
v
ie
w
)
ca
n
lim
it
ca
pi
ta
l a
va
ila
bi
lit
y.

•
In
di
vi
du
al
s
an
d
or
ga
ni
sa
tio
ns
a
re

ra
tio
na
l a
nd
re
sp
on
d
ap
pr
op
ri
at
el
y
to
in
ce
nt
iv
es
(b
ut
n
ot
n
ec
es
sa
ri
ly

al
l t
he
ti
m
e)
.
•
C
er
ta
in
m
ar
ke
ts
, e
sp
ec
ia
lly
th
os
e
ch
ar
ac
te
ri
se
d
by
s
ta
bi
lit
y
an
d
sl
ow

ra
te
s
of
c
ha
ng
e,
d
o
te
nd
to
w
ar
d
eq
ui
lib
ri
um
(b
ut
m
an
y
ot
he
r
m
ar
ke
ts
d
o
no
t)
E
m
pi
ri
ca
l f
in
di
ng
s
th
at
a
re
o
pp
os
ed

to
w
ha
t t
he
th
eo
ry

st
at
es
•
In
no
va
tio
n
is
a
m
uc
h
la
rg
er

dr
iv
er
o
f g
ro
w
th
th
an
c
ap
ita
l.
•
Pr
od
uc
tiv
e
ef
fi
ci
en
cy
6 a
nd

ad
ap
tiv
e
ef
fi
ci
en
cy
7 a
re
m
uc
h
m
or
e
im
po
rt
an
t t
o
ec
on
om
ic
g
ro
w
th
th
an

m
ax
im
is
in
g
al
lo
ca
tiv
e
ef
fi
ci
en
cy
.
•
T
he
e
co
no
m
y
in
cr
ea
si
ng
ly

do
es
n’
t t
en
d
to
o
ne
e
qu
ili
br
iu
m
.8
•
In
di
vi
du
al
s
an
d
fi
rm
s
ar
e
no
t
ne
ce
ss
ar
ily
ra
tio
na
l a
ct
or
s.

•
E
co
no
m
ic
h
is
to
ry
, c
ul
tu
re
,
no
rm
s,
in
st
itu
tio
ns
, a
nd
p
at
h
de
pe
nd
en
cy
m
at
te
rs
.
•
C
ap
ita
l d
ee
pe
ni
ng
is
re
sp
on
si
bl
e
fo
r o
nl
y
a
sm
al
l p
ar
t o
f a
dv
an
ce
s
in

la
bo
ur
p
ro
du
ct
iv
ity
.9
•
In
te
r-
fi
rm
c
ol
la
bo
ra
tio
n
is
a

fa
ci
lit
at
or
n
ot
a
n
in
hi
bi
to
r o
f
co
m
pe
tit
iv
e
su
cc
es
s.
10
•
T
he
re
is
n
o
co
ns
is
te
nt
re
la
tio
ns
hi
p
be
tw
ee
n
co
ns
um
er
s
pe
nd
in
g
an
d
pr
od
uc
tiv
ity
g
ro
w
th
.
•
C
ha
ng
es
in
w
ag
es
h
av
e
be
en
ti
ed

to
c
ha
ng
es
in
p
ro
du
ct
iv
ity
o
ve
r t
he

m
od
er
at
e
an
d
lo
ng
te
rm
.
•
N
o
ge
ne
ra
l f
in
di
ng
s.
•
N
o
ge
ne
ra
l f
in
di
ng
s.
Ta
bl
e
1.
C
on
tin
ue
d
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10
Manufacturing in a High Cost Environment

of the value chain and forces that act towards a
geographic and organisational concentration of
the value chain, as well as the policy settings in
the different jurisdictions. Some jurisdictions
e.g. Germany are primarily evolutionary in their
outlook, some like e.g. Australia are primarily
neoclassical in their outlook, whereas e.g. US, UK
and Japan are balanced between the neoclassical
and the Keynesian outlook.
Technology
The structure of manufacturing will be impacted
by developments in a set of key technologies and
systems of technologies like production systems.
Some of these developments have potentially
transformative structural implications .These key
technologies with examples of their structural
implications on future manufacturing are outlined,
very briefly, in Table 2.
The patenting activity by sector 2000-2009 is
shown in Table 3 and illustrates the KET knowl-
edge intensity by sector:
All the above technology developments will
impact on existing value chains and form new
value chains. They are a prime reason for greater
concentration and clustering of value chains, as
opposed to the trends to outsourcing and offshor-
ing which act to disperse value chains.
This can be exemplified with additive manu-
facturing that is likely to create markets and value
chains for (Sissons & Thompson, 2012):
• Design: Additive manufacturing will likely
create a global market for digital designs,
both for generic blueprints and bespoke de-
sign services;
• Bespoke Manufacturing Services:
Additive manufacturing may well place in-
creased emphasis on the service aspect of
Figure 2. Policy roles in response to market failures over the entire technology life cycle (Tassey, 2013,
p. 14)
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11
Manufacturing in a High Cost Environment

Ta
bl
e
2.
S
om
e
is
su
es
a
ro
un
d
th
e
im
pa
ct
o
f t
he
K
E
T
(K
in
se
y
(2
00
1)
; S
ou
th
ga
te
e
t a
l.
(2
00
7)
; K
in
se
y
et
a
l.
(2
00
9)
; A
tz
or
i e
t a
l.
(2
01
0)
; B
ol
an
d
(2
01
0)
; B
ut
te
r e
t a
l.
(2
01
1)
; J
en
ki
ns
e
t a
l.
(2
01
1)
; S
po
rl
ed
er
&
B
ol
an
d
(2
01
1)
; A
E
N
E
A
S
&
C
A
TR
E
N
E
(2
01
2)
; B
re
ch
er
, e
t B
re
ch
er
, e
t a
l.
(2
01
2)
;
C
he
n
(2
01
2)
; C
SC
(2
01
2)
; G
op
al
ak
ri
sh
na
n
&
B
ro
w
n
(2
01
2)
; S
is
so
ns
&
T
ho
m
ps
on
, (
20
12
);
v
an
d
e
Ve
ld
e
et
a
l.
(2
01
2)
; A
hl
qv
is
t e
t a
l.
(2
01
3)
;
D
ic
ke
ns
e
t a
l.
(2
01
3)
;
M
an
yi
ka
e
t a
l.
(2
01
3)
;
O
ko
li
et
a
l.
(2
01
3)
; R
oo
s
(2
01
3)
; W
oo
dl
ey
e
t a
l.
(2
01
3)
; K
ilk
en
ny
(2
01
4)
; R
oo
s
et
a
l.
(2
01
4)
)
Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
In
fo
rm
at
io
n
an
d
C
om
m
un
ic
at
io
n
Te
ch
no
lo
gi
es

in
cl
ud
in
g
B
ig
D
at
a
&
B
ig
D
at
a
A
na
ly
tic
s.
11
T
he
re
a
re
m
an
y
im
pr
ov
em
en
t
re
qu
ir
em
en
ts
e
.g
.:
B
et
te
r d
yn
am
ic
m
od
el
s.

H
ig
he
r p
ro
ce
ss
in
g
sp
ee
ds
.
B
et
te
r t
ra
ns
m
is
si
on
s
pe
ed
s.

B
et
te
r c
om
pr
es
si
on
a
lg
or
ith
m
s.

B
et
te
r d
at
a
st
or
ag
e.
W
ill
e
na
bl
e
th
e
di
gi
ta
lis
at
io
n
of

m
an
uf
ac
tu
ri
ng
th
at
re
du
ce
s
th
e
ne
ed

fo
r p
ro
du
ct
io
n
ac
tiv
iti
es
in
m
ul
tip
le

lo
ca
tio
ns

E
st
im
at
ed
im
pa
ct
b
y
20
25
is
:
•
M
ob
ile
In
te
rn
et
:
  o
4
–5
%
in
cr
ea
se
in
e
ff
ic
ie
nc
y
th
ro
ug
h
so
ci
al
te
ch
no
lo
gy
v
ia

  m
ob
ile
fo
r i
nt
er
ac
tio
n
la
bo
ur
.
  o
1
0–
30
%
p
ro
du
ct
iv
ity
g
ai
n
fr
om

tim
e
sa
ve
d
ac
ce
ss
in
g
in
fo
rm
at
io
n
fo
r
tr
an
sa
ct
io
n
la
bo
ur
.
•
A
ut
om
at
io
n
of
k
no
w
le
dg
e
w
or
k:

  o
$
35
,0
00
v
al
ue
p
er
F
T
E
o
f
ad
di
tio
na
l p
ro
du
ct
iv
ity
fo
r c
le
ri
ca
l
an
d
cu
st
om
er
s
er
vi
ce
/s
al
es
la
bo
ur
.
  o
$
60
,0
00
v
al
ue
p
er
F
T
E
o
f
ad
di
tio
na
l p
ro
du
ct
iv
ity
fo
r I
T,

Sc
ie
nc
e/
E
ng
in
ee
ri
ng
a
nd
M
an
ag
er
ia
l
la
bo
ur
.
  o
$
65
,0
00
v
al
ue
p
er
F
T
E
o
f
ad
di
tio
na
l p
ro
du
ct
iv
ity
fo
r f
in
an
ce

an
d
le
ga
l l
ab
ou
r.
•
C
lo
ud
te
ch
no
lo
gy
:
  o
2
0–
30
%
p
ro
du
ct
iv
ity
g
ai
ns

th
ro
ug
h
re
du
ce
d
in
fr
as
tr
uc
tu
re
a
nd

fa
ci
lit
ie
s
fo
ot
pr
in
t t
og
et
he
r w
ith

hi
gh
er
ta
sk
s
ta
nd
ar
di
sa
tio
n
an
d
au
to
m
at
io
n.

  o
1
0–
15
%
p
ro
du
ct
iv
ity
g
ai
ns

th
ro
ug
h
st
an
da
rd
is
at
io
n
of
a
pp
lic
at
io
n
en
vi
ro
nm
en
t a
nd
p
ac
ka
ge
s
to
ge
th
er

w
ith
fa
st
er
e
xp
er
im
en
ta
tio
n
an
d
te
st
in
g.
W
ill
c
on
tin
ue
to
e
na
bl
e
be
tte
r
co
or
di
na
tio
n
ac
ro
ss
c
om
pl
ex

sy
st
em
s
of
m
ul
tip
le
a
ct
iv
iti
es

an
d
pa
rt
ic
ip
an
ts
in
in
cr
ea
si
ng
ly

di
sp
er
se
d
lo
ca
tio
ns
. H
en
ce

re
du
ce
s
th
e
si
ze
re
qu
ir
em
en
ts

fo
r f
ir
m
s
to
d
is
pe
rs
e
th
ei
r v
al
ue

ch
ai
ns
g
lo
ba
lly
.
W
ill
c
on
tr
ib
ut
e
to
a
fu
rt
he
r
m
ov
in
g
aw
ay
fr
om
a
fo
cu
s
on
in
te
rn
al
is
in
g
ac
tiv
iti
es
to

ex
te
rn
al
is
in
g
th
em
e
.g
. o
pe
n
in
no
va
tio
n.
W
ill
e
na
bl
e
th
e
co
ns
um
er
to
b
ec
om
e
aw
ar
e
of
p
ro
du
ct
o
ff
er
in
gs
fa
st
er
a
nd
to
s
ou
rc
e
pr
od
uc
ts
in
te
rn
at
io
na
lly
c
on
tr
ib
ut
in
g
to

a
gl
ob
al
is
at
io
n
an
d
in
cr
ea
si
ng
s
im
ila
ri
ty

of
d
em
an
d
pr
ef
er
en
ce
s
as
w
el
l a
s
an

ac
ce
le
ra
tio
n
of
d
em
an
d
gr
ow
th
a
nd
d
ec
lin
e
re
su
lti
ng
in
s
ho
rt
er
li
fe
-c
yc
le
s
bu
t w
ith

hi
gh
er
v
ol
um
es
. co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
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12
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
A
dd
iti
ve
M
an
uf
ac
tu
ri
ng

w
ith
s
pe
ci
fi
c
fo
cu
s
on
m
et
al

pr
od
uc
in
g
sy
st
em
s.
•
Sp
ee
d
–
N
ee
ds
to
b
e
im
pr
ov
ed
b
y
a
fa
ct
or
o
f 1
0
to

10
0.

•
R
ep
ea
ta
bi
lit
y
–
im
pr
ov
e
pr
oc
es
s
pr
ed
ic
tio
n
an
d
cl
os
ed

lo
op
fe
ed
ba
ck
to
p
ro
vi
de
th
e
ba
si
s
fo
r p
ro
ce
ss
re
lia
bi
lit
y.

•
Im
pr
ov
e
m
at
er
ia
l p
ro
pe
rt
ie
s
in
fo
rm
at
io
n.

•
Fo
rm
ul
at
e
un
ifo
rm
te
st
in
g
st
an
da
rd
s
(t
he
ta
sk
o
f A
ST
M

In
te
rn
at
io
na
l –
F
42
).
•
In
cr
ea
se
th
e
av
ai
la
bi
lit
y
of

tr
ai
ne
d
de
si
gn
er
s,
e
ng
in
ee
rs
,
te
ch
ni
ci
an
s,
s
of
tw
ar
e
pr
og
ra
m
m
er
s,
e
tc
. t
ha
t h
av
e
th
e
ca
pa
bi
lit
y
of
e
xp
lo
iti
ng

th
e
ca
pa
bi
lit
ie
s
of
a
dd
iti
ve

m
an
uf
ac
tu
ri
ng
. (
e.
g.
p
ro
du
ci
ng

co
m
pl
ex
g
eo
m
et
ri
es
, p
ro
ce
ss

op
tim
is
at
io
n,
p
ro
ce
ss

m
an
ag
em
en
t)
.
•
Su
pp
or
t s
ys
te
m
s
m
us
t b
e
de
ve
lo
pe
d.
In
m
an
y
sy
st
em
s
ov
er
ha
ng
in
g
fe
at
ur
es
n
ee
d
a
m
at
er
ia
l t
o
ac
t a
s
a
su
pp
or
t.
Su
pp
or
ts
m
ay
b
e
th
e
sa
m
e
m
at
er
ia
l a
s
th
e
pa
rt
o
r
co
m
pl
et
el
y
di
ff
er
en
t.
A
s
pa
rt
s
be
co
m
e
m
or
e
co
m
pl
ex
th
e
su
pp
or
t r
em
ov
al
b
ec
om
es
m
or
e
di
ff
ic
ul
t o
r i
m
po
ss
ib
le
.
•
D
es
ig
n
So
ft
w
ar
e
m
us
t b
e
de
ve
lo
pe
d
si
nc
e
ex
is
tin
g
•
W
ill
e
na
bl
e
th
e
ce
nt
ra
lis
at
io
n
of
m
an
uf
ac
tu
ri
ng
e
.g
. t
he
to
ol

pr
od
uc
tio
n
fo
r t
he
p
la
nt
b
y
th
e
pl
an
t
at
th
e
pl
an
t –
re
du
ci
ng
th
e
ne
ed
fo
r
to
ol
m
ak
er
s
an
d
si
m
pl
if
yi
ng
a
nd

co
nc
en
tr
at
in
g
th
e
va
lu
e
ch
ai
n;
th
e
pr
od
uc
tio
n
of
s
pa
re
p
ar
ts
b
y
th
e
sp
ar
e
pa
rt
u
se
r o
n
th
e
sp
ar
e
pa
rt

us
er
’s
lo
ca
tio
n
an
d
w
he
n
th
e
sp
ar
e
pa
rt
u
se
r n
ee
ds
it
h
en
ce
s
im
pl
if
yi
ng

an
d
co
nc
en
tr
at
in
g
th
e
va
lu
e
ch
ai
n;

et
c.
B
en
ef
it:
L
itt
le
to
n
o
pr
od
uc
tio
n
w
as
te
, s
ho
rt
c
ha
ng
eo
ve
r t
im
es
, a
nd

no
to
ol
in
g
ch
an
ge
s
or
d
ir
ec
t l
ab
ou
r
re
qu
ir
ed
. W
ill
in
iti
al
ly
im
pa
ct
B
2B

m
an
uf
ac
tu
re
rs
w
ith
lo
w
p
ro
du
ct
io
n
ra
te
o
r m
ak
e-
to
-o
rd
er
a
ss
em
bl
y
lin
es

an
d
m
an
uf
ac
tu
re
rs
w
ith
p
ro
du
ct
s
th
at

ha
ve
in
tr
ic
at
e
in
te
rn
al
s
tr
uc
tu
re
s.

•
E
st
im
at
ed
im
pa
ct
b
y
20
25
fr
om

ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
is
:
  o
6
0–
80
%
v
al
ue
in
cr
ea
se
p
er

3D
-p
ri
nt
ed
p
ro
du
ct
a
nd
3
5–
60
%

co
st
s
av
in
gs
to
c
on
su
m
er
s
pl
us
1
0%

ad
de
d
va
lu
e
fr
om
c
us
to
m
is
at
io
n
fr
om

co
ns
um
er
u
se
.
  o
4
0–
55
%
c
os
t s
av
in
gs
to
b
uy
er
s
of
3
D
-p
ri
nt
ed
p
ro
du
ct
s
fr
om
d
ir
ec
t
pr
od
uc
t m
an
uf
ac
tu
ri
ng
.
  o
3
0%
p
ro
du
ct
io
n
co
st
re
du
ct
io
n
us
in
g
su
pe
ri
or
3
D
-p
ri
nt
ed
m
ou
ld
s
fr
om
to
ol
s
an
d
m
ou
ld
m
an
uf
ac
tu
ri
ng
.
E
na
bl
es
th
e
co
ns
um
er
to
c
re
at
e
pe
rs
on
al
is
ed

go
od
s;
c
op
y
ex
is
tin
g
pr
od
uc
ts
(c
om
pa
re

th
e
co
py
in
g
of
m
us
ic
im
pa
ct
o
n
th
e
m
us
ic

in
du
st
ry
);
o
r p
ro
du
ce
o
n
de
m
an
d.

Po
te
nt
ia
l f
or
d
is
ru
pt
io
n
fr
om
a
dd
iti
ve

m
an
uf
ac
tu
ri
ng
o
n
se
ct
or
al
le
ve
l c
an
b
e
su
m
m
ar
is
ed
a
s:

•
Fo
od
, D
ri
nk
a
nd
T
ob
ac
co
: U
nl
ik
el
y
to

m
ov
e
w
ho
lly
to
a
dd
iti
ve
m
an
uf
ac
tu
ri
ng
,
al
th
ou
gh
s
om
e
co
m
po
ne
nt
s
(i
nc
lu
di
ng

pa
ck
ag
in
g)
m
ay
b
e
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng

w
ith
in
s
up
pl
y
ch
ai
ns
.
•
Te
xt
ile
s,
C
lo
th
in
g
an
d
L
ea
th
er
:
L
ik
el
y
to
b
e
he
av
ily
d
is
ru
pt
ed
b
y
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
, w
ith
d
es
ig
n,
lo
gi
st
ic
s
an
d
re
ta
il
pr
oc
es
se
s
po
te
nt
ia
lly
tr
an
sf
or
m
ed
.
•
W
oo
d
an
d
Pa
pe
r:
a
dd
iti
ve
m
an
uf
ac
tu
ri
ng

pe
ne
tr
at
io
n
w
ill
d
ep
en
d
on
a
bi
lit
y
to
p
ro
ce
ss

di
ff
er
en
t m
at
er
ia
ls
.
•
P
ri
nt
in
g
an
d
R
ec
or
di
ng
: P
ri
nt
in
g
an
d
re
co
rd
in
g
ha
ve
a
lr
ea
dy
b
ee
n
hu
ge
ly

di
sr
up
te
d
by
s
hi
ft
to
d
ig
ita
l c
on
te
nt
; t
hi
s
is
li
ke
ly
to
b
e
fa
r m
or
e
si
gn
if
ic
an
t t
ha
n
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
, a
s
di
gi
ta
l m
ed
ia

do
m
in
at
e
ph
ys
ic
al
m
ed
ia
.
•
R
ef
in
ed
fu
el
s:
U
nl
ik
el
y
to
b
e
si
gn
if
ic
an
tly

af
fe
ct
ed
b
y
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
.
•
C
he
m
ic
al
s:
S
om
e
pa
rt
s
of
th
e
in
du
st
ry

m
ay
b
e
af
fe
ct
ed
b
y
sh
if
t t
o
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
, b
ut
c
om
pl
ex
ity
o
f c
he
m
ic
al

te
ch
no
lo
gi
es
li
ke
ly
to
m
ak
e
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
s
lo
w
to
d
is
ru
pt
.
•
P
ha
rm
ac
eu
ti
ca
ls
: S
ig
ni
fi
ca
nt
p
ot
en
tia
l
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

13
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
do
es
n
ot
w
or
k
w
el
l f
or
th
e
co
m
pl
ex
g
eo
m
et
ri
es
(e
.g
.
in
te
rn
al
la
tti
ce
s
an
d
su
rf
ac
e
te
xt
ur
es
) t
ha
t c
an
b
e
m
ad
e
by
p
ro
du
ce
d
w
ith
a
dd
iti
ve

m
an
uf
ac
tu
ri
ng
. P
ro
bl
em
s
ex
is
t
w
ith
g
eo
m
et
ry
p
tim
is
at
io
n
an
d
re
pr
es
en
ta
tio
n
of
m
ix
ed
o
r
gr
ad
ed
m
at
er
ia
ls
e
tc
.
•
N
ew
b
us
in
es
s
M
od
el
s
ar
e
ne
ed
ed
to
b
en
ef
it
fr
om
lo
t s
iz
es

of
o
ne
, c
us
to
m
is
ed
p
ro
du
ct
s
an
d
re
m
ot
e
m
an
uf
ac
tu
ri
ng
.
•
D
ev
el
op
m
en
ts
to
e
na
bl
e
E
le
ct
ro
-M
ec
ha
ni
ca
l S
ys
te
m
s
In
te
gr
at
io
n
–
i.e
. d
es
ig
n
an
d
pr
od
uc
tio
n
of
c
om
po
ne
nt
s
th
at

in
te
gr
at
e
se
ns
in
g,
a
ct
ua
tio
n,

an
d
co
m
pu
tin
g.
fo
r o
n-
de
m
an
d
m
an
uf
ac
tu
re
o
f d
ru
gs
in

ho
sp
ita
ls
, a
lth
ou
gh
m
uc
h
w
ill
d
ep
en
d
on

te
ch
no
lo
gy
.
•
R
ub
be
r
an
d
pl
as
ti
cs
: H
ig
h
lik
el
ih
oo
d
of

di
sr
up
tio
n,
e
sp
ec
ia
lly
fo
r b
es
po
ke
s
ha
pe
d
pl
as
tic
s.
P
la
st
ic
s
ar
e
al
so
li
ke
ly
to
b
e
th
e
ke
y
m
at
er
ia
l f
or
a
dd
iti
ve
m
an
uf
ac
tu
ri
ng
, w
hi
ch

m
ay
p
ro
m
pt
in
no
va
tio
n
in
d
ev
el
op
m
en
t o
f
pl
as
tic
s.

•
M
et
al
s
an
d
B
ui
ld
in
g
M
at
er
ia
ls
:
Po
te
nt
ia
l f
or
s
ig
ni
fi
ca
nt
d
is
ru
pt
io
n
fr
om

ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
. H
ow
ev
er
, a
dd
iti
ve

m
an
uf
ac
tu
ri
ng
m
ay
n
ot
p
ro
vi
de
th
e
sc
al
e
of

pr
od
uc
tio
n
re
qu
ir
ed
fo
r s
om
e
in
du
st
ri
al
a
nd

co
ns
tr
uc
tio
n
pr
oc
es
se
s.

•
C
om
pu
te
rs
, E
le
ct
ro
ni
cs
a
nd
E
le
ct
ri
ca
l
E
qu
ip
m
en
t:
S
om
e
po
te
nt
ia
l f
or
d
is
ru
pt
io
n
fr
om
a
dd
iti
ve
m
an
uf
ac
tu
ri
ng
, a
lth
ou
gh

is
su
es
o
f a
ss
em
bl
y
an
d
pr
ec
is
io
n
m
ay
li
m
it
up
ta
ke
.
•
M
ac
hi
ne
ry
: 3
D
p
ri
nt
in
g
is
li
ke
ly
to
p
la
y
a
m
aj
or
ro
le
in
p
ro
vi
di
ng
b
es
po
ke
a
nd
o
n-
de
m
an
d
m
ac
hi
ne
ry
.
•
C
ar
s
an
d
ot
he
r
V
eh
ic
le
s:
a
dd
iti
ve

m
an
uf
ac
tu
ri
ng
is
u
nl
ik
el
y
to
re
m
ov
e
as
se
m
bl
y
lin
es
o
r e
nd
m
as
s
pr
od
uc
tio
n,

bu
t m
ay
p
la
y
a
ro
le
in
m
an
uf
ac
tu
re
o
f
co
m
po
ne
nt
s.

•
Sh
ip
s
an
d
A
er
os
pa
ce
: L
ar
ge
s
ca
le

bu
ild
in
g
pr
oj
ec
ts
m
ak
e
ad
di
tiv
e
m
an
uf
ac
tu
ri
ng
u
nl
ik
el
y,
a
lth
ou
gh
m
ay
b
e
in
vo
lv
ed
in
th
e
su
pp
ly
c
ha
in
.
•
Fu
rn
it
ur
e:
a
dd
iti
ve
m
an
uf
ac
tu
ri
ng
s
ho
ul
d
pl
ay
a
m
aj
or
ro
le
in
re
-s
ha
pi
ng
fu
rn
itu
re

m
ar
ke
ts
, w
ith
d
es
ig
ns
a
nd
lo
gi
st
ic
s
he
av
ily

di
sr
up
te
d.

•
O
th
er
M
an
uf
ac
tu
ri
ng
: O
th
er

m
an
uf
ac
tu
ri
ng
in
cl
ud
es
a
ra
ng
e
of
lo
w
-t
ec
h,

be
sp
ok
e
m
an
uf
ac
tu
re
rs
s
uc
h
as
to
ys
; t
he
se

ar
e
lik
el
y
to
b
e
on
e
of
th
e
ea
rl
ie
st
m
ar
ke
ts

fo
r a
dd
iti
ve
m
an
uf
ac
tu
ri
ng
. (
Se
e
fi
gu
re
a
t
en
d
of
ta
bl
e)
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

14
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
In
du
st
ri
al
B
io
te
ch
no
lo
gy
w
ith

sp
ec
if
ic
fo
cu
s
on
m
ic
ro
bi
al

co
ns
or
tia
e
ng
in
ee
ri
ng
in
cl
ud
in
g
sy
nt
he
tic
b
io
lo
gy
•
M
in
im
is
in
g
th
e
m
ic
ro
bi
al

ce
lls
.
•
A
ss
em
bl
in
g
pa
th
w
ay
s
th
at
c
an
m
et
ab
ol
is
e
m
ix
ed

su
bs
tr
at
es
.
•
R
em
ov
in
g
un
ne
ce
ss
ar
y
pa
th
w
ay
s
co
ns
um
in
g
su
bs
tr
at
es
.
•
U
til
is
at
io
n
of
s
ea
w
at
er
fo
r
ce
ll
gr
ow
th
.
•
M
in
im
is
in
g
ox
yg
en
d
em
an
d
fo
r a
er
ob
ic
c
el
ls
&
re
du
ci
ng

Q
uo
ru
m
s
en
si
ng
e
ff
ec
ts
.
•
D
ev
el
op
in
g
co
nt
in
uo
us

pr
oc
es
se
s.

•
C
on
ta
m
in
at
io
n
re
si
st
in
g
st
ra
in
s
gr
ow
n
in
o
pe
n
sy
st
em
s.

•
D
ev
el
op
in
g
an
ae
ro
bi
c
bi
op
ro
ce
ss
es
.
•
A
rt
if
ic
ia
l c
el
ls
th
at
c
on
ta
in

on
ly
n
ec
es
sa
ry
m
et
ab
ol
ic

pa
th
w
ay
s.
W
ill
c
ha
ng
e
th
e
st
ru
ct
ur
e
of

so
m
e
va
lu
e
ch
ai
ns
li
ke
c
he
m
ic
al

pr
od
uc
tio
n;
re
cy
cl
in
g;
m
in
in
g
et
c.

T
he
im
pa
ct
w
ill
b
e
bo
th
c
on
ce
nt
ra
tin
g
an
d
di
sp
er
si
ng
d
ep
en
di
ng
o
n
th
e
sp
ec
if
ic
v
al
ue
c
ha
in
b
ut
it
w
ill
h
av
e
dr
am
at
ic
im
pa
ct
b
y
ch
an
gi
ng
th
e
pa
rt
ic
ip
an
ts
in
a
g
iv
en
v
al
ue
c
ha
in

an
d
fr
eq
ue
nt
ly
re
du
ce
th
e
nu
m
be
r
of
p
ar
tic
ip
an
ts
in
th
e
va
lu
e
ch
ai
n.

Sy
nt
he
tic
b
io
lo
gy
a
pp
ro
ac
he
s
ca
n
be

us
ed
to
re
-c
on
st
ru
ct
p
la
nt
a
nd
w
as
te

fe
ed
st
oc
ks
in
to
b
es
po
ke
fe
ed
st
oc
ks

de
si
gn
ed
fo
r o
pt
im
al
p
ro
ce
ss
in
g
fo
r s
pe
ci
fi
c
no
n-
fo
od
b
io
re
fi
ni
ng

ap
pl
ic
at
io
ns
.
•
A
s
re
la
te
s
to
fo
od
: C
on
su
m
pt
io
n
or
ig
in
at
ed
in
th
e
ne
ed
to
g
et
c
al
or
ie
s
an
d
nu
tr
ie
nt
s
th
en
m
ov
ed
o
n
to
s
at
is
fy
ta
st
e
pr
ef
er
en
ce
s
an
d
to
da
y
ha
ve
a
dd
ed
th
e
ne
ed

to
p
ro
vi
de
fo
r c
on
ve
ni
en
ce
a
nd
p
er
so
na
l
he
al
th
le
ad
in
g
to
e
xp
ec
ta
tio
ns
a
ro
un
d
fo
od

sa
fe
ty
a
nd
h
ea
lth
p
er
fo
rm
an
ce
in
th
e
fo
rm

of
e
.g
. f
un
ct
io
na
l f
oo
ds
a
nd
n
ut
ra
ce
ut
ic
al
s.

In
du
st
ri
al
b
io
te
ch
no
lo
gy
w
ill
e
na
bl
e
th
e
de
ve
lo
pm
en
t o
f p
ro
du
ct
s
an
d
pr
od
uc
tio
n
pr
oc
es
se
s
th
at
w
ill
b
e
ab
le
to
s
at
is
fy
th
es
e
ne
ed
s
w
hi
ls
t b
lu
rr
in
g
th
e
lin
e
be
tw
ee
n
fo
od

an
d
m
ed
ic
in
e.

•
In
b
io
fu
el
s,
b
io
ba
se
d
ch
em
ic
al
s
an
d
bi
op
la
st
ic
s
th
er
e
is
a
h
ig
h
pr
ob
ab
ili
ty
fo
r
fu
ll-
sc
al
e
re
pl
ac
em
en
t o
f a
s
ig
ni
fi
ca
nt

po
rt
io
n
of
c
ru
de
o
il
as
a
fe
ed
st
oc
k
w
ith
th
e
as
so
ci
at
ed
v
al
ue
c
ha
in
im
pa
ct
in
th
e
ea
rl
ie
r
pa
rt
s
of
th
e
va
lu
e
ch
ai
n.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

15
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
•
D
ev
el
op
m
en
t o
f a
p
la
tfo
rm

or
ga
ni
sm
fo
r m
an
y
pr
od
uc
ts
.
•
W
as
te
o
r a
ct
iv
at
ed
s
lu
dg
e
as

su
bs
tr
at
es
.
•
T
he
u
se
o
f c
ar
bo
n
st
ee
l
fa
ci
lit
ie
s.

•
A
ch
ie
vi
ng
s
ca
le
in
p
ro
du
ct
io
n
as
w
el
l a
s
th
e
de
ve
lo
pm
en
t o
f
re
lia
bl
e,
c
on
si
st
en
t a
nd
s
ca
la
bl
e
m
an
uf
ac
tu
ri
ng
p
ro
ce
ss
es
.
•
St
re
am
lin
in
g
of
re
gu
la
tio
ns

an
d
ap
pr
ov
al
s.

•
In
cr
ea
se
d
sp
ee
d
an
d
re
du
ce
d
co
st
in
d
ev
el
op
in
g
ne
w
b
io
lo
gi
ca
l p
ro
du
ct
io
n
pr
oc
es
se
s.

•
So
lv
e
th
e
pr
ob
le
m
s
ar
ou
nd

in
su
ff
ic
ie
nt
c
el
l s
ou
rc
es
, s
lo
w

ce
ll
pr
ol
ife
ra
tio
n
ra
te
a
nd
la
ck

of
c
on
st
ru
ct
s
th
at
m
im
ic
th
e
de
pl
oy
m
en
t e
nv
ir
on
m
en
t.
•
E
st
ab
lis
h
m
at
er
ia
l s
ta
nd
ar
ds

an
d
pr
oc
es
s
st
an
da
rd
is
at
io
n
pr
ot
oc
ol
s.

•
Im
pr
ov
e
ca
pa
bi
lit
y
to
m
an
ag
e
st
or
ag
e
an
d
tr
an
sp
or
ta
tio
n
lo
gi
st
ic
s
fo
r l
iv
in
g
pr
od
uc
ts
to

en
d
us
e
si
te
.
E
st
im
at
ed
m
ar
ke
t s
iz
e
in
2
01
5
is

$1
25
bn

•
E
st
im
at
ed
im
pa
ct
fr
om
n
ex
t-
ge
ne
ra
tio
n
ge
no
m
ic
s
in
2
02
5
is
:
  o
1
5–
20
%
c
os
t s
av
in
g
in
e
th
an
ol

pr
od
uc
tio
n
an
d
15
0–
20
0%
p
ri
ce

pr
em
iu
m
fo
r d
ie
se
l t
og
et
he
r w
ith

30
–7
0%
C
O
2
re
du
ct
io
n
fr
om
fu
el
s
ov
er
li
fe
c
yc
le
fr
om
s
ub
st
an
ce

pr
od
uc
tio
n.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

16
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
In
te
rn
et
-o
f-
th
in
gs
In
te
gr
at
io
n
of
s
ev
er
al

te
ch
no
lo
gi
es
a
nd

co
m
m
un
ic
at
io
ns
s
ol
ut
io
ns
.
Id
en
tif
ic
at
io
n
an
d
tr
ac
ki
ng

te
ch
no
lo
gi
es
, w
ir
ed
a
nd

w
ir
el
es
s
se
ns
or
a
nd
a
ct
ua
to
r
ne
tw
or
ks
, e
nh
an
ce
d
co
m
m
un
ic
at
io
n
pr
ot
oc
ol
s
an
d
di
st
ri
bu
te
d
in
te
lli
ge
nc
e
fo
r
sm
ar
t o
bj
ec
ts
.
•
Se
ns
or
s
to
tr
ac
k
m
ac
hi
ne
ry

an
d
pr
ov
id
e
re
al
-t
im
e
up
da
te
s
on

eq
ui
pm
en
t s
ta
tu
s
w
hi
ch
d
ec
re
as
es

do
w
nt
im
e.

•
Se
ns
or
s
to
tr
ac
k
tr
uc
ks
a
nd
p
al
le
ts

to
im
pr
ov
e
su
pp
ly
c
ha
in
tr
ac
ki
ng
a
nd

m
an
ag
em
en
t a
s
w
el
l a
s
m
on
ito
ri
ng

th
e
fl
ow
o
f i
nv
en
to
ry
a
ro
un
d
fa
ct
or
y
fl
oo
rs
o
r b
et
w
ee
n
di
ff
er
en
t
w
or
ks
ta
tio
ns
, r
ed
uc
in
g
w
or
k-
in
–
pr
og
re
ss
in
ve
nt
or
y
le
ve
ls
, d
ec
re
as
in
g
w
ai
t t
im
es
, a
nd
c
re
at
in
g
tr
an
sp
ar
en
cy

to
b
et
te
r o
pt
im
is
e
fl
ow
s.

•
Se
ns
or
s
an
d
ac
tu
at
or
s
ca
n
be
u
se
d
to
c
ha
ng
e
th
e
po
si
tio
n
of
o
bj
ec
ts

as
th
ey
m
ov
e
do
w
n
as
se
m
bl
y
lin
es
,
en
su
ri
ng
th
at
th
ey
a
rr
iv
e
at
m
ac
hi
ne

to
ol
s
in
a
n
op
tim
um
p
os
iti
on
,
av
oi
di
ng
th
e
sm
al
l d
ev
ia
tio
ns
in
th
e
po
si
tio
n
of
w
or
k
in
p
ro
ce
ss
th
at
c
an

ja
m
o
r e
ve
n
da
m
ag
e
m
ac
hi
ne
to
ol
s.

E
st
im
at
ed
e
co
no
m
ic
im
pa
ct
o
n
m
an
uf
ac
tu
ri
ng
is
$
90
0-
23
00
bn
in

20
25
b
as
ed
o
n
2.
5–
5.
0%
s
av
in
g
in
o
pe
ra
tin
g
co
st
s,
in
cl
ud
in
g
m
ai
nt
en
an
ce
a
nd
in
pu
t e
ff
ic
ie
nc
ie
s.
W
ill
h
av
e
ve
ry
b
ro
ad
im
pa
ct
o
f w
hi
ch
th
e
la
rg
es
t m
ig
ht
in
iti
al
ly
b
e
in
th
e:

•
Tr
an
sp
or
ta
tio
n
an
d
lo
gi
st
ic
s
do
m
ai
n,

H
ea
lth
ca
re
d
om
ai
n,
S
m
ar
t e
nv
ir
on
m
en
t
(h
om
e,
o
ff
ic
e,
p
la
nt
) d
om
ai
n,
P
er
so
na
l a
nd

so
ci
al
d
om
ai
n.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

17
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
Ph
ot
on
ic
s
•
Fu
rt
he
r m
in
ia
tu
ri
sa
tio
n
of
p
ro
du
ct
s
an
d
pr
oc
es
se
s
w
ill
e
na
bl
e
th
e
us
e
of

ph
ot
on
ic
te
ch
no
lo
gi
es
in
n
ew

m
in
ia
tu
ri
se
d
sy
st
em
s,
c
re
at
in
g
ne
w
m
ar
ke
ts
.
•
In
cr
ea
si
ng
in
te
lli
ge
nc
e
of
s
ys
te
m
s,
d
ue
to
s
of
tw
ar
e
de
ve
lo
pm
en
t,
bu
t a
ls
o
sm
ar
te
r
m
at
er
ia
ls
e
na
bl
e
m
or
e
tr
ad
iti
on
al
p
ho
to
ni
c
se
ns
or
y
sy
st
em
s
to
b
e
us
ed
a
s
pa
rt

of
th
e
m
ac
hi
ne
/e
nv
ir
on
m
en
t
in
te
rf
ac
e.

•
U
bi
qu
ito
us
n
et
w
or
ks
b
oo
st

th
e
de
ve
lo
pm
en
t o
f s
m
ar
t
ph
on
es
(a
nd
u
se
o
f s
cr
ee
ns
).
•
In
te
rn
et
o
f t
hi
ng
s,

w
he
re
p
ho
to
ni
cs
s
en
so
rs

ar
e
in
st
ru
m
en
ta
l f
or

im
pl
em
en
ta
tio
n.

•
R
ob
ot
d
ev
el
op
m
en
t w
ill

in
cl
ud
e
m
an
y
ph
ot
on
ic

co
m
po
ne
nt
s,
e
sp
ec
ia
lly

im
ag
in
g
an
d
se
ns
in
g
de
vi
ce
s.

•
N
ew
c
on
su
m
er
-o
ri
en
te
d
m
ed
ic
al
p
ro
du
ct
s
(e
.g
. e
ar
ly

di
ag
no
st
ic
d
ev
ic
es
, r
ob
ot
is
ed

su
rg
er
y)
u
si
ng
p
ho
to
ni
cs
.
•
D
ev
el
op
m
en
t o
f s
w
ar
m
in
g
su
rv
ei
lla
nc
e
sy
st
em
s,
w
he
re

ph
ot
on
ic
s
en
so
rs
a
re
u
se
d
to

e.
g.
p
re
di
ct
r
io
ts
a
nd
c
ri
m
in
al

ac
tiv
ity
.
•
B
et
te
r p
re
di
ct
io
n
of

ep
id
em
ic
s
an
d
pa
nd
em
ic
s
w
ill
le
ad
to
a
n
ew
d
em
an
d
fo
r
ph
ot
on
ic
s-
en
ab
le
d
de
vi
ce
s.

•
V
ir
tu
al
m
od
el
lin
g
an
d
te
st
in
g
ac
co
m
pa
ni
ed
b
y
ph
ot
on
ic
s-
en
ab
le
d
m
an
-m
ac
hi
ne

in
te
rf
ac
es
.
E
st
im
at
ed
m
ar
ke
t s
iz
e
in
2
01
5
is

$4
80
bn
.
Is
a
k
ey
e
na
bl
er
fo
r t
he
fo
llo
w
in
g
in
du
st
ri
al

se
ct
or
s:

•
M
an
uf
ac
tu
re
o
f E
le
ct
ro
ni
cs
a
nd
O
pt
ic
al

E
qu
ip
m
en
t;
M
an
uf
ac
tu
re
o
f V
eh
ic
le
s
an
d
L
ar
ge
M
ac
hi
ne
ry
; M
an
uf
ac
tu
ri
ng
o
f
Fi
ne
C
he
m
ic
al
s
an
d
Ph
ar
m
ac
eu
tic
al
s;

M
an
uf
ac
tu
ri
ng
o
f T
ex
til
es
a
nd
C
lo
th
in
g;

M
ed
ia
P
ro
du
ct
io
n
an
d
B
ro
ad
ca
st
in
g;

Fo
od
a
nd
B
ev
er
ag
e
Pr
od
uc
tio
n;
P
ri
nt
in
g
&
P
ub
lis
hi
ng
A
ct
iv
iti
es
; O
il
an
d
G
as

E
xp
lo
ra
tio
n.

A
nd
is
c
on
tr
ib
ut
in
g
si
gn
if
ic
an
tly
to
th
e
fo
llo
w
in
g
fi
na
l m
ar
ke
t s
ec
to
rs
:
•
M
ed
ic
in
e
&
H
ea
lth
ca
re
A
ct
iv
iti
es
;
D
ef
en
ce
a
nd
S
ec
ur
ity
A
ct
iv
iti
es
; A
vi
at
io
n
an
d
Sp
ac
e
In
fr
as
tr
uc
tu
re
; R
oa
d
&
R
ai
l
Tr
an
sp
or
t a
nd
L
og
is
tic
s
In
fr
as
tr
uc
tu
re
;
Te
le
co
m
m
un
ic
at
io
ns
In
fr
as
tr
uc
tu
re
; S
ci
en
ce
,
R
es
ea
rc
h
&
D
ev
el
op
m
en
t;
E
le
ct
ri
ci
ty

G
en
er
at
io
n
&
S
up
pl
y;
C
on
st
ru
ct
io
n
an
d
B
ui
lt
E
nv
ir
on
m
en
t;
E
nv
ir
on
m
en
ta
l
M
on
ito
ri
ng
a
nd
P
ro
te
ct
io
n;
R
ec
re
at
io
n,

C
ul
tu
re
a
nd
E
du
ca
tio
n;
R
et
ai
l &
S
er
vi
ce
s.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

18
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
A
dv
an
ce
d
M
at
er
ia
ls
in
cl
ud
in
g:

•
L
ig
ht
w
ei
gh
t &
u
ltr
a-
st
ro
ng

m
at
er
ia
ls
.
•
M
at
er
ia
ls
c
ap
ab
le
to
re
si
st

ag
gr
es
si
ve
e
nv
ir
on
m
en
ts
.
•
Su
rf
ac
e
m
at
er
ia
ls
a
nd

co
at
in
gs
.
•
E
le
ct
ro
ni
c
an
d
ph
ot
on
ic

m
at
er
ia
ls
.
•
Sm
ar
t,
m
ul
tif
un
ct
io
na
l
de
vi
ce
s
an
d
st
ru
ct
ur
es
.
•
B
io
m
at
er
ia
ls
.
•
In
du
st
ri
al
a
nd
o
th
er

m
at
er
ia
ls
.
Sp
ee
di
ng
u
p
th
e
de
si
gn
-t
o-
m
ar
ke
t t
im
e.
E
st
im
at
ed
m
ar
ke
t s
iz
e
in
2
01
5
is

$1
50
bn
.
W
ill
im
pa
ct
a
ll
m
an
uf
ac
tu
ri
ng
a
ct
iv
iti
es
.
N
an
ot
ec
hn
ol
og
y
To
d
ev
el
op
e
ff
ic
ie
nt
a
nd

ec
on
om
ic
al
ly
v
ia
bl
e
m
an
uf
ac
tu
ri
ng
/
fa
br
ic
at
io
n
pr
oc
es
se
s
th
at

as
su
re
n
an
om
at
er
ia
ls
a
re

av
ai
la
bl
e
in
s
uf
fi
ci
en
t q
ua
nt
ity

an
d
at
a
ff
or
da
bl
e
co
st
.
E
st
im
at
ed
m
ar
ke
t s
iz
e
in
2
01
5
is

$2
7b
n.
W
ill
im
pa
ct
a
lm
os
t e
ve
ry
d
om
ai
n
bu
t i
s
st
ill

ea
rly
in
it
s
vi
si
bl
e
im
pa
ct
.
A
dv
an
ce
d
M
an
uf
ac
tu
ri
ng

E
qu
ip
m
en
t w
ith
s
pe
ci
al
fo
cu
s
on
in
du
st
ri
al
ro
bo
tic
s.
N
um
er
ou
s
im
pr
ov
em
en
ts
s
til
l
ne
ed
ed
in
th
is
d
om
ai
n.
•
Si
m
ul
ta
ne
ou
s
in
cr
ea
se
in

pe
rf
or
m
an
ce
a
nd
re
du
ct
io
n
in
c
os
t i
n
pa
ra
lle
l w
ith
s
im
pl
er
s
et
-u
p
an
d
lo
w
er

se
t-
up
c
os
ts
a
re
lo
w
er
in
g
th
e
ba
rr
ie
rs

to
e
nt
ry
e
na
bl
in
g
SM
E
s
to
b
en
ef
it
fr
om
th
e
te
ch
no
lo
gy
.
•
Sm
ar
te
r d
ri
ve
r-
le
ss
v
eh
ic
le
s
w
ill

dr
am
at
ic
al
ly
re
du
ce
d
ir
ec
t l
ab
ou
r
co
st
s
an
d
im
pr
ov
e
sc
he
du
lin
g
th
ro
ug
h
se
lf
-o
pt
im
is
at
io
n.
W
ill
p
ri
m
ar
ily

im
pa
ct
p
ro
ce
ss
in
du
st
ri
es
li
ke
M
in
in
g
&
F
or
es
tr
y
as
w
el
l a
s
m
ov
em
en
t
in
te
ns
iv
e
ac
tiv
iti
es
li
ke
lo
gi
st
ic
s
as

w
el
l a
s
W
ill
im
pa
ct
a
ll
m
an
uf
ac
tu
ri
ng
b
us
in
es
se
s.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

19
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
m
ov
em
en
t i
nt
en
si
ve
p
ro
du
ct
io
n
lik
e
sh
ip
bu
ild
in
g
an
d
co
ns
tr
uc
tio
n.

•
M
os
t m
an
uf
ac
tu
ri
ng
a
ct
iv
iti
es
w
ill

be
im
pa
ct
ed
b
y
se
lf
-c
on
fi
gu
ri
ng
a
nd

ad
ap
tin
g
ro
bo
ts
th
at
w
ill
b
e
ab
le

to
p
er
fo
rm
w
ith
th
e
fl
ex
ib
ili
ty
o
f a

sk
ill
ed
h
um
an
a
nd
th
e
pr
ec
is
io
n
an
d
sp
ee
d
of
a
ro
bo
t.
•
E
st
im
at
ed
im
pa
ct
fr
om
a
dv
an
ce
d
ro
bo
tic
s
in
2
02
5
is
:
  o
$
24
0,
00
0–
39
0,
00
0
pe
r p
er
so
n
fo
r
ex
te
nd
ed
/ i
m
pr
ov
ed
q
ua
lit
y
of
li
fe

fr
om
ro
bo
tic
h
um
an
a
ug
m
en
ta
tio
n.

  o
7
5%
p
ot
en
tia
l i
m
pr
ov
em
en
t
in
p
ro
du
ct
iv
ity
p
er
u
ni
t o
f w
or
k
au
to
m
at
ed
fr
om
in
du
st
ri
al
ro
bo
ts
.
  o
3
5–
55
%
p
ot
en
tia
l i
m
pr
ov
em
en
t
in
p
ro
du
ct
iv
ity
p
er
u
ni
t o
f w
or
k
au
to
m
at
ed
fo
r c
om
m
er
ci
al
s
er
vi
ce

ro
bo
ts
.
•
E
st
im
at
ed
im
pa
ct
fr
om
a
ut
on
om
ou
s
an
d
ne
ar
-a
ut
on
om
ou
s
ve
hi
cl
es
in

20
25
is
:
  o
$
2–
8
pe
r h
ou
r i
n
va
lu
e
of
ti
m
e
sa
ve
d
as
w
el
l a
s
70
–9
0%
fe
w
er

ac
ci
de
nt
s
to
ge
th
er
w
ith
1
5–
20
%
g
ai
n
in
fu
el
e
ff
ic
ie
nc
y
fr
om
a
ut
on
om
ou
s
ca
rs
.
  o
7
0–
90
%
fe
w
er
a
cc
id
en
ts
a
nd
1
0–
40
%
g
re
at
er
fu
el
e
ff
ic
ie
nc
y
pl
us
1
–2

dr
iv
er
s
pe
r 1
0
tr
uc
ks
(f
or
m
on
ito
ri
ng
)
fr
om
a
ut
on
om
ou
s
tr
uc
ks
.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

20
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
Pr
od
uc
tio
n
Sy
st
em
s
ta
rg
et
ed

at
h
ig
h
co
st
o
pe
ra
tin
g
en
vi
ro
nm
en
ts
v
iz
:
•
In
di
vi
du
al
is
ed
P
ro
du
ct
io
n,

de
fi
ne
d
as
a
c
on
ce
pt
fo
r
th
e
de
si
gn
a
nd
la
yo
ut
o
f a
ll
el
em
en
ts
o
f a
p
ro
du
ct
io
n
sy
st
em
in
s
uc
h
a
w
ay
th
at

it
pe
rm
its
a
h
ig
h
de
gr
ee
o
f
va
ri
ab
ili
ty
in
th
e
pr
od
uc
tio
n
pr
og
ra
m
m
e
w
hi
ls
t m
ai
nt
ai
ni
ng

pr
od
uc
tio
n
co
st
s
on
a
le
ve
l
co
m
pa
ra
bl
e
to
th
at
o
f m
as
s
pr
od
uc
tio
n.

•
V
ir
tu
al
P
ro
du
ct
io
n
Sy
st
em
s
ar
e
de
pl
oy
ed
in
th
e
de
ve
lo
pm
en
t o
f n
ew
p
ro
du
ct
s
w
ith
th
e
ob
je
ct
iv
e
of
re
du
ci
ng

tim
e
an
d
re
so
ur
ce
s
us
ed
fo
r
no
n-
pr
od
uc
tiv
e
pl
an
ni
ng

ac
tiv
iti
es
p
ri
or
to
th
e
ac
tu
al

va
lu
e
cr
ea
tio
n.

•
H
yb
ri
d
Pr
od
uc
tio
n
Sy
st
em
s
bu
ild
o
n
a
co
m
bi
na
tio
n
of

pr
od
uc
tio
n
te
ch
no
lo
gi
es
b
as
ed

on
d
if
fe
ri
ng
p
hy
si
ca
l p
ri
nc
ip
le
s
or
th
e
in
te
gr
at
io
n
of
s
ep
ar
at
e
pr
od
uc
tio
n
pr
oc
es
se
s
in
to
a

si
ng
le
, n
ew
p
ro
du
ct
io
n
pr
oc
es
s.

•
Se
lf
-O
pt
im
is
in
g
Pr
od
uc
tio
n
Sy
st
em
s
po
ss
es
s
an
in
he
re
nt

in
te
lli
ge
nc
e
an
d
ha
ve
th
e
ca
pa
bi
lit
y
to
a
da
pt
th
em
se
lv
es

au
to
no
m
ou
sl
y
to
c
ha
ng
in
g
am
bi
en
t c
on
di
tio
ns
in
o
rd
er

to
a
ch
ie
ve
g
re
at
er
p
ro
ce
ss

fl
ex
ib
ili
ty
.
N
um
er
ou
s
sp
ec
if
ic

te
ch
no
lo
gi
es
, d
ep
en
di
ng

on
w
hi
ch
o
f t
he
p
ro
du
ct
io
n
sy
st
em
s
ar
e
ob
se
rv
ed
, n
ee
d
to
m
ig
ra
te
fr
om
th
e
re
se
ar
ch

ph
as
e
to
th
e
op
er
at
io
na
l p
ha
se
.
A
re
d
es
ig
ne
d
to
e
na
bl
e
hi
gh
er

m
an
uf
ac
tu
ri
ng
b
as
ed
v
al
ue
c
re
at
io
n
in
a
h
ig
h
co
st
o
pe
ra
tin
g
en
vi
ro
nm
en
t
th
an
in
a
lo
w
o
pe
ra
tin
g
co
st

en
vi
ro
nm
en
t.
Ta
bl
e
2.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

21
Manufacturing in a High Cost Environment

Te
ch
no
lo
gi
es
/S
ys
te
m
s
of

Te
ch
no
lo
gi
es
K
ey
I
ss
ue
s
to
b
e
So
lv
ed

be
fo
re
th
e
Te
ch
no
lo
gy
w
ill

ha
ve
M
aj
or
D
is
ru
pt
iv
e
Im
pa
ct
Im
pa
ct
o
n
C
on
ce
nt
ra
ti
ng
F
or
ce
s
Im
pa
ct
o
n
D
is
pe
rs
in
g
Fo
rc
es
Im
pa
ct
o
n
Sh
ift
in
g
C
on
su
m
er
D
em
an
d
an
d/
or
I
nd
us
tr
y
Se
ct
or
s
M
ic
ro
a
nd
N
an
oe
le
ct
ro
ni
cs
.
In
th
e
na
no
el
ec
tr
on
ic
s
er
a,
th
e
di
ff
er
en
ce
s
in
th
e
m
at
er
ia
ls

an
d
m
an
uf
ac
tu
ri
ng
p
ro
ce
ss
es

re
qu
ir
ed
to
p
ro
du
ce
d
ig
ita
l
da
ta
p
ro
ce
ss
in
g,
s
to
ra
ge
a
nd

ad
di
tio
na
l f
un
ct
io
na
lit
ie
s
th
at
a
re
p
hy
si
ca
lly
re
al
is
ed

co
nt
in
ua
lly
in
cr
ea
se
.
B
ec
au
se
o
f t
he
m
as
si
ve
re
so
ur
ce
s
re
qu
ir
ed
to
b
ri
ng
a
bo
ut
th
is

in
no
va
tio
n
an
d
re
ne
w
al
, e
xt
en
de
d
co
lla
bo
ra
tio
n
is
re
qu
ir
ed
th
ro
ug
ho
ut

th
e
na
no
el
ec
tr
on
ic
s
ec
os
ys
te
m
,
ad
dr
es
si
ng
th
e
en
tir
e
va
lu
e
an
d
in
no
va
tio
n
ch
ai
n.
S
uc
h
co
lla
bo
ra
tio
n
m
us
t b
ri
ng
to
ge
th
er
le
ad
in
g
re
se
ar
ch

in
st
itu
te
s
an
d
ac
ad
em
ia
, s
up
pl
ie
rs

of
s
em
ic
on
du
ct
or
m
an
uf
ac
tu
ri
ng

eq
ui
pm
en
t a
nd
m
at
er
ia
ls
, d
es
ig
ne
rs

an
d
m
an
uf
ac
tu
re
rs
o
f s
em
ic
on
du
ct
or

m
ic
ro
ch
ip
s,
a
nd
s
ys
te
m
in
te
gr
at
or
s
of

m
ic
ro
ch
ip
s
fo
r e
nd
u
se
r a
pp
lic
at
io
ns
.
E
st
im
at
ed
m
ar
ke
t s
iz
e
in
2
01
5
is

$3
00
bn
.
In
no
va
tio
n
th
ro
ug
h
na
no
el
ec
tr
on
ic
s
is

an
e
ss
en
tia
l e
na
bl
er
o
f g
ro
w
th
in
th
e
au
to
m
ot
iv
e,
a
er
os
pa
ce
, m
ed
ic
al
, i
nd
us
tr
ia
l,
an
d
te
le
co
m
m
un
ic
at
io
ns
s
eg
m
en
ts
.
Ta
bl
e
2.
C
on
tin
ue
d
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

22
Manufacturing in a High Cost Environment

Ta
bl
e
3.
K
ey
E
na
bl
in
g
Te
ch
no
lo
gi
es
P
at
en
tin
g
In
te
ns
ity
b
y
In
du
st
ry
S
ec
to
r
(v
an
d
e
Ve
ld
e
et
a
l.,
2
01
2,
p
.3
4-
35
)
N
A
C
E

R
ev
. 2
Sh
ar
e
of

Pa
te
nt
s
th
at
a
re

K
E
T

Pa
te
nt
s
in
th
e
Se
ct
or
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
In
du
st
ri
al

B
io
te
ch
no
lo
gy
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
M
ic
ro
a
nd

N
an
oe
le
ct
ro
ni
cs
Sh
ar
e
of

K
E
T
P
at
en
ts

th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
at
er
ia
ls
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
P
ho
to
ni
cs
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
N
an
ot
ec
hn
ol
og
y
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
an
uf
ac
tu
ri
ng

Te
ch
no
lo
gy
10
8
M
an
uf
ac
tu
re
o
f o
th
er
fo
od

pr
od
uc
ts
14
%
66
%
ze
ro
12
%
ze
ro
1%
20
%
11
0
M
an
uf
ac
tu
re
o
f b
ev
er
ag
es
31
%
28
%
19
%
19
%
ze
ro
3%
31
%
12
0
M
an
uf
ac
tu
re
o
f t
ob
ac
co
p
ro
du
ct
s
5%
23
%
ze
ro
32
%
2%
13
%
30
%
13
1
Pr
ep
ar
at
io
n
an
d
sp
in
ni
ng
o
f
te
xt
ile
28
%
5%
3%
71
%
9%
1%
12
%
17
1
M
an
uf
ac
tu
re
o
f p
ap
er
a
nd
p
ap
er

pr
od
uc
ts
13
%
1%
8%
56
%
15
%
2%
18
%
17
2
M
an
uf
ac
tu
re
o
f a
rt
ic
le
s
of
p
ap
er

an
d
pa
pe
rb
oa
rd
13
%
8%
2%
67
%
1%
2%
20
%
19
2
M
an
uf
ac
tu
re
o
f r
ef
in
ed

pe
tr
ol
eu
m
p
ro
du
ct
s
28
%
6%
13
%
40
%
13
%
2%
27
%
20
1
M
an
uf
ac
tu
re
o
f b
as
ic
c
he
m
ic
al
s,

fe
rt
ili
se
rs
a
nd
n
itr
og
en

co
m
po
un
ds
, p
la
st
ic
s
an
d
sy
nt
he
tic
r
ub
be
r i
n
pr
im
ar
y
fo
rm
s
42
%
8%
13
%
46
%
9%
3%
19
%
20
2
M
an
uf
ac
tu
re
o
f p
es
tic
id
es
/
ag
ro
ch
em
ic
al
p
ro
du
ct
s
5%
71
%
1%
6%
1%
2%
20
%
20
3
M
an
uf
ac
tu
re
o
f p
ai
nt
s,
v
ar
ni
sh
es
,
co
at
in
gs
, p
ri
nt
in
g
in
k
39
%
1%
2%
77
%
3%
6%
11
%
20
4
M
an
uf
ac
tu
re
o
f s
oa
p
an
d
de
te
rg
en
ts
, c
le
an
in
g
an
d
po
lis
hi
ng
p
re
pa
ra
tio
ns
, p
er
fu
m
es

an
d
to
ile
t p
re
pa
ra
tio
ns
10
%
6%
4%
59
%
4%
10
%
17
%
20
5
M
an
uf
ac
tu
re
o
f o
th
er
c
he
m
ic
al

pr
od
uc
ts
32
%
2%
22
%
28
%
30
%
4%
15
%
20
6
M
an
uf
ac
tu
re
o
f m
an
-m
ad
e
fi
br
es
33
%
ze
ro
21
%
22
%
40
%
5%
12
%
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

23
Manufacturing in a High Cost Environment

N
A
C
E

R
ev
. 2
Sh
ar
e
of

Pa
te
nt
s
th
at
a
re

K
E
T

Pa
te
nt
s
in
th
e
Se
ct
or
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
In
du
st
ri
al

B
io
te
ch
no
lo
gy
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
M
ic
ro
a
nd

N
an
oe
le
ct
ro
ni
cs
Sh
ar
e
of

K
E
T
P
at
en
ts

th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
at
er
ia
ls
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
P
ho
to
ni
cs
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
N
an
ot
ec
hn
ol
og
y
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
an
uf
ac
tu
ri
ng

Te
ch
no
lo
gy
21
1
M
an
uf
ac
tu
re
o
f b
as
ic

ph
ar
m
ac
eu
tic
al
p
ro
du
ct
s
28
%
60
%
ze
ro
3%
4%
3%
31
%
21
2
M
an
uf
ac
tu
re
o
f p
ha
rm
ac
eu
tic
al

pr
ep
ar
at
io
ns
9%
54
%
2%
11
%
3%
7%
23
%
22
1
M
an
uf
ac
tu
re
o
f r
ub
be
r p
ro
du
ct
s
28
%
1%
7%
65
%
14
%
2%
13
%
22
2
M
an
uf
ac
tu
re
o
f p
la
st
ic
s
pr
od
uc
ts
48
%
2%
11
%
66
%
7%
2%
12
%
23
1
M
an
uf
ac
tu
re
o
f g
la
ss
a
nd
g
la
ss

pr
od
uc
ts
61
%
1%
13
%
48
%
22
%
2%
14
%
23
4
M
an
uf
ac
tu
re
o
f o
th
er
p
or
ce
la
in

an
d
ce
ra
m
ic
p
ro
du
ct
s
40
%
ze
ro
21
%
43
%
3%
5%
27
%
23
9
M
an
uf
ac
tu
re
o
f a
br
as
iv
e/
no
n-
m
et
al
lic
m
in
er
al
p
ro
du
ct
s
43
%
ze
ro
28
%
14
%
30
%
4%
24
%
24
1
M
an
uf
ac
tu
re
o
f b
as
ic
ir
on
a
nd

st
ee
l a
nd
o
f f
er
ro
-a
llo
ys
54
%
ze
ro
8%
50
%
3%
ze
ro
38
%
24
4
M
an
uf
ac
tu
re
o
f b
as
ic
p
re
ci
ou
s/
no
n-
fe
rr
ou
s
m
et
al
s
46
%
ze
ro
11
%
49
%
3%
2%
36
%
25
6
Tr
ea
tm
en
t a
nd
c
oa
tin
g
of
m
et
al
s;

m
ac
hi
ni
ng
4%
ze
ro
12
%
48
%
8%
12
%
20
%
26
1
M
an
uf
ac
tu
re
o
f e
le
ct
ro
ni
c
co
m
po
ne
nt
s
an
d
bo
ar
ds
31
%
1%
42
%
8%
17
%
4%
28
%
26
2
M
an
uf
ac
tu
re
o
f c
om
pu
te
rs
a
nd

pe
ri
ph
er
al
e
qu
ip
m
en
t
19
%
1%
39
%
6%
20
%
7%
27
%
26
3
M
an
uf
ac
tu
re
o
f c
om
m
un
ic
at
io
n
eq
ui
pm
en
t
6%
ze
ro
37
%
4%
32
%
6%
21
%
26
4
M
an
uf
ac
tu
re
o
f c
on
su
m
er

el
ec
tr
on
ic
s
25
%
1%
32
%
4%
42
%
3%
18
%
Ta
bl
e
3.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

24
Manufacturing in a High Cost Environment

N
A
C
E

R
ev
. 2
Sh
ar
e
of

Pa
te
nt
s
th
at
a
re

K
E
T

Pa
te
nt
s
in
th
e
Se
ct
or
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
In
du
st
ri
al

B
io
te
ch
no
lo
gy
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
M
ic
ro
a
nd

N
an
oe
le
ct
ro
ni
cs
Sh
ar
e
of

K
E
T
P
at
en
ts

th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
at
er
ia
ls
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
P
ho
to
ni
cs
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at

Fa
ll
w
it
hi
n
N
an
ot
ec
hn
ol
og
y
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
A
dv
an
ce
d
M
an
uf
ac
tu
ri
ng

Te
ch
no
lo
gy
26
5
M
an
uf
ac
tu
re
o
f i
ns
tr
um
en
ts
a
nd

ap
pl
ia
nc
es
fo
r m
ea
su
ri
ng
, t
es
tin
g
an
d
na
vi
ga
tio
n;
w
at
ch
es
a
nd

cl
oc
ks
23
%
7%
25
%
9%
22
%
6%
30
%
26
6
M
an
uf
ac
tu
re
o
f i
rr
ad
ia
tio
n,

el
ec
tr
om
ed
ic
al
e
qu
ip
m
en
t
5%
18
%
13
%
21
%
13
%
8%
27
%
26
7
M
an
uf
ac
tu
re
o
f o
pt
ic
al

in
st
ru
m
en
ts
/p
ho
to
gr
ap
hi
c
eq
ui
pm
en
t
44
%
1%
27
%
9%
43
%
4%
15
%
27
1
M
an
uf
ac
tu
re
o
f e
le
ct
ri
c
m
ot
or
s,

ge
ne
ra
to
rs
, t
ra
ns
fo
rm
er
s
an
d
el
ec
tr
ic
ity
d
is
tr
ib
ut
io
n
an
d
co
nt
ro
l a
pp
ar
at
us
21
%
2%
31
%
18
%
20
%
4%
25
%
27
2
M
an
uf
ac
tu
re
o
f b
at
te
ri
es
a
nd

ac
cu
m
ul
at
or
s
13
%
ze
ro
8%
24
%
56
%
5%
7%
27
3
M
an
uf
ac
tu
re
o
f w
ir
in
g
an
d
w
ir
in
g
de
vi
ce
s
17
%
ze
ro
22
%
18
%
45
%
1%
13
%
27
4
M
an
uf
ac
tu
re
o
f e
le
ct
ri
c
lig
ht
in
g
eq
ui
pm
en
t
50
%
ze
ro
22
%
3%
69
%
2%
5%
27
5
M
an
uf
ac
tu
re
o
f d
om
es
tic

ap
pl
ia
nc
es
2%
ze
ro
14
%
33
%
45
%
3%
5%
27
9
M
an
uf
ac
tu
re
o
f o
th
er
e
le
ct
ri
ca
l
eq
ui
pm
en
t
36
%
1%
29
%
12
%
42
%
8%
8%
28
1
M
an
uf
ac
tu
re
o
f g
en
er
al
-p
ur
po
se

m
ac
hi
ne
ry
15
%
2%
21
%
47
%
1%
4%
25
%
28
2
M
an
uf
ac
tu
re
o
f o
th
er
g
en
er
al
–
pu
rp
os
e
m
ac
hi
ne
ry
13
%
2%
25
%
13
%
7%
5%
48
%
28
4
M
an
uf
ac
tu
re
o
f m
et
al
fo
rm
in
g
m
ac
hi
ne
ry
/m
ac
hi
ne
to
ol
s
11
%
ze
ro
10
%
24
%
51
%
1%
13
%
Ta
bl
e
3.
C
on
tin
ue
d
co
nt
in
ue
d
on
fo
llo
w
in
g
pa
ge
EBSCOhost – printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use

25
Manufacturing in a High Cost Environment

N
A
C
E

R
ev
. 2
Sh
ar
e
of

Pa
te
nt
s
th
at
a
re

K
E
T

Pa
te
nt
s
in
th
e
Se
ct
or
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
In
du
st
ri
al

B
io
te
ch
no
lo
gy
Sh
ar
e
of
K
E
T

Pa
te
nt
s
th
at
F
al
l
w
it
hi
n
M
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Te
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28
9
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pu
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%
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24
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28
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os
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R
&
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3.
C
on
tin
ue
d
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26
Manufacturing in a High Cost Environment

manufacturing, with retail and production
being fused into a bespoke service;
• Home Additive Manufacturing: Some
Additive manufacturing is likely to take
place within the home, while some will
take place within shops or factories; these
domestic and commercial markets will
look very different;
• Manufacture of Additive Manufacturing
Units: Producing and servicing Additive
manufacturing units themselves should be
a big money industry; and
• Materials: Creating and sourcing materi-
als for use in Additive manufacturing units
will also be a significant market.
The complexity surrounding these domains
as well as the large impact they will have can be
illustrated by medical applications of nanotechnol-
ogy as illustrated in Figure 3:
As can be seen, one of the key challenges is
to develop suitable policies that are conducive to
the development, adoption, innovation, wealth
creation, wealth retention and public good as it
relates to these key technologies.
Policy action will be required on:
• Intellectual property.
• Competence development aimed at indi-
viduals and firms.
• Adoption support aimed at firms.
Figure 3. Socioeconomic dynamics of innovation and uptake: medical application of nanotechnology
(Baucher et al., 2013, p. 41)
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27
Manufacturing in a High Cost Environment

• Health and Safety implications.
• Participation in standard setting bodies.
• Demand and supply side support for the
development of core firms within the new
value chains created by these technologies
e.g. large scale inorganic-nano-power pro-
duction as an input to additive manufactur-
ing and as a core firm in the additive manu-
facturing materials value chain.
Over the last 140 years, manufacturing pro-
ductivity growth among the OCED nations has
converged. Further, there is empirical evidence
that continued productivity growth is strongly
linked to research intensity (as a proxy for inno-
vation intensity). Given this, it is fundamentally
important that research intensity in high cost
operating environment countries is maintained on
a higher level than in low operating cost environ-
ment countries, especially since non-OECD low
operating cost environment countries can speed up
their convergence to the frontier countries if they
have a well developed financial system (Madsen
& Timol, 2011).
Other drivers that are shifting the balance
in favour of value chain concentration include
increasing wage-levels in emerging economies,
lower quality of the business environment in
emerging economies (LDCs), lower importance
of economies of scale for production, and need for
closer interaction with customers (Kianian et al.,
2013) These forces are discussed further below.
Wage Cost Drivers
In a recent survey (Statistic Denmark, 2008) half
of Danish, Swedish and Dutch firms stated that
labour cost savings was the primary reason for
offshoring outsourced activities. This also means
that the firms that were first movers in terms of
offshoring were those that had a high share of
labour costs in their production and that have a
low need to be co-located with their customers
or suppliers. Given that the wage levels in many
BRIC and N11 countries are increasing faster
than productivity improvements, the labour cost
advantage is a transitory advantage. (It is argued
that average labour costs in China are increasing by
20% per year and that due to insufficient produc-
tivity improvements, the net cost to manufacture
in China and the USA will converge around 2015
(Sirkin et al., 2011).
Firms that pursue this benefit will have to
constantly change location in order to chase the
lowest cost labour location that also has an ad-
equate skill level available in sufficient numbers.
Not only will this deprive the previous location
of the manufacturing activities now being moved
out after having first been moved in, but it sets
in motion a vicious cycle of damage to the eco-
nomic development of nations and their human
and social capital.
During the presence of these manufacturing
activities in the country from which they are now
moving, there was initiated a growth in related
industries to the industry that relocated to the
country. This growth increased the demand for
skilled labour to the level where a bidding war for
scarce talent erupts with rapidly escalating wage
costs as a result, hence contributing to shorten-
ing the presence of the firms that located in the
country due to the resulting profitability pressure
within these firms.
In addition, increasing living standards and
government policy have encouraged the return of
high skilled nationals to their country of origin with
the associated higher levels of wage cost, further
increasing wage cost pressures due to setting new
wage “benchmarks” (Saxenian, 2006). Both of
these effects can be observed e.g. in China.
These developments provide for the potential
of relocating the manufacturing activities back
to their country of origin. But unfortunately the
retrieval of manufacturing is a problem, as once
reduced below a threshold, it may not be possible
to reverse.
The logic of this, from a neo-classical point
of view, is outlined by Venables (1999, pp.178-
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28
Manufacturing in a High Cost Environment

179): “As firms exit or relocate, remaining firms
benefit from a relaxation of competitive pressure
(they get a larger share of local demand). How-
ever, they suffer from now having lower demand
for any intermediate products they produce and
from having to pay a higher price for intermedi-
ates, more of which are now imported (with a
transport cost) rather than being locally supplied.
Withdrawal of the benefits arising from these
demand (backwards) and cost (forwards) linkages
can cause collapse of the entire sector. There may
be multiple equilibria and consequent hysteresis.”
It follows from this that policy measures must be
evaluated to avoid such an outcome.
Venables (1999) also points out that it is ex-
tremely difficult for (neo-classical) economists
to predict the effect of policy change due to the
existence of demand and cost linkages. Moreover,
this situation is complicated further due to technol-
ogy development, associated creative destruction
and subsequent innovative and entrepreneurial
renewal, as well as the irrationality of human
behaviour, easiest visible in goods with primarily
intrinsic and extrinsic value (including Veblen
good12) as discussed in behavioural economics.
Some of the key policies are to create a link
between productivity improvement and wage cost
increases to ensure that the relative wage cost is not
increasing and resulting in pressure to outsource
or offshore the production.
Business Environment
The operating environment as controlled by gov-
ernment is a potential driver of cost advantage or
cost disadvantage of firms and will impact their
decision to concentrate their activities in fewer
locations or distribute, and potentially disperse,
their value chains into more locations.
If a firm locates its activities across very
many locations and jurisdictions, it may incur an
increase in the number of internal transactions
and governance costs which may, if high enough,
eventually outweigh the benefits of offshoring
and outsourcing (Tallman & Li, 1996). A well
functioning institutional setting (i.e. easy interface,
clarity of rules and predictability of any changes
in the regulatory and institutional environment)
of the destination market contributes to lowering
the transaction cost of entering this new market
(Meyer, 2001).
Developing a well functioning institutional
setting (i.e. having high transparency, clarity
and predictability) forms a competitive market
condition that encourages firms to build market-
based firm-specific advantages e.g. technological
capabilities (Globerman & Chen, 2010). Accord-
ing to transaction cost theory, this will result in
full ownership of the local firm to protect these
asset-specific capabilities and created advantages
from opportunism13 and involuntary spillovers
(e.g., Williamson, 1985; Beamish & Banks, 1987;
Hennart 1988, 1991; Hennart & Larimo, 1998).
The ownership choices of foreign firms reflect both
efficiency and legitimacy concerns. In particular,
the business behaviour of foreign firms is condi-
tioned by the political behaviour of government
(Zhang, 2007). This leads to two conclusions:
firstly, if the institutional setting is unpredictable
or difficult to understand (i.e. differs wildly from
the one the firm is used to (Coeurderoy & Murray,
2008)), the transaction cost of entering the market
will be high. This provides a substantial barrier to
entry and if entry is still pursued, the entry will
be joint with a local firm or entity which in turn
limits the firm’s desire to create market-based,
firm-specific advantages due to the difficulty in
protecting these from opportunistic appropriation
by third parties or through involuntary spillovers.
Secondly, if the institutional setting is developing
in a direction that increases the transaction cost
for the firm or on a trajectory that is not reducing
the transaction cost at the pace expected by the
firm, this will contribute towards a decision by
the firm to exit the market. Some clear guidelines
for factor and framework condition policy setting
can be drawn from this analysis (Moavenzadeh
et al., 2013):
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29
Manufacturing in a High Cost Environment

• Provide a consistent and stable policy en-
vironment, freed from election cycles, pro-
viding longer-term certainty for business
investment decisions. As capital invest-
ment and workforce hiring decisions have
long-term consequences – often 10- to
20-year time horizons or more – establish-
ing policy stability over longer time peri-
ods facilitates the setting of business and
investment strategies with greater confi-
dence and enhances the ability to commit
to stakeholders.
• Establish policies that are globally compet-
itive with other nations and which do not
create competitive disadvantages for busi-
nesses (“do no harm”). Further, policies
should strive to help level the playing field
and be rigorously enforced for all global
competitors. Policy-makers have a critical
role to play regarding the establishment
of fair and competitive global markets.
Strong enforcement is essential particular-
ly in the areas of intellectual property pro-
tection, currency manipulation and trade
violations.
• Ensure that policies are developed in mean-
ingful dialogue and collaboration between
business leaders and policy-makers, lead-
ing to more informed and thoughtful pol-
icy development and limiting unintended
negative consequences.
• Ensure policies that create institutional le-
gitimacy – in the court systems, the finan-
cial systems and markets, for intellectual
property protection, for asset protection,
for enforcement, and for fair and consistent
consequences of infractions and violations.
This is essential for markets to thrive and
grow and to attract investment of capital
and talent. Corruption should find no home
in free markets.
• Policy-makers should strive to reduce the
fragmentation and complexity of today’s
policy environment through the synchroni-
sation and harmonisation of national, state,
and/or local policies and across agencies
and branches of government.
• Individual polices and the overall policy
bundle must be financially affordable and
reasonable for business and society. The
costs associated with policies – even those
that may be well intentioned and arguably
necessary – should not outweigh the ben-
efits. Here it is important that the benefits
expressed in all value dimensions (instru-
mental, extrinsic and intrinsic) and across
all legitimate stakeholders are converted
to a monetary equivalent number14 to get
a proper value for money estimate in order
not to erroneously limit it to instrumental
value only for a narrow stakeholder group.
Changing Importance of Economies
of Scale for Production
At what saving is it profitable to separate product
development from manufacturing? This topic was
first discussed by Arditti (1968) who showed that
the cost saving in a number of defence contracts
would have had to be in the region of 25-31%. A
further study by Teece (1977) found a range of
0.3%-37% with an average of 5% in the process
industry and a range of 1%-179% with an average
of 25% in the machinery industry (findings from
these two studies is consistent with the study from
the same time period by Mlinar (1978)). There
are three new developments since these studies:
Firstly, the complexity of products has in-
creased (this is true even if the products have
architectural and modular design structures – it is
just a question of on what scale the complexity has
increased: system, sub-system, part, component,
etc) which increases the difference in the cost as
starting points for the learning curves as well as
increasing the difference in slope for the learn-
ing curve both to the advantage of the developer
if development and production is co-located15.
The cost differential is made up of the cost to
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30
Manufacturing in a High Cost Environment

shift organisational resources (e.g. drawings,
formulae, documented processes, specific soft-
ware, information, etc.), competence (primarily
tacit knowledge like e.g. know-how, knowledge
gained from experience, etc.) as well as absorptive
capacity costs (e.g. expenditure on R&D by the
supplier, cost of training workers to adapt to new
technology, or acquiring new technology from the
technology market) (Grover). The effects of this
for outsourcing is outlined by Grover (and aligns
with the findings of Antràs, 2003; Grossman &
Rossi-Hansberg, 2008) and is simplified and sum-
marised in Figure 4.
As can be seen from the Figure 4, when the
relative wage differential declines (i.e. when the
horizontal line moves downwards in the figure),
the domain where international outsourcing is
an appropriate response decreases both from the
low-tech domain (i.e. from the left in the figure)
and from the high-tech domain (i.e. from the
right in the figure) but it decreases faster from
the high-tech domain. This fits well with what we
see happening in China at the moment. In order
to compensate for this trend a country like China
must build better contracting institutions to influ-
ence the level of production sharing by impact-
Figure 4. Trade-off between Domestic Outsourcing and International Outsourcing (source: Simplified
after Grover, 2008)
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31
Manufacturing in a High Cost Environment

ing relative productivity of the final good sector
(Acemoglu et al., 2007) and increase the level of
absorptive capacity and proficiency in technology
to sustain a more technologically sophisticated
good by lowering the cost of technology transfer
(Grover, 2008). Both of these actions would widen
the range of offshoring in the figure above.
Secondly, the average life cycle for a given
product has shortened with the associated decline
in volume produced of a given product, leading to
pressure to decrease time-to-market and lowering
tolerances for any delays in the time-to-market (a
six month delay in releasing a new car model or a
one month delay in releasing a new mobile phone
model will wipe out the profit of that model).
Thirdly, the relative labour cost differential for
a given skill level of labour has, for some time,
increased between the OECD located developer
and the potential BRIC16 or N1117 based producer
(be that a fully owned subsidiary or outsourcing
and offshoring to a contract producer), albeit for
some of these countries like China this differ-
ence has decreased rapidly over recent years (see
above). Given these developments, it is likely that
the cost differential needed to justify offshoring or
outsourcing (and hence separating development
from production) has declined, with the emergence
of the globalisation period, from the initial 1960s
estimate by Arditti of a high 20 percent level,
down to 7-9 percent at the lowest point of these
three forces (around the year 2000), to then rise
back to around 15 percent in 2013 and be on an
upwards trajectory18.
Technological developments will also reduce
the labour cost component of manufacturing
as well as enabling smaller series, down to the
level of one, produced cost efficiently. These
developments include additive manufacturing,
robotics, collaborative manufacturing services and
the four types of production systems (see Table
3), with the associate technologies embodied in
both equipment and processes, targeted at high
cost operating environments as discussed in the
table above. This technology-enabled reduction
in the labour cost component will start in high
cost operating environments, firstly, since an
increase in the intensity of technology use leads
to a substitute of labour by capital equipment as
well as an increase in output; and secondly, since
a given level of intensity in technology use will
have the same level of labour reduction, the cost
effect is higher in a high cost operating environ-
ment than in a low operating cost environment and
as a consequence the optimal level of technology
intensity is lower in a low cost operating environ-
ment than in a high cost operating environment
(Brecher et al., 2012).
Two of the key cost savings with these new
technologies are in waste (additive manufactur-
ing operates on a waste level of around 7% of the
input material whilst subtractive manufacturing
operates on a waste level of up to 90%) and in
energy use (where the reduction in transportation
enabled by these new technologies plus higher
energy efficiency in the production process itself
due to these technologies will enable substantial
cost savings).
These technology related developments are
likely to open the way for returning production
from low cost operating environments to the origi-
nating high cost operating environment (Grossman
& Helpman, 2005; Tuck & Hague, 2006; Holstein,
2010; Nash-Hoff, 2012a; Nash-Hoff, 2012b; Chu
et al., 2013; Kianian et al., 2013; Tavassoli, 2013),
given that the relevant industrial commons have
not been impoverished beyond the point of no
return and given that a sufficient level of economic
complexity exists in the home jurisdiction . This
opportunity must influence the policy settings to
facilitate the realisation of returning production
with the associated economic benefits.
Changing Need for Interaction with
Customers and Input Providers
Given a shortening of the product life cycle, the
need to continuously innovate is increasing. This
innovation needs to be faster, better aligned with
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32
Manufacturing in a High Cost Environment

customer and consumer needs and with lower
failure rates. The innovation needs to take place
not only in the end product-service-system domain
but also in the production process domain and the
deployment of new production equipment and
new production system domains. In spite of the
fact that transactions and exchanges can be made
almost instantly and independent of location and
distance, there are transactions and exchanges
that for one reason or another do not follow this
pattern but are instead highly sensitive to distance.
These activities need to be built on trust and a
common institutional framework that can only
be developed by face-to-face contact and hence
require geographical proximity (Karlsson, 2012).
This creates a pressure to be co-located with key
input providers in all relevant domains, which
will of course provide contradictory pressures
on location of activities as outlined in Table 4:
The key benefits of these proximities are best
articulated by Döring & Schnellenbach (2006):
“Networks of regionally clustered businesses and
institutions, therefore, offer two broad opportu-
nities: formal exchanges of knowledge through
market relationships, where proximity allows
the establishment of closer ties; and the informal
exchange of knowledge in social networks of
individuals”.
Those beneficial aspects of close proximity
which firms cannot control or achieve in any
other way than through close geographical and
specialisation proximity have been named un-
traded interdependencies by Storper (1995; 1997).
The economic terminology for this is agglom-
eration economics and a policy driven opera-
tionalisation of this is known as cluster policy or
smart specialisation. The research in this domain
shows that firms that are members of agglomera-
tions have higher productivity as well as higher
productivity improvements than firms that are not
members of any agglomeration (Jaenicke et al.,
2009; Garanti & Zvirbule-Berzina, 2013). Typi-
cal benefits are fourteen percentage points higher
value added growth, seven percentage points
higher profitability growth and two percentage
points higher wages per employee (a proxy for
productivity) to the advantage of firms in clusters
vs. those not in clusters (Extracted from Table 2,
page 30 in Sölvell & Williams, 2013). A cluster/
smart specialisation policy needs to be part of an
overarching manufacturing policy.
In order to realise the opportunity present in
this development, countries and locations must
have a strong industrial commons (i.e. a high
economic complexity – see discussion below);
the presence of the key components in a regional
innovation system19 (example in Figure 5) and
a suitable system innovation perspective (sum-
marised in Figure 6).
Changing Needs for Skills in
the Manufacturing Workforce
Given the rapidly increasing technological so-
phistication of products, production processes,
production equipment and production systems,
tomorrow’s manufacturing workforce will be re-
Table 4. Location pressure by input provider
Input
Provider
Location Pressure
Lead
customer
Location in proximity of lead customer’s
location.
University
or PRO/
RTO
Location of R&D in proximity of external
research provider and given the discussion above
this also means pressure to locate manufacturing
in the same proximity (e.g. Arnold et al., 2010;
Connell & Probert, 2010; Kliknaite, 2011; Roos
& Pike, 2011).
Equipment
Supplier
In order to be a lead customer to an equipment
supplier you either have to be located in the
proximity of the equipment supplier or be
located at the equipment supplier’s most
important market.
Key
market
If transportation cost is a large component of
total cost the location of the producer has to be
in close proximity of the key market (Warrian,
2010).
If there is a large requirement for market
adaptation/customisation the producer has to be
in close proximity of the key market.
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33
Manufacturing in a High Cost Environment

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34
Manufacturing in a High Cost Environment

quired to have substantially higher skills including
new knowledge domains like e.g. ICT (hardware,
sensor and software skills); sufficient technology
competence to understand the key production
process/equipment e.g. nanotechnology, biotech-
nology, advanced manufacturing technologies,
material science etc. and key skills required for
participating in and contributing to a high per-
formance workplace environment e.g. problem
solving, interpersonal collaboration, etc. This will
require a substantially higher level of formal edu-
cation on entering the workforce complemented
by continuous education to stay productive in this
future manufacturing environment.
Modern manufacturing requires teamwork, plan-
ning skills, communication skills, improvisation,
agility of the mind, and a large foundation of
knowledge. (Mitchell, 2012).
The lowest level of education is likely to be
the highest level of VET (or technical colleges)
including joint programs with industry, whereas
the norm is likely to be Bachelor level university
degrees. There is already a clear link in high cost
operating environments between the educational
attainment of both management and the workforce
and productivity improvements20. In addition, the
effects of productivity growth and liberalised trade
tend to be felt disproportionately by low-skilled
workers (Berman et al., 1994) resulting in fewer
employment opportunities for them (Deitz &
Orr, 2006). The need for STEM graduates will
accelerate as a consequence of these shifts and the
availability of these graduates is a prerequisite for
manufacturing moving back to high cost operat-
ing environments. A more detailed discussion
around the emerging skill production system for
manufacturing can be found in Weaver & Oster-
man (2014) and of the emerging skill need in
Davis et al. (2012).
Given the servitization of manufacturing and
the increasing tradability of services and service
activities, it will be challenging for those high
Figure 6. Summary of system innovation perspective (based on Geels)
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35
Manufacturing in a High Cost Environment

cost operating environments that do not manage
to retain or recoup manufacturing activities, that
do not mange to have enough entrepreneurial
activity to regenerate high value adding activities,
and that do not manage to add value to domestic
raw material. This challenge will be around the
level of employment available and the general
salary level of this employment. This is because
these jobs will be in service professions where
productivity improvements are either impossible
or undesirable, where any wage increase will re-
sult in a cost increase since it cannot be offset by
a productivity increase (Baumol’s disease21) and
hence the relative cost for these services will tend
to increase faster than the consumer price index.
This is acceptable for luxury services, but not for
non-luxury services were this will instead force
constant wage reduction to keep the cost constant
in relative terms .This presents a major political
challenge because it will affect a large and grow-
ing number of people in such an economy (well
exemplified by the present trajectory of Australia).
In order to realise the opportunity present in
this development, countries and locations must
have a strong industrial commons (i.e. a high
economic complexity – see discussion below);
the presence of the key components in a regional
innovation system22 (example in Figure 5) and
a suitable system innovation perspective (sum-
marised in the table below).
INDUSTRIAL COMMONS AND
ECONOMIC COMPLEXITY
The industrial commons is normally defined as
the embedded knowledge, technology capabilities,
specialised equipment and specific co-specialised
assets that enhance the efficiency, effectiveness
and productivity of the proprietary capital and
labour that use it. This industrial commons does
not reside in one organisation but is spread out
over a large group of organisations and individuals
but normally within a limited geographic domain
(Pisano & Shih, 2009). A broad base of indus-
trial commons with different domain expertise
and located in different geographies across the
country provides a basis for a high level of eco-
nomic complexity. Hence, the complexity of an
economy is related to the multiplicity of useful
knowledge embedded in it. In a broad context, the
term ‘complexity’ could be substituted by such
terms as ‘density’, ‘thickness’, ‘interweaving’ or
‘network richness’. This emphasises the fact that
modern societies are able not only to amass but
also to utilise effectively large amounts of produc-
tive knowledge, because of it being distributed in
modules amongst members of society.
This is an extension of Adam Smith’s idea
that economic progress is the result of an ever-
deepening division of labour (Smith, 1863; Young,
1928). This division of labour gives us all access
to knowledge we would not be capable of holding
individually. Economic complexity is therefore
expressed in the composition of a country’s
productive output and reflects the structures that
emerge to hold and combine knowledge. To be fully
utilised, different knowledge need to come together
in diverse combinations in teams, organisations
and markets. It is these various teams, organisa-
tions and markets that allow the diffusion and use
of this knowledge across society and globally,
and that provide on the one hand the networks
that allow increasing degrees of specialisation,
whilst on the other hand ensuring that the outputs
of this specialisation can be absorbed and used.
Increased economic complexity is necessary for a
society to be able to hold and use a larger amount
of productive knowledge vested in many individu-
als and networks). That means that to be utilised
fully, knowledge needs to be organised through
a social process into organisations, markets and
institutions as modules. This complexity then
consists of:
• Increasing levels of specialisation and
technical sophistication and organisation
of knowledge into modules, and
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36
Manufacturing in a High Cost Environment

• Their complex combining and coming to-
gether in institutions, enterprises, markets
and organisations.
This productive knowledge is not only formal
but also tacit, and hence hard to acquire. It is
not tradable, nor can it be priced in the normal
sense. It is clustered around and embedded within
organisations, markets, institutions and their net-
works and referred to as the “industrial commons”
when limiting it to manufacturing only. For those
countries and regions that do acquire and hold
it, it becomes a basis for competitive advantage
distinct from standard price-based competition. It
is therefore evident in those high cost manufactur-
ing economies that succeed regardless of low cost
competition, and is of vital importance to all coun-
tries and specifically to countries like Australia,
that have become high cost economies and are in
clear danger of losing significant manufacturing
capabilities, unless they undertake accelerated
transition to advanced manufacturing activities.
The higher the economic complexity, the easier
to transition into advanced manufacturing since
this requires the interaction and combination of
the knowledge of specialists (e.g. designers, mar-
keters, finance specialists, engineers, technology
experts from various disciplines, human resource
managers, legal experts, environmental scientists,
specialists from the social sciences, etc.). Where
these inputs are missing, it is not possible to make
products of the same complexity. Making advanced
products involves interdependencies requiring co-
operation amongst and between individual actors.
The more these interdependences can be located
within a nation or region, the more that nation or
region’s economy has the potential to capture the
benefits of the activity or sector in locally based
complex value chains. Building these networks
embodying key capabilities, including leverag-
ing demand along high growth value chains is a
central task for policy.
Hausmann et al. (2011) have developed an
Economic Complexity Index for 128 countries.
The Economic Complexity Index attempts to
capture the total amount of productive knowl-
edge embedded in society, relating to two terms:
‘diversity’ and ‘ubiquity’: A country exhibiting
diversity in its products has a large amount of
embedded knowledge and a sophisticated array of
capabilities: it can do many things. Less diversity
indicates the reverse. Ubiquity is about the number
of countries that make the same or similar product,
given that sophisticated products are made in rela-
tively few places. The more ubiquitous a product
the less sophisticated it is likely to be. In short,
the knowledge-intensity of a nation is expressed
in the (higher) diversity of the products it makes
and the (lesser) ubiquity of its products.
The higher the economic complexity (and the
faster it grows) the stronger the economic value
creation prospects of an economy. The countries
with the highest Economic Complexity Index are
in order Japan (2.3), Germany (2.0), Switzerland
(1.9), Sweden (1.9), Austria (1.8), Finland (1.7),
Singapore (1.6), Czech Republic (1.6), United
Kingdom (1.6), Slovenia (1.5) and Korea (1.5).
These are then followed by e.g. the US (1.4) in
the next group, whereas Australia is ranked as
number 79 with an Economic Complexity Index
of -0.3. These findings are aligned with the find-
ings of Abeles & Rivas (2011), who when they
analysed the relationship between the level of
overall economic development as illustrated by
per capita GDP (and the degree of industrialisa-
tion as represented by per capita manufacturing
sector GDP), identified two features that stood out:
• Countries with the highest per capita GDP
levels are also those which reveal the high-
est per capita manufacturing GDP levels
i.e. the US, Japan, Germany, Switzerland
and northern European countries (e.g.
Sweden, Finland). This group is then fol-
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37
Manufacturing in a High Cost Environment

lowed by most of the remaining European
countries, as well as Canada, Australia and
some Asian countries (e.g. South Korea).
• The data analysed had a good logarithmic
fit suggesting that the impact of an increase
in the weight of the manufacturing sector
in the economy depends very much on ini-
tial conditions.
In order to achieve a high Economic Complex-
ity Index an economy has to have a high presence
of product groups (or communities) requiring or
generating high complexity. Some product com-
munities and their Economic Complexity Index
are shown in Table 5:
From the above table we can see that manufac-
turing is critical for a country’s ability to achieve
high levels of economically-useful embedded
knowledge and hence for its ability to capture
value from economic activities and to grow both
employment and GDP over time. An economy with
a high economic complexity has a higher prob-
ability of benefiting from a random entrepreneurial
event than one with low economic complexity. In
the latter economy, the entrepreneurial event will
engage lead customers and access specialist sup-
pliers in places with high economic complexity
and this will over time lead to the entrepreneurial
start-up firm migrating to the economy with the
higher economic complexity and larger economic
scale. From the earlier discussion, we can also
conclude that many of the product communities
that involve the technologies discussed above will
have a high economic complexity index.
IMPLICATIONS OF THE ABOVE
CHANGES IN MANUFACTURING
The present benefits of manufacturing to an
economy and the future changes to each of these
are summarised in Table 6.
CONCLUSION
Structural Changes to Manufacturing
High cost operating countries have so far moved
through two waves of offshoring and outsourcing
(the first relating to production activities and the
second to service and support activities linked to
the pre- and post production phase together with
general administrative activities) and are on the
Table 5. Economic Complexity Index for selected product communities (Hausmann et al., 2011)
Product Community ECI Product Community ECI Product Community ECI
Machinery 2.54 Construction Materials & Equipment 0.77 Garments -0.4
Chemicals & health 2.52 Metal Products 0.76 Fruit -0.6
Electronics 2.25 Meat & Eggs 0.64 Mining -0.6
Pulp & Paper 1.77 Agrochemicals 0.4 Misc Agriculture -0.8
Other Chemicals 1.67 Coal 0.21 Leather -0.9
Boilers 1.56 Textile & Fabrics 0.18 Animal Fibres -0.9
Aircraft 1.48 Beer, Spirits & Cigarettes 0.07 Fish & Seafood -1.2
Petrochemicals 1.22 Precious Stones 0.02 Tobacco -1.5
Home & Office 1.16 Food Processing -0.1 Tropical Agriculture -2
Milk & Cheese 1.14 Inorganic Salts & Acids -0.2 Oil -2.1
Ships 0.83 Cereals & Vegetable Oils -0.3 Cotton, Rice, Soy & Others -2.3
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38
Manufacturing in a High Cost Environment

way into the third wave which is backshoring of
activities to the country of origin. These waves are
driven by the changing balance between the forces
that are pushing for a coordinated but fragmented
and dispersed value chain and the forces that are
pushing for a coordinated and concentrated value
chain. The drivers that are pushing this balance in
the favour of the concentrating forces are: technol-
ogy development; reduced importance of labour
costs in production combined with reduced wage
cost differential with BRICS and N11 countries;
increasing skill requirements for the workforce;
changes in the industrial structure with an increas-
ing need for high economic complexity in the form
of broad and deep industrial commons as well as
an increasing need to be close to customers and
key input providers; and a requirement on well
functioning institutional settings.
Basis for Future Success
by High Cost Nations
On the firm level comparative advantages are
becoming less important than competitive advan-
tages at the same time as competitive advantages
tend to have a shorter duration i.e. becoming
temporary. The ongoing structural changes in
manufacturing are putting the competitive focus
on the creation of value more than on cutting costs
(although both are important) and this requires
Table 6. Consequences of the future development of the manufacturing industry
Present Benefit of Manufacturing to a
Country or a Jurisdiction
Impact from the Changing
Structure of Manufacturing Consequence
Driver of total factor productivity including the
development of productivity improvement tools
and techniques with spillover effects into the
rest of the economy.
This role will become even more
pronounced as manufacturing
digitalises.
Economies without a presence of advanced
manufacturing will slip behind in terms
of productivity improvement with an
associated decline in wealth generation
capability and living standards.
Driver of jobs and economic activity in the rest
of the economy through very high multiplier
effects.
This role will reduce as manufacturing
servitizes.
The requirement to increase entrepreneurial
start-up activities will become stronger to
compensate through employment growth
for the decline in manufacturing related
employment. This will be easier the higher
the existing economic complexity.
Manufacturing jobs pays better than non-
manufacturing jobs.
This role will become even more
pronounced as the skill requirement
increases in manufacturing.
This will put pressure on economies that
want to bring back, retain, grow or develop
manufacturing to ensure the presence of
a sufficiently well educated workforce in
sufficient numbers.
Manufacturing provides a disproportionately
large share of tax revenues in terms of tax on
value added throughout the supply chain, tax
on firm profit, tax on salaries paid, tax on the
consumption enabled by the salaries paid plus
different fees and duties.
This role will likely become smaller
due to the reduction in multiplier
effect in spite of likely higher salaries
and higher profits.
This will put pressure on economies
to either find other sources of revenue
that do not reduce their comparative
competitiveness or to cut expenditure.
Manufacturing provides a disproportionately
large share of R&D.
This role will become even more
pronounced due to the accelerating
technology development with adoption
and the increasing servitization
following from the digitalisation of
manufacturing.
This will put pressure on research providers
to become high performing suppliers
to industry and on the creation of high
performing clusters and regional innovation
systems.
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39
Manufacturing in a High Cost Environment

closeness to customers and key input providers, a
wider understanding of value, both deep and wide
mastery of the core knowledge that underpins the
firm, as well as very high absorptive capacity all
of which aims at maximising the productive and
adaptive efficiency and hence resulting in endur-
ing competitiveness. The policy environment must
provide both carrot and stick to ensure that firms
align with these developments.
The higher the economic complexity of a
nation the easier to transition into advanced
manufacturing since this requires the interaction
and combination of the knowledge held by many
different individuals and organisations. Where this
knowledge is missing, it is not possible to make
products of the same complexity. Making advanced
products involves interdependencies requiring
cooperation amongst and between individual ac-
tors. The more that these interdependences can
be localised within a nation or region, the more
that nation or region’s economy has the potential
to capture the benefits of the activity or sector
in locally based complex value chains. Building
these networks (i.e. building deeper and broader
industrial commons or increasing the economic
complexity) embodying key capabilities, includ-
ing leveraging demand along high growth value
chains is a central task for policy.
Failure to do the above will result in reducing
employment levels as well as reducing wage levels
for those in employment .This is because the ma-
jority of jobs will be in service professions where
productivity improvements are either impossible
or undesirable, where any wage increase will
result in a cost increase since it cannot be offset
by a productivity increase and hence the relative
cost for these services will tend to increase faster
than the consumer price index. This is acceptable
for luxury services, but for non-luxury services,
this will instead force a constant wage reduction
to keep the cost stable in relative terms .This
presents a major political challenge because it will
affect a large and growing number of people in
such an economy (well exemplified by the present
trajectory of Australia). It also put the focus on the
inadequacies of the neoclassical economic lens as
a policy lens in high cost operating economies as
opposed to the more suitable Neo-Schumpeterian
(evolutionary/innovation) economic lens.
Policy Actions
High cost operating countries need to take policy
actions in the following fields:
• Technology:
◦ The creation of an intellectual prop-
erty regime conducive to the deploy-
ment of emerging technologies.
◦ Competence development aimed at
individuals and firms.
◦ Technology adoption support aimed
at firms.
◦ Health and Safety implications of
emerging technologies.
◦ Participation in standard setting bod-
ies to lay the groundwork for success-
ful domestic firms.
◦ Demand and supply side support for
the development of core firms within
the new value chains created by these
technologies e.g. large scale inorgan-
ic-nano-power production as an input
to additive manufacturing and as a
core firm in the additive manufactur-
ing materials value chain.
• Wage Cost:
◦ Linking wage cost changes to produc-
tivity changes.
◦ Outsourcing and offshoring will only
happen when the technological com-
plexity is medium, when the wage
differential is high, when the increase
in technological complexity is slow
and when productivity improvement
is lower in the outsourcing country.
Policy should strive to ensure that
these conditions are not present.
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40
Manufacturing in a High Cost Environment

• Workforce:
◦ Ensure substantially higher level of
formal education on entering the
workforce complemented by substan-
tial amounts of continuous education
to stay productive. This is a question
of both quality and quantity and is
valid for shop floor and management
alike.
• Industrial Structure:
◦ Ensure that sectoral collapse is avoid-
ed as a consequence of firm exits
leading to lower demand for inter-
mediates, forcing remaining firms to
import more at higher costs whilst
operating under reduced competitive
pressure and hence rapidly becoming
uncompetitive and going under.
◦ Facilitate co-location between firms
drawing on common knowledge do-
mains and firms and their input pro-
viders (e.g. facilitate precinct and
clusters) generating formal exchanges
of knowledge through market rela-
tionships where proximity allows es-
tablishment of closer ties, and infor-
mal exchange of knowledge in social
networks of individuals resulting in
superior performance of participating
firms.
◦ Facilitate access to lead customers –
government is a very important lead
customer and more sophisticated
procurement policies are needed that
look at whole-of-life costs as well as
demanding solutions not yet in exis-
tence rather than purchasing off-the-
shelf proven solutions.
◦ Implement policies that drive an in-
crease in economic complexity as
well as broadening and deepening the
industrial commons.
• Business Environment:
◦ Ensure a well functioning institu-
tional setting, i.e. having high trans-
parency, clarity and predictability, as
a competitive market condition that
encourages firms to build market-
based firm-specific advantages. This
can be achieved using the following
guidelines:
▪ Provide a consistent and stable
policy environment, freed from
election cycles, providing lon-
ger-term certainty for business
investment decisions. As capital
investment and workforce hiring
decisions have long-term conse-
quences – often 10- to 20-year
time horizons or more – estab-
lishing policy stability over lon-
ger time periods facilitates the
setting of business and invest-
ment strategies with greater con-
fidence and enhances the ability
to commit to stakeholders.
▪ Establish policies that are global-
ly competitive with other nations
and which do not create competi-
tive disadvantages for businesses
(“do no harm”). Further, policies
should strive to help level the
playing field and be rigorously
enforced for all global competi-
tors. Policy-makers have a critical
role to play regarding the estab-
lishment of fair and competitive
global markets. Strong enforce-
ment is essential particularly in
the areas of intellectual property
protection, currency manipula-
tion and trade violations.
▪ Ensure that policies are devel-
oped in meaningful dialogue
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41
Manufacturing in a High Cost Environment

and collaboration between busi-
ness leaders and policy-makers
contributing to more informed
and thoughtful policy develop-
ment and limiting unintended
negative consequences.
▪ Ensure policies that create in-
stitutional legitimacy – in the
court systems, the financial
systems and markets, for intel-
lectual property protection, for
asset protection, for enforce-
ment, and for fair and consistent
consequences of infractions and
violations. This is essential for
markets to thrive and grow and
to attract investment of capital
and talent.
▪ Reduce the fragmentation and
complexity of today’s policy
environment through the syn-
chronisation and harmonisation
of national, state, and/or local
policies and across agencies and
branches of government.
▪ Individual policies and the over-
all policy bundle must be finan-
cially affordable and reasonable
for business and society. The
costs associated with policies
– even those that may be well
intentioned and arguably neces-
sary – should not outweigh the
benefits. Here it is important
that the benefits expressed in all
value dimensions (instrumen-
tal, extrinsic and intrinsic) and
across all legitimate stakehold-
ers are converted to a monetary
equivalent number to get a prop-
er value for money estimate in
order not to erroneously limit it
to instrumental value only for a
narrow stakeholder group.
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ENDNOTES
1 For more on the discussion on value cat-
egories see e.g. Beardsley, (1965); Rescher,
(1969); Anderson, (1995); Saracevic & Kan-
tor, (1997); Bradley, B. (1998); Rabinowicz
& Rønnow-Rasmussen, (2000); M’Pherson
& Pike, (2001); Kelly & Male, (2004); Pike
& Roos, (2004); Sigala, M. (2006); Goel,
(2008); Zimmerman, (2008); Town, (2011);
Ng & Smith, (2012); Puustinen, (2012).
2 Allocative efficiency is the market condition
whereby resources are allocated in a way that
maximizes the net benefit attained through
their use; and the quantity of goods produced
is that which is most beneficial to society. An
allocative efficient market is one in which
scarce goods and services are consumed on
the basis of the prices consumers are willing
to pay for them and scarce goods and services
are produced on the basis of marginal costs
equalling the prices charged for them.
3 This is because innovation and productivity
depend not just on the workings of individual
firms acting alone, but on a wide array of
supports, such as a strong research base,
skilled workers, networks, standards, and
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a host of other factors that public-private
partnerships can play a key role in helping
to provide (Atkinson & Audretsch 2008)
4 Audretsch & Link (2012)
5 Breener et al., (1991); Alesina & Rodrik
(1994); Leibfritz et al. (1997) and for a
more recent and detailed discussion see e.g.
Voitchovsky (2003)
6 Productive efficiency is the ability of or-
ganizations to produce in ways that lead to
the most amount of output with the fewest
inputs, including labour inputs
7 Adaptive efficiency is the ability of econo-
mies and institutions to change over time to
respond to successive new situations, in part
by developing and adopting technological
innovations
8 Equilibrium systems by definition are in a
state of rest, while growth implies change
and dynamism (Beinhocker, 2007)
9 Nelson (1981) ; Bradford De Long (1991);
Klenow & Rodriguez-Clare (1997); Hall &
Jones (1999); Easterly & Levine (2001)
10 Marsh & Shaw (2000)
11 Big Data Analytics is underpinned by data
fusion/analysis (including mining, visualiza-
tion and management of data and informa-
tion using e.g. probability, statistics, quality,
reliability, fuzzy logic, multivariable testing,
pattern analysis, etc.), decision modelling
(including discrete simulation, finite ele-
ment analysis, stochastic methods, neural
networks, genetic algorithms, optimization,
etc. and needs further tool development since
most steady state models become irrelevant
in a real-time environment), and systems
engineering which focuses on integrating
products, processes and operations from a
holistic perspective (Tien, 2012)
12 Named after Thorstein who first identified
the concepts of conspicuous consumption
and status-seeking in his 1899 publication
(Veblen & Almy, 1899)
13 Described by (Williamson, 1981) as dishon-
est behaviour by competing firms
14 Using a valid methodology like e.g. Conjoint
Value Hierarchy
15 The technology transmission cost incurred
by a sourcing firm in an internal production
transfer is substantial and forms a part of its
relationship specific investment, while the
subsidiary manager has little incentive to
invest in technology assimilation – in other
words, the absorptive capacity development
cost is born by the sourcing firm. If the off-
shore production is contracted to an outside
supplier i.e. outsourced, then the supplier
has to incur a significant proportion of the
technology transfer costs while the sourcing
firm has little motivation to bear the costs of
technology transmission and this is facili-
tated by competition among suppliers that
ensures that the sourcing firm’s technology
costs are minimised (Grover).
16 Brazil, Russia, India and China sometimes
also including South Africa and then known
as BRICS
17 Bangladesh, Egypt, Indonesia, Iran, Mexico,
Nigeria, Pakistan, Philippines, Turkey, South
Korea, and Vietnam
18 These are the author’s estimates and are based
on a labour share of total cost of around 15%
and an architecturally and technologically
complex system (product) in the B2B space
where absorptive capacity issues will arise
in the firms sourced from.
19 Innovation system theory states that inno-
vation and technology development result
from a complex set of relationships among
actors in the system, which include enter-
prises, universities and research institutes.
The original concept was articulated (using
different terminology) by List (1841) and the
present concept was introduced by Lundvall
(1985).
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51
Manufacturing in a High Cost Environment

20 See e.g. de La Fuente (2011). For a discus-
sion of the literature here
21 So named after being first described in
Baumol & Bowen (1966).
22 Innovation system theory states that innova-
tion and technology development result from
a complex set of relationships among actors
in the system, which includes enterprises,
universities and research institutes. Original
concept was articulated (using different
terminology) by List (1841) and the present
concept was introduced by Lundvall (1985).
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52
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 2
Competing from a High
Cost Economy:
What is the Challenge to
Australian Public Policy?
ABSTRACT
The starting point for this chapter is that Australia is a high-cost economy with a fading resources boom
and a diminished domestic manufacturing sector. The chapter explores the fresh challenge that these
structural developments present to public policy. It argues that this requires a shift from the dominant
neo-classical policy paradigm, which has to date provided the intellectual muscle for a transformation
of Australia’s political economy. The chapter makes the case for policies framed to foster innovation
and knowledge as the approach needed for Australia to succeed in an environment characterised by the
new international distribution of manufacturing, the impact of new technologies, and the prevalence
of global supply chains. To realise innovation-based economic renewal requires capacities for much
more targeted interventions that engage business at cluster, sectoral, and/or regional levels. The chapter
concludes by considering the obstacles to, and the possibilities for, policy change.
INTRODUCTION
Australia is a high cost economy with a fad-
ing resources boom and a diminished domestic
manufacturing sector (Roos, 2012, 2013). This
chapter explores the fresh challenge that these
structural developments present to public policy.
This, so it argues, involves a shift in the focus
of policy towards innovation, with particular
attention to manufacturing and start-ups. This
approach already receives rhetorical – and limited
substantive – support from federal and state gov-
ernments.1 As the chapters in this book suggest,
this is insufficient. The challenge is fundamental
and wide ranging. It involves assimilating a new
policy paradigm (Hall, 1983), which cuts across
the current conventional wisdom, based in neo-
classical understandings of economic dynamics.
Since 1983, this stream of conceptual and policy
ideas has provided the intellectual muscle for a
Ian Marsh
University of Tasmania, Australia
DOI: 10.4018/978-1-4666-5828-8.ch002
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53
Competing from a High Cost Economy

transformation of Australia’s political economy.
But, as has recently been convincingly argued, the
new international distribution of manufacturing,
the impact of new technologies and the prevalence
of global supply chains combine to create a new
international economic context (e.g. McKinsey
Global Institute, 2012; Gereffi and Lee, 2012;
Herrigal and Zeitlin, 2010). This coincides with
the end of the resources boom in Australia and
the emergence of substantial new domestic eco-
nomic challenges including employment, skills
and growth (e.g. Garnaut, 2012; Parkinson, 2012).
This is encapsulated in the broad idea of a
‘knowledge economy’. This phrase points to the
transcendence of commoditised activity, which
remains the basis of much economic and indus-
trial practice. In this world, knowledge is often
secondary to other considerations like scale or ef-
ficiency – but in the context of a given technology.
In the past decade, commoditised manufacturing
has moved to low cost and low wage settings. Op-
portunity now lies in products and services that
are much more responsive to individual tastes
or business needs – indeed in the best case they
shape these tastes and needs – and to a dynamic
based on technologies that cut costs and enhance
quality. A myriad of contemporary innovations
sustain these opportunities. Indeed fully realised
the idea of a knowledge economy extends beyond
any narrow technical conception. A knowledge
economy is embedded in a society that nourishes
creativity, imagination and risk taking, one that
welcomes these disruptions to conventional ways.
In the best case, this is the vision of an open
society, one whose citizens are alert to emerging
economic and other challenges and who do not
baulk at the adjustments that adaptation requires.
Utopian? Perhaps. But, to sustain their ways of
life, economically advanced societies would seem
to have few alternatives.
So knowledge-driven innovation and entrepre-
neurship may hold the key to economic renewal
(Roos, op cit). But realisation requires a new
conception of the economic role of the state and
new capacities for federal-state collaboration. It
requires capacities for much more targeted inter-
ventions that engage business at cluster, sectoral
and/or regional levels: in other words, relation-
ships that are different from the arms-length and
hands-off philosophy that currently prevails. A
theoretical framework for this approach is avail-
able in the concept of a knowledge economy
and its associated focus on the development of
specific economic capabilities (e.g. Lipsey et al,
2008; West 2013; Pedersen, 2010). This concept
represents both a next step beyond the neoclassi-
cal focus on economy-wide deregulated markets
and a response to the competitive challenge in a
high cost economy.
This is now well recognised in economies
whose economic maturity and basic cost structures
more or less resemble those of Australia, notably
the United States. There, as well as in Britain and
Canada, a variety of programmes that involve new
catalytic and leadership roles for the state are either
being implemented or discussed. These include
collaborative engagement and strategy develop-
ment at regional and sectoral levels. They involve
a focus on economic capabilities that are based in
shared infrastructures, most importantly concern-
ing knowledge development, but also involving
training, communications, logistics, finance etc.
They ask if relevant upstream, downstream and
spill-over capabilities are appropriate to the needs
of particular contexts. In this exercise, business,
universities and other research and industry bod-
ies are partners. In other words, in a knowledge
economy, relevant actors collaborate in thinking
systemically about common sources of economic
leverage. In a federation like Australia, this espe-
cially involves working across levels of govern-
ment. Moreover start-ups present a special case.
Where innovation is concerned, their consolidation
can become a particular priority for public policy
(Mazzucatto, p. 37-39).
Such roles for the state are a world away from
the conventional wisdom that currently informs
policy in relation to industry. They include a posi-
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54
Competing from a High Cost Economy

tive, opportunity-oriented focus and acting as a
catalyst in system-level analysis and engagement;
also the development of appropriate institutional
arrangements. Incentive structures and motives
need to be congruent with the policy environ-
ment. As we will see, one particular challenge
concerns the ability of the state to act at sectoral
and regional levels. In Australia’s case, evidence
of the distance between this need and present
capacities is available in a source that may at first
appear to have little to do with industry – that is,
indigenous affairs. In this area, where the approach
to decentralised activity is most elaborated, we
also see most starkly the scale of the challenge
to prevailing centralised governmental practices.
In exploring these issues, this chapter first
surveys some key conceptual and other differences
between innovation and neo-classical approaches.
It then sketches public policy measures that have
been adopted in a variety of jurisdictions to ca-
talyse innovation. It continues to illustrate dilem-
mas in their adoption in the present Australian
public policy system. The chapter concludes by
considering the obstacles to, and possibilities for,
policy change.
THE FRAMEWORK FOR
PUBLIC POLICY
A high cost economy creates a new context.
Competitiveness is not based on cost advantages
and not only or primarily on economy-wide ef-
ficiencies. In a high cost economy, it derives from
superior products, superior quality and superior
responsiveness to specialised customer needs or
tastes. Innovation theory offers a framework for
a policy response to these imperatives. It offers
an alternative framing of the role of the state in
the economy. It offers a different, and essentially
bottom-up, reading of firm-level dynamics and of
the logic of economic coordination. This is avail-
able in a technical version (e.g. Lipsey et al. 2005;
Fagerberg et al. 2005; West 2013) or generalised
in a more expansive ‘learning by doing’ account
(e.g. Sabel, 2004, 1992 and elsewhere; Sabel and
Zeitlin, 2011; Sabel and Simon, 2011). A number
of conceptual and governance perspectives join
to create the framework for public policy.2 Here
these elements can only be sketched – but hopefully
this will be sufficient to indicate the fundamental
character of the challenge that they present.
What Knowledge is Relevant?
How is it Disseminated?
A high-cost economy competes, at one level,
through the development of transformative tech-
nologies and, at another, on quality and continuous
improvement: put more generally, it competes on
the basis of superior knowledge. But there are
fundamental differences between conceptions of
the economic role of knowledge in neo-classical
and innovation paradigms. The former treats
knowledge as a homogenous category that arises
exogenously and diffuses seamlessly. In essence
it assumes a world in which basic technologies
already exist and are widely available. In this
world, costs and prices adequately assimilate all
relevant information and are thus sufficient to
drive optimising choices. The mechanical, neo-
classical equilibrium model is an elegant synthesis
of these assumptions and, in a world in which
general purpose technologies are the basic drivers
of economic activity, it has wide and appropriate
practical application. This basic model has also
been modified to accommodate technological
change. But even in this modified (evolutionary)
form, neo-classical theory does not sufficiently
recognise the dynamic nature of knowledge and
the organisational, institutional capabilities and
settings that mediate its development and appli-
cation (Lipsey et al. p. 29; Mazzacuto, p. 31-35;
Smith and Estibals, p. 7-10).
By contrast, in innovation approaches, knowl-
edge is the primary driver of economic activity.
Knowledge systems are no less important than
market structures.
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55
Competing from a High Cost Economy

The knowledge that is involved is differenti-
ated, lumpy and contingent and its diffusion is
problematic. Knowledge interactions are multi-
directional and context specific. A linear model
– from scientists to entrepreneurs to products – is
wholly discounted. Knowledge can be specific to
particular clusters of economic activity (Porter,
1990 and 1998). A later Brookings research pro-
gramme explored the requirements for developing
such strategies in metro settings (Muro, 2008) –
work that has since been extended to the design
of federal-state collaboration (Katz, 2012).
The knowledge that is involved can also be
trans-sectoral. Recent US research suggests ‘co-
located interdependencies among complemen-
tary activities, not narrowly specialised clusters,
produce higher rates of growth and job creation.
Moreover, they do so across a broad range of
industries, not just in high-tech or advanced
manufacturing (Berger et al. 2013 citing Delgardo
et al. 2012). Whatever the span of engagement,
the essentially heterogeneous, local and contex-
tualised character of knowledge is clear; equally
clear is the problematic nature of its development
and dissemination (e.g. March, 2005).
Knowledge comes in a variety of forms. Blue
skies research typically involves basic frameworks
and paradigms (black matter, black holes) and
general purpose technologies (e.g. IT, nano-
technology, robotics). The public good character of
this research is well established. Other broad forms
are generic knowledge and applied and focused
knowledge. Generic knowledge is concerned with
technologies or processes that have application in a
number of specific economic settings (e.g. surface
engineering; advanced sensing, measurement and
process control; advanced forming and joining
technologies: President’s Council of Science and
Technology, Report to the President, 2012,p. 18:
this nominates eleven such technologies). This
research is hybrid in nature. There can be both
public and private interest in the development
of this knowledge – the latter because particular
firms recognise the importance of the technology
in question for their immediate activities; the
former because of wider spill-over possibilities.
As is illustrated in the next section, public-private
and state-federal collaboration focused on generic
knowledge has been the primary concern of re-
cent US policy development. In addition, process
and organisational innovations may be no less
significant than technologies (e.g. Roos, 2011;
Sabel and Simon, 2011, p. 62).
Knowledge creation is thus a multi-facetted and
complex process. Generic knowledge is the form
which presents especial challenges to policy. It can
arise within a disciplinary field or by synthesis
across disciplinary fields. It can concern technolo-
gies strictly understood or systems and processes.
The settings in which these research activities can
be pursued are also varied: for example, universi-
ties, dedicated national and/or regional and/or local
research institutes, science parks, entrepreneurial
accelerators etc. Where there are joint public-
private interests in the activity it invariably involves
interactions between producers and researchers.
Indeed, the more knowledge becomes the prime
source of product and systems development, the
greater the need for intermediary and brokerage
organisations.
In mapping particular knowledge systems,
three questions are pertinent. How in this par-
ticular economic ecology are shared problems
identified? How are they solved? How are the
results disseminated to, and taken up by, those who
need to know? Clearly, different economic and
research contexts will involve diverse institutional
architectures. Thus the Australian wine industry
represents one configuration (Smith and Marsh,
2007); the Taiwanese biotechnology industry an-
other (Dodgson et al. 2008; also Matthews, 2000
on electronics). The wide literature on national
innovation systems is also relevant (e.g. Nelson,
1993; West 2013, p. 13-15)
This brief sketch of the role of knowledge
in innovation theory points to important policy
implications. First, where knowledge develop-
ment becomes the primary driver of productivity
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56
Competing from a High Cost Economy

the state has a direct stake in the propagation of
this activity. Second, the spillover implications
of generic technologies reinforce this interest.
Third, these knowledge developments are essen-
tially contextual or ‘local’ in character. We have
moved from a world in which the focus of policy
is economy wide to one in which this shifts to
particular regions or contexts or ecologies of in-
stitutions and firms. Fourth, the general skill level
of the population is an essential consideration.
Risk, Uncertainty and their
Policy Implications
A second critical conceptual difference concerns
risk and uncertainty. Neo-classical theory does
not distinguish these terms. People with the same
information are assumed to have similar prefer-
ences. Hence in neo-classical models, two people
faced with similar choices will make the same
decisions. Genuine uncertainty, which is expressed
in different and equally plausible judgements of
future possibilities, is thus assumed away and
modelling becomes tractable.
In the real world uncertainty is pervasive.
Two people with the same information may reach
totally different judgments. One important reason
concerns the mystery that is the future. They may
assign different weightings to technological risk.
They may assess production risk differently. They
may anticipate different market opportunities.
They may evaluate financing risks differently.
Uncertainties can also arise where there is inter-
dependence between developments. Risk is thus
not only of different types, it also varies across
contexts and sector.
From a policy perspective, at least two implica-
tions follow. One concerns financing. The returns
on innovation are typically highly uncertain and
the assets involved often take intangible forms
(e.g. West, 2006, 2009). An absence of any ac-
counting history and limited market power are
other problems especially for start-ups and SMEs.
Uncertainty may be a particular impediment to the
provision of finance and investment and deliber-
ate action may need to be taken to counteract its
impacts. A survey of EU practices concluded:
‘There is no single optimum method for financing
innovation-active firms – there is a mix of relevant
financial instruments and firm behaviours, and
policy needs to take account of the heterogeneity
in the population of firms and in their need for
funding during the life cycle of the innovation
processes’ (cited Smith and Estabels, p. 73).
A second implication concerns strategies for
value-capture at the national level. The encour-
agement of risky investments involves tilting the
playing field towards higher than average returns.
By comparison with businesses operating with
established technologies, the gains from success
accrue disproportionately to stock owners. West
(2013, p. 20) cites the shares of income accruing
to wages and net operating surplus to underline
this policy finding: ‘For many nations it is not
sufficient to rely upon serving as an attractive base
for the operations of foreign-owned corporations.
In the past a strategy of this type could assume
that much value would be captured locally through
wages. But that is less and less true.’ Recent
debates in Britain and Germany about the use of
tax havens to minimise liabilities from domestic
sales introduce yet another consideration.
The Concept of Efficiency
Efficiency now figures prominently in public
policy analysis. The Productivity Commission
has recently released a discussion paper which
defines its various forms (2013). In neo-classical
thinking the relevant form is allocative – that is
exchange should occur in markets that are as
close as possible to the theoretical ideal of perfect
competition. In such a setting prices are set at
optimal levels and resources are thus allocated
to their most productive uses.
In innovation theory, the relevant form of
efficiency is different: it is not primarily of this
allocative type, important though that is as a
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57
Competing from a High Cost Economy

base-line indicator of structural effectiveness.
Rather the relevant type involves what Libenstein
(1966) termed X efficiency. Efficient price-based
exchanges remain as a base-line condition, but once
established other linkages and spillovers come
into focus. For example, X-efficiency focuses
on the quality of relationships at the level of the
firm and in the relations between a firm and its
customers and suppliers. It involves attention to
the appropriateness and presence of supporting
infrastructures like knowledge or skills or finance
or logistics or communications. It derives from
a variety of local, on-the-job, technological and
quality factors and from the broader infrastructures
that sustain such possibilities. This reinforces a
shift of the focus of policy to sectors or regions,
and to the systems of activity that develop at these
levels. Markets are one important element in such
systems, but other institutions – or systems of
activity – are equally, if not more, critical. The
context is the definitive consideration.
Coordination and Accountability
In a world of decentralised action, where continu-
ous improvement is sought via collaboration at
sectoral and/or regional levels, the issue arises:
how can the centre preserve accountability? How
can the circle be squared between local initiative,
innovation and/or continuous improvement and
centralised accountability? This is an important
issue in any governance system, but particularly
acute in a federation. In integrating the activity
of sovereign governments around common goals,
the EU has adapted an approach described as
pragmatic or experimentalist governance (e.g.
Borras and Radaelli. 2011).
Its primary proponent, Charles Sabel has de-
scribed its core elements (the following quotes
are from Sabel and Simon p. 79-83): ‘First,
framework goals (such as “adequate education” or
“good water status”) and provisional measures for
establishing their achievement are established…
through consultation between the centre and the
local units and relevant outside stakeholders.
Second, local units are explicitly given broad
discretion to pursue these ends as they see fit….
But third, as a condition of this autonomy, local
units must report regularly on their performance
and participate in a peer review in which their
results are compared with those of other units
employing other means to the same general ends.
These reviews require the local units to describe
and explain their efforts to peers and superiors; to
show that they have considered alternatives; and
to demonstrate that they are making progress by
some jointly acknowledged measure of success,
or re making plausible adjustments if not.’ The
centre provides services and inducements that
facilitate this disciplined comparison of local
performances and mutual learning.
An experimentalist regime differs from com-
mand and control in that ‘a large fraction of their
norms are indicative or presumptive rather than
mandatory…..rules will be continuously revised in
the course of application. It treats rule departures
diagnostically as symptoms of systemic problems
and opportunities for systemic improvement.’
Incentive designs should reinforce these out-
comes. Their distinctive goal is ‘to induce actors
to engage in investigation, information sharing
and deliberation about problems with multiple
dimensions that are only dimly understood’. A
variety of grant programs in the US indicate how
these designs can be operationalised. These ‘award
large grants …through a competitive process in
which …applications are judged on the extent to
which they demonstrate capacities to plan and
self-assess, to share and make use of information
about their own and peer performances, and to
co-ordinate with critical stakeholders in both the
public and private spheres.’
Accountability also differs between systems
based on narrow by contrast with extended notions
of efficiency. ‘(Agents) often have discretion to
depart from rules when they believe it would be
counterproductive to follow them. This discre-
tion, however, is limited by the requirement that
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58
Competing from a High Cost Economy

the worker do so transparently in a manner that
triggers review, and, if her judgment is sustained
prompt rewriting of the rule to reflect the new
understanding.’
Policy Advice
What of policy advice? Neo-classical theory takes
its cue from mechanics and images systems of
economic activity as tending to equilibrium. This
has many consequences not least the possibility of
formal modelling. This lends a degree of precision
to policy advice – which is appropriate in certain
contexts, but not where innovation is the focus.
Innovation theory does not draw on equilibrium
models and envisages no terminal or end point to
system development. Rather, competition involves
a continuous and never resolved pursuit of advan-
tages. Schumpeter’s (1975, p. 83) answer to this
is his paradox of competition: ‘A system that at
every point of time fully utilises its possibilities
to the best advantage may yet in the long run be
inferior to a system that does so at no given point
in time, because the latter’s failure to do so many
be a condition for the level or speed of long run
performance’.
Analysis thus ends in a technically-informed
prudential judgement and in this respect resembles
determinations of monetary policy. In Lipsey et al.
summary: ‘…policy ….must be based on a mix of
theory, measurement and selective judgment. The
need for judgment does not arise simply because
we have imperfect measures of the variables that
our theory shows to be important, but because of
the very nature of the uncertain world in which
we live. Although a radical idea with respect to
microeconomic policy, the point that policy re-
quires an unavoidable component of subjective
judgment is commonly accepted with respect to
monetary policy.’ After discussing Friedman’s
failed effort to make central banking rule based,
they conclude that the approach now adopted by
central bankers can be generalised to innovation
policy making: ‘Central banking… is guided by
theoretical concepts; it is enlightened by many
types of empirical evidence; and in the end all of
these are inputs into the judgments that central
bankers cannot avoid making’ (2005, p. 505-506)
Collaboration
As we will see in the next section, where innova-
tion is concerned, collaboration between business,
government and other actors is essential. But this
runs counter to much current thinking about the
risks of engagement between public and private
actors. This derives from a powerful body of
analysis, public choice theory, which involves the
application of the neo-classical model of choice
(‘instrumental rationality’) to political relation-
ships. In a public choice perspective, collabora-
tion encourages not productive activity but rent
seeking. This arises as powerful interests seek to
acquire and preserve special or sectional benefits at
the expense of wider taxpayer and public interests
(e.g. Olson, 1965, 1982).
The empirical evidence on this subject is mixed.
There can be little doubt that favoured interests
fight to preserve special privileges. On the other
hand recent evidence suggests the state is not as
ineffective as the public choice analysis implied
(e.g. Australian tariff roll-backs: Edwards, 2006,
p. 21 notes that by 2001 the average rate decreased
from 38% in the 1970s to 5%). The psychological
model of choice on which public choice analysis
is based is critical. It assumes that optimising
preferences arise independently of the current
context. If the expected benefits outweigh the costs
of lobbying, a rational optimiser, who perceives
opportunities for especial gain – such as tariffs or
subsidies – will pursue these rents. By contrast,
the generality of taxpayers have no incentives to
monitor this advocacy or to resist this outcome.
On its own logic, this model is compelling.
But is this logic of choice the only or right
frame? An alternative conception of agency, ‘ap-
propriate behaviour’, offers a much more positive
and expansive foundation for choice (March and
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59
Competing from a High Cost Economy

Olsen, 1995, 2006). Whether researcher, public
official or entrepreneur, appropriate behaviour
develops from a basic question: ‘How should a
person like me behave in a situation like this?’
The answer to this question will depend on under-
standings of context, which continuously develop
and unfolds. This model of choice and behaviour
thus builds on the uncertainty that is inherent in
innovation. It offers a much more sanguine read-
ing of possibilities of collaboration. It suggests
that, through an understanding of shared contexts,
self-interested rational actors can not only vary
their reading of self-interest (to attain ‘self-interest
well understood’ in Tocqueville’s famous phrase)
but also their understanding of the ways in which
their immediate interests are implicated in the
actions of others.
These can concern not just uncertainties about
technologies, but also inter-subjective understand-
ings associated with institutionally-based collabo-
ration. Culpepper (2008, 2003) describes some
of these: ‘Uncertainty springs from the inability
to gauge the performance of new institutions, the
actions of other players, or the consequences of
what we will gain if we do change our behaviour’
(2008, p. 7). And elsewhere: ‘Actors in this new
setting are not simply unclear about the sort of
people with whom they are interacting; they may
also be unclear about what game they are playing
and consequently how they should understand
their own stakes in the game.’ (p. 16). And in
a third framing: ‘Actors not only need a way to
estimate how well new political institutions and
new practices will work, but they also need a
mechanism to help coordinate their expectations
about what other actors will do’. But uncertainty
and inter-subjectivity also intersect to create op-
portunities for negotiated accommodation. Where
private incentives are absent, governments can
play a catalytic role in convening co-ordination,
risk-pooling and risk reduction and bridging. The
steps that are being taken in particular jurisdic-
tions to advance such outcomes are explored in
the next section.
IMPLEMENTING INNOVATION
POLICY: ALTERNATIVE DESIGNS
It will be clear from the foregoing that not only is
there not one best policy design but also that the
scope of policies can vary widely. Each high cost
economy needs a policy design appropriate to its
broader political, economic and indeed cultural
setting. That said, the examples that follow illus-
trate the steps that are being taken by a diverse
variety of developed states, perhaps notably the
United States, to cope with high cost contexts.
As these examples show, innovation strate-
gies can be of two broad forms: they can be the
keystone for public policy designs across their
full range; or they can be more circumscribed,
focusing particularly on economic capabilities
(Pedersen, 2010). For example, Denmark illus-
trates the former category. Pedersen (2006) has
described Denmark as a ‘negotiated economy’
– one in which the development of capabilities
is the primary focus of policy and in which a va-
riety of central, regional and joint public-private
institutions seek to mediate continuous learning.
The Economist recently suggested that a variant
of this design is common throughout Scandinavia
where it is associated with very high levels of
both economic prosperity and social satisfaction
and trust (The Nordic Countries: The Next Super
Model, 2nd February 2013).
The tiger economies of East and Southeast Asia
are another area where different models of eco-
nomic development have emerged (Weiss, 2010;
Marsh 2006). These started as strong state-led
developmental models but more recently they have
moved towards innovation-based designs. Thus
Dodgson et al. (2008) described the collaboration
between the Taiwanese government and private
interests in the development of biotechnology
capacities in that state. They assess a work-in-
progress with qualified optimism. Looking to
the economy overall, Strand et al (2011) offer
an analogous assessment. Recent developments
in Singapore are explored in Ng (2012) and
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60
Competing from a High Cost Economy

Hornbridge (2010) and in South Korea in Noland
(2012) and Lim (2012). In each case the shift of
overall policy designs to a focus on innovation
and economic capabilities is evident.
Most relevant to Australia, thinking is also
advancing in new directions in the United King-
dom and the United States. In the former case,
the triggers include the election of the coalition
government in 2010 and the financial crisis, al-
though aspects (such as technology forecasting)
had long been established (Public Administration
Select Committee, Governing the Future, HC
126, 2007, Ev. p. 77). Think tanks have also been
actively promoting a new approach (e.g. Institute
for Public Policy Research – Creative Destruction,
2010, The Third Wave of Globalisation, 2012;
Demos – The Entrepreneurial State, 2011). The
relevant government department, Business, In-
novation and Skills, has also commissioned an
extensive review of the practical implications of
academic literatures (Innovation and Research
Strategy for Growth, 2011). In a leaked letter to
the Prime Minister and Chancellor, the Minister,
Vince Cable, subsequently proposed a much
more sectorally oriented strategy and various
forms of special financial support. Some of these
proposals were subsequently adopted (Cable, The
Telegraph (London), 6 March 2012) but the most
far-reaching semi-official report was by Michael
(now Lord) Heseltine, a former Conservative
Minister, who was commissioned in early 2012 by
David Cameron to review economic strategy (No
Stone Unturned, October 2012). Its central recom-
mendation involves the replacement of current
highly centralised approaches with a decentralised
design in which Local Enterprise Partnerships
would be charged to formulate development plans
for their areas. These would start with economic
opportunities which would also guide research,
education and social strategies. Overall priorities
and co-ordination would be accomplished through
a formal national growth strategy. This would be
the responsibility of a National Growth Council
made up of senior ministers and chaired by the
Prime Minister. These proposals reflect ‘knowl-
edge economy’ assumptions about the role of the
state and the practice of economic policy. They
remain far from current practice. But these and the
think tank reports noted above reflect a developing
alternative conversation.
Turning to the United States, the nominal home
of free market capitalism, Marina Mazzacutto
(Professor of Science and Technology Policy at
the University of Sussex) has described in detail
the entrepreneurial role adopted by the American
state. Through four examples, she illustrates how
the US federal government has progressively
developed an entrepreneurial role. The first in-
volves the Defence Advanced Projects Agency
(DARPA) which was founded in 1958. To explore
the potential in emerging technologies, the agency
played a catalytic role mobilising big and small
firms and university and government laboratories.
Its work contributed critically to what became the
computer industry and later to the emergence of
biotechnology (pp. 79-81). Building on this expe-
rience, the Reagan administration established the
Small Business Innovation Research Programme
which was designed to provide support to high-
tech firms. Later the federal government played
a lead role in drug development (through the
Orphan Drugs Act of 1958 which was designed
to fast track research on drugs that affected less
than 200 000 people) and most recently in the
National Nanotechnology Initiative.
More recent developments exemplify the ex-
tent to which knowledge economy thinking has
come to inform US practice. As in the UK this
has been driven by various factors including the
offshoring of manufacturing jobs, unemployment
following the financial crisis, the emergence of
new thinking about the requirements for innovation
and of new technologies that holds in prospect a
manufacturing revival. The arrival of the Obama
administration in 2008 was one turning point and
the fact that 26 governorships changed hands in
the 2011 election another.
The transmission of knowledge economy
concepts into public policy in the United States is
reflected first in the development of interdependent
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61
Competing from a High Cost Economy

national and state economic strategies. Although it
is too early for impact to have been evaluated, the
number of programmes and their complementar-
ity suggests the emergence of a new public policy
design: one that moves away from arms-length
regulatory change or a sole focus on competition
policy towards new patterns of public-private
collaboration driven by new central capacities
for linking emerging technological capabilities to
emerging global economic opportunities.
Consistent with innovation theory, this ap-
proach started with the identification of specific
generic technologies that offer the prospects of
driving future productivity growth and manufac-
turing recovery. This occurred in a report to the
President released in July 2012.3 For example, five
of the nominated technologies are: advanced sens-
ing, measurement and process control, sustainable
manufacturing, nano-manufacturing, industrial ro-
botics. The report also suggested that ‘Universities,
national labs, intermediate technology institutes,
independent research institutions and community
colleges will need to work together with industry
to support research, development and deployment
and to develop the talent pipeline for industry’.
Thereafter the focus shifted to implementation
at regional or sectoral levels. This marked a shift
of the competitive focus to local and regional
‘ecologies’ of institutions. These policy changes
are documented in several recent publications. For
example, in early 2013 the National Governors
Association Policy Academy (NGA) released a
report entitled “Making” our Future: What States
are doing to encourage Growth in Manufactur-
ing through Innovation, Entrepreneurship and
Investment. 4 This surveys the recent develop-
ment of policy in eight states: Massachusetts,
Connecticut, California, Colorado, Illinois, New
York, Pennsylvania, and Kansas. Another example
of an elaborated state wide strategy is available
in the approach adopted by Washington State.5
Despite diversity in basic strategies, four common
elements are noted:
• Strategy Development: All of the US
States pursued an integrated approach to
develop an advanced manufacturing strat-
egy connecting large and small manufac-
turers, as well as state, federal and regional
partners.
• Industry Led: In each case, the policy de-
sign involved co-production – the policy
priorities and partnerships that were iden-
tified were developed by and with the rel-
evant industries, not imposed from outside
by arms-length official action.
• Collaboration: In each case the effort to
boost innovation potential included a par-
ticular focus on small and mid-sized firms.
In addition, the strategies all involved
creating linkages between firms, universi-
ties, research institutes and other appro-
priate coordinating and skill development
agencies.
• Skills: Finally, the need to create a spe-
cial focus on the development of ap-
propriate skills was acknowledged. This
was designed not only to fill immediately
specialised needs but also to deliver life-
long, industry relevant training to workers.
STEM programmes (Science, Technology,
Engineering, Mathematics) were a general
feature.
Since context was critical, the approach to these
broad objectives was varied. In practice, strategy
development was based on mechanisms such as:
state-wide councils, a regional and bottom-up
process or a development of existing structures
by strengthening their role and standing. For
example, in 2011 Pennsylvania appointed the
Governor’s Manufacturing Advisory Council
as a public-private partnership. Leadership was
shared between a senior elected official and a
business leader with acknowledged standing both
in the business community and in the broader
community. The council consisted of 24 people.
Following an eighteen month period of research
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62
Competing from a High Cost Economy

and consultations, it provided a blueprint for
state development which was endorsed and
implemented. By contrast, New York created
ten regional economic Councils one in each of
the State’s regions. These brought together lo-
cal business, university, labour and community
leaders. Each region designed its own plan. The
state budget was aligned to these priorities and a
consolidated application process for funding was
introduced. Applications were invited for projects
and in 2012, 2800 were submitted. The regional
councils then ranked the projects.
The NGA report also illustrates the variety of
arrangements which have developed in different
regions to pool research capacities, encourage col-
laboration amongst firms and link business to the
research community. For example, Virginia has
established a Commonwealth Center for Advanced
Manufacturing which includes three universities
(University of Virginia, Virginia Tech and Vir-
ginia State University) and industry members at
Tier 1 and Tier 2 levels of support. The former
have access to both generic and directed research
whereas the latter only have access to generic
findings. Contributions are scaled accordingly.
The partnership was led by the state as part of an
effort to bring a Rolls Royce production facility to
Virginia. There are now eight Tier 1 participants
including Newport News Shipping, Rolls Royce
and Siemens. Surface engineering exemplifies a
generic technology which has wide application
amongst participating industries. The Centre also
prepares a skilled workforce for manufacturing
jobs through a variety of internships and through
partnerships with community colleges to help
design curricula.
Other elements of these programmes include
innovation vouchers and sectoral collaboration to
build workforce capabilities. Innovation vouchers
have been introduced to strengthen ties between
small and medium manufacturers and universi-
ties and research organisations. Already well
established in the Netherlands, Germany, Austria,
Switzerland and Canada, the EU has conducted
an extensive evaluation and that experience was
used to inform policy design in US states (e.g.
Connecticut).6 Workforce development is also
orchestrated through a variety of sectoral partner-
ships. The NGA report records over a thousand
have been established around the states.
Another report (Trends in Technology Based
Economic Development, Local State and Federal
Action in 20127) records parallel efforts in ten
states: Connecticut, Colorado, Hawaii, Idaho,
Massachusetts, Michigan, New Jersey, New York,
Virginia and Washington. It reports initiatives in
relation to commercialising research, investing
in workforce skills, organisation and branding of
state economic development agencies, the devel-
opment of strategic and competitiveness plans,
the development of tax incentives and city-based
initiatives.
Together, these varied descriptive accounts
affirm the shift towards innovation based ap-
proaches.
DILEMMAS IN SHIFTING
PUBLIC POLICY
The diverse initiatives described in this chapter
all involve decentralised policy designs. The ca-
pacity to shift substantial initiative in the design
and implementation of public policy to regional
and sectoral levels is critical. The requirements
are also clearly set forth in a number of OECD
reports.8 How equipped is the Australian policy
system to manage such a transition?
The most developed example of such an effort
is available in a policy area which, at first sight,
may seem remote from innovation but in fact the
public policy challenge is directly analogous.9 In
March 2000, in an endeavour to impart a more posi-
tive orientation to indigenous policy, the Howard
government espoused what it labelled ‘practical
reconciliation’. This explicitly acknowledged the
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63
Competing from a High Cost Economy

leadership role of the national government.10 It
aimed to improve conditions on the ground in
relation to health, housing and education.
In 2002, a regionally based and joined-up
government strategy was launched with tri-
als at eight indigenous sites. In May 2004, the
government established a Ministerial Taskforce
on Indigenous Issues. The idea was to create a
Cabinet level committee to drive the ‘practical
reconciliation’ process.11 This was supported by
a Secretaries Group which was designed to coor-
dinate implementation. At an administrative level,
an Office of Indigenous Policy Coordination was
also established.
In an analogue of joint strategy agreements
around innovation, and to facilitate change at the
regional level, Shared Responsibility Agreements
(SRAs) were to be signed covering particular
measures. In addition, to build coordinated action
these were to be backed by Regional Partnership
Agreements (RPAs). By 2007, 180 SRAs and 3
RPAs had been signed (Australian National Audit
Office (ANAO) evaluation, 2009). To implement
these arrangements, thirty multi-agency Indig-
enous Coordinating Centres (ICCs) were also
established in urban, rural and remote Australia.
By 2006, some 562 staff members were assigned
to ICCs (approx 19 staff per centre). They as-
sumed three main roles: program administration;
solution brokering to provide a bridge between
community needs and departmental programs;
and developing SRAs with local communities.
ICC managers were the key.
Ten evaluations have since been conducted.
Their findings are uniform. Governance is con-
founded at the critical regional and ICC levels.
The obstacles are structural and systemic not con-
tingent or personal. Consider the two most recent
reports, one official (2008, conducted by KPMG)
and the other independent (2010, conducted by
academics from the ANU and the University of
Canberra). The KPMG study involved a review
of internal documents plus interviews with 158
Australian and state government agency staff
and 35 community organisations. The following
selected observations define the magnitude of the
structural barriers that continue to frustrate this
arrangement despite six years experience and at
least eight preceding reviews. Here is a catalogue
of the obstacles:
Siloed departments were fundamental obstacles
to more joined-up activity at local levels and to
the exercise of discretion by ‘local’ staff.
There is a definite trend of line agency staff
presenting to communities/organisations as
representative of their agency…..Communities/
organisations reported this as confusing as they
do not know who to talk to or if they have to talk
to all the different agencies instead of accessing
services through the ICC….ICC staff and line
agency staff rarely visit communities together.
ICC managers reported frustration in undertaking
(their intended leadership) role. As coordina-
tors, Managers indicated that they do not have
authority to gather agency staff support….Line
agencies confirmed that their staff are directly
responsible to their line agency and that the ICC
manager has no authority to compel or direct staff
to undertake ICC work.
Line agency staff located in ICCs commented that
they experienced a tension between their program
management responsibilities (i.e. the expectations
of their line agency) and their responsibility to
engage in what they referred to as ICC work….
Conversely ICC managers reported feeling pow-
erless in some situations as they do not have the
authority to direct change. (p. 9)
The implementation of whole-of-government col-
laboration in ICCs is an area requiring significant
improvements. Many of the issues that impede
whole-of-government are structure and have little
to do with ICC staff and management’s willingness
to collaborate. (p. 10)
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64
Competing from a High Cost Economy

Resource allocation and spending authority
remained highly centralised:
One ICC took over 12 months to negotiate and
approve an SRA which was worth under $50 000
in funding…To overcome the barrier of obtaining
multiple line agency approvals…many ICCs have
adopted the approach of developing smaller SRAs
in terms of dollar value, number of signatures and
issues to be addressed.
A perceived barrier to reducing red tape is line
agencies different program and funding guide-
lines….For example one agency may apply more
rigorous risk assessment for applications over
$100 000, while another agency’s more rigor-
ous assessment only applies to applications over
$150 000.
Accountability arrangements were another
obstacle.
Many line agency staff were unable to provide
governance and financial management assistance
to organisations due to probity issues relating
to assessment of funding applications… Com-
munities advised that it was difficult for them to
keep abreast of the changing policy and service
delivery environment.
In Summary
‘Overwhelmingly the consultation repeated the
message that the current funding and reporting
arrangements are a significant barrier to whole-
of-government collaboration…Line agencies have
different program guidelines, funding rounds and
delegation which do not align… Complaints were
raised about the different risk assessments each
line agency applies..in some cases this can result
in applications undergoing up to 8 different risk
assessments’
The findings of the University-based study
(O’Flynn et al. 2011) echo these conclusions albeit
in more graphic terms. This study was based on 48
field interviews covering staff at ICCs, State and
regional offices and in Canberra. Their conclu-
sion is unequivocal: ‘Due to entrenched barriers,
which permeate the broader public service, ICCs
have been a failed experiment.’
Like KPMG, O’Flynn et al. identify structural
failings in the basic organisational design:
• No or limited assignment of author-
ity to the Indigenous Coordination Centre
Managers,
• An ad hoc approach to the representation
of departments (which meant staff were
withdrawn as cost pressures emerged);
• An underinvestment in skills;
• Inconsistent operating systems.
Accordingly they conclude: ‘The pervasiveness
of a program focus and the silos that it creates were
seen as impossible to combat even in a setting
where there was physical co-location and strong
endorsement from Ministers and Secretaries.’
Most recently, under the 2009 National Part-
nership Agreements between the Commonwealth
and the States, the same broad arrangements
have been extended to coordinate the delivery of
programs across jurisdictions. The parties com-
mit to ‘developing a co-ordinated approach’ and
‘enabling initiatives to be delivered in a manner
appropriate to needs in particular locations’. To
oversee the arrangements, a Coordinator-General
based in Canberra was appointed in 2009. This
officer would ‘have the authority to work across
agencies to cut through bureaucratic blockages
and red tape…the Coordinator–General will have
direct relationship with Commonwealth Secretar-
ies …and will work collaboratively with State
and Territory officials and Ministers to achieve
a unified approach’ . The reports so far produced
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65
Competing from a High Cost Economy

suggest centralised accountability arrangements
and siloed programmes remain as a fundamental
obstacle to co-ordinated action.
Despite the well-intended rhetoric, the pro-
gramme has failed totally in practice to realise its
decentralised ambitions. The structural obstacles
that have hobbled this exercise will likely confound
any parallel moves in industry and innovation
strategies.
CONCLUSION
High cost economies present new policy challeng-
es (the specific challenge to Australia is explored
in Roos. esp. sections 4.1-4.6).They require a shift
in policy focus towards economic capabilities.
The magnitude of this shift is suggested in the
concepts and approaches that were discussed in
earlier sections. Above all, this requires a move
from centralised one-size-fits-all designs towards
collaborative, decentralised architectures that fo-
cus on capabilities and continuous improvement.
Earlier sections also surveyed descriptively the
array of approaches that have been adopted in a
variety of jurisdictions that are close in culture and
practice to Australia. Last, the chapter reviewed the
obstacles that have thwarted the development of
more decentralised policy designs in one particular
space, indigenous affairs. Although apparently far
removed from innovation, the effort in indigenous
affairs illustrates the many obstacles that will
thwart more decentralised policy designs wher-
ever they might be sought. Why is the Australian
policy system so resistant to change?
The major obstacle is clear. The overriding
structure and ethos of programmes remains embed-
ded in neo-classical thinking. This is reinforced
in the habits and approaches of policy makers.
Neo-classical approaches to governance have
embedded centralised control and accountability.
Indeed, this is noted as one of the prime virtues
of present arrangements (e.g. Keating, 2004; Bell
and Hindmoor, 2009). This policy design was
implemented in the decade after 1983. It was de-
signed to overcome protectionist habits, practices
and patterns of policy that had developed over the
preceding 80 years. This was accomplished in a
remarkably short period (surveyed in Marsh and
Miller 2012, pp. 163-176).
If public policy in Australia is to move in the
same direction as in the United States (and as
seems to be happening more tentatively in Brit-
ain), the extent to which it confounds structures,
habits and practices developed and nurtured over
the past 30 years must be confronted. The basic
thrust of these changes was to buttress the power
of the central state to accomplish an economy
wide transformation. This project has been ex-
traordinarily successful. But decentralised designs
introduce a new direction. To be implemented upon
any elaborated scale they require the reworking
of governance arrangements at the centre no less
than at local or regional levels.
These obstacles are compounded by the deep
suspicion, nourished not without cause, by neo-
classical policy analysis. Many studies in the
public choice tradition discount the capacity of
the state to act positively in economic affairs. The
way this formerly encouraged rent seeking by
interest groups is well documented (e.g. Kasper,
2000; but see McLean 2012 for a more sanguine
view). These concerns are surely not groundless.
On the other hand the policy designs reviewed in
the last section involve clear performance metrics.
Moreover the pragmatic or experimentalist frame
explored earlier suggested how accountability
can be developed in a way that avoids interest
group capture.
In sum, despite current concerns about the
decline of productivity and despite the examples
of practice in other jurisdictions, it seems clear
that much more pressure, both at conceptual and
political levels, will need to be mobilised to effect
any substantial change in current approaches. Until
this occurs, it is hard to see how an innovation-
focused policy design can proceed much beyond
rhetoric.
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66
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KEY TERMS AND DEFINITIONS
Allocative Efficiency: A norm of efficiency
that derives from the neo-classical ideal of perfect
competition: a frictionless world in which prices
ensure that resources are allocated to their most
productive uses. The ideal becomes a powerful
practical benchmark for public policy.
Decentralised Policy Designs: The essential
framework for a policy that fosters innovation. In
this setting, many required capabilities are context
specific: they respond to critical local/regional/
national/systemic business needs.
Economic Capabilities: ‘Accumulations of
strategic resources and proprietary knowledge,
which, to be realised, require organisational
routines, employee commitment, and superior
problem-solving. Deep capabilities are those
aspects of the economy that are difficult for oth-
ers to copy and that support ongoing gains in
competitiveness’.
High Cost Economy: A circumstance that cre-
ates a new competitive context – where economy-
wide cost advantages and efficiencies are not the
only or primary form of economic capability. In a
high cost setting, competitive advantages derive
from superior products, superior quality and
superior responsiveness to specialised customer
needs or tastes.
Innovation Theory: Offers an alternative,
bottom-up, reading of firm-level and whole-
economy dynamics and of the logic of economic
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coordination. Assumes the pursuit of advantages
by firms is never ending – the idea of an end-point
is a misleading fiction. Includes an enabling and
facilitating conception of the economic role of
the state.
Knowledge Economy: A conception in which
economic capabilities underpin products and
services that respond to differentiated individual
tastes and specialised business needs – indeed in
the best case they shape these tastes and needs.
Product, process, and other forms of knowledge
are critical in achieving these outcomes.
Neo-Classical Economics: The most authori-
tative contemporary theory of economic activity.
Starting with assumptions about individuals,
their rationality and their logic of choice, builds
up to an economy-wide, equilibrium model of
exchange and allocation. A static construction
that involves a number of critical simplifying as-
sumptions, covering the role of knowledge, the
idea of uncertainty, behaviour etc.
ENDNOTES
1 See A Plan for Australian Jobs, The Austra-
lian Government’s Industry and Innovation
Statement, February 2013 for some embry-
onic proactive initiatives.
2 James Q Wilson describes the contribution
of theorists to public policy in the follow-
ing terms: ‘(They contribute) the concep-
tual language, the ruling paradigms, the
empirical examples (note I say examples,
not evidence) that become the accepted
assumptions of those in charge of making
policy. Intellectuals frame, and to a large
degree conduct, the debates about whether
this language and these paradigms are cor-
rect. The most influential intellectuals are
those who manage to link a concept or a
theory to the practical needs and ideologi-
cal predispositions of political activists and
government officials. The most important
source of intellectual influence on public
policy arises out of the definitions of what
constitutes a problem….What intellectuals
mostly bring to public policy debates is not
knowledge but theory…..Some theories, if
adopted, will make us better off. The problem
is to know which ones.’ Public Interest, 64,
1981, pp. 31-47.
3 AMP Steering Committee, President’s Coun-
cil of Advisors on Science and Technology,
Report to the President on Capturing Do-
mestic Competitive Advantage in Advanced
Manufacturing, (Washington, DC. AMP
Steering Committee, Presidents Council of
Advisers on Science and Technology, July
2012)
4 (http://www.nga.org/cms/home/nga-center-
for-best-practices/center-publications/
page-ehsw-publications/col2-content/main-
content-list/making-our-future.html).
5 Driving Washington’s Prosperity A Strat-
egy for Job Creation and Competitiveness
Washington Economic Development Com-
mission http://wedc.wa.gov/Download%20
files/2013StrategicPlan
6 Barbara Good and Brigitte Tiefenthaler,
Innovation Vouchers – Small is Beautiful,
Platform FTeval, December 2011.
7 Trends in Technology-Based Economic De-
velopment: Local, State and Federal Action
in 2012 State Science & Technology Institute
http://www.ssti.org/trends
8 Strengthening Global-Local Connectiv-
ity in Regional Innovation Strategies:
Implications For Regional Innovation
Policy OECD http://www.oecd-ilibrary.
org/governance/strengthening-global-
local-connectivity-in-regional-innovation-
strategies_5kgc6d80nns4-en
Regional innovation strategies OECD
http://www.oecd.org/innovation/policyplat-
form/48137737
Governance of Public Policies in De-
centralised Contexts OECD http://www.
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71
Competing from a High Cost Economy

oecd-ilibrary.org/governance/governance-
of-public-policies-in-decentralised-
contexts_5kg883pkxkhc-en
9 More limited examples of these same ap-
proaches in relation to community and
economic development are available in
Australia at the state level. The following
describes approaches that have been applied
in Tasmania and Victoria: Spatial Innova-
tion in Tasmania Constructing Advantage
through Regional Development Platform
Methods (RDPM) AIRC http://www.utas.
edu.au/__data/assets/pdf_file/0020/111188/
Spatial-Innovation-in-Tasmania
10 Grattan, M. ‘Howard practices a sorry argu-
ment’, Sydney Morning Herald, 30 March
2000, p. 8.
11 Ministerial Taskforce on Indigenous Affairs
available at http://www.atns.net.au/agree-
ment.asp?entityID=2330
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72
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 3
Foundations for Industrial
Rejuvenation:
Lessons from International
and National Experience
ABSTRACT
Drawing on a body of research examining the economic and social effects of downturns and major
manufacturing plant closures in Australia and South Australia in particular, this chapter investigates
how industrial rejuvenation strategies can help to minimise the negative impacts on the workforce and
supply chains affected. The chapter identifies key lessons from the national and international literature on
industrial rejuvenation and the management of major closures. Industrial rejuvenation is a multi-faceted
strategy that seeks to manage pressures and complex change in response to local, national, and global
conditions. The chapter focuses on the evidence about the strategic options for industrial rejuvenation
available to government in partnership with industry, trade union, and community stakeholders. The
chapter concludes by drawing out some broad strategic implications for the design of more integrated
rejuvenation and regeneration policies.
INTRODUCTION
While Australia has been spared the devastat-
ing economic and social dislocation that many
other OECD countries have experienced since the
Global Financial Crisis, it has not been immune
to its impacts. Slower economic and employment
growth at a national and local level are reminders
of this. So too are sectoral pressures playing out
in vulnerable sectors like manufacturing where
the combination of a high Australian dollar and
the rise of low cost mass manufacturing in Asia
has undermined the competitiveness of significant
manufacturing operations in South Australia and
elsewhere. This now includes General Motors
Holden which announced in December 2013 that
will close its automotive manufacturing operations
in Australia in 2016 and Toyota which announced
John Spoehr
University of Adelaide, Australia
DOI: 10.4018/978-1-4666-5828-8.ch003
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73
Foundations for Industrial Rejuvenation

in February 2014 that it will close its automotive
manufacturing operations in Australia in 2017
effectively announcing the end of car manufactur-
ing in Australia.
There is now an urgent need to develop a
sophisticated response to the closures to help
minimise the negative impacts of the closure on
the workforce and the supply chains affected. The
starting point for this is to identify key lessons
from national and international literature on indus-
trial rejuvenation and the management of major
closures. Industrial rejuvenation can be viewed
as a multi-faceted strategy that seeks to manage
pressures and complex change in response to local,
national and global conditions. The difficulties
associated with managing change, dislocation
and restructuring are magnified during periods of
economic crisis when underlying vulnerabilities
become more evident and the increased scale
and intensity of impacts cause widespread socio-
economic hardship.
The last 30 years have seen three distinct peri-
ods of crisis resulting in large-scale firm closures
with associated layoffs. The recessions of the early
1980s and 1990s were marked by very high levels
of retrenchment, fuelling high unemployment and
long-term unemployment (Spoehr and Shanahan,
1994). Unemployment in South Australia peaked
at around 12.3 per cent, largely as a consequence
of firm closures and mass layoffs. The last period
is occurring presently in what is a clear wave of,
primarily, foreign owned subsidiary closures with
ripple effects into the local supply chains.
Huge structural changes were unleashed
during the 1980s with the deregulation of the
banking and financial system and phasing down
of industry tariff protection. Since this time Aus-
tralian industry has faced significant adjustment
pressures requiring restructuring and the adop-
tion of innovation and productivity enhancing
measures. To influence and manage change, a
range of restructuring plans were adopted in-
cluding the Passenger Motor Vehicle Industry
Plan, the Metal Plan and the Clothing, Textile
and Footwear Plan. Each of these plans sought
to improve the competitiveness of firms though
tri-partite planning and processes. Allied labour
adjustment packages sought to provide alterna-
tive employment pathways for workers displaced
through restructuring. During recessions this
proved particularly difficult to achieve, resulting
in high rates of unemployment for those that were
retrenched. During periods of economic growth
the costs of adjustment to workers, families and
communities is often considerably less.
This chapter has been prepared during a
period in which considerable global economic
instability prevails. The GFC has exposed exist-
ing vulnerabilities, particularly in relation to mass
manufacturing which has been subjected to intense
competitive pressures from a high Australian
dollar and subdued global and domestic demand.
The rise of low cost mass manufacturing in Asia
adds to this pressure, forcing a fundamental reas-
sessment of manufacturing strategy in Australia.
In South Australia this challenge has been taken
up by the State Government through the adop-
tion of the Manufacturing Works strategy which
seeks to support the development of knowledge
intensive high value manufacturing, a strategy
endorsed in much of the literature as Trippl and
Otto (2009) attest:
A cost-reduction response to a severe crisis is not
a viable way forward, whereas a search for market
niches and an orientation on innovation promises
better results. If the firms succeed in enhancing
their competences to operate innovatively within
their existing markets, and to move to the upstream
end of their industries, their accumulated knowl-
edge and skills will be redeployed in a creative
way. (Trippl and Otto, 2009, p 1220)
The impacts of downsizing and closures during
economic downturns are quantitatively and quali-
tatively different to those that take place during
periods of growth and relatively low unemploy-
ment. For example, we know that the prevalence
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74
Foundations for Industrial Rejuvenation

of long-term unemployment amongst manufac-
turing workers is very high as a consequence of
firm closures or downsizing during economic
downturns. The scale and focus of interventions
to manage and minimize the negative impacts of
significant change and shocks must be acutely
tuned to the prevailing economic and labour
market conditions. The following chart provides
an illustration of this, indicating the significant
differences in economic conditions prevailing at
the time of the closure of Mitsubishi in the middle
to latter part of last decade, compared to the last
few years. Of particular note is the sharp decline
in manufacturing employment since the GFC and
the steady rise in labor force underutilisation. A
more subdued economic outlook for South Aus-
tralia is expected in 2014-15, creating challenging
business and labour market conditions in the year
ahead (Budget Paper No. 1, 2013-14).
In considering the economic impact of GMH
in South Australia it is instructive to review a
recent assessment of the automotive industry in
South Australia prepared by The Allen Consulting
Group. It is important to note that the assessment
was undertaken using a General Computable
Equilibrium Model (CGE) which assumes that
shocks like closures will lead to adjustment in
wages which in turn will affect demand in other
sectors, generating a decline in demand in some
and an increase in others. In addition it assumes
that capital is flexible and readily deployed to
other sectors. These assumptions are problem-
atic as the capital associated with the closure of
GMH will not be reinvested in Australia. While
significant depletion of capital deployed in one
part of the automotive sector might result in a
benefit for another producer in Australia, there is
a high risk of capital flight from the sector as a
whole due to the loss of economies of scale and
other factors. Local economic and labour market
circumstances will also mediate any outcome, with
parts of Northern Adelaide, where GMH is based,
Table 1. Selected Labour Market Trends 2004-2013 (ABS Labour Force Australia: 6291.0.55.003 Labour
Force, Australia, Detailed, Quarterly Table 05. Employed persons by State and Industry; 6291.0.55.001
Labour Force, Australia, Detailed – Electronic Delivery Table 02. Labour force status by State, Capital
city / Balance of state and Sex; 6202.0 Labour Force, Australia Table 23. Labour underutilisation by
State and Sex – Trend, Seasonally adjusted and Original)
Unemployment
(Monthly/April)
Employment (Quarterly/
May)
Employment Growth
(Quarterly/May)
Underemployment (Quarterly/Nov)
Year Unemployment
Rate (%)
Total
(‘000)
Manufacturing
(‘000)
Total
(%)
Manufacturing
(%)
Labour Force
Underutilisation
Rate (%)
Underemployment
Rate (%)
2004 5.9 719.1 101.4 0.4 9.5 12.9 8.1
2005 5.4 742.0 93.7 3.2 -7.6 12.1 7.7
2006 5.1 754.1 98.4 1.6 5.0 12.5 7.6
2007 5.3 766.6 87.7 1.7 -10.8 11.8 7.3
2008 5 783.4 93.7 2.2 6.8 12.7 7.7
2009 5.7 799.6 80.0 2.1 -14.6 13.4 8.2
2010 5.9 805.3 82.4 0.7 2.9 12.6 7.3
2011 5.6 815.1 81.8 1.2 -0.7 13.4 8.4
2012 5.5 818.4 74.7 0.4 -8.6 13.2 8.1
2013 6 831.4 73.3 1.6 -1.9 na na
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75
Foundations for Industrial Rejuvenation

experiencing amongst the highest unemployment
rates in the nation. In summary it is reasonable to
expect that the closure of GMH in South Australia
and Toyota in Victoria will generate substantial,
widespread negative impacts, significantly in
excess of those estimated using a CGE model.
With these caveats in mind The Allen Consult-
ing Group estimated that the impact of an automo-
tive industry closure in South Australia would be
very substantial (2013, p 50-51). They calculated
that a shut-down of the automotive sector in South
Australia would result in a 1.1 per cent reduction
in Gross Regional Product with employment ex-
pected to decline by around 1.3 per cent. The loss
to 2031 of a shutdown of the entire industry in
Australia is calculated to be around $23 billion in
net present value terms. Should economic condi-
tions remain difficult or deteriorate the impacts
would be considerably worse.
Using an input-output modelling approach
Burgan and Spoehr (2013, p 3) estimate the direct
and indirect employment losses associated with the
closure of GMH to be around 12,000. The closure
is estimated to result in a $1.1 billion loss to South
Australian GSP and $65 million in lost taxes.
Recognising this, it is vital to examine the
potential role that economic and industrial reju-
venation strategies might play in both mitigating
and minimising the impacts of the closure and
creating the conditions for sustainable develop-
ment in the years ahead. There are no quick fixes
available in circumstances like these, though
early intelligent intervention can greatly assist.
This might include investments in transitionary
measures like accelerating the roll out of major
infrastructure projects, which can greatly assist
with rapid generation of alternative employment in
circumstances where short-term demand for skills
is subdued. Similarly fast tracking new investments
in defence projects would provide certainty to the
defence sector and associated supply chain partici-
pants. Medium term growth prospects also exist
in horticultural industry development, particularly
through value adding in response to growing de-
mand for clean and green food. Sustained growth
in education services remains a high priority. In
addition the considerable growth currently tak-
ing place in the wellbeing, health, aged care and
community services sectors is set to continue
with allied investments though Disability Care
and Consumer Directed Care programs creating
additional demand for a wide range of assistive
technologies and services. Finally, investments in
civic, transportation, communications, health and
educational infrastructure can play a key role in
boosting short term demand and jobs while adding
to medium term productivity growth.
The intention of the chapter is not to provide
an exhaustive review of the extensive literature
that exists on rejuvenation but rather a more
select examination of that part of the literature
which focuses on strategic options available to
government in partnership with industry, union
and community stakeholders.
The chapter comprises five sections including
this introduction.
• Section 2 discusses the dimensions of in-
dustrial rejuvenation and the related con-
cept of regeneration. The emergence of the
regional innovation systems agenda and its
relevance as a strategic response to indus-
trial decline and dislocation is reviewed.
The emergence of smart specialisation in
the European Union is discussed prior to a
brief discussion on the relevance to rejuve-
nation strategies of integrated and inclusive
innovation and problem solving processes.
• Section 3 reviews notable international case
studies of rejuvenation and regeneration.
• Section 4 focuses on the impacts of major
industrial change, paying particular atten-
tion to major industrial dislocations and
closures in Australia and Britain. It iden-
tifies key lessons arising from scholarly
research on strategic responses to closure.
• Finally Section 5 draws out some of the
broad strategic implications from the lit-
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Foundations for Industrial Rejuvenation

erature for the design of more integrated
rejuvenation and regeneration policy and
strategy.
REJUVENATION AND
REGENERATION
While it is not always made explicit in scholarly
work and government reports, the literature on
industrial rejuvenation has close linkages with
that on urban and regional regeneration. There is
a shared concern with better understanding and
managing crisis and change, reversing economic
and industrial decline, fostering innovation and
improving competitiveness, generating employ-
ment, reducing unemployment and disadvantage
and improving urban amenity and community
well-being. This suggests the existence of a mu-
tually reinforcing relationship between industrial
rejuvenation and urban and regional regeneration,
a premise that has significant implications for
policy and strategy development.
Industrial rejuvenation involves the trans-
formation of existing industries as well as the
development of new and more resilient ones. In
broad terms it recognises the need to respond stra-
tegically and sometimes in transformational ways
to structural and cyclical change that can threaten
the viability and sustainability of sectors, harming
the well-being of businesses, employees and com-
munities. Innovation is often seen to be at the core
of rejuvenation, necessitating the development
of close and robust formal and informal linkages
between government, industry, unions and the
research community. Agile industry networks
and clusters situated in a sophisticated regional
innovation system are central to this challenge.
This section provides some insights from the
literature into this, drawing out the important role
that policy and institutions, along with innovation
and creativity, play in successful rejuvenation.
Urban and regional regeneration on the other
hand entails the modernisation and revitalisation
of ageing housing stock and physical and social
infrastructure, creating healthy, stimulating and
vibrant spaces to live, work and invest in. This is
commonly regarded as a foundation for improving
well-being and productivity, essential to building
and sustaining successful industries and econo-
mies. During periods of crisis, urban regeneration
can play a vital role in boosting domestic demand,
creating alternative employment opportunities
for those who lose their jobs through downsizing
and closure. It also plays a vital role in boosting
regional pride and morale. Linking urban and
regional regeneration to industrial rejuvenation
represents a significant conceptual, policy and
practical challenge, which this section will shed
some light on.
Concern that narrowly conceived policy
responses to economic and financial crisis are
largely ignoring innovation objectives has led
some scholars to argue for “an innovation solution
to the contemporary economic crisis” (Ranga, M.
and Etzkowitz 2012, pp. 1429-1437).
Regional Innovation
Systems and Change
Over the last 30 years Australian manufacturing
has been exposed to increasingly intense global
competition, particularly as a consequence of
trade liberalisation in Australia and the industri-
alisation of China, India and Thailand who have
emerged as major centres for low-cost, high volume
manufacturing. Regions with a high dependence
on mass-manufacturing in Australia have been
profoundly affected by these changes, calling into
question the viability of some sectors and demand-
ing major transformation of others, circumstances
that have caused some to reflect on the value of
Schumpeterian economic analysis.
…the current economic crisis has triggered dual
effects: on the one hand, it affected innovation
systems both directly, as a result of the economic
slump and financial shortages, and indirectly,
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by aggravating existing systemic weaknesses, in
a process of “creative destruction” (Schumpeter
1942). On the other hand, it provides an im-
mense opportunity for correcting such systemic
weaknesses, salvaging old industries in parallel
with creating new ones and boosting innovation
systems, in a concomitant process of “creative
reconstruction”. (Ranga, M. and Etzkowitz 2012,
p 1433)
A challenge arising from this is to identify the
competitive foundations for industrial renewal of
old industrial areas (OIAs) and the appropriate
roles that government, industry, unions and the
wider community might play in establishing and
sustaining these in building robust and respon-
sive regional innovation systems and successful
industry clusters.
In this context Todtling and Trippl (2004)
discuss the renewal of clusters in old industrial
regions, focusing on the region of Styria in Austria
as an example of an old industrialised area in which
a dominant industrial cluster came under threat.
They address the question of how clusters might
be renewed in regions facing decline and how
they adjust to changes in their environment. The
authors compare the renewal of the automotive
and the metal clusters in the region, concluding
that a well-developed regional innovation system,
the establishment of new innovation networks and
new and more indirect forms of policy are critical
to the development of successful new clusters.
Moreover they find that:
• Clusters in such regions often face the
problems of mature industries such as stag-
nating demand, high competition and “lock
in” to old technology paths.
• The renewal of clusters can be supported
by a well-developed Regional Innovation
System (RIS).
• Clusters in old industrial regions are often
characterised by either fragmentation (few
links within the region) or by networks ori-
ented towards the old trajectory.
• The attraction of leading transnational
companies may have a positive effect on
cluster renewal, if they bring in comple-
mentary knowledge to the cluster and if
they can be integrated into regional sup-
plier and innovation networks.
• Active policy is needed to overcome the
situation of ‘lock in’; market forces alone
will not be sufficient to improve the situ-
ation. Measures such as the stimulation of
networks, the enhancement of ‘systemness’
within clusters, and an upgrading of the re-
gional innovation system are important.
Trippl and Otto (2009, p 1219) apply a regional
innovation systems approach to an analysis of
the challenges that OIAs face in designing and
effectively implementing successful industrial
rejuvenation strategies. Focusing on the areas
of Styria in Austria and Saarland in Germany,
they discuss three types of cluster-based renewal:
an innovation-oriented adjustment of mature
clusters (incremental change); the emergence of
new agglomerations1 2 in established industries
(diversification); and the rise of knowledge-
intensive and high-technology activities (radical
change). The study shows that Styria rebuilt its
regional innovation system more successfully,
enabling the innovation-oriented adjustment
of a mature cluster, the rise of a new cluster in
an established industry, and the emergence of
knowledge-intensive activities. The key factors
underpinning this success according to Trippl
and Otto (ibid, p 1232) were:
• The presence of local firms with strong in-
novation capabilities;
• The attraction of FDI which established in-
novation networks with local actors;
• Related diversification processes of steel
companies;
• The existence and further strengthening of
an excellent knowledge infrastructure;
• A proactive policy approach facilitating in-
novation linkages and cluster development.
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Foundations for Industrial Rejuvenation

By contrast, in the Saarland, the regional
innovation system has been more specialised,
resulting in poorer performance with respect to
incremental change and diversification and high
performance regarding radical change. Trippl and
Otto (ibid) argue:
In the Saarland, branch plants attracted by low
wages, the region’s weak endowment with knowl-
edge providers and supporting institutions and a
late and less proactive policy response provided
rather unfavourable conditions for the dynamic
evolution of the automotive cluster. (Trippl and
Otto, 2009, p 1232)
A key conclusion from the study was the need
to identify, support and sustain the development
of “new clusters to broaden the economic base
and to promote related diversification in order to
avoid the risk of economic overspecialization”
(Trippl and Otto 2009, p 1232). Central to this
is a sophisticated and well functioning regional
innovation system that enables firms and clusters
to overcome problems associated with ‘lock in’
to old technologies, managerial practices and
working arrangements. Regions with sectors that
display these characteristics might find part of the
solution in building new industries upon the old,
argues Treado (2010, p 112).
Regions, like Pittsburgh, that have a strong
reputation for expertise in a particular industry
or set of industries may find reputation building
to be easier than regions that are attempting to
build reputation from scratch in a new industry
…or have built strong, competing reputations in
other industries.
When Pittsburgh’s industrial legacy is viewed
narrowly as pertaining to steel production
alone, the region seems to serve as an excellent
illustration of how path dependence can lead to
industrial ‘lock-in’ and the resulting pitfalls of a
destabilising shock. In these models, the ability
of the Pittsburgh region to transition from steel
production to steel technology represents an es-
cape from path dependence.
…when Pittsburgh’s industrial legacy is viewed
broadly as pertaining to metallurgical and mate-
rials engineering, the presence of the steel tech-
nology cluster is more consistent with its legacy.
Reflecting on the experience of the Steel
Technology Cluster in Pittsburgh, Treado (2010,
p 114) concludes that the “ultimate source of
regional resilience” was the expertise of the re-
gional workforce.
More than any other factor, the technical knowl-
edge of local labour seemed to be the key to at-
tracting and retaining the members of the steel
technology cluster.
Transforming old industrial areas by moving
up the value chain and fully utilising the exper-
tise available locally might be accompanied by
a strategy designed to attract FDI. One common
expression of this has been the establishment of
technology and science parks, which have sought
to embed relationships between universities, in-
dustry and government in new common spaces.
In a study of evolution and change in industrial
clusters, Parker (2009, p 256) notes, “The out-
standing success of high-technology clusters has
sparked initiatives from governments and other
social actors, including universities, to promote
the development of regional industrial models
that replicate the entrepreneurial and innovation
dynamics of successful clusters”. One manifesta-
tion of this has been the establishment of technol-
ogy and science parks like Sophia Antipolis and
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79
Foundations for Industrial Rejuvenation

Hsinchu in Taiwan, which are the subject of a
major comparative study by Parker (ibid, p 257).
They conclude that:
• Institutional change involving the transfor-
mation of a city/region does not necessar-
ily depend on exogenously induced crisis.
It may involve access to new ideas and
visions from political entrepreneurs and
policy elites.
• The provision of resources and physical
infrastructure to support regional transfor-
mation is an important element in estab-
lishing the viability of the new vision for
the region.
• Institutional systems are not necessarily
static in between moments of exogenous-
ly induced crisis. They may evolve and
change through a reflective process of stra-
tegic learning in which social actors iden-
tify problems with the existing institutional
base of the city/region and reconfigure in-
stitutions to new ends.
• The processes of adaptive institutional
change involve the strategic learning of
social actors and firms who reconfigure
institutions to suit their own needs and per-
spectives regarding the future development
of the industrial base.
EU Smart Specialisation
The importance of context responsive regional
innovation systems is now an overriding con-
sideration for both scholars and policymakers
(Martin and Trippl, 2013, p 9). This is strongly
reflected in the European Union’s Europe 2020
Strategy. The emergence of the smart specialisa-
tion agenda in Europe represents a new chapter
in regional innovation systems policy develop-
ment and practice. In adopting the Europe 2020
(sustainable, inclusive and smart growth) Strategy
the European Union (EU) has placed innovation at
the centre of efforts to tackle the economic crisis
facing much of Europe. The strategy involves
three interlinked priorities:
• Smart growth, based on knowledge and
innovation;
• Sustainable growth, promoting a more re-
source efficient, greener and competitive
economy;
• Inclusive growth, fostering a high employ-
ment economy delivering economic, social
and territorial cohesion.
The EU (2012a, p 7) asserts “Investing more
in research, innovation and entrepreneurship is
at the heart of Europe 2020 and a crucial part
of Europe’s response to the economic crisis”. A
cornerstone of the EU approach is the “design of
national/regional research and innovation strate-
gies for smart specialisation as a means to harness
the potential for smart growth and the knowledge
economy…” (ibid).
The rationale for smart specialisation3 is to
focus nations and regions on a “limited number”
of economic and industry development priorities
that are capable of being competitive in the global
economy (ibid, p 11). The EU argues that smart
specialization “allows regions to take advantage
of scale, scope and spillovers in knowledge pro-
duction and use, which are important drivers of
productivity” (ibid).
The adoption of smart specialisation is de-
signed to respond to weaknesses evident in past
regional innovation strategies including (ibid):
• Lack of an international and trans-regional
perspective with the regional innovation
and economic systems being considered in
isolation from each other;
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Foundations for Industrial Rejuvenation

• Lack of responsiveness to local economic
and industrial conditions and insufficient
business drivers of R&D;
• Lack of a sound analysis of a region’s
assets;
• Tendency to pick winners;
• Tendency to copy best performing regions
without due consideration of local context.
The pursuit of smart specialization will require
different forms of change (ibid, p 12-14). This
includes:
• Transition: From an existing sector to a
new one based on cooperative institutions
and processes (i.e. from fine mechani-
cal and optical engineering to medical
technologies);
• Modernisation: Technological upgrading
of existing industry involving the adoption
of Key Enabling Technology (i.e. nano-
technology, biotechnology, photonics);
• Diversification: Developing synergies be-
tween existing industrial activities and new
ones that are more sustainable;
• Radical Foundation of a New Domain:
New technologies making previously low
growth activities attractive.
In developing a regional innovation system
based on smart specialization the EU has devel-
oped a model to guide strategy development in
Europe called RIS3. It comprises four key strategic
elements (ibid, p 17):
• (Tough) Choices and Critical Mass:
Limited number of priorities on the basis of
own strengths and international specialisa-
tion – avoid duplication and fragmentation;
• Competitive Advantage: Mobilise talent
by matching research, training, develop-
ment and innovation capacities and busi-
nesses needs through an entrepreneurial
process;
• Connectivity and Clusters: Develop
world class clusters and provide arenas for
related variety/cross-sector links internally
in the region and externally, which drive
specialized technological diversification –
match what you have with what the rest of
the world has;
• Collaborative Leadership: Efficient in-
novation systems as a collective endeavour
based on public-private partnership (qua-
druple helix) – experimental platform to
give voice to un-usual suspects.
The EU has set out the following 6-step process
for development of RIS3 strategies (ibid, p 18-25).
• Analysis of the regional context for innova-
tion (regional assets, internal and external
linkages and dynamics of entrepreneurial
environment).
• Set up of a sound and inclusive governance
structure (industry, government, research
and education and civil society).
• Production of a shared vision about the fu-
ture of the region.
• Selection of a limited number of priorities
for regional development.
• Establishment of suitable policy mixes.
• Integration of monitoring and evaluation
mechanisms.
In the context of the Smart Specialisation
agenda, Ortega-Argiles (2012) provide an over-
view of what a range of EU regions are focusing
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Foundations for Industrial Rejuvenation

on. While there are some significant variations in
focus there are also striking similarities as Table
2 suggests.
While smart specialisation suggests variation
in the sectoral focus of regional innovation and
rejuvenation strategies most regions converge
around advanced medical technologies, photonics
and sensing, cleantech and robotics.
Integrated and Inclusive
Problem Solving
Accompanying the smart specialisation debate
and central to the processes involved in industrial
rejuvenation has been a related debate about in-
tegrated and multi-dimensional innovation and
problem solving processes. This is significant
because it draws attention to important behavioural
and organisational factors underlying innovation,
along with long held observations made in the
extensive literature on regional economic and
industry development emphasising the importance
of collective learning, tacit knowledge and insti-
tutional thickness (Martin, 2003). An important
manifestation of the debate has been the Triple
Helix Model of innovation and subsequent Qua-
druple and Quintuple variants – all of which seek
to convey the value of integrated and collaborative
innovation processes using the intertwined threads
characteristic of a helix as a metaphor. The original
Table 2. Smart specialisation focus in some EU regions (Ortega Argiles (2012, pp 11-))
Region Country Focus
Flanders Belgium • Strategy built around creation of 6 clusters (transport-logistics; ICT and services in healthcare;
new materials, manufacturing and nanotechnology; ICT-enabling services platforms for socio-
economic innovation (e-health, e-gov, e-learning); energy and environmentally friendly smart
grids). Each area has spearhead initiatives.
• New Industrial Policy based on 4 pillars (new sources of productivity in resources, smart
infrastructure, clusters and specialization; Factory of the Future; Robust management structures;
robust stakeholder based discovery processes.
Navarra Spain • Moderna Plan defines four types of clusters: basic (auto, electric vehicles and sustainable
construction; healthcare services), strategic (renewable energies, agro-food industries), future
commitments (biomedicine, medical appliances, services to persons; sustainable tourism,
environment and waste; mechatronics, design and creativity, safety) and complementary (business
services, education and generation of knowledge).
Lower Austria Austria • Technopol Program comprises four different technopols (Medical biotechnology; Agro and
environmental biotechnology; Modern industrial technologies; Bioenergy, agriculture and food
technology).
• Clusters include Green building cluster; Food cluster; Logistic cluster; Plastics cluster).
Berlin
Brandenberg
Germany • Cluster strategy InnoBB aims to develop future fields of excellence into clusters (Life science;
Energy technologies; Transport, mobility and logistics; ICT/New media; Optical technologies).
Lahti Finland • Environmental technology (Cleantech); design (particularly industrial) and practice based
innovation (tools to support innovation) are defined as key strengths.
Silesia Poland • Medical technologies; Environmental technologies; ICT (modeling and simulation or processes
and optoelectronics; Production and processing (metal alloys, polymer and ceramic materials),
Transport and transport infrastructure (intelligent systems); Machinery, auto, aerospace and mining
(automation, sensors, robots, design); Nanotechnologies.
Limburg Netherlands • Mapping project identifies 3 key areas of strength: Chemicals and Advanced Materials; Health
(life) Sciences; High-tech Systems.
• Initiatives include: cross campus strategic co-operation linking universities and businesses;
attracting and retaining knowledge workers from all over the world through an International
Knowledge Works program.
Emilia Romagna Italy • Program of activity centered around multiple technopoles and a Regional High Technology
Network composed of 34 structures for industrial research and 11 Centres for technology transfer.
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Foundations for Industrial Rejuvenation

Triple Helix Model (Etzkowitz and Leydesdorff,
2000) aimed to shed light on the potential value
to innovation processes of collaboration between
government, industry and universities while the
Quadruple Helix (Carrayannis and Campbell,
2012) added civil society as a fourth stakeholder.
The Quintuple Helix (Carayannis, Barth and
Campbell, 2012) adds the environment into the
innovation equation, embedding innovation in
principles of sustainability.
Flowing from this debate, particularly that
associated with the Quadruple Helix, has been a
range of so-called user-oriented innovation con-
cepts including ‘living labs’, ‘open innovation’,
and ‘social computing’ (Arnkil, Jarvensivu, Koski
and Piirainen, 2010). These seek to engage, to
various degrees of intensity, with existing or po-
tential service or product users, with the objective
of optimising outcomes for the parties involved.
The extent to which benefit accrues for different
stakeholders is the subject of considerable debate,
reflected in the shift in preference from the Triple
Helix to the 4 and 5 strand models which engage
variously with the wider community either as end
users, stakeholders or active participants.
Recent interest in ‘co-design’, ‘design thinking’
and ‘integrated design’ concepts intersect with
this debate, sharing a view that multi-disciplinary/
multi-stakeholder approaches are necessary to
develop innovative solutions to complex problems
and challenges (Curley and Salmelin, 2013). One
of the outstanding examples of this internation-
ally is the Stanford d-school that has created an
environment designed to generate productive
knowledge rich collaborations.
At any one moment, there are hundreds of projects
underway at the d.school4 involving partners,
stakeholders, users and experts. Some are quick
introductions that last just an hour or two, oth-
ers are 10-week class projects and some span
years as student teams stick with a project after
their class is over. http://dschool.stanford.edu/
our-point-of-view/
The emergence of a network of living labo-
ratories5 based on ‘co-design’ or ‘co-creation’
principles is also of significance. Typically liv-
ing labs involve a combination of the following
activities (Pallot, 2009):
• Co-Creation: Bring together technol-
ogy push and application pull (i.e. crowd-
sourcing, crowdcasting) into a diversity of
views, constraints and knowledge sharing
that sustains the ideation of new scenarios,
concepts and related artefacts.
• Exploration: Engage all stakeholders, es-
pecially user communities, at the earlier
stage of the co-creation process for discov-
ering emerging scenarios, usages and be-
haviours through live scenarios in real or
virtual environments.
• Experimentation: Implement the proper
level of technological artefacts to experi-
ence live scenarios with a large number of
users while collecting data which will be
analysed, taking into account the context,
during the evaluation activity.
• Evaluation: Assess new ideas and innova-
tive concepts as well as related technologi-
cal artefacts in real life situations through
various dimensions such as socio-ergo-
nomic, socio-cognitive and socio-econom-
ic aspects; make observations on the poten-
tiality of a viral adoption of new concepts
and related technological artefacts through
a confrontation with users’ value models.
From 19 foundation members in 2006, lab
membership of the European Network of Liv-
ing Laboratories (ENoLL) is over 300. ENoLL
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83
Foundations for Industrial Rejuvenation

members can be found in all continents including
Australia as the following maps illustrate.
A recent living lab to be established in Aus-
tralia is the Future Logistics Living Lab located
at Australian Technology Park in Sydney (see
http://www.futurelogisticslivinglab.com.au). One
review of the success of living labs by Planitz,
Hanlen and Souminen (2010) has concluded that
“less than 30 percent were clear successes”.
The European Union has also sought to foster
researcher, industry government and community
collaborations through the establishment of larger
scale Knowledge and Innovation Communities
(KICs). These are described by the EU as, “highly
integrated, creative and excellence driven partner-
ships which bring together the fields of education,
technology, research, business and entrepreneur-
ship, in order to produce new innovations and new
innovative models that inspire others to emulate
it” http://eit.europa.eu/kics/. The KICs program
has funded major initiatives designed to foster col-
laboration in the areas of ICT, climate and energy.
Over the past five years various purpose built
spaces, inspired by initiatives like these have
emerged in Australia, including Hub Melbourne,
Hub Sydney, The University of Adelaide Hub, Hub
Adelaide and various ‘smart work centres’. The
Tonsley innovation precinct in Southern Adelaide
and the Stretton Centre in Northern Adelaide are
larger scale examples of these developments. The
Figure 1. Location and number of members in the European Network of Living Laboratories (ENoLL)
(http://www.openlivinglabs.eu)
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84
Foundations for Industrial Rejuvenation

latter is a partnership between The University of
Adelaide Australian Workplace Innovation and
Social Research Centre, the City of Playford,
Renewal SA and the Australian Government’s
Suburban Jobs Program.
REJUVENATION AND
REGENERATION IN CITIES
AND REGIONS
In the world of urban policy-making, there is a
fascination for cities that have managed to turn
around their economic fortunes or emerge like
a phoenix after crisis. Occasionally, some cities
acquire a ‘paradigmatic’ or ‘celebrity’ status as
they seem to “sum up an era, the place where it
all comes together…If Paris was the capital of
modernity and Los Angeles of post-modernity,
Bilbao and Barcelona in Spain have become
meccas for urban regeneration, from industrial
cities of a post-authoritarian regime to culturally
vibrant magnets of visitors, and all in only a few
decades. (Gonzalez, 2011, p 1397)
When we think of regeneration and rejuvenation of
cities and regions our minds often turn to the icons
of transformative change – Bilbao, Barcelona and
Manchester, places often visited by policymakers
seeking inspiration. Indeed such is the attraction of
these places that some have argued that they have
become sites for regeneration tourism – around
5000 professionals visit Bilbao and Barcelona
each year to study regeneration (Gonzalez, 2011,
pp. 1397-1413). This suggests caution needs to
be exercised in reviewing the literature emerging
from these places, laden as it can be, with often-
immodest messages of success. Thoughtful and
critical reflection is urged upon the reader. In the
absence of robust evaluation of regeneration and
rejuvenation programs, value judgments remain a
valuable but imperfect guide to decision making.
Older Industrial Regions
The problems faced by industrial regions expe-
riencing long-term decline are complex multi-
dimensional ones, rooted in space and time. In
reviewing cases of regeneration and rejuvenation
we face a long list of cities and regions that have
experienced one or a combination of recession,
de-industrialisation and major company closures.
In a multi-country study Koutský et al (2011)
examine issues related to older industrial regions
including:
• Manchester (UK)
• Ruhr Area or Saarland (Germany)
• Basque Bilbao and its hinterland (Southern
Europe)
• Detroit and environs (USA)
• Manchuria (China)
• Examples of ‘new industrial spaces’;
• The environs of M4 highway in Great
Britain,
• Bavaria (Europe)
These regions are regarded as among the
principal ‘losers’ in the deepening process of
globalisation, a consequence of the emergence
of ‘new’ industrial regions in a rapidly changing
global political economy. While this change has the
potential to overwhelm some cities and regions, the
authors, using Manchester as a case study, argue
that new development trajectories are possible.
Koutský et al (2011) reject fatalistic predictions
in their assessment of Manchester, arguing that
adaptability and the formation of “new combina-
tions” based on the interconnection of local and
global trends can generate specific advantages,
which will enable regions facing decline, to once
again become competitive.
Manchester faced extremely difficult economic
circumstances over the decade to the mid 1980s,
resulting in the loss of over 200,000 industrial
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85
Foundations for Industrial Rejuvenation

jobs and an unemployment rate exceeding 20 per
cent (ibid, p 170). Responding to these difficult
circumstances Manchester became a touchstone
for policymakers and researchers interested in
regeneration and rejuvenation, particularly the
cultural dimensions. It is one of the first cities in
the world to industrialise and one of the earliest
to experience the effects of de-industrialisation. A
revitalised cultural sector is regarded as one of the
success stories of the regeneration effort in Man-
chester, a strategy that would later be emulated by
other regions including Bilbao and Barcelona in
Spain. Like Bilbao, Barcelona’s emergence from
industrial decline involved major investments in
cultural infrastructure as well as the attraction
of major events like the 1992 Olympics which
provided a focal point for regeneration as well as
attracting international attention on the city and
region. The regeneration efforts of Barcelona were
lauded internationally with the award of the Royal
Gold Medal for Architecture, a major first for a
city design project.
Koutský et al (2011) caution against interpret-
ing the success of one particular region as unam-
biguously positive (as such processes can lead to
internal and external tensions); or as perfectly
replicable elsewhere (as this is only replicable in
regions with a similar institutional and structural
context). Hence this should be interpreted as a
useful guide in facilitating the development of
new industrial combinations during the process
of rejuvenation.
Cities like Glasgow and Manchester in the
United Kingdom have been the focus of consid-
erable attention by policymakers and scholars
searching for solutions to industrial decline.
Glasgow experienced a sharp decline in manu-
facturing employment during the 1980s. At the
beginning of the 1970s manufacturing employ-
ment numbered around 306,000, declining to
121,000 by 1991 (Gomez 1998, p 108). While
services sector employment grew over the period
it was insufficient to fill the employment gap that
remained, around 160,000 fewer jobs available in
1991 relative to 1971.
The extent to which regeneration and rejuvena-
tion strategies have been successful in tackling de-
industrialisation and chronically high unemploy-
ment has been of central concern. Gomez (1998)
has argued that despite the image of Glasgow as
a city transformed by regeneration, the strategies
adopted up until the late 1990s failed to reverse
industrial decline and generate sufficient employ-
ment in the services sector to compensate for heavy
losses in manufacturing. While the enormity of this
challenge is recognized, it is a preoccupation with
image reconstruction and the lack of integration
of urban regeneration and industrial rejuvenation
that appears to be at the heart of the problem as
Gomez argues:
The emphasis on fostering service sector growth
via image reconstruction, primarily through the
promotion of the city centre, has had very limited
success in Glasgow. There is no doubt that this
strategy has had dividends in respect of the number
of visitors to the city. …it is also undeniable that
the image of Glasgow, both within and outside
the city, has been radically reconstructed. There
is also agreement on the success of these poli-
cies in terms of Glasgow’s central area physical
renaissance. But this seems to refer only to a very
constrained and poor idea of urban regeneration.
In fact it’s clear that the formula used to revitalize
the urban area has not been very fortunate as far
as employment is concerned.
Furthermore, a wider exercise of revitalization,
focusing on potential industrial employment, has
been hampered…by the growth of centralized
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power…and subsequent exclusion of the city as
a location for manufacturing inward investment.
(Gomez, 1998, p 118)
Bilbao
Situated in the Basque Country of northern Spain,
Bilbao’s population reached around 1 million in
2013. The industrial structure of the city was
once dominated by heavy industries, particu-
larly steel, shipyards and machine engineering.
A deep economic crisis during the first half the
1980s led to unemployment rising to around 25
per cent and widespread demoralisation (Ploger,
2007; Gomez, 1998). Over the 20 years to 1995
manufacturing employment declined by half or
around 60,000 jobs in Bilbao. By 2005 manufac-
turing employment had declined from 46 per cent
of total employment to just 22 per cent. Service
sector employment on the other hand, rose steadily
from around 40 per cent to nearly 70 per cent of
total employment (Ploger, 2007, p 27). By 2009
manufacturing employment comprised just 18 per
cent of total employment (Plaza and Harrich, 2013,
p 8). While much of the employment growth in
the post crisis period was in lower paid and less
secure service jobs, Plaza and Harrich (ibid) note
a sharp rise in advanced business services from
around 10 per cent in 1995 to more than 18 per
cent in 2009 (ibid).
Population outflow from the area was dramatic
with the City of Bilbao alone losing around 16 per
cent of inhabitants over the fifteen years to 1995.
Over the following decade more than 11 billion
Euro (Aus $15.6b) in public sector investment was
directed towards urban regeneration and industrial
rejuvenation projects. On the integration between
regeneration and rejuvenation, Arancegui, Quere-
jeta and Montero (2011, p 12) note that:
The diversification strategy of the Basque Gov-
ernment went beyond industry and addresses
the regeneration of cities, especially in Bilbao. A
prominent sign of this policy was the Guggenheim
project, which sought to place the city in a global
network of cultural and recreational centres.
Key elements of a regeneration strategy
emerged in the late 1980s with the early focus
being on major projects before the development
of an overarching strategy. A strategic plan was
drafted towards the end of the 1980s, “establishing
a regulatory framework for regeneration of Bil-
bao” (Ploger, 2007, p 16). In 1991 the ‘Strategic
Plan for Revitalisation of Metropolitan Bilbao’
was finalised and a “dedicated agency,” ‘Bilbao
Metropoli-30’ (BM30) established to drive the
process of regeneration in accordance with the
strategy.
BM30 has been described as “a think-tank,
lobby organisation and catalyst for investment,”
industry led but based on a “partnership model with
the public and private sector” (ibid). Four areas
of action were identified as priorities for BM30.
• Formation of a knowledge-based high-tech
sector.
• Inner-city renewal; especially revitalisation.
• Environmental intervention; river clean-
ing, industrial land recycling.
• Strengthening of cultural identity through
culture-led regeneration.
An early initiative was to develop a regenera-
tion Master Plan drawing on the experiences of
Barcelona and other areas of Spain with project-
led regeneration (i.e. Olympic Games). Addi-
tional inspiration came from lessons learnt in
Glasgow and Baltimore, cities badly affected by
de-industrialisation.
An ambitious vision for regeneration was
adopted, seeking to transform Bilbao into “a key
node on the European axis,” to “not only guarantee
(sic) the ‘survival’ of the city but also establish
(sic) the city as a competitive node in an emerg-
ing post-industrial urban network” (ibid, p 17).
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This was embodied in a ‘Territorial Plan’, which
sought to focus regional and global attention on
Bilbao, recruiting leading architects like Frank
Gehry to transform the urban landscape.
Other institutions were established to facilitate
development including Bilbao Ria 2000, respon-
sible for regeneration of abandoned industrial
land and infrastructure. Bilbao Ria 2000 has been
described as pivotal to the regeneration project
(ibid). It is a not-for-profit agency involving all
tiers of government in the redevelopment of vacant
land. While establishment funds for the venture
came from central, regional and EU sources, Bil-
bao Ria 2000 became self-financing through land
value enhancement strategies, underpinning major
redevelopments throughout the area (ibid, p 18).
Regeneration and rejuvenation was under-
pinned by detailed work involving leading planners
and architects with the initial plan generated by
Cesar Pelli who had undertaken similar work in
New York City on the Battery Point regeneration
project. Public sector investment played a key role
in the regeneration in Bilbao with the private sector
reluctant to contribute to major civic and trans-
portation projects. Centrepiece projects included
the Guggenheim Museum (144 million Euro) and
the Euskaduana Conference Centre (72 million
Euro) (ibid, p 20). More than 6 billion Euro was
invested in transportation infrastructure projects
including an extensive metro system and new
metro stations designed buy renowned architect,
Normal Foster (ibid, p 21). The scale of transport
modernisation was astounding, leaving little if any
infrastructure untouched by the regeneration and
rejuvenation program.
Another major pillar of the Bilbao regenera-
tion program was environmental remediation of
contaminated industrial land and waterways. A
foundational investment was the development of
a new sanitation system costing one billion Euro
(ibid, p 22).
Combined the civic and transportation in-
frastructure projects stimulated significant eco-
nomic and employment development in the region,
growth that was reinforced by wider industrial
rejuvenation initiatives underpinned by EU funds
over the ten years to 2006 (ibid, p 26). Around
4.5 billion Euro was invested in economic and
industry restructuring projects, particularly in the
steel and shipbuilding sectors.
REFLECTIONS ON BILBAO
The success of the Bilbao regeneration and reju-
venation strategy is attributed in part to the level
of autonomy available to decision makers at the
local level in the Basque region, a consequence of
democratic reforms (ibid, p 15) that enabled Bilbao
to “design tailored policies at the right time”. The
Basque region is, notably, the most autonomous
region in Spain. The availability or resources to
support regeneration and the establishment of
specific institutions to drive regeneration were
a function of domestic taxation policies and a
high level of autonomy, conferring considerable
institutional agility.
Cultural tourism has increased markedly since
the crisis of the 1980s with the Guggenheim
Museum alone attracting 1 million visitors each
year (ibid, p 30). Business visitation increased
tenfold over the ten years to 2005, attributable to
the establishment of the conference centre and
airport upgrades.
The Bilbao strategy has been criticised for
not being sufficiently inclusive of community
stakeholders and being too “top down” (ibid, p
35). Others have argued that while civil construc-
tion projects were effective in providing much
needed employment, longer-term industrial and
employment development initiatives have not been
particularly successful (Gomez, p 112).
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The adoption of strategic planning, while
important, has lacked the statutory foundations
to overcome inter-institutional complexity and
duplication. Bilbao Ria has been viewed by some
as privatisation of functions once undertaken by
local government, circumventing democratic
processes and accountability (Gomez, ibid).
Gomez (ibid, p 113) points to a tendency in
regeneration to place style ahead of substance,
focusing more on the development of iconic build-
ings than on sustainable industries and jobs. Plaza
and Harrich (2013, pp 8-12) argue however that
the Guggenheim Museum in Bilbao has played
an important role as part of a wider strategy of
attracting investment and boosting “connectivity
for the city of Bilbao, providing favourable condi-
tions for improving the region’s competitiveness
and attractiveness”. In isolation, a new building
can do only so much. As part of a wider strategy
of rejuvenation and regeneration it can be inspi-
rational as Guggenheim Bilbao continues to be.
To this day Bilbao and the wider Basque region
remains a source of great interest to policymakers
and scholars seeking to better understand factors
influencing industrial rejuvenation and urban
regeneration. In a review of smart specialisation
in the region Arancegui, Querejeta and Montero
(2011, p 13-18) note a commitment in the 2010
Science, Technology and Innovation Plan (PCTI
2010) to a science and technology push involv-
ing the development of new sectors and enabling
technologies, focusing on commitments in a num-
ber of areas including biosciences, nanosciences,
alternative energies and electronics for intelligent
transport. This overarching plan built on earlier
strategic initiatives including BioBasque (2003
and updated in 2010) and nanoBasque (2008),
extending this work into the energy sector. These
strategies selectively extended the engagement
of the region into areas where it was judged the
region might develop a competitive advantage.
Arancegui, Querejeta and Montero (ibid, p 14) note
that “the strategy fostered the lines that matched
the most with the Basque system: human health,
but with less of a focus on the bio-pharmaceutical
chain because [of] the lack of companies in that
sector and more of a focus on diagnostic systems
and bioengineering”.
To activate the BioBasque strategy the Bio-
Basque agency was established to help drive
innovation in the sector, to “influence not only
the central part of the bioscience value chain
(i.e. the bio-science business group) but also the
entire value chain, including suppliers (driving
the diversification of the significant machine tool
industry towards the production of instruments
and equipment for the bio-business sector and
research in the field of health) and users (driv-
ing diversification in sectors such as agro-food,
environment and chemicals) where, although
the Basque country does not have high levels of
specialisation, there is significant employment
and economic activity” (ibid, p 15).
The nanoBasque strategy was accompanied
by the establishment of the nanoBasque Agency,
both of which were designed to “advance the
diversification of all sectors of the Basque
economy through the introduction of micro and
nanotechnology applications” (ibid), which are
regarded as general-purpose technologies or GPTs.
Building on a foundation of companies already
specialising in nanotechnology, the nanoBasque
Agency embarked on a process of mapping
existing interest and capabilities in the sector.
In reviewing smart specialisation in the Basque
region, Arancegui, Querejeta and Montero (ibid)
conclude that, “different modes of diversification
based on R&D can coexist in a single territory.
In each mode, the roles of government and other
agents differ according to the entrepreneurial and
scientific skills available in the region. When
such capabilities exist in the private sector or
university environment, the government can take
a primary role as facilitator…In other cases where
such skills are non-existent or only potential, the
role of government is much more active” (ibid,
p 17). Key reasons for the success of the Basque
approach to smart specialisation is the “high degree
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of competence of the regional government” and
“a large and sustained investment capacity that
has been made possible by its unique system of
economic agreements…” Arancegui, Querejeta
and Montero (ibid) argue that responsiveness of
the University sector was a “notable weakness”
that requires transformation of universities.
Arancegui, Querejeta and Montero (ibid, p
19) suggest that caution needs to be exercised
in arriving at a view about the optimal role for
government in smart specialisation, arguing that
advocacy of a minimal role for government is
likely to prove counterproductive in circumstances
where there is underdeveloped or nascent entre-
preneurial leadership.
Generally, the role of government is greater when
the production base and knowledge in the stra-
tegic area of diversification are lower. Even in a
relatively advanced region, such as the Basque
Country, the pure “entrepreneurial discovery
processes” seem to be more an exception than
the rule and the regional government’s role can
go beyond that of a mere facilitator or catalyst.
As noted by Etzkowitz (2003), entrepreneurship
need not be restricted to the private sector; it can
also be undertaken by the government.
IMPACTS OF INDUSTRIAL
CHANGE AND SHOCKS
Industrial rejuvenation must be undertaken in
an integrated way in order to deal with both the
economic and social consequences of industrial
dislocation and shocks like the closure of GMH.
This section briefly reviews literature on the im-
pacts of major business closures and downscaling
in this context. Lessons learnt from a number of
national and international case studies of closure
are identified.
It is vital when reviewing the impacts of
closures and retrenchment to take account of the
circumstances in which they take place, as these
help to both understand the causes of particular
events and the likely magnitude of impacts. Cook
et al (2013, p 4) argue:
The immediate causes of closures are due to
business decision-making, but the wider context
of causes needs to be understood in the light of
sectoral, market and technological trends. These
trends can include the changing nature and size
of demand in markets, over-capacity in supply/
provision, cheaper competition from international
producers and altering business models including
with respect to the processes of innovation. The
macroeconomic environment can have a particu-
lar bearing on some of these causes. For example,
economic downturns can have a noticeable effect
on demand, as can exchange rate shifts, which can
affect the competitiveness of goods and services.
Some of the causes can be tracked and understood
over time, which can contribute to foresight of
shocks (or potential shocks).
Regions with a high dependency on mass manu-
facturing have proven to be particularly vulnerable
to large-scale downsizing and firm closures over
the last 20 years (Spoehr and Shanahan 1994).
The timing of downsizing and closures profoundly
shapes the experiences of those who are retrenched.
During periods of economic decline those ex-
periencing retrenchment are much more likely
to become long-term unemployed (unemployed
for 12 months or more). During the recessions
of the early 1980s and 1990s, retrenchments in
South Australia increased sharply from 23,000 in
1988 to 48,000 in 1992 (ibid, p 6). Around one
in three of these job losses were concentrated in
manufacturing. Retrenchment as a proportion of
unemployment in South Australia doubled during
the height of the 1990s recession (ibid).
Major business closures and restructuring can
have a wide range of direct and indirect impacts
(Cook et al 2013), which are mediated in their
severity by economic, financial and organisa-
tional and personal circumstances. In relation
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to the workforce, factors such as age, gender,
educational qualifications, cultural background
and financial circumstances play a key role in
shaping outcomes. Six broad categories are used
here to review impacts that commonly accompany
closures and major downsizing events. These are:
• Economic and employment
• Supplier
• Health and psycho-social
• Population
• Taxation
• Housing
Economic and Employment Impacts
Business closures and large-scale downsizing
often have significant economic impacts with
large-scale closures having the potential to signifi-
cantly reduce economic output and value added in
an economy. The extent to which closures result
in net negative economic impacts depends on the
existence of compensating factors such as the time
available to adjust prior to closure, the quantity and
quality of new business or government investment
designed to offset impacts and the effectiveness of
policy and strategy designed to mitigate negative
impacts and generate alternative economic and
employment opportunities.
While impacts vary in their severity from case
to case, a recent review of the impact of large
firm closures undertaken by the Nous Group for
the Department of Industry, Innovation, Science,
Research and Tertiary Education (Nous, 2013, p
10) concludes that:
Workers displaced as part of major firm closures
or retrenchments often experience poor labour
market outcomes for extended periods of time.
These negative effects are not felt uniformly;
although some level of hardship is the typical ex-
perience, particular groups tend to struggle more
than others. The effect of a mass-layoff extends
beyond the individuals who lose their jobs and is
felt keenly in communities that are reliant on one
or two industries.
Studies of the estimates of the economic
impact of closures in South Australia by Spoehr
and Morrison (2002) and Spoehr, Wilson and
Morrison (2003) illustrate the potential impacts of
large-scale business closures on economic output
and value added. The closure of the Mitsubishi
Lonsdale plant and downsizing of Tonsley Park
plant operations was estimated to reduce economic
output by around $370 million at the business itself
and have flow on effects in the wider economy
of a further $230 million. In addition the changes
were expected to result in the loss of around $79
million in value added directly from the business
and a further $98 million in value added as a result
of flow on effects throughout the wider economy.
The negative impacts that ultimately flowed from
the closure of Mitsubishi, while significant (see
case study in section 4.1), were contained to a
large extent by the relatively buoyant economic
and labour market conditions that prevailed at the
time of closure.
The closure of the Port Stanvac Oil Refinery
was estimated to result in the loss of around
$23 million in direct value added from the state
economy and a reduction in flow on value added
in other sectors of the state economy of around
$50-80 million. Spoehr, Wilson and Morrison
(2003) indicate that a significant number of
businesses linked contractually to the Mobil Oil
Refinery expected negative sales and production
impacts. They identify other potential economic
impacts including increased demand for Federal
and State income support arising from an increase
in unemployment.
A wide range of employment impacts can be
expected to flow from business closures. The
magnitude of these impacts will be mediated by
prevailing economic, industry and labour market
conditions, the location of the plant and policy
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responses. Business closures during periods of
economic downturn or significant turmoil within
an industry sector often generate significant un-
employment and long-term unemployment. One
consequence of this can be the out-migration of
individuals and families from one region to another
in the search for work. Closures during periods
of strong economic and employment growth will
often have fewer negative employment impacts,
though this is dependent upon the quality and
the suitability of the employment that is avail-
able. Harris (1984) has found that the industries
and geographic regions in which businesses are
generating new jobs can differ markedly from
those losing jobs through plant closings and major
layoffs. This mismatch in the location of growth
and decline can be a source of considerable social
and economic distress.
Plant closures can have a wide range of em-
ployment related impacts in addition to job loss
including difficulty in transferring existing skills
to new jobs, a reduction in pay and benefits and
increased insecurity of employment (Armstrong et
al 2008; Beer et al 2006; Collins and Quark 2006;
Tomaney et al 1999, p 408). While it is common
for plant closures to lead to higher unemployment
and under-employment, a consequence of plant
closures can also be the entry of a new business
or new investment, which generates employment
(Yoder and Staudohar, 1985).
Spoehr and Morrison (2004) estimated the
potential employment impacts of the closure of
the Mitsubishi Motors Limited Lonsdale plant and
downsizing of the Tonsley Park Plant in South
Australia. They found that the reduction in opera-
tions would result in the loss of approximately
1,170 full-time equivalent jobs at Mitsubishi
directly and around 1,000 jobs in other sectors of
the state economy. Flow-on employment effects
were estimated to be greatest in the property and
business services, other manufacturing, trade, and
other motor vehicles and parts manufacturing sec-
tors. The study notes that the results do not take
account of potential offsetting positive impacts
flowing from reductions in the scale of Mitsubi-
shi’s operations. These include employees gaining
alternative employment, income transfers from
State and Federal Governments associated with
re-training, unemployment and general adjustment
assistance that may flow to South Australia if
there were a significant reduction in the scale of
the automotive industry in the State.
Spoehr, Wilson and Morrison (2003) estimate
the likely economic impact on the South Australian
economy of the closure of the Mobil Port Stanvac
oil refinery. Employment loss was estimated to
be approximately 350 full-time equivalent jobs
directly and between 450 and 740 jobs lost in
other sectors of the state economy. Flow-on effects
were estimated to be greatest in the utilities, other
manufacturing, business services and transport
sector. Large firms with significant contracts with
Mobil indicated that they would reduce employee
working hours or cut staff. Businesses that were
dependent on Mobil for a majority of their turnover
indicated that a third of their staff would have to
be laid off as a result of the closure. Furthermore,
one owner/manager indicated that the closure of
Mobil would force him into semi-retirement.
In a study of the impact of the closure of the
Geelong based Sterling Clothing Company plant
in 1985, Kriegler and Sloan (1986) focus on the
significant employment losses flowing from the
closure. The majority of employees made redun-
dant were able to secure alternative employment
almost immediately. This is likely to have been
due to the relatively favorable economic climate
prevailing at that time. Most of the employees
were able to find work with other clothing firms,
reflecting strong demand for machinists in Geelong
at the time. The study found that re-employment
was related to the timing of undertaking job search.
Those who started to look for work either before the
announcement of the plant’s closure or between the
announcement and the actual closure were much
more likely to have jobs than those who had not
started their job search until after the plant had
closed. One-fifth had left the labour force at the
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time and a further one-fifth were unemployed.
Those who had withdrawn from the labour force
tended to be older than those who had found new
jobs. They were also more likely to be foreign-born,
married, and long-standing employees.
Health and Psycho-Social Impacts
Business closures and major restructuring can have
a wide range of health and psycho-social impacts.
A major review undertaken by an expert European
group in 2011 found that negative impacts on the
health of workers were evident for workers where
retrenchment has been experienced indirectly,
that is colleagues were made redundant in their
workplace (Koper et al 2013, p 21). Among the
key impacts found were:
• Impairment in self-rated health state.
• Increase in certified sickness absence.
• Impaired sleep.
• Impaired ‘recuperativeness’.
• Increased self-reported stress.
• Cardiovascular impairment and increased
rates of related mortality.
• Increased drug addiction.
• Increased number of medical prescrip-
tions/use of psychotropic drugs.
• Increase in smoking and alcohol
consumption.
In a study of the closure of General Motors and
Ford plants in California in the mid-1980s, Yoder
and Staudohar (1985) found that employees and
their families experienced high levels of anxiety
and stress as a result of the closures. They indicate
that poor management of the closure and the lack
of job placement support services available to
employees generated high levels of anxiety among
workers. They report that employees experienced
physical and psychological problems that led
to a number of suicides. Spoehr and Morrision
(2002) indicate that closures resulting in job loss
may result in an increase in family stress levels,
increase in domestic violence and child abuse and
increased drug and alcohol abuse.
Using Mitsubishi Motor Limited in South
Australia as a case study, Verity and Jolley (2008)
draw attention to potential impacts of closures on
sense of community and belonging. They conclude
that closure can lead to the loss of close work
based friendships and supportive relationships, a
problem exacerbated by long-held work based ties
in many manufacturing workplaces. Nearly half
of Mitsubishi employees responding to a survey
indicated that they had worked at the plant for
over 21 years and many others much longer (ibid,
p 334). According to Verity and Jolley (ibid, p
337) the “Loss of repetition of contacts within the
organizational setting seems to have impeded the
maintenance of relationships that had existed over
many years within and outside paid work. In other
words the loss of regular contact with co-workers
led to the loss of deep work-based social attach-
ments and intensive and extensive networks that
developed over time” (ibid, p 340). They conclude
that there is a need for policymakers to pay greater
attention to these potential impacts by engaging
human service professionals in post-retrenchment
support and community development processes.
Community Impacts
Business closures can result in the loss of cash
and in-kind donations and support to community
organisations and programs. Spoehr and Wilson
(2003) indicate that the closure of the Mobil Oil
Refinery would have a significant impact on local
schools and community organizations, which were
beneficiaries of $600,000 in donations from Mobil
over a six year period. The loss of corporate fi-
nancial support from the oil refinery was expected
to intensify the pressure on organisations to seek
support from alternative sources. Similarly the
McDowell Group (2004) found that the closure of
the Agrium Kenai Nitrogen plant in Kenya would
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result in substantial losses to the community. The
plant contributed around $195,000 to 43 non-profit
organisations or programs while a further seven
organisations received in-kind support. Agrium
was active in a wide range of industry and busi-
ness support organisations.
Large-scale business closures can also result
in significant population impacts including the
out-migration from a region of people seeking
employment elsewhere. The McDowell Group
(2004) argue that the loss of an important busi-
ness might result in both immediate population
loss and gradual, long-term population decline.
Significant reductions in economic output,
income and demand flowing from business clo-
sures are likely to result in a decline in revenue to
government with the impact of losses mediated
by prevailing economic conditions in the wider
economy. This is likely to be most profound where
significant out-migration to other regions arises
from closures. Any reduction in revenue is likely
to increase the tax burdens on residents and busi-
nesses that remain and/or result in a reduction in
services provided. The McDowell Group (2004,
p 2) found that the closure of the Agrium Kenai
Nitrogen Plant in Alaska would result in the loss
of around $2 million in industrial property tax
and $0.2 million in residential property tax from
Agrium’s employees’ houses.
Revenue impacts flowing from business
closures in the Australian context might include
reductions in revenue streams from property tax,
payroll tax, local government rates, Goods and Ser-
vices Tax, business tax and employee income tax.
There are potential housing impacts flowing
from large-scale business closures. The McDowell
Group (2004) suggests that business closures and
layoffs might result in a weakening of the hous-
ing market where a closure results in significant
unemployment and population outflow. Spoehr,
Morrison and Wilson (2003) suggest that closures
could result in an increased demand for low cost
housing and housing assistance from employees
who become unemployed or underemployed.
In summary the literature confirms that the im-
pact of retrenchment and closure is multi-faceted,
with social, economic, health and psychological
dimensions that can each require attention. This
necessitates an integrated, multi-agency response.
The challenge as we shall see in the following case
studies, is to put this into practice.
RESPONDING TO INDUSTRIAL
CHANGE AND SHOCKS
Large-scale jobs losses and closures necessitate
early intervention to support retrenched workers
and their families. In the absence of appropriate
support and alternative employment, retrenched
workers can face long periods of unemployment
and associated social-psychological and health
impacts. Mitigating and minimizing the risk of
this presents a great challenge to policymakers,
particularly when closures are sudden and occur
during periods of economic difficulty.
While retrenched workers can become unem-
ployed, they commonly have skills, qualifications
and a record of continuous employment prior to
retrenchment. They normally also have access to a
separation package that can act as a buffer against
short-term hardship and enable a reduction in
home mortgage or other forms of debt. A problem
emerges when the benefits of this are eroded by
the inability to find suitable alternative employ-
ment or when the security and remuneration of
employment is significantly inferior.
The common response to major closures in
Australia has been the development of Labour
Adjustment Packages (LAPs) funded from finan-
cial contributions from government and industry.
Australia has a long history of implementing such
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packages, particularly during recessions when
closures are common. LAPs typically include the
following elements:
• Counselling
• Career advice
• Resumé writing
• Financial assistance for career transition
• Re-training
Importantly most LAPs are accompanied
by industry development initiatives designed to
support industrial diversification and generate
employment in the affected area. Making judg-
ments about the success or otherwise of LAPs can
be difficult given the lack of robust longitudinal
evaluations of them. Fortunately a number of
surveys have been undertaken on the impact of
closure on employees over time. There is much
that we can learn from these and from reflections
on the experience of industrial shocks and closures
in Australia and elsewhere. This section reviews a
number of relevant case studies detailing the policy
response to the event, evidence of outcomes and
lessons learnt. The case studies are:
• Mitsubishi (Southern Adelaide)
• MG Rover (Birmingham)
• BlueScope Steel (Illawarra)
• Bridgestone (Northern Adelaide)
Mitsubishi
The closure of Mitsubishi in Southern Adelaide
in South Australia occurred during a period of
economic growth, prior to the sharp decline in
manufacturing employment triggered by the
Global Financial Crisis. Employment prospects
were regarded to be high at the time, particularly
given increased investment in mining exploration
and the proposed expansion of Olympic Dam,
which subsequently did not proceed. In 2004
Mitsubishi announced that it would close the
Lonsdale based engine plant and downsize its
Tonsley Park assembly plant, affecting around
1200 workers. In 2008 the closure of the Tons-
ley Park plant followed resulting in around 1700
Mitsubishi workers losing their jobs.
The Response
In response to the Lonsdale closure and downsizing
at Tonsley Park in 2004 a $10m Labour Adjust-
ment Program and $45m Structural Adjustment
Fund SA (SAFSA) were established. The Fed-
eral Government provided $45m with balance
provided by the South Australian Government.
In addition to the services provided though the
LAP, the South Australian Government provided
access to financial counselling, résumé prepara-
tion and career counselling valued at around
$380,000 (Armstrong et al, p 345). The response
to the Mitsubishi closure has been described by
some analysts as “rushed…ad hoc and not very
effective” (Armstrong et al, p 353), a conclusion
that warrants more detailed examination than is
possible in the absence of robust evaluation of clo-
sure responses and outcomes, which incidentally
should be integrated into the implementation of
closure response strategies.
Outcomes
In a survey of Mitsubishi workers (n 372), Beer
et al (2006, p ii) found that a large proportion of
those affected by the closure were optimistic about
the future, reporting that, “Most respondents…
believed they had good prospects for finding
employment within the next six months”. A sig-
nificant deterioration in the quality and security
of the employment secured after layoff resulted
with Beer et al finding that, while “a significant
number had secured employment by the time of
Stage 1 interview, …many of those jobs were ca-
sual or short-term contract employment,” the study
reports (ibid). The vast majority of Mitsubishi
workers experienced a significant deterioration
in their income and security post redundancy:
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• 225 of 316 respondents (72%) reported
earning less than they did after redundancy;
• Just 11% reported earning around the same
post-redundancy while 15 per cent report-
ed earning more;
• Around one third of those in employment
had held three or more jobs in the last 12
months.
The vast majority (36 per cent) of respondents
found work in manufacturing while around 11 per
cent worked in retail, 7 per cent in construction,
6 per cent in health services and just 2 per cent
in mining and 2 per cent in defence.
More of those who were retrenched might have
found employment if they had been encouraged
to undertake retraining. According to Armstrong
et al (ibid, p 346) no funds were made available
for retraining of Mitsubishi workers despite the
existence of skill shortages in a range of areas in
South Australia.
Importantly the Mitsubishi impact study re-
vealed that “many…respondents reported that
the JobNetwork providers were unable to assist
workers in their situation,” a consequence of ap-
plying a model designed to support long-term
unemployed people, to recently displaced workers
(ibid, p v). The key implication of this is the need
to develop a tailored program of assistance that is
responsive to the client group (ibid, p vi). Some
respondents reported that they were not fully in-
formed about the employment service entitlements
available to them through JobNetwork providers.
This appeared to be a function of inconsistency
of knowledge among service providers.
Other effects of the Mitsubishi closure on
surveyed employees indicate, as earlier studies
have also demonstrated, the need for attention to
be paid to a holistic response to downsizing and
closures involving a coordinated response from a
range of agencies beyond industry, employment
and training, including health, community services
and housing. The evidence includes:
• Half of respondents believed that the loss
of employment at Mitsubishi affected their
social life;
• Higher levels of mental health problems
were reported relative to the population as
a whole;
• Housing costs were a source of worry for
around 60 of the respondents who sought
assistance with their housing. (Beer et al,
2006, p iv).
The $45m Structural Adjustment Fund SA
(SAFSA) offered grants for new business want-
ing to start up in South Australia and assistance
for the expansion of existing operations, with the
intention that much of the employment that was
generated, be to the benefit of those who were
retrenched from Mitsubishi. The extent to which
this was the case is difficult to discern. Armstrong
et al (1998, p 345) indicate that “While there have
been numerous businesses established on the
Lonsdale site through SAFSA funding, the govern-
ment has been forced to admit that the majority of
firms who received grants have not achieved their
employment targets”. They add that, “…over half
of the SAFSA funding went to businesses on the
northern side of the city, when virtually all of the
displaced workers lived in the southern region”. It
should be noted that the closure of Mitsubishi is
likely to have had an impact on suppliers located
across the greater Adelaide area.
Lessons
• Attention needs to be paid to dimensions of
quality, security and appropriateness in the
provision of career advice and placement
support.
• Retraining should be offered as a pathway
to alternative employment, particularly to
avoid people retiring prematurely.
• Mainstream services provided to unem-
ployed people are not likely to translate well
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96
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for application to closures. Employment
and support services should be tailored to
meet the needs of the sector and the work-
ers involved.
• A large proportion of manufacturing work-
ers that were retrenched from Mitsubishi
went on to work in other areas of manu-
facturing, indicating that this is a highly
preferred outcome. As a consequence in-
dustry development funds need to be better
targeted to start-ups and expansions in sec-
tors that are likely to generate employment
for those directly effected by closure.
• The short and longer term social, health,
housing and psychological impacts of
retrenchment need to be central to any
response to closure. A multi-agency,
multi-disciplinary case-work approach is
warranted.
MG Rover
MG Rover closed its Birmingham plant in July
2005, making 5500 workers redundant and af-
fecting the operations of a range of suppliers.
The turnover of the company was equivalent to
around 1 per cent of GDP and it generated a flow
of revenue to government of around £200 million
per annum (Bailey and MacNeill, 2008, p 112).
Like the Mitsubishi closure, the MG Rover
closure took place during a period of relative
economic buoyancy, prior to the GFC. The scale
of the response was significantly larger but so was
the size of the MG Rover workforce.
MG Rover was a very significant contributor
to the regional economy, boosting gross regional
production by around 0.5 to 1 per cent and income
to government in excess of £200 million annually
(Armstrong et al 2008, p 348). Five years prior
to the collapse of MG Rover a Task Force was
established to provide support to the automo-
tive sector. The report of the Rover Task Force
detailed over £58 million of initiatives in three
interlinked areas, modernization, diversification
and regeneration (Bailey and MacNeill, 2008,
p 112). Related to this was a program of supply
chain improvement.
Bailey and MacNeil (ibid, p 113) note:
While the modernization included a number
of linked initiatives to improve competitivene,
through increased productivity, the new diver-
sification programme sought to help suppliers
diversify away from Rover, and from automotive
in general, by encouraging the application of
engineering skills to other industries such as
medical and nano technologies.
The Response
In response to the closure, Rover Task Force – mark
2 was established to manage the response, which
was resourced from a £177 million assistance
package. The Task Force involved a wide range
of organisations drawn from industry, govern-
ment, unions and the NGO sector. The focus of
the Task Force was to “…facilitate diversification
in the supply chain, support ex MGR workers to
find new jobs and provide assistance to the wider
community” (Armstrong et al 2008, p 349)6.
The financial assistance package included the
following elements:
• £50 million for re-training.
• £40 million in redundancy payments.
• £24 million loan fund for business growth.
• £41.6 million to assist suppliers plus
a further £7.6 million for supplier
diversification.
The Task Force put in place a telephone hotline
for the workforce, a website, helpline and a central
Jobcentre. Travel subsidies were made available
for workers having to commute longer distances to
work. Of particular note was a 3.4 million pound
wage replacement scheme assisting around 170
firms, which Bailey and MacNeill (2008, p 114)
note, “kept around 3000 workers in place for
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Foundations for Industrial Rejuvenation

the critical weeks following the collapse, with
1,329 ‘confirmed’ jobs being saved in this way”.
Armstrong et al (ibid) argue “that in contrast to
ex-Mitsubishi workers, there has been significant
assistance to ex-MGR workers”.
Specialist assistance was offered to MG Rover
suppliers for diversification initiatives. In the
following section we examine some survey and
outcomes data collected to track post-closure
experience and outcomes.
Outcomes
Armstrong et al (ibid, p 349-50) report the follow-
ing outcomes from a longitudinal survey (3 waves)
undertaken by de Ruyter, Bailey and Bentley
(2012) on the impact of the closure.
Six months after the closure:
• More than half of the respondents (n232)
were in full-time employment.
• Around one third of respondents were still
unemployed.
Twelve months after the closure:
• Around 4000 of those retrenched were in
work with around 90 per cent of those in
full-time work (compared to around two-
thirds of those in the Mitsubishi study
earlier).
• 667 were undertaking or waiting for training.
• 398 had received training but were not in
work.
• 530 were not working.
The main employing sectors for those re-
trenched in order of priority were:
• Manufacturing
• Motor industry
• Transport
• Engineering
• Construction
• Local government
• Health
• Government
• Transport
• Retail
• Security
• Financial services
In the final wave of the survey in 2008, de
Ruyter, Bailey and Bentley (2012, p 10) found
that around “86 per cent of ex MG Rover workers
who had become re-employed had ‘permanent’
contracts, while the remainder (14%) employed
on a casual basis, or on fixed term contracts, or
via agency work”. Significant instability of em-
ployment was evident for those whose contracts
were for less than 12 months (the statutory pe-
riod required in order to claim unfair dismissal)
(ibid). Around one third of respondents who
were employed reported a higher occupational
role compared to their role at MG Rover, while
one third reported a decline in their occupational
status (ibid, p 11).
Around two thirds of respondents reported
their annual incomes being significantly lower
than their income at MG Rover (ibid, p 11).
Lessons
A range of policy lessons have been identified by
researchers examining the Rover MG experience
(de Ruyter, Bailey and Bentley, 2012, p 10; Bailey
and MacNeill, 2008, pp. 115-122). These relate
to the areas of employee transitions/support and
industrial rejuvenation and diversification.
• Employee transitions and support
◦ Effective policy intervention requires
supporting people to enable them to
have different options to move within
the same sector (and thereby assisting
skill reproduction).
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◦ Avoiding sudden closures and slow-
ing down the process of plant closure
also enable workers released to pick
up jobs arising through ‘replacement
demand’ where firms require workers
to cover those who have left, retired
and so on.
◦ Government and regional/local agen-
cies need to do more to ensure that
employees have the necessary skills
to cope as industries change, through
high quality, flexible education,
training, information and mobility
programmes.
◦ A policy response is needed to tack-
le growing income inequality. This
needs to go beyond a reliance on the
National Minimum Wage and con-
sist of genuine measures to provide a
“living wage” for individuals.
• Industrial rejuvenation and diversification
◦ Local economic diversification
should be supported…supporting
modern manufacturing…given both
the growth potential of this sector and
the need to diversify the economy
so as to avoid over-reliance on retail
and financial services as drivers of
growth.
◦ Regional development policy needs
to foster knowledge intensive compe-
tencies through regional ‘collective
learning’ which is central to the de-
velopment of a successful milieu or
set of territorial arrangements linked
to cluster development.
An evaluation of the impact of a suite of
programs implemented in response to the crisis
facing Rover and then MG Rover provides useful
insights into the value of different interventions
(ECOTEC 2008)7. Prepared for Advantage West
Midlands by ECOTEC the evaluation represents
one of the most detailed of its kind available. It
reveals that the response to managing the crisis
played a critical role in helping to maximize the
number of workers re-employed after closure,
retain workers in related businesses and create new
employment opportunities. Key program strengths
and areas for potential improvement identified
from the evaluation included (ibid, p 10-11):
• Strong partnership working across the re-
gion and recognition of its importance.
• Strong central co-ordination of the process
of interventionism.
• A well prepared and efficient intervention-
ist approach.
• Absence of isolationist stances i.e. every-
one playing their part.
• Speed of response by all players.
• Pro-active and direct approach and confi-
dence building between agencies and the
private business sector.
• Flexibility in delivery and program con-
struction to meet short term specific needs.
• Diversification being recognised as a con-
tinuous process.
• Realisation that short term responses can
form the basis of long term improvements.
• Awareness of future strategic positioning
as a result of the developments associated
with the Rover and MG Rover experience.
• Safeguarding of jobs.
Areas identified for potential improvement
included:
• A fuller realisation of the actual dependen-
cy of businesses beyond claimants.
• Avoidance of inconsistency between differ-
ing agents in terms of managing programs.
• Greater emphasis on ensuring diversifica-
tion was being applied into the long-term
and across the West Midlands in spite of
emergency situations.
• Better identification of outcomes associat-
ed with program elements and monitoring.
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• Wider UK impacts needed to have been
considered and the construction of relation-
ships with other Regional Development
Agencies was not so apparent.
• Greater emphasis on the potential leverag-
ing of alternative funds as a result of pub-
lic sector support to encourage employer
engagement.
• Need for examination of multiplier effects
as a result of jobs created or safeguarded.
• Need for strong identification of linkage
between business outputs and skills devel-
opment and up-skilling.
• Realisation that more could have been
done to wean firms off Rover, or other large
firm dependency and greater monitoring
through better screening of how reliant the
supplier firms actually were.
BlueScope Steel
BlueScope Steel announced the restructuring
of their Australian operations in August 2011,
resulting in 1,000 retrenchments (800 from the
Port Kembla site). In addition to those directly
effected there were around 650 indirect job losses
in the Illawarra region (Nous 2013, p 6). Total
direct and indirect estimates of jobs losses were
estimated to range between 1450 and 2500.
Retrenchment took place two months after the
announcement. In the intervening period a ‘redun-
dancy swap’ arrangement was made available by
the company. This enabled some workers whose
positions had been made redundant to swap with
someone who wished to leave but their position
had not been made redundant. One consequence
of this is that the redundancy program encouraged
older workers to leave – around half of those who
were retrenched, retired.
Unemployment in the Illawarra region was
significantly higher than the State average, lim-
iting local employment opportunities for those
searching for work.
The Response
• A taskforce (Illawarra Stakeholder Taskforce)
was established to manage the response.
• BlueScope established a Job Centre to
provide support to workers – an office pro-
viding information and job search advice
and support. It also provided a jobs board
for local employers. Access to the service
was made available prior to redundancy as
JSA services were not available till after
redundancy arrangements were confirmed.
These were confirmed around 12 months
after the announcement.
• Establishment of the Illawarra Region
Innovation and Investment Fund with contri-
butions from BlueScope, State Government
and the Australian Government – a $30m
fund (Australian Government – $20m; NSW
Government – $5m; BlueScope Steel – $5m
over three years to June 2014) providing grants
for employment generation linked to indus-
trial diversification and sustainable jobs.
• Establishment of the BlueScope Labour
Adjustment Program delivered by DEEWR
– a $10m allocation for career support and
transition services.
• A website/information sessions detailing
entitlements was made available to workers.
• A Jobs Market was held to link local em-
ployers with BlueScope employees.
Outcomes
• Estimated that 50 per cent of retrenched
workers retired immediately.
• Of those eligible for Job Services Australia
support services, 338 were placed in jobs
by the end of October 2012.
• No data available on the quality of jobs or
turnover in jobs after retrenchment.
• Quality of the vacancy data available to in-
form job search was questioned by some.
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• Innovation and Investment Fund claims
outcomes of around 900 FTE. Concerns
were reported about slow pace of allocat-
ing grants; no requirement for the program
to directly benefit BlueScope workers;
lack of support for SMEs relative to larger
enterprises.
Lessons
• Delivery of programs regarded as effective
but largely as a consequence of informal
linkages rather than effective formal insti-
tutional arrangements.
• The contribution of Local Employment Co-
ordinator regarded as central to successes.
• Job Centre provided a central point for con-
tact prior to formalisation of redundancy.
• Jobs Market viewed as broadening range of
employment options available.
• Lack of support to map skills and identify
training needs.
• Need to combine training with on the job
experiences to increase employability.
• Need for more guidance about what jobs
are in demand beyond vacancy lists.
• Focus on supply does not of itself solve the
problem of lack of available and appropri-
ate employment.
• Support to BlueScope suppliers regarded
as inadequate, particularly given the large
presence of these in the area. Need to pro-
vide assistance for diversification.
Bridgestone
Bridgestone Australia was a major tyre manu-
facturing factory based in Northern Adelaide in
South Australia. In October 2009 it announced
that it would close its Salisbury plant leading to
the retrenchment of 600 workers. This followed
earlier automotive industry plant closures, notably
Mitsubishi in 2004 and 2008.
The Response
A ‘Beyond Bridgestone’ steering committee was
established to manage the response to the closure.
The committee was supported by five working
groups. Nous (2013, p 28) notes that “the involve-
ment of so many players from different layers of
government confused the process for workers who
would have benefited from a single information
source or co-ordinator”. A Local Employment
Co-ordinator worked with a separate working
group, which was linked to the steering committee.
A range of institutions provided services
funded by the Automotive Industry Structural
Adjustment Program while additional support was
provided through the Productivity Places Program
for training. Retrenched workers were provided
access to Stream 3 Job Services Australia intensive
support services.
Outcomes
• While 438 Bridgestone workers were re-
ported to have found jobs, the relative
quality and security of these jobs are not
known.
• Job search assistance provided by JSAs
was reported as valuable by some.
• Concerns were expressed that the reward
structure in place for JSAs led them to
streaming people into short-term jobs rath-
er more secure longer term arrangements.
• The take up of PPP places was low.
• Access to Recognition of Prior Learning
assessment was accessed by 404 workers
with 267 gaining qualifications through
this process.
Lessons
• The governance arrangements were re-
garded as inappropriate and cumbersome
by some. Lack of communication be-
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tween the working groups and the Steering
Committee was a limitation, though early
inertia was overcome to a large extent
through the constructive role played by the
Local Employment Co-ordinator.
• Recognition of Prior Learning played a
key role in successful transitions for a large
proportion or workers.
• JSAs may be too focused on short-term
outcomes driven by the incentive struc-
tures in place. This may generate job place-
ments that are unsuitable or unsustainable.
• Lack of data about the experiences of
workers interactions with services makes
it difficult to evaluate the effectiveness of
specific services.
Responding to Shocks
A recent report on lessons from past economic
shocks commissioned by the British Government,
Cook et al (2013, p 51-60) provides a useful
summary of potential interventions/responses to
help inform future action. These are summarised
below by domain (Business, Supply Chain, People
and Place).
The British Framework for
Managing Economic Shocks
A key outcome of the research commissioned by
the British Department for Business, Innovation
and Skills on Economic Shocks has been the
development of a framework for how to under-
stand and respond appropriately to them (Cook
et al, 2013, p 61-92). The broad contents of the
framework are summarised below. It comprises
four domains and accompanying guidance to assist
with responding to and managing shocks.
Diagnosis of the Shock
Key elements in this domain are:
• Determine whether or not there is (or there
might be) a case for intervention in any or
all of the domains.
• Identify the critical issues and potential
needs for each of the four domains.
• Identify the market and other failure argu-
ments that might provide a case for public
sector intervention.
Key outputs for this stage should be assessment
and diagnosis of the shock.
Reviewing Functions and Forms
Key elements in this domain are:
• What mainstream services already exist
that businesses or individuals could be
signposted to, and/or that place/communi-
ties could benefit from.
• What existing initiatives and services can
be leveraged and/or deployed in response
to the shock.
• What additional bespoke actions might be
required to cover any needs that remain
unmet by mainstream or existing services,
and how self-standing might these be into
the future.
Developing Appropriate Packages
Key elements in this domain are:
• Testing strategic fit, so as to ensure that the
response action works.
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Table 3. Potential interventions/responses to help inform future action (Cook et al (2013, p 51-60))
Domain Intervention/Response Commentary on what Worked/Learning
Business Support package to influence decision
making
In the case of General Motors’ decision to stay at Ellesmere Port, government
was able to draw on a package of interventions around the business and its
supply chains (e.g. Grant for Business Investment, Advanced Manufacturing
Supply Chain Initiative) and its workforce (e.g. National Apprenticeship
Service). This was also facilitated by workforce concessions to help improve
plant efficiency.
Business Selective Financial Assistance Harris and Trainor (2007) found that receipt of Selective Financial Assistance
(SFA) by manufacturing firms in Northern Ireland reduced the probability of
plant closure by 15%-24%. The results showed that the overall net effect on
employment change was an increase of around 19,600 jobs in plants that had
received SFA compared with a loss of 33,200 jobs in eligible but non-assisted
plants.
Business
& supply
chains
Business support Albeit based mainly on self-reported benefits, RDA evaluation evidence found
that the largest benefits (relative to costs) were in the area of business support
(PricewaterhouseCoopers, 2009).
Supply
chains
Support to modernise and diversify Mitigating actions were successful in helping suppliers to Rover to diversify
between the Rover Task Force in 2000 and the MG Rover Task Force in 2005,
and then thereafter (ECOTEC, 2008). This was a tailored support package.
People Combining employer-led redundancy
support with Jobcentre Plus and
Rapid Response Service
The quick and coordinated response following the closure of RTA in
Northumberland meant that 78% of redundant workers were in new employment,
engaged in start-up/self-employed enterprise, in training, or retired within
several months of closure. The sustainability of outcomes was unknown at the
time of the work.
People Coordination and ‘flexicurity’ The coordination between employers, employees and public authorities has
been identified as key in Finland in providing financial security to redundant
workers in between jobs (European Commission, 2008). This incentivises
partners to help secure positive destinations for workers quickly. In Austria,
outplacement services are jointly-funded by employers, surviving workers and
redundant workers (European Commission, 2010) – this requires a strong public
employment service and a cooperative ethos and culture.
People Employer pools and coordination In various countries in Europe, employer pools are used to identify opportunities
in other employers locally – e.g. in Sweden and Germany (European
Commission, 2010)
People Retraining A key part of the response to MG Rover’s closure was having:
• discretionary support so that workers could take part in retraining for
alternative careers
• flexibility that could be used to bend rules (e.g. retaining benefits even though
workers were in short-term full-time training).
90% of ex-MG Rover workers were in employment three years after the closure
and 60% had undertaken some form of retraining/education (Bailey et al., 2012).
Long-term restructuring Pringle et al. (2011) identify a number of issues in supporting place-based
growth, including having long-term stability in institutions, developing new
areas of growth in related activities, and the importance of strong research
centres and human capital that reinforces development. This emphasizes holistic
place-based responses over a long period of time that take advantage of local
strengths. E.g. in Germany (in the Ruhr and Munich for example), there have
been targeted investments in strategic transport, and assets such as science parks
and educational establishments alongside other support.
Place Long-term restructuring In Gothenburg, long-term response to closure of the shipyards has taken
25+ years. It has combined investment in educational establishments, with
development of related clusters around information technologies where synergies
have been found to other sectors, e.g. automotive. The process benefited from
long-term stability in institutions, and a private sector ethos of borrowing at
commercial rates to fund regeneration (Cadell, 2008).
continued on following page
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• Options assessment to consider the pros,
cons, possible costs and benefits and risk
associated with different actions; key to
this is to review critically past evaluation
learning.
• Discussion with key agencies delivering
relevant services about capacity and ca-
pability to deliver at higher scale and/or
around eligibility criteria.
• Identification of possible funding sources
to deliver actions, including within part-
ners, private sector, national and other
sources – and discussion about scope to
relax any eligibility criteria or other con-
straints on funding.
• Planning to set out all relevant actions, lead
parties taking responsibility for actions and
reporting arrangements.
Implementation
Key elements in this domain are:
• Review and refinement of actions.
• Monitoring and evaluation of the event and
interventions.
Figure 2. British Department for Business, Innovation and Skills’ Framework for Managing Economic
Shocks (Cook et al, 2013, p 61-92).
Domain Intervention/Response Commentary on what Worked/Learning
Place Investing in technology assets In the West Midlands, longer-term transformation of the economy was
implemented through regional strategy and regional programs around clusters
and High Technology Corridors. The High Technology Corridors program
was seen as effective in developing technology assets and was combined with
specialist support to businesses, e.g. through proof of concept funding and
innovation networks (SQW, 2008).
Place Developing sites The future development of sites and premises requires some coordination
between public authorities and private developers/owners. In some cases,
developers may ‘sit on’ sites, hoping values will increase. A desirable outcome
is for sites/premises to be used appropriately in the context of local economic
strengths, which may require taking a long-term view and may mean seeking
higher value uses. For example, the current approach at Discovery Park
(formerly Pfizer) seems to combine technology uses with other employment
creation that may be appropriate to the local labour market.
Table 3. Continued
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FOUNDATIONS FOR REJUVENATION
AND REGENERATION
This final section of the chapter distils some broad
strategic implications flowing from the various
strands of literature reviewed here. Taken together
they might be regarded as some of the foundations
for successful rejuvenation and regeneration.
Strategic Implications
As we have discovered, rejuvenation and regen-
eration can be regarded as mutually reinforcing
concepts. When intelligently integrated they have
the potential to significantly improve the social
and economic prospects and wellbeing of areas
experiencing industrial decline, closures and a
legacy of underinvestment in social and physical
infrastructure.
Integrated Planning and Execution
• Integration of economic, industry, work-
force, social and urban policy and program
agendas.
• Ensuring responsiveness to place, econom-
ic, political, historical and cultural needs
and circumstances.
• Agile and responsive collaboration and
governance processes and structures.
Facilitative and Catalytic
Leadership and Institutions
• Developing high quality leaders and diffus-
ing leadership.
• Authentic engagement, trust building and
collaboration.
• Effective communication of vision, strate-
gic responses and progress.
• New trans-disciplinary institutional spaces
for design thinking, problem solving and
action.
Early Impact Assessment and
Response Management
• Early assessment of the full range of poten-
tial impacts of disinvestments and closures
to provide an evidence base prior to them
occurring.
• Economic, workforce and social modelling
of potential and actual impacts.
• Scenario planning of alternative responses
to large scale retrenchments with particu-
lar attention to short and medium term de-
mand side solutions.
• Ensuring that the social and economic
costs of industry adjustment are mitigated
or minimised for workers, families and
communities through early intensive as-
sistance appropriate support or pathways
to appropriate employment made available
to all those affected by restructuring, re-
trenchment or closure.
Transformative Knowledge Intensive,
High Value Economic and Industry
Development Pathways that Build on
Existing Strengths and Add New Ones
• Building and sustaining a robust regional
innovation system.
• Developing viable pathways for transition-
ing from mass production to knowledge
intensive, high value goods and services.
• Transforming existing industries and en-
terprises to make them more resilient in
the face of domestic and global pressures.
• Fostering and supporting the growth of
new and more resilient firms/sectors to re-
spond to the decline of others.
• Investing in high performance workplace
systems.
• Facilitating and sustaining robust and
outward looking industry clusters and
networks.
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105
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• Fostering and investing in a culture of cre-
ativity and innovation sustained by design
thinking processes and institutions.
Modernising Physical and Social
Infrastructure and Improving Well-Being
• Identifying early infrastructure develop-
ment priorities that help to boost employ-
ment in the short term and productivity
over the medium term.
• Improving the quality of civic amenity as
a foundation for improving morale, well-
being, population/workforce attraction and
retention.
• Modernising housing and transport infra-
structure to improve well-being and reduce
travel to work times.
Learning from Experience
• Ongoing monitoring, evaluation and adjust-
ment as appropriate of response strategies.
ACKNOWLEDGMENT
This chapter has been prepared with grant support
from the Government of South Australia through
the Department of Manufacturing, Innovation,
Trade, Resources and Energy and the Stretton
Centre supported by the Australian Government.
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KEY TERMS AND DEFINITIONS
Creative Destruction: The process by which
innovation arises from the decline of previous
regional economic orders, i.e. old industrialised
areas undergoing renewal through regional in-
novation system approaches and diversification.
Industrial Diversification: Processes by
which industries build on the capabilities of exist-
ing manufacturers to develop new products and
unlock new markets.
Industrial Rejuvenation: A multi-faceted
strategy that seeks to manage pressures and
complex change in response to local, national and
global conditions. It involves the transformation
of existing industries as well as the development
of new and more resilient ones.
Industry Clusters: Concentration of net-
worked businesses, suppliers and institutions in
a region that leads to increased productivity and
competitive advantage the diffusion and sharing
of knowledge.
Integrated and Inclusive Problem-Solving:
An approach to innovation processes based on
multidisciplinary collaboration to optimise out-
comes for the various parties involved (sometimes
called ‘design thinking’, ‘co-design’, ‘integrated
design’, ‘open innovation’ etc.).
Regional Innovation Systems: A strategic
response to industrial decline and dislocation
that identifies the competitive foundations for
industrial renewal. It considers the roles that gov-
ernment, industry, unions and wider community
might play in establishing the rapid diffusion of
knowledge, skills and best practice to sustain
renewal and build robust and successful industry
clusters.
Smart Specialisation: Involves smart growth
based on knowledge and innovation; sustainable
growth promoting a more resource efficient,
greener and competitive economy; and inclusive
growth, fostering a high employment economy de-
livering economic, social and territorial cohesion.
Urban and Regional Regeneration: Entails
the modernisation and revitalisation of ageing
housing stock and physical and social infrastruc-
ture, creating healthy, stimulating and vibrant
spaces to live, work and invest in.
ENDNOTES
1 Economics of Agglomeration: Many
economists argue that the economic suc-
cess of cities and regions is closely related
to the degree of concentration of economic
activity, the sectoral composition of this
activity and important contributory factors
such as urban amenity, knowledge and skills
intensity, social and creative capital and the
quality of physical and social infrastructure.
Following the path breaking work of Alfred
Marshall in the late 19th century, economic
geographers and economists have been eager
to better understand the drivers of economic
concentration – an area of research known
as agglomeration economics. Locations
thick with similar economic activity expose
firms to pools of skilled labour specialized
suppliers and potential inter-firm knowledge
spillovers that can provide firms with oppor-
tunities for competitive advantage. (Alcacer
and Chung 2010, p 26)
2 Benefits of Agglomeration: Dense concen-
trations of economic activity are generally
seen as giving rise to increasing returns that
may be shared by business units that cluster
in space. The analysis shows that virtually all
plants reap productivity benefits from being
located in places where occupational distri-
bution of workers matches the demand for
labour by occupation. ..older firms, whose
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Foundations for Industrial Rejuvenation

production processes have been standard-
ized, are better able to exploit advantages
of local supplier/buyer networks. (Brown
and Rigby 2013)
3 Smart Specialisation is about generating
unique assets and capabilities based on the
region’s distinctive industry structures and
knowledge bases. (EU 2012a, p 11)
4 The D.School Process: This process – which
has been called design thinking – draws on
methods from engineering and design and
combines them with ideas from the arts,
tools from the social sciences and insights
from the business world. Students begin in
the field, where they develop empathy for
the people they design for, uncovering real
human needs they want to address. They then
iterate to develop an unexpected range of pos-
sible solutions, and create rough prototypes
to take back out into the field and test with
real people. (http://dschool.stanford.edu)
5 Collaborative Research in the Real
World: Living laboratories provide a way
to structure research and innovation so that
those involved work together more co-
operatively and the end result constitutes
a better response to the preferences and
circumstances of innovation end-users and
others affected and to environmental impera-
tives. Researchers, industry, government and
often end-users collaborate on the research
and development, testing it out in real world
settings. (Salter and White 2013)
6 Rover MG Program – Employment and
Economic Impact of Programs: A suite of
programs was put in place by government
to help minimize negative impacts from the
restructuring and ultimate closure of MG
Rover. Fortunately some evidence on the
impact of these programs is available. An
evaluation of key Rover Task Force 2000 and
MG Rover Task Force 2005 programs was
undertaken by ECOTEC in 2008. The evalu-
ation estimates that around 620 jobs were
created and nearly 12,000 jobs safeguarded
over the 2002/3-2007/8 period as a result of
the suite of programs (ECOTEC, p 31). The
bulk of these were attributable to extension
support, innovation, diversification and
wage subsidy programs. ECOTEC estimate
the Gross Value Added benefit of the jobs
created and safeguarded to be around £174
million.
7 Rover MG Program – Conclusions: “The
evidence suggests that on the whole the Rover
Task Force and MG Rover Task Force pro-
grams were highly successful in mitigating
the overall economic impact of the declining
fortunes of the automotive sector and its
supply chain. The interventions however,
must be taken in the context of a prevailing
relatively healthy labour market, but one
where a declining automotive sector was far
from conducive to the re-employment of a
large number of workers back into the sector
itself and where the overall trends in this sec-
tor did not provide support for employment,
investment and growth. The contribution of
the Task Force activities in generating and
safeguarding jobs and assisting businesses
is considered substantial especially in terms
of generating and replacing to a degree what
would have been lost income and Gross
Value Added. The amount of skills training
was substantial and contributed in no small
part to the retention of experienced workers”.
(ECOTEC 2008, p 11)
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Section 2
Responses for Sectors,
Clusters, and Regions
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112
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Chapter 4
The Role of Local and
Regional Institutions
ABSTRACT
This chapter explores the ways in which regions that are remote from the main concentrations of economic
wealth and power can achieve development in a high cost environment. The role of effective institutions
in creating the conditions for economic development has become a major field of scholarship. Recently,
these insights have been applied to the urban and regional scale. This chapter pays particular atten-
tion to the role that regional and local institutions play in shaping patterns of economic performance,
especially in high cost environments. The chapter examines ways in which this new thinking is informing
regional policy. It provides some case studies of regions that have succeeded in the high cost environment
of Europe. It concludes by stressing the importance of effective and adept local and regional institutions
in ensuring the prosperity of cities and regions.
REGIONAL DEVELOPMENT IN
A HIGH COST ECONOMY
How can regions prosper in a high cost economy?
Peripheral cities and regions are typically seen as
especially vulnerable in a high cost environment.
The concentration of economic activity in mega-
cities with large and diverse markets and agglomera-
tions of industries is seen as providing productivity
returns that offset the disadvantages of a high cost
base (Glaeser, 2011). This chapter explores the ways
in which regions that are remote from the main
concentrations of economic wealth and power can
achieve development in a high cost environment.
The role of effective institutions in creating the
conditions for economic development has become
a major field of scholarship. For Douglass North
(2005) the long-run evolution of the political-
economic structure of a society is key to how
choices are made and how they are able to shape
economic policies and contribute to “adaptive
efficiency,” that is, the ability of some societies
to adjust to shocks in a world characterised by
ubiquitous uncertainty and constant change and
under conditions of bounded rationality (cf. Simon,
1986). Institutions are the “scaffolding that shapes
human interaction” (North 2005: 48) or, “the rules
of the game in a society; (and) more formally, the
humanly devised constraints that shape human
interaction” (North 1990: 477).
Recently, scholars and policymakers have
sought to apply these insights to the urban and
John Tomaney
University College London, UK
DOI: 10.4018/978-1-4666-5828-8.ch004
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113
The Role of Local and Regional Institutions

regional scale (see Tomaney 2013 for an over-
view). Thus this chapter pays particular attention
to the role that local and regional institutions play
in shaping patterns of economic performance,
especially in high cost operating environments.
The chapter begins by looking at new thinking on
“place-based” forms of development. It then exam-
ines ways in which this new thinking is informing
regional policy. The chapter then looks at some
case studies of regions that have succeeded in the
high cost environment of Europe. It concludes by
stressing the importance of effective and adept
local and regional institutions in ensuring the
prosperity of cities and regions.
NEW THINKING ON PLACE-
BASED CITY AND REGIONAL
DEVELOPMENT
Over recent years there has been a growth in new
thinking about the process of local economic de-
velopment. Across the world local and national
governments have moved away from traditional
approaches that emphasised the provision of
large-scale infrastructure, the attraction of foot-
loose investors and the disbursement of transfer
payments designed mainly to compensate for the
effects of industrial restructuring and low growth.
Under these conditions, peripheral regions in
high cost economies often find themselves com-
peting for investment through lowering wages.
Such approaches have generally proved to be
temporary measures that fail to contribute to the
factors that will underpin more sustainable forms
of development. The new approaches tend to
emphasise the identification and mobilization of
endogenous potential; that is, the ability of cities
and regions to grow drawing on own resources.
The new approach though is applied not just in
areas with obvious economic strengths such as
major cities – but in all areas. The new “place-
based” approaches involve attempts to tap into
economic potential that remains unused and not
identifiable to outside agencies, so that all cities
and regions – potentially at least – can contribute
to national development.
This kind of thinking is evident in recent
reports by the OECD (2009, 2010 and 2012),
by Fabrizio Barca (2009) for the EU and from
the Obama administration (White House, 2010),
which have pioneered “place-based” approaches.
These reports posit a model of regional and local
development intervention which is being increas-
ingly adopted, in adapted fashion, in developed
and developing countries, in cities and regions,
and which at its heart focuses on the identification
and mobilisation of endogenous assets, i.e. the
region’s internal skills and innovation capabilities.
The OECD calls it a “new paradigm” of regional
development (see Box 1). Skills and innovative ca-
pacity are very important to regional development
because they can be used to embed investment in
cities and regions in an era of more mobile capital
in ways that the provision of low cost labour and
infrastructure alone cannot.
Table 1. Old and new paradigms of regional
policy (Source: adapted from OECD (2009: 51)
Regions Matter: Economic Recovery, Innovation
and Sustainable Growth, OECD: Paris)
Old Paradigm New Paradigm
Objectives
Compensating
temporarily
for location
disadvantages of
lagging regions.
Tapping underutilised
potential in all regions
for enhancing regional
competitiveness.
Unit of
intervention
Administrative
units.
Functional economic
areas.
Strategies Sectoral approach.
Integrated development
programmes.
Tools
Subsidies and state
aids.
Mix of soft and hard
capital (capital stock,
labour market, business
environment, social
capital and networks).
Actors Central government.
Multiple levels of
government.
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114
The Role of Local and Regional Institutions

‘Place-based’ development policies are par-
tially a response to perceived failures of earlier
regional policies and focus instead on tackling un-
derutilised economic potential and reducing social
exclusion, through supply of integrated goods and
services tailored to local contexts and triggering
innovation, which is critical to economic growth.
NEW APPROACHES TO LOCAL
AND REGIONAL DEVELOPMENT:
GLOBAL DEVELOPMENTS
Table 1 summarises the broad shift in approaches
to regional policy that can be observed globally,
albeit there is considerable unevenness in the ap-
plication of the new principles and in practice the
lines between them prove to be fuzzy.
The new paradigm emphasises bottom-up,
locally designed and owned strategies aimed at
promoting growth potential in all local econo-
mies. It stresses the importance of integrating
policies for land-use, infrastructure and business
support. It places a particular emphasis on “soft”
factors of development such as high-level skills
and innovative capacities of firms and public
sector organisations and especially the role of
inter-firm networks in contributing to growth.
New approaches tend to emphasise the need for
multi-annual comprehensive strategies which ad-
dress the broader local environment that affects
the performance of firms, including the quality
of human capital, innovation and the provision of
patient investment funds. They also tend to stress
the promotion of endogenous assets rather than
the role of exogenous investments and transfers.
Increasingly cities and regions conceive of their
economies as regional innovations systems. Within
these new approaches there is a preference for iden-
tifying and exploiting opportunities for growth,
rather than ameliorating the consequences of de-
cline. A further feature of the new paradigm is the
prominence of negotiated multi-level governance
with a stronger role for local and regional actors,
including business and other social partners, in
the formulation of policy. The proliferation of the
Regional Development Agency model, especially
in Europe, is a concrete expression of some of
these developments (OECD, 2009, 2010, 2012).
To some extent the new paradigm represents
an addition to existing concerns and approaches.
Thus, good quality infrastructure is regarded as
a necessary but insufficient condition for devel-
opment. Infrastructure investments only have a
positive impact on growth and development if
they are accompanied by improvements in human
capital and innovative capacity. For example, re-
taining graduates and attracting skilled migrants
are typically policy priorities in the new regional
policy paradigm, although these are especially
difficult to achieve in lagging regions. The focus
on human capital and the centrality of innovation,
though, are the hallmarks of the new paradigm.
In a knowledge economy, know-how and product,
process and organisation innovation are the key
to competitive advantage. Despite the growing
integration of the international economy and
concomitant increase in the mobility of capital,
Box 1. A “new paradigm” of city and regional
development? (OECD, 2009: 5)
“In response to poor outcomes, regional policy has evolved,
and continues to evolve, from a top-down, subsidy-based
group of interventions designed to reduce regional disparities,
into a much broader family of policies designed to improve
regional competitiveness. These policies are characterised
by: a strategic concept or development strategy that covers
a wide range of direct and indirect factors that affect the
performance of local firms; a focus on endogenous assets,
rather than exogenous investments and transfers; an emphasis
on opportunity rather than on disadvantage; and a collective/
negotiated governance approach, involving national, regional
and local government plus other stakeholders, with the central
government playing a less dominant role. The new regional
approach is based on the principle that opportunities for
growth exist in the entire territory, across all types of regions.
The aim is to maximise national output by encouraging each
individual region to reach its growth potential from within.
Before, policy makers regarded regional polices as a zero sum
game. Recent reforms of regional policy in a number of OECD
countries provide evidence that this thinking has undergone a
paradigm shift”
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The Role of Local and Regional Institutions

cities and regions which offer specialist skills and
innovative capacities that are at a premium in the
economy are able to attract and retain enterprises
because of the quality of their local human and
knowledge capital, albeit these need continual
upgrading. The issue here is how cities and regions
insert themselves and draw benefit from national
and global flows of investment.
The shift from redistributive approaches to
growth-oriented spatial policy has different impli-
cations for different types of region. In general the
focus on opportunities and the advantages afforded
by agglomeration economies would appear both
to favour larger metropolitan areas and heighten
territorial competition at the expense of weaker
cities and regions. In Europe, cities and regions
are insulated from the full effects of heightened
interregional competition because, even under
the terms of the new paradigm, centralized fiscal
systems, which allocate resources according to
population, act as automatic financial stabilisers
of local economies. As a rule, the kinds of fiscal
crises of local and state governments which are
visible in the United States are less frequent in
Europe. In Europe, territorial competition has
tended to be regarded as a zero sum activity, which
exacerbates territorial inequalities, although it may
improve the efficiency and timeliness with which
infrastructure, services and skills are provided.
Cities can derive economic advantages by
virtue of their size, diversity, the extent of their
economic specialisation, and the role these play
in contributing to lower costs of labour and in-
puts and generating knowledge spillovers and an
increase in the value of urban assets. On the other
hand, the advantages of concentration are offset by
“diseconomies of agglomeration” including rising
land and property prices, which can have negative
labour market impacts and by costs of congestion.
Concentration may drive growth, but the accrued
private benefits are associated with societal costs.
The balance between forces of centralisation and
decentralisation is partially contingent on time
and place and the extent to which public policy
is effective in its management and the extent to
which growth occurs in “unexpected places”
(OECD, 2006, 2009; Turok, 2004).
The new paradigm operates differently in
different places. In more remote rural areas char-
acterised by a declining share of employment in
agriculture, it finds expression in the shift from
sectoral policies to the promotion of local com-
petitiveness based on sustainable development
and resource management, diversification around
natural resource endowments, the introduction of
new skills and technologies into traditional sec-
tors, and reform of local governments in order
to achieve scale economies in service provision.
In many parts of Europe, policy focuses increas-
ingly on interactions between urban and rural
areas, often in the context of pressures to man-
age urban growth, with land considered less for
its agricultural value and more for housing and
leisure amenity.
At the urban scale, the new paradigm finds
expression in the shift away from a focus on
managing the consequences of urban decline to
strategies based on making cities attractive to
mobile knowledge workers. Urban problems,
however, have not disappeared and in some re-
spects have intensified, contributing to a growth
in intra-urban inequality, sometimes exacerbated
by rural migration. In practice, there is consid-
erable variation in approaches to urban policy
reflecting the degree of decentralisation within
national political systems and the wide diver-
sity of urban problems and opportunities. But,
in principle, large agglomerations are able to
contain a greater range of specialisms in growth
sectors which avoid the problems of narrowly
specialised economies and make larger urban
economies more resilient, notwithstanding the
fact that the importance of manufacturing as
the “flywheel of growth” makes it critical to
policy concerns (Kaldor, 1972). Policy strongly
focuses on the promotion of knowledge assets,
including industry-university links and the en-
couragement of key clusters, which require a
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116
The Role of Local and Regional Institutions

detailed knowledge of the economic structure
and its properties (OECD 2006). While almost
all large metropolitan regions are seeking to be
hi-tech leaders, Turok cautions that,
…most branches of most urban economies do not
need to compete in international markets. Many
cities could prosper by serving predominantly
regional and national markets, especially as ser-
vices become a larger share of their economies
(2004: 1072).
In general, major cities, especially cities at the
top of urban hierarchies confront the dilemma
of economic dynamism versus liveability. Live-
ability may increasingly be a factor in attracting
dynamic firms and individuals, but it is constantly
under threat in successful cities. Designing taxa-
tion regimes, and planning effective governance
systems which address the negative factors that
threaten liveability (including social inequality)
is highly challenging, but there are cities around
the world which seem to manage this challenge
better than others.
PLACE-BASED APPROACHES
IN EUROPE
The EU is characterised by deep and enduring re-
gional inequalities, partly the product of successive
enlargements, in which lower income countries
acceded to membership, but the result also of
enduring structural problems in some regions in
Western Europe. At the same time, the EU is a
high cost environment for firms. The European
Commission’s Fifth Report on Cohesion (2010)
identified mixed progress on addressing regional
development with some evidence of narrowing
disparities between countries, but the widening of
regional disparities within countries often reflect-
ing the accelerating growth of capital cities and
declining relative performance of lagging regions.
Even in the current context of severe austerity
there are marked differences in the resilience and
performance of regions within Europe.
Within Europe, the distinction between ur-
ban and rural regions is increasingly irrelevant,
partly because of the growth of suburbanisation
and, partly, because the new paradigm suggests
growth is possible in both types of region. In
Europe, policy increasingly is concerned with the
interaction between rural and urban economies,
reflected in the growing interest in, and concern
with, the development of city regions. This concept
stresses the relationship between cities and their
hinterlands. In some cases, such regions are mono-
centric, with a very strong urban centre – such as
London, which dominates the whole of south-east
England – or polycentric, with inter-connected
multiple development nodes or centres often pro-
viding complement functions in the urban-rural
system – such as the Randstad in the Netherlands
or the Rhein-Ruhr region in Germany.
Within this context the European experience
provides good examples of cities and regions
which have prospered and in which public policy
and effective city and regional development strate-
gies have played a critical role (Pike et al, 2006).
These include cities which are simultaneously
economically dynamic, relatively highly taxed
and “liveable,” notably in the Nordic and Alpine
countries. Europe also provides examples of
economies which have maintained competitive-
ness despite a dependence on traditional industries
through the pursuit of strategies based on innova-
tion and the promotion of SME networks, such as
Emilia Romagna and Toscana (Tuscany) in Italy
or Baden Württemberg and Bayern (Bavaria)
in Germany or Steiermark (Styria) in Austria
or which have remade themselves as high tech
regions based around universities, such as Västra
Götaland (Sweden) or Oulu (Finland). Industry
clusters based on the developing manufacturing
and knowledge activities have developed in west-
ern Norway in relation to oil and gas and wood in
Styria. Finally within Europe are regions which
have successfully industrialised on the basis of
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117
The Role of Local and Regional Institutions

the attraction of FDI including Navarre (Spain)
and Wielkopolska (Poland). All of these regions
are being tested in the current severe recessionary
conditions in Europe, but some regions are likely
to prove more resilient than others.
Boxes 1-4 report the experiences of four Euro-
pean regions that have performed comparatively
well over recent years, albeit they face intensified
competition and restrained public finances in the
current context. A number of general lessons arise
from these examples. The production of integrated
city and regional development strategies is gener-
ally accompanied by the development of strong
institutions of regional governance – a process
sometimes referred to as the “new regional-
ism”. Decentralisation and devolution have been
strong tendencies across Europe, albeit in many
countries central governments retain control of
public finances. Across Europe the Regional
Development Agency model has been widely
adopted — the European Association of Develop-
ment Agencies (EURADA) has a membership of
about 150 regional development agencies from
all member states. Typically, they operate at a
range of urban and regional scales and tend to be
semi-autonomous bodies, with strong business
representation and a focus on key local clusters
and the promotion of innovation (Bellini, et al,
2012). However, there is a wide diversity of
forms of decentralisation between and even within
countries and assessing the impacts of these is
difficult. One crucial denominator is the form of
accountability to which development bodies are
subject. In some cases, Regional Development
Agencies are instruments of central government
such as in England or Romania. In other cases,
they are accountable to sub-national governments
such as ERVET (Emilia-Romagna Valorizzazione
Economica Territorio) in Emilia Romagna; or
SFG, the Styrian Economic Development Agency
(Steierische Wirtschaftsförderung) in Austria.
Elsewhere, the emphasis has been on coordinat-
ing existing multi-level governance institutions to
focus on shared priorities, such as in the Swedish
Regional Growth Agreement (tillväxtavtal).
The OECD (2009: 112-113) concludes that lo-
cally accountable agencies are a superior form of
institution because, by drawing on information and
analysis possessed by local actors, they allow for a
better focus on the identification and exploitation
of local opportunities and the integration of this
into effective strategies. However, local institu-
tions can also contribute to functional, cognitive
and political “lock-in” where local development
strategies remain focused on outmoded sectors
or activities (Pike et al, 2006). The examples of
ERVET and SFG above are noteworthy because
both have been critical to the dynamic adaptation
of their respective industrial structures to chang-
ing competitive environments. These approaches
to development policy rely heavily on the input
of local actors such as business organisations,
requiring these same organisations to devolve their
structures and develop local analytical capacity.
In short, recent interest in place-based ap-
proaches to local development has begun to at-
tract much policy attention and debate in Europe.
Europe is characterised by a diversity of local
economic experience, but well performing regions
typically exhibit strong commonalities notably
the presence of clear local economic strategies,
effective and accountable local institutions and
emphasis on innovation as the centrepiece of the
approach.
LESSONS FOR CITIES
AND REGIONS
Although the challenges facing peripheral cities
and regions are formidable, there is evidence that
they can succeed in high cost environments. A
recent study by the Organisation for Economic
Cooperation and Development (OECD, 2012)
suggested that while the power of economic
concentration is incontestable, there is also reason
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118
The Role of Local and Regional Institutions

Box 2. Small firm networks and international competitiveness in Emilia Romagna
The experience of Emilia Romagna has attracted worldwide attention for the lessons it provides in relation to local and regional
development. Emilia Romagna has a population of 3.9 million people, with Bologna its capital and part of the Third Italy group of
regions located between the poor south (or Mezzogiorno) and northern industrial heartlands around Turn and Milan. It experienced rapid
and sustained economic growth during the 1970s with a distinctive economic structure based on 90,000 small manufacturing firms, 90
per cent of which employed less than 50 people. The region was characterised by many “industrial districts” producing high value mature
products based on networks of cooperating artisan enterprises, such as high end garments, footwear, fashion and furniture; ceramic tiles,
farm machinery and engineering products and motorbikes. Also distinctive was the region’s political culture, which was dominated by
the Italian Communist Party (PCI) for most of the post-war period. The PCI-controlled regional government established a sophisticated
set of institutions to support the development of the small firms, including the regional development agency, ERVET, and a group of
“real service centres,” which provided direct support to small firms in particular sectors (http://www.ervet.it/ervet2010/Default.asp — in
Italian).
During the 1980s economic growth slowed in the region in face of intensifying international competition and the region underwent a
period of economic and institutional restructuring. The process of industrial restructuring saw the decline of some industrial districts, the
increased use of informal migrant labour and the consolidation of some micro-enterprises into larger firms. But this occurred alongside
the renewal of some existing activities and the emergence of new ones and the arrival of inward investors for the first time. This process
involved the intensification of innovation and upgrading of skills within existing sectors, but also the growth of new activities such as
business services and consultancy linked to traditional industries.
Changes in policy and governance accompanied these developments. The PCI reduced its influence in the region and presided over a shift
to a public-private partnership model of support for regional development, with the private sector more closely involved in the design
and management of the regional development policies and agencies. Although the regional government of Emilia Romagna gained new
powers from the central government, it undertook a major reform of regional development institutions, closing many real service centres,
focusing more strongly on support for innovation, entrepreneurship, the provision of patient capital and support for internationalisation of
small firm activities. At the same time support moved away from individual firms to support for firm networks and the development of a
“one stop shop” approach to support for enterprises.
These developments were associated with a relative resurgence of the economic performance of the region. It would be wrong to eulogise
this experience, but some important lessons can be drawn from it. These lie less in the particular forms of small firms that underpin the
model of growth that are impossible to transfer, but rather the degree to which competitiveness was based on the adaptation of existing
industries and the way in which locally owned policy and institutions have evolved to support this over a long period.
Sources: Brusco (1982); Bellini and Pasquini (1998); Rinaldi (2005), ERVET documentation.
Box 3. Renewal and growth in mature industries in Styria (Steiermark), Austria
Styria (Steiermark) is a region which attracts attention because of its relatively successful recovery from a structural crisis of its economy
in the 1980s. Styria is a state (Land) in the Austrian federal system with Graz its capital city and a population of 1.2 million people,
traditionally governed by the Austrian People’s Party (ÖVP) until 2005. The economy was historically based on iron and steel production
and mechanical engineering, with a high degree of public ownership. These sectors contracted in the recession of the 1980s and the
region experienced a peak unemployment rate of 18 per cent and the state became a byword for economic decline in Austria. However,
this situation changed during the 1990s and 2000s and — until the global financial crisis — output and employment in the state grew
faster than the Austrian average. The basis for this improved performance was a massive increase in R&D and innovative activity. By
2007, Styria had had the highest spend per state on R&D as a proportion of Gross Regional Product at 4.3 per cent (compared to the
Austrian average of 2.46 per cent) with over 70 per cent of this expenditure in the private sector and employed over 10,000 workers in
this activity.
The transformation of Styria’s performance coincided with some important institutional changes. At a national level responsibility
for innovation policy — hitherto a national policy —was devolved to the states. Meanwhile, at the state level, economic development
policy was radically restructured. At the centre of this restructuring was the creation in 1991 of a new regional development agency,
the Steirische Wirtschaftsförderung (SfG), an independent semi-public body funded by the state government (http://www.sfg.at/ — in
German). SfG developed a strategy focused on improving the innovation performance of existing firms and attracting new firms with a
strong innovation performance. This strategy was pursued with a strong emphasis on support for the development of key clusters which
it had identified as being important for the regional economy and in which the state exhibited real strengths. The state’s seven higher
education institutes were also identified as a key strength and the aim of the strategy was to develop and intensify university-industry
links within (and beyond) the region. While some of these activities were hi-tech, such as life sciences and informatics located around
Graz, others included mature sectors such the automotive, wood and paper and mechanical engineering industries. The aim of the
strategy is to raise the innovation performance of each of these sectors. The strategic focus on the innovative potential of mature sectors is
a distinctive feature of the Styrian case.
These issues are exemplified by the wood and paper cluster (http://www.holzcluster-steiermark.at/en/desktopdefault.aspx). Over 60
per cent of Styria is covered in forest and forestry and associated industries employ 55,000 people in 5,000 businesses. Enterprises are
involved in a long value chain from timber harvesting and processing to innovation-intensive, high-end products such as flooring, fuel,
housing and paper. This cluster has attracted global attention in part because of the large R&D programme supporting its development,
focusing on innovations in the sustainable use of wood as a building material especially in housing.
Sources: Geldner (1998); Trippl and Tödtling (2008); Steiner and Schenlast (2012) Sturn (2000); SfG documentation
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to question the extent to which economic growth
is solely associated with densely developed
mega-cities. Statistical analysis demonstrates
that sources of economic growth among OECD
regions are heterogeneous, while the potential
for growth exists in a diversity of locations with
human capital and innovation as key factors.
The study explores why these patterns emerge,
including why some regions become trapped
in low growth equilibriums. A key explanatory
factor for poor economic performance turns out
to be “institutional bottlenecks” including poor
mobilisation of stakeholders, lack of continuity
and coherence in the implementation of policies
by institutions, institutional instability, lack of a
common and strategic vision, and lack of capacity
and gaps in multi-level governance frameworks.
For the OECD:
Formal and informal institutions that facilitate
negotiation and dialogue among key actors in
order to mobilise and integrate them into the
development process are vital, as are those that
enhance policy continuity … the challenge is to
create institutions that strengthen the region’s
“voice” in dealing with other regions and coun-
tries and those that foster linkages among the
private, public and education sectors (2012: 25).
Box 4. Regional agreements and economic restructuring in Västra Götaland, Sweden
Västra Götaland in western Sweden is the second largest Swedish region by area and contains a population of 1.5 million. Its capital is
the city of Gothenburg (Göteborg). In the post-war period its economy was strongly specialised in shipbuilding as well as automotives,
petrochemicals, pharmaceuticals and food. During the 1980s and 1990s these industries experienced decline. Since the 1990s, however,
the region has made a relatively successful transition from a predominantly industrial region to one based more on knowledge-intensive
activities. This change has been accompanied by the creation of new regional institutions, strategies and policies in a country hitherto
characterised by strong central government, a large number of small independent local councils and a weak regional structure. Region
Västra Götaland was created in 1999 through merger of existing county councils as an experimental devolved region with an elected
assembly and a higher level of autonomy than other local councils in Sweden.
Sweden in general suffered from slow growth in the 1990s and widening regional inequalities as regions such as Västra Götaland
struggled to deal with industrial restructuring. At the same time the Swedish economy was characterised by a high rate of R&D in
both industries and universities. The Swedish government responded by promoting a new “national regional growth policy” aimed
at promoting growth in all regions rather than compensating slow growing regions with transfer payments. The main instrument
for achieving this objective was Regional Growth Agreements (tillväxtavtal) later replaced by Regional Growth Programmes
(tillväxtprogram) aimed at coordinating the resources of central and regional authorities around agreed objectives rather than the
provision of new resources. Central government remains an important actor in the process especially through the national innovation
agency VINNOVA. These new approaches have emphasised coordinated sectoral policies, localised learning, innovation and clusters.
Drawing on regional assets of corporate R&D departments, relatively high R&D expenditure and internationally renowned research-
intensive universities, the core of Västra Götaland’s strategy focuses on the development of a “regional innovation system” and the
diffusion of technology-based activities in new and existing businesses in hi-tech sectors exemplified by GöteborgBIO an initiative in
the medical sector including among others AstraZeneca, Business Region Göteborg, Chalmers University of Technology, University of
Gothenburg, Nobel Biocare and Region Västra Götaland.
A key objective has been to connect areas of economic decline (towns such as Uddevalla and Trollhättan) to knowledge hubs in
Gothenburg in order to relieve inflationary pressures there in labour and housing markets.
This knowledge-based strategy was based upon high R&D intensity, new technology-based firms and intermediate organisations to
facilitate university-industry knowledge transfer in “Science parks”. The aim was to better connect the regional knowledge base with
existing economic activities and more effective commercialisation and exploitation of new innovations and technologies. Cross-cutting
and interconnecting the more generic research-oriented hubs and platforms were cluster-oriented initiatives focused upon automotive,
forestry, metallurgy, IT and telecommunications, medical technology pharmaceuticals/biotechnology and aviation and aeronautics
sectors. For instance, the Trollhättan Science Park specialises in production technology and is closely linked into the local automotive
sector, particularly the research programmes of Volvo and SAAB.
Determining the exact impact of these initiatives is difficult, but they coincided with a marked improvement in the region’s economic
performance with the region experiencing a long period of growth (until the GFC) with GDP and employment rates reaching 99% and
73% of the national average respectively (119% of EU average) in the mid-2000s. Moreover, Västra Götaland can claim an exceptional
performance in levels of R&D investment and the growth of new technology-based firms in recent years, especially in the leading science
parks in Gothenburg. Productivity and investment levels have improved alongside new firm formation rates.
Sources: Larsson (2004) Niklasson, L. (2006) Region Västra Götaland (2007) Pike, A (2008)
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The OECD study simultaneously calls into
question the overriding importance of economic
concentration as the source of economic growth
and draws attention to the importance of local and
regional institutions in the process of economic
development as a central element of the “new
paradigm” of regional policy.
For firms in peripheral cities and regions there
are particular challenges to achieving success in a
high cost operating environment, but this chapter
has outlined ways in which regions can tackle
these challenges and looked at some cases where
at least a degree of success can be identified. It has
highlighted the importance of local and regional
institutions because these “frame the struggle
between the proponents of change and their op-
ponents and thereby affect the ability to innovate
and to implement new technologies” (Helpman,
2004: 112). The larger lesson of this discussion
is that we should broaden our focus beyond the
firm to examine the wider systems of regulation
and governance in order to understand the nature
of success in a high cost operating environment.
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KEY TERMS AND DEFINITIONS
Agglomeration: Agglomeration economies
are the benefits that arise when firms and people
locate near one another together notably in large
cities.
Growth Oriented Regional Policy: Policies
aimed at supporting fast growing regions in the
belief that these will make the greatest contribu-
tion national development.
Local and Regional Institutions: The public,
private and non-governmental bodies that seek to
identify and mobilise local and regional economic
potential.
Place-Based Development: A long-term
development strategy aiming at reducing unde-
rutilization of resources and social exclusion of
specific places, through through the development
of local knowledge and assets.
Redistributive Regional Policy: Resource
transfers to regions in order to compensate them
for weak economic performance.
Regional Development: The social and
economic transformation of sub-national com-
munities traditionally measured as improvements
in economic output but increasingly understood
as encompassing wider measures of wellbeing.
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122
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 5
Putting Clusters to Work
ABSTRACT
This chapter illustrates the effect of clusters on company performance through rigorous mapping of the
patterns and strength of relationships between companies applied in the Aalborg region of Hub North,
Denmark. This case study has been selected from similar industry cluster projects undertaken between
1999 and 2013 in Midjutland, Denmark, Dalarna, Sweden, mining regions in Queensland, and the
Playford industrial region in South Australia. A conceptual methodology and suite of tools that have
translated cluster theory into bottom up business outcomes for companies participating in these cluster
projects demonstrates how a deeper understanding of clusters can contribute to the economic develop-
ment of industrial regions. The methodology and findings described in this chapter pioneer new insights
and ways to analyse emerging cluster developments.
INTRODUCTION
This chapter illustrates the effect of clusters on
company performance through rigorous map-
ping of the patterns and strength of relationships
between companies in a methodology developed
by Rodin Genoff & Associates and applied in
the Aalborg region of Hub North, Denmark.
This case study has been selected from similar
industry cluster projects undertaken between
1999 and 2013 in Midjutland, Denmark, Dalarna,
Sweden, mining regions in Queensland and the
Playford industrial region in South Australia. A
conceptual methodology and suite of tools that
have translated cluster theory into bottom up
business outcomes for companies participating in
these cluster projects demonstrates how a deeper
understanding of clusters can contribute to the
economic development of industrial regions. The
methodology pioneers new insights and ways to
analyse emerging cluster developments.
Part One outlines the Business Opportunity
and Strategic Potential Framework (BOSP) model
that forms the conceptual basis and methodology
to explore a region’s competitive capabilities and
its level of interconnectedness, both locally and
globally. Responses to a Performance Audit and
Cluster Survey questionnaire are used to identify
Rodin Genoff
Rodin Genoff & Associates, Australia
Graeme Sheather
University of Technology, Sydney, Australia
DOI: 10.4018/978-1-4666-5828-8.ch005
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Putting Clusters to Work

the strengths and weakness of the local business
networks. The framework compares the effec-
tiveness of a company’s ability to ‘Win Orders’,
and relates this to its central position in regional
‘Supply Chain’ and ‘Product Chain’ networks
operating between the company and its first tier
suppliers and customers. Sets of Network Maps
based on supply and product chain Transaction
Scores are used to identify the array of Connector
Companies, that is, the most interconnected clus-
ters within the region. Finally, Cluster Companies
and their characteristics are used as input to the
Business Collaboration Process (BCP) to lever-
age their ‘Competitive Capability’ and ‘Business
Outcomes’ through joint ventures.
Part Two summarises the Business Collabora-
tion Process (BCP). The BCP has been deployed
through putting to work ‘connector’ companies
identified through the industry and cluster map-
ping processes described in Part One, or working
from the bottom up individually with selected
companies to optimise business collaboration
opportunities. This results in the formation of
new joint ventures between companies that bring
together complementary business services right
through to companies working across disparate yet
connected industry clusters such as electronics,
creative industries and engineering, to spinning
off completely new companies as a result of the
formation of strategic alliances.
Such collaborations in high cost economies and
especially between small to medium size enter-
prises (SMEs), develop over time deep reservoirs
of trust that are a prerequisite for companies to
work more closely together. These collaborations
result in reduced transaction costs – planning and
decision making is faster and more integrated.
A direct spinoff of this trust is the creation of a
milieu that fosters innovation and the ability of
these business partnerships and collaborations to
compete in niche markets, particularly in markets
that require tailored products and services.
Hence one of the key outcomes of SMEs col-
laborating together in high cost economies is the
ability to provide turnkey solutions to their cus-
tomers. This has several benefits from increasing
their ability to work as an integrated team to win
new contracts to cooperating more effectively with
their customers to improve say engineering speci-
fications and design as they go into production.
For their customers, this means faster turn around
and superior end product. It is this interaction that
increases the competitiveness of these SMEs in
high wage economies, while delivering a regional
productivity dividend back to the industries and
regions of which they are a part..
Part Three provides several practical examples
and outcomes of this process at work and discusses
how it has helped to transform the companies that
have participated in these cluster projects and in
the process,created new jobs, while building the
capacities and capabilities of SMEs at a regional
level.
The conclusion outlines the lessons learnt from
developing clusters across a range of industries
from mining, engineering, electronics and related
software companies to cleantech and the creative
industries.
Methodology in Relation to
Existing Cluster Literature
The cluster methodology described in this chapter
is an example of applied research. Its findings
can be positioned to add to and provide new
understandings of existing literature on cluster
development and formation. The findings show the
capacity of businesses to generate opportunities
for regional growth and joint venture development
through identifying ‘latent nodes’ for collaboration
and networking. This also demonstrates where
the cluster methodology differs from current
approaches.
The following provides an outline of where
the cluster methodology and its findings draws
from and contributes to existing cluster literature.
The cluster methodology demonstrates how
to integrate theory and practice. It is an action
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research methodology that delivers tangible
business results for clusters and the companies
operating within their networks. Theoretically
the approach owes much to the work of Alfred
Marshal and theories of agglomeration that have
informed the pioneering work of Michael Porter.
Stuart Rosenfeld’s Industrial Strength Strategies
(1995) has guided the thinking from traditional
economic analysis to more innovative and ‘hands
on’ methods and approaches to gathering practical
business data on a region, its clusters and business
performance of its firms.
The difference between this cluster method-
ology and a number of traditional approaches to
cluster theory, its application and then implemen-
tation, can be seen by comparing the macro-scale
industrial economic concepts of clusters with the
micro-scale level of application guidelines. This
model bridges the two scales. At the macro level,
Michael Porter’s theories of industrial dynamics
(Porter, 1990), strategy formulation (1996) and
clusters as the new economics of competition
(Porter, 1998) are supported by Michael Enright’s
“Five Levels of Competiveness Framework”
(Enright and Petty, 2013: 54). His model for
drivers of competitive influence starts with firm
level drivers, moving to industry level drivers,
onto cluster level drivers, to regional/national
level drivers, closing with global level drivers.
At the operational improvement level of the firm
John Gattorna’sDynamic Supply Chains (2009)
specifications are relevant, whilst at the micro
industry level Ffowcs-William’s The Go-to Hand-
book (2012) provides guidelines for cooperative
partnering.
This methodology provides a bridge by build-
ing upon Porter’s integrated value chain concepts
(Porter, 1998) and his concept of ‘mapping activity
systems’ (Porter, 1996) to identify the connections
between both upstream and downstream business
operations. These act as sets of interconnected
cross-sector linkages between firms that form po-
tential clusters for creating business opportunities,
access to business relevant information, capital
equipment and finances, joint venture projects,
market information, and collaboration in R&D
innovation, with both product and geographic
advantages. Implementation strategies based on
identified business alliances and collaborative
networks illustrate the ‘how to’ at the micro scale
of this model.
The business networking dimension of the
methodology has been informed by the practical
‘bottom up’ strategies deployed by regions such
as Emilia Romagna (Best, 1990; Brusco and
Righi, 1989; and Worrall,1993), and the numerous
practical applications reported in The Formation
of Inter-Organizational Networks (Ebers, 1997).
Frameworks developed in Australia by the Bureau
of Industrial Economics in its seminal work Be-
yond the Firm (1995) that informed Australia’s
national networking program during the 1990s,
have also informed our approach. The application
of social network analysis to mapping supplier
and buyer inter-firm linkages is developed from
Burt’s (1991) seminal work on general purpose
network analysis. Kleindorfer and Wind’s (2009)
compilation of research papers on The Network
Challenge as it affects corporate strategies and
firm profitability also provided useful insights
into how to document and implement supply webs
and networks of global suppliers.
The extensive research undertaken by the
OECD on cluster formation and the role of the
private and public sectors has provided the basis
for bridging theory and practice. The OECD’s
(2001) publication Innovative Clusters: Drivers of
National Innovation Systems was in many respects
a landmark study especially Bergman, Charles and
Hertog’s (2001) exposition of value chain cluster
development and concepts of complementarity.
Both these works have guided the integration of
the Business Opportunity and Strategic Potential
(BOSP) component and the Business Collabora-
tion Process (BCP) component of the methodol-
ogy. Historically, the principal omission in cluster
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practice is ‘top down’ policy driven frameworks
that have failed to address the day to day concerns
of business.
The cluster approach adopted in this methodol-
ogy is ‘bottom up’, firmly grounded in gathering
practical and real time industry intelligence. It
focuses on unlocking the connection between
companies, not only in their own cluster, but in
other clusters to which they are connected. For
example, the automotive sector is connected to
mining, food processing, electronics, or aerospace
through their supplier and/or customer networks.
As Sabel (2002) notes, it is important to focus not
only on specialisation but also on diversity. This
compliments Green et al. (2001) observation that
we live in a world of “boundary less clusters”.
This ‘bottom up’ methodology and way of
working directly with companies and stakeholders
has enabled the survey auditing and interviewing
to tap into small to medium sized enterprises and
work with them in a manner that has led to the
creation of significant new investment and em-
ployment opportunities in practice. As a result,
the business networks created span cross-sector
clusters and cross- country boundaries. There
is empirical evidence from previous cluster
projects that the approach and methodology has
helped address the ‘top down’ failures of cluster
policy identified in the OECD’s report Competi-
tive Regional Clusters (2007) and the European
Union’s A Toolbox for Inspired Regional Cluster
Development (2008).
Lundvall et al. (2002) work is important in
providing an understanding of the relationship
between high, medium high, medium low and
low technology industries to which we apply this
model. Their report addresses the rapid diffusion
of the concept of a ‘national system of innova-
tion’ as well as related concepts. In Section 3 we
describe how “the Aalborg version of the concept
evolved by a combination of ideas that moved
from production structure towards including all
elements and relationships contributing to inno-
vation and competence building”. (Source:http://
infojustice.org/download/gcongress/dii/lund-
vall%20article%202 ) This is relevant since
this illustration is also drawn from the Hub North
Aalborg region and reinforces the findings of our
cluster methodology. At a macro level it is also
grounded in the European triple helix cluster
policy architecture of bringing together universi-
ties, government and business. The case studies in
Part 4 of this chapter show that the combination
of government, cluster, innovation and knowledge
play a vital role in supporting the formation of
new business collaborations and joint ventures.
The OECD report (2000) presented at The
OECD Bologna Ministerial Conference focused
on “Local partnerships, clusters and SME glo-
balisation” and “Enhancing the Competitiveness
of SMEs in the Global Economy: Strategies and
Policies”. This work, along with that of Ifor Ffowcs
-William’s on effective governance, stresses the
need to pull local government and business associ-
ations together to ensure a’ bottom up’ and business
driven approach. Our approach demonstrates how
to do this by addressing the phenomena of clusters
of firms and inter-firm networks, the competitive
advantages that can derive from membership of
business alliances and the definition of public
policy directed towards both. These organisational
forms and related policies are considered in the
context of the increasing international integration
of markets for goods, services, capital and labour.
Different perspectives are presented reflecting
economic analysis of what policy should entail
as well as the insights of practitioners concerned
with the daily implementation of policy.
Ffowcs-Williams, I., (2012), Cluster Devel-
opment: The Go-To Handbook; Building Com-
petitiveness Through Smart Specialisation, targets
cluster managers, public agencies, private sector
organisations and academics that “(1) Want a
comprehensive guide to establishing a successful
clustering initiative; (2) Want to revitalise a weak
initiative; and (3) Want to lift a cluster to the next
level of competitiveness”. (Source: http://www.
clusternavigators.com/content/view/104/97/) It
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begins with ‘Setting the Stage’, explores ‘The
What?’ and ‘The Why?’ of cluster development,
and follows up with ‘Cluster Development in Prac-
tice’, identifying ‘The How?’ of cluster develop-
ment, dividing the journey into a series of Twelve
Steps. These steps include cluster identification,
cluster analysis, the cluster’s governance board
and measurement and evaluation. The process
can be used for kick-starting a new clustering
initiative and for revitalising existing businesses,
as has been accomplished in the Aalborg region.
Bell G. G. (2005) extends current knowledge
of industry clusters by disentangling the effects of
networks from cluster (i.e., distinctly geographic)
mechanisms on firm performance as well as by
studying the influence of these different mecha-
nisms on firms located inside and outside the
industry cluster. He also highlights the importance
of simultaneously modelling multiple networks
which may differentially influence important
firm outcomes.
Clusters have increasingly dominated local and
regional development policies in recent decades.
The Handbook of Research on Cluster Theory
(Bergman, 2008) provides a “comprehensive refer-
ence source for scientists, students, policymakers
and cluster managers keen to have an up-to-date
overview of agglomeration and cluster theory,
cluster research methods, clustering in different
spatial contexts and clustering in service indus-
tries. Consequently, leading experts in the field
provide the basis for improving and evolving future
research on clusters”.
The most recent longitudinal and cross sec-
tional (by industry) study by Örjan Sölvell (Sölvell
and Williams, 2013) Building the Cluster Com-
mons is a comparative survey of twelve Swedish
cluster organisations. It traces the value add impact
of cluster formation on individual company finan-
cial performance as a guide to organised cluster
policymakers. This Cluster Audit methodology
employs a similar set of business performance
metrics, but goes further and deeper by tracking
the transactions between a company’s suppliers
and buyers. The resulting networks between these
SMEs provide the basis for identifying ‘connec-
tor companies’ as potential collaborators in joint
ventures using our ‘bottom up’ Business Col-
laboration Process (BCP) approach.
PART ONE: DEFINING BUSINESS
OPPORTUNITIES AND STRATEGIC
POTENTIAL FOR A REGION
Overview
The objective of the Hub North Industry Cluster
project is to explore the region’s competitive
capabilities and its level of interconnectedness,
both locally and globally. Company responses
to a Cluster Survey questionnaire are used to
identify the strengths and weaknesses of the lo-
cal business networks. The framework compares
the effectiveness of a company’s ability to ‘Win
orders’, relates this to its central position in ‘Sup-
ply and Buy Chain’ networks, and the type of
‘Collaborative Arrangement’ operating between
the company and its first tier suppliers and final
customers, within the Aalborg region. The BOSP
performance measurement framework is shown
in Figure 1.
The model has two principal streams one
headed BUSINESS CAPABILITIES, relating to
the company’s competitive capability to win orders
in markets along with its corresponding organisa-
tional performance. The second stream is headed
NETWORK CONFIGURATION, depicting the
spatial configuration and operational capacity
of each company. The first stream combines
Competitive Capability and Organisational Per-
formance metrics for each company. The second
stream produces the sets of Network Maps based
on Transaction Scores, along with elements that
form the Connections Triad, that taken together
identify the array of Connector Companies.
These clusters are filtered according to selected
company characteristics and their competitive and
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business capabilities to target those companies
from which to shape Action Plans that have the
greatest potential for development opportunities.
Companies with complex procurement and distri-
bution logistics can be expected to generate high
concentrations of activity and comprise ‘hubs’
of the network. These hubs may be SMEs, large
companies and multinationals, but they may also
be first tier suppliers depending upon the com-
plexity of the product range – as in the case of
Elaborately Transformed Manufacturers (ETMs).
The project used a sample of 20 companies
drawn from the Hub North membership engaged
in a mix of manufacturing and service operations
related to the off shore wind industry and energy
related industries. Data collection involved se-
lected site visits to obtain responses to the Audit
Survey from original equipment manufacturers
Figure 1. Business opportunity and strategic potential framework (Source: Rodin Genoff & Associates,
2013)
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(OEMs) and SME companies, capturing data on
these companies, their first tier suppliers, end-users
and their customers across the Aalborg region.
Data analysis employs sophisticated database
software, network mapping routines and data
visualisation techniques.
Business Performance:
Competitive Capability
A company’s competitive capability compares
the strategic intent of the company relative to its
advantage or position in the industry summed
across the seven capabilities of price, flexibility,
quality, delivery, service, speed and innovation, as
shown in Figure 2. These competitive capabilities
are crucial to a company’s ability to ‘win orders’ in
their respective market places. Usually a company
employs a mix of two or three of these capabilities
depending on product type, customer demand and
stage in the product or service development life
cycle, and competitors’ market strategies.
Performance on all these measures has a cumu-
lative impact on a company’s reliable operation,
fast throughput, error-free processes, ability to
change product/service range, ability to innovate,
ability to control cost structures and, therefore, its
productivity and profitability.
To illustrate how effective a company’s com-
petitive strategies are in ‘winning orders’ against
the ‘performance of its major competitors’ the
relationship can be expressed as ‘Zones of Com-
petitive Capability’. These zones are shown in
Figure 3 and indicate the effectiveness in strategic
intent of a company’s competitive capabilities in
terms of:
Figure 2. Performance objectives and seven competitive priorities (Source: Rodin Genoff & Associates
adapted from Operations Management (2nd Edition) Slack et al., 1998)
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• Excessive Effort: Meaning an over invest-
ment in terms of what is required to satisfy
the customer and therefore an inefficient
application of those resources/capabilities.
• Appropriate Response: Or application
of effort in order to qualify and/or win the
orders.
• Needs Improvement: Suggesting an in-
crease in the level of application of the
key competitive attributes valued by the
customer.
• Requires Urgent Action: On selected ca-
pabilities to remain in the market or prod-
uct space.
Results of Competitive Capability
The diagonal line A B represents the ‘Lower
Bound of Acceptability’ with the scatter of 20
companies distributed across the four levels of
strategic preparedness recorded in Zones A to E.
The ‘Excess’ region above the boundary line EF
defines where an unwarranted level of resources
is devoted given the low importance of winning
orders for these products/services. The boundary
line CD distinguishes between ‘Urgent Priority’
actions required (Zone D) and the less urgent
‘Improvements Needed’ in Zone C. Overall, 14 of
the manufacturing and service delivery companies
Figure 3. Zones of acceptability – total companies (Source: Rodin Genoff & Associates adapted from
Slack et al., 1998)
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in the Aalborg region convert strategic intent into
competitive capability to satisfy customer require-
ments to win orders. A number of companies
proclaim the importance of using a marketing
strategy employing a mix of the seven attributes
but are unable to convert their strategic intent
into industry leadership. Clearly, six companies
must leverage the importance of their strategic
capabilities if they are to become successful with
their marketing efforts.
A number of specific recommendations can
be made based on this analysis relating to those
companies falling below the A-B line: speed
and reliability of delivery; target pricing; market
strategies to meet product support and after sales
service; investment in technologies and new prod-
uct innovation to avoid falling behind industry
best practice.
Business Performance Outcomes
The data records the current level of performance
for key business indicators and management func-
tions scored on the range from ‘Weak, Moderate,
On Par, Strong, to Very Strong’. Figure 4 displays
these metrics for all 20 companies categorised by
Financial Measures, shown on the Y axis, and
Planning Measures, shown on the X axis. Four
quadrants are depicted in the graph, that compare
how financially strong the companies are (score
Figure 4. Business performance (Source: Rodin Genoff & Associates, 2013)
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1-5) against how effective their corporate plan-
ning systems (score 1-5) are used to support their
financial performance.
Results of Business Performance
Five groupings of companies emerge from this
analysis shown as Zone A (2 companies), Zone
B (8 companies), Zone C (4 companies), Zone D
(3 companies) and Zone E (3 companies). Zone
A companies are leading companies reporting
Strong to Very Strong levels of performance on
both Financial and Planning metrics. Zone B
companies are middle performing companies
reporting Strong Planning performance but only
On Par Financial performance. Zone C companies
report Strong Planning performance but Below Par
Financial performance. Zone D companies report
On Par performance for both Financial and plan-
ning metrics. Finally, Zone E companies report
only Moderate to Below Par performance for both
Financial and Planning metrics. Three companies
fall well below par on both their financial and/or
their business planning performance.
Those companies that are ‘On Par’ with respect
to financial and planning system performance
need to examine their strategic targets related to
productivity, profitability, and cash flows; and
efficiency of ERP systems regarding business/
market planning, demand planning and operational
controls. Companies with ‘Strong’ performance
need to examine why and how they achieve
these results, and put in place Key Performance
Indicator (KPI) targets to ensure sustainable
business outcomes, and constantly survey and
monitor performance. ‘Weak’ companies need to
develop strategic business objectives culminating
in corporate plans focussing on how to improve
market penetration, new product development
and operational processes, all targeted towards
growing their businesses.
Operational Capacity Scorecard
This section focuses on mapping the collabora-
tion between major companies operating in the
Aalborg region. First, Network Configurations for
supplier and buyer transactions between compa-
nies are analysed. Second, the Types of Supply
Chains operated, types of Manufacturing Process
employed, and the types of Collaborative Arrange-
ments entered into by the companies are recorded.
Supply Chain Types
The types of supply chains employed by each
company to support the production of key products
or services are categorised as Lean, Fully Flexible,
Agile, Continuous Replenishment, and Digital
Services and Engineering Design Services. De-
pending on the mix of physical products produced
or digital services offered there can be different
types of supply chains operating concurrently in
a particular company.
Figure 5 demonstrates the five types of generic
supply chains differentiated according to ‘Predict-
ability of Demand’ from High to Low against
‘Relationship with the Customer’ from Tight to
Loose. The four quadrants display Lean (Type 1);
Fully flexible (Type 2); Agile (Type 3); Continu-
ous replenishment (Type 4); and involved in all
four types, Digital and design services (Type 5).
Analysis of Types of Supply Chains
The mix of types of supply chains operating per
company can be used to explain the nature of
supply/buy networks operation across the Aalborg
region. Survey data records the preference is for
Agile types of supply arrangements required to
service unpredictable, unplanned or unforeseen
situations of PULL customer demand. Such
demand requires Agile responses at high cost-
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to-service, with capacity to meet speed in time-
to-service. Second are the other three systems of
Fully Flexible, Continuous Replenishment and
Digital Services which are evenly split, indicat-
ing a broad range of types of customer demand
requiring (1) ability to respond opportunistically
and manage the outputs, (2) meet the requirements
of dedicated pull environments and (3) ability to
engage and link all stakeholders from customer
demand to final product delivery.
Based on the self-reported categorisation of
supply chain types, a number of strategic rec-
ommendations were drawn from this analysis,
relating to: increasing the efficiency of supply
chains: creating agile manufacturing; responding
to PULL environments; undertaking research and
development (R&D); applying ERP systems to
link all operations and suppliers; and improving
innovation in digital technologies.
Manufacturing Processes
The Types of Manufacturing/Operational Process-
es employed by the companies in the production
of their key products and/or services use a mix of
manufacturing processes across various product
or service lines ranging from Project, Jobbing,
Batch, Line, to Continuous Processing as shown
in Figure 6 and described below.
Results of Manufacturing/
Operational Processes Analysis
As may be expected within the heavy engineer-
ing industries that support off-shore energy and
wind turbine contracts the majority of companies
surveyed utilised Project, Jobbing, and Batch
manufacturing processes. This requires a mix of
design and turn-key operational skills for the Proj-
Figure 5. Five generic supply chain types (Source: Rodin Genoff & Associates adapted from Dynamic
Supply Chain Alignment, Gattorna, 2009)
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ect type. In turn Jobbing and Batch types require
dedicated equipment and tooling, fixed machine
layouts, Kanban procurement, JIT operations, and
quality control systems to produce sub-assemblies
and finished components, plus fully integrated
supply and distribution logistical systems. Essen-
tial to the operation to the three key processes of
projects, jobbing and batch, is the role of digital
technology services providing industrial design,
software and IT services, manufacturing protocols,
and logistical and management control.
A number of strategic recommendations were
drawn from this analysis concerning: partnering
between companies for joint ventures, where
their individual manufacturing processes are
complimentary; building competitive capability
for ‘contract-relationship’ tendering, and entering
into joint R&D for process improvements.
Relationship between Supply Chain
and Manufacturing Processes
Manufacturing processes adopted by each OEM
or SME dictate the type of supply chain ar-
rangements needed to service the production/
operational/service lines. As described above the
majority of processes focus on turn-key projects (8
companies), jobbing (5 companies), and batch (7
companies) type manufacturing. The supply chain
arrangements required to service each of these
Figure 6. Position of hybrid processes and the five classic choices of process configuration (Source:
Rodin Genoff & Associates adapted from Manufacturing Strategy (2nd Edition), Hill, 1993)
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processes assigned to one or more product lines
are predominantly: Fully Flexible (9 companies);
Agile (20 companies); Digital Technologies (10
companies). The relationship between processes
(Y axis) and supply chains (X axis) is shown in
Figure 7, where manufacturing processes for
Projects, Jobbing, and Batch are serviced by Fully
Flexible, Agile, and Continuous Replenishment
supply chains. The number of OEMs shown at the
intersection of the two approaches may be repeated
due to their multiple uses of supply chains and/or
manufacturing processes.
Types of Collaborative Networks
The literature on the Principles of Network Analy-
sis (Burt, R.S. 1991) suggests that the pattern of
relationships between prominent actors operat-
ing in social networks can take five principal
forms, namely brokerage, range, prominence,
equivalence, and cohesion. To expand these in-
dividual actor concepts to reflect collaborative
arrangements existing at multi-level supply and
buyer network levels appropriate to cluster audit
analysis, we have created a new nomenclature
Figure 7. Relationship between supply chain types and manufacturing processes (Source: Rodin Genoff
& Associates, 2013)
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135
Putting Clusters to Work

for the typologies. This nomenclature better re-
flects the essence of major inter-organisational
relationships, namely: Negotiator, Resourcer,
Leader, Enabler and Integrator. Two of these
principal forms depict the phenomena of struc-
turing based on common boundaries and social
bonding (namely integrator and enabler), with
the phenomena of network behaviour between
agencies described by the principal forms of
negotiator, resourcer and leader. A taxonomy is
applied where the five structural types lie on a
spectrum ranging from ‘disorganised’ through to
a ‘fully integrated ‘level of network organisation
along the X axis. The level of Transaction Scores
for the Supply Chains of companies constitutes
the Y axis of the Network diagram. Data is
drawn from key responses to the audit survey
that indicates the different levels and types of
collaboration engaged in by the companies and
their nominated suppliers and buyers.
The hierarchical configuration of each type
along this spectrum is illustrated in Figure 8 rang-
ing from a minimum degree of collaboration to
a maximum level of interaction, and describes a
range of increasingly interconnected networks.
The types are:
Type 1: Negotiator (based on ability of individual
agents to broker connections)
Type 2: Resourcer (based on ability of agents to
assemble a range of resources)
Type 3: Leader (based on the predominance of
agents to dominate their networks; and are
often found in hierarchical supply chains)
Figure 8. Hierarchy of supply chain network types (1-5) (Source: Rodin Genoff & Associates adapted
from Structure, Version 4.2, Burt, 1991)
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136
Putting Clusters to Work

Type 4: Enabler (based on agents who engage/
contract/share common patterns of relation-
ships and boundaries)
Type 5: Integrator (where similar agents are tied
together by trust, a high level of business
collaboration and through the strength of
joint projects and potential clusters)
Results of Collaborative
Network Analysis
There is a spread of types of collaborative rela-
tionships across the 20 surveyed companies (also
known as OEMs) ranging from Type 1 to Type 5
describing the relationship between the companies
and their first tier suppliers and first tier custom-
ers. The predominant type is Type 3 – Leader (12
companies), then Type 4 – Enabler (10 companies),
followed by Type 5 – Integrator (7 companies),
and Type 2 – Resourcer (6 companies). There are
no companies that fit Type 1 – Negotiator typol-
ogy that involves Business Networks, brokers or
cluster arrangements. There are more companies
than the 20 surveyed OEMs recorded in the clas-
sification (i.e., 35) as companies stretch across
a mix of hybrid typologies depending upon the
range of markets, customers, products and services
they provide.
As is common in industrial regions, the pre-
dominant arrangement is Leader – Type 3, involv-
ing multiple first-tier supply chain companies
servicing intermediate and finished product OEM
manufacturers and service providers. Companies
lying in the Integrator Type 5 category provide
excellent opportunities for cluster development
due to shared/common suppliers and/or custom-
ers, shared professional services, and partners in
business networks.
Supplier and Buyer Transactions
Supplier Networks
This section provides the basis for finding common
linkages between OEMs and SMEs and their sets
of first tier suppliers – that is, which suppliers are
most central across all companies throughout the
Hub North region. The survey asks companies
to list major suppliers, location, and number of
deliveries made per annum, the average spend
per annum, by type of product category and/or
digital service technologies. The results provide
a transaction score illustrating the ‘intensity of
exchange’ as a basis for plotting the density of
the supply chains. Figure 9 displays the pattern of
linkages between eighteen respondent companies
and their 88 first tier suppliers.
Analysis of this network map shows that fifteen
of the companies (also known as OEMs) have
unique sets of preferred or endorsed suppliers,
ranging from single up to 10 different supplier
companies. At the core of the map there are three
OEMs that share suppliers and produce similar
product and services such as control systems,
automation processes and security systems to the
wind industry. This set of service-industry OEMs
and their common suppliers provide the basis for
Connector Companies highlighted as Cluster A
in the shaded circle.
This set of cluster companies constitutes the
focus for the development of future joint venture
action plans. They can examine partnerships to
facilitate joint procurement discounts, quality
controls for common and standard components,
and joint marketing and tendering arrangements.
This facility provided a powerful mechanism for
workshopping potential sets of Connector Com-
panies within the Hub North region, particularly
those trading in overseas markets.
Buyer Networks
This section provides the basis for finding common
linkages between OEMs and SMEs and their sets
of first tier buyers – that is, those customers that
are most preferred, and their major buyers both
domestically and internationally. The survey asks
companies to list major customers, their location,
the number of sales deliveries per annum, the aver-
age spend per annum, by type of product category
and/or digital service technologies. The results
again provide a transaction score illustrating the
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137
Putting Clusters to Work

‘intensity of exchange’ as a basis for plotting the
density of the buyer distribution/logistics chains.
Figure 10 displays the pattern of linkages between
seventeen respondent companies (also known as
OEMs) and their 70 first tier customers who con-
stituted wholesale, regional distribution centres
or final end-users.
Analysis of this network map shows that eight
of the OEMs have unique sets of customers, rang-
ing from three up to nine different client compa-
nies and stand alone in the network map. Besides
these stand-alone OEMs there are three clusters
of OEMs that share common sets of customers.
Cluster A comprises OEM 8 and OEM 16 that
share a single common customer 184, and 10 other
separate customers. Together, these companies
represent heavy machinery for marine and wind
turbine applications, along with automation sys-
tems for export. In Cluster B there is a unique
situation where all seven OEMs are interlinked via
four buyer companies as customers. These seven
OEMs provide the basis for potential Connector
Companies in association with the four shared
customers. Together, these companies constitute
a mix of heavy machinery and engineering ser-
vices, transport equipment and services, project
Figure 9. Hub North supplier cluster map (Source: Rodin Genoff & Associates, 2013)
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138
Putting Clusters to Work

management, control technology applications, and
training services – essentially the construction and
management core of the wind industry. In Cluster
C there is a similar configuration as for Cluster
A where only two OEMs are linked by a single
common customer number. This cluster repre-
sents consumables packaging products, plastics
moulding, electrical installation and maintenance
services to both regional and export markets.
Data visualisation software provides a drop
down menu with the ability to filter details of
these individual OEMs, plus details for major
customers by location, Danish Krona (DKK)
spent per annum, product category, accreditation,
transaction intensity, and size of OEM by number
of employees. This facility provides a powerful
mechanism for workshopping potential sets of
customer Connector Companies within the Hub
North region as explained below.
Pathways for Strengthening
Connections between
Suppliers and Buyers
This section outlines four key pathways used
to build the business capabilities of Hub North
companies and their suppliers and buyers:
Pathway 1: Explores how to build on strategic
alliances between companies. Specific path-
Figure 10. Hub North buyer cluster map (Source: Rodin Genoff & Associates, 2013)
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139
Putting Clusters to Work

ways are outlined in Figure 11 that are based
on different types of relationships between
companies. This is important to understand
because a one size fits all approach to
building clusters misses the dynamics and
essential differences in their relationships.
Pathway 2: Explores similar characteristics of
companies with common capabilities that
form the basis for developing connections
between companies that can create new busi-
ness and investment opportunities.
Pathway 3: Profiles connector OEMs in the clus-
ters they are situated in and offers insights
into how their underlying capacities and
capabilities can be marshalled to generate
new collaborations and future business op-
portunities.
Pathway 4: Outlines a process to support Hub
North strengthening connections between
suppliers and buyers and provides a basis
for developing future action agendas.
Operationalising Pathway 1: Building Alliances
between Suppliers and Buyers
Within these four pathways the relationship
between supplier companies to OEMs and the
customers to whom these OEMs sell (their buyers)
can be expressed as a set of potentially strategic
alliances or partnerships. The degree of strategic
alliance occurs at four levels, where Level 1 covers
Buyer-High relative to Supplier-High dependence;
Level 2 covers Buyer- Low to Supplier- High de-
pendence; Level 3 covers Buyer-High to Supplier-
Low dependence; and Level 4 covers Buyer-Low
to Supplier- Low dependence. The matrix of these
relationships is shown in Figure 11.
Operationalising Pathway 2: Leveraging
Common Capabilities for Investment and
Employment Growth
The purpose of this pathway is to identify those
companies with maximum potential for forming
collaborative clusters in the Hub North region.
Multi-dimensional scaling plots the alignment
between companies based on the types of op-
erational processes they adopt for Supply Chain
Management, Manufacturing Processes, and
Collaborative Networking. Groups of OEMs
emerge that are aligned due to a mix of common
and unique characteristics across these three pro-
cesses. The array of inter-connections between
these companies are recorded as zones A, B, C,
D in the ‘Connections Triad’ graph in Figure 12.
This three dimensional graph brings together
companies (shown as spheres) that have similar
scores on supply chain types, manufacturing
process types, and collaborative network types.
These common, yet distinct characteristics
can be leveraged to create new employment,
business and investment opportunities. For
example in Zone A are companies that have
fully flexible supply chains, project manufac-
turing processes and leader types of collabora-
tion. Zone B uses digital supply chains, batch
manufacturing processes and enabler forms of
collaboration. Zone C contains companies that
have lean supply chains, batch manufacturing
processes and enabler types of collaboration.
Zone D companies employ agile supply chains,
project manufacturing processes and integrator
types of collaboration. Companies recorded
in these respective zones have many common
product/service linkages. For example, Zone A
companies comprise heavy engineering, wind
turbines, control systems and moulding pack-
age products. Zone B companies manufacture
component assemblies, transport equipment and
control technologies. Zone C companies pro-
duce construction and transport facilities, and
engineering steel machinery. Zone D companies
produce off shore foundations, construction and
transport equipment.
The Hub North Demonstration Project has
focused on these sets of companies as potential
clusters to leverage the region’s manufacturing
capacity, provide access to new and emerging
markets, and generate innovation in new products
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140
Putting Clusters to Work

and services. All of this has enhanced the economic
capability of the Aalborg region to undertake joint
ventures and new development opportunities, and
ultimately lead to new job creation.
Pathway 3: Profiles Summary of Connector
Companies
The profiles of OEM connector companies in Sup-
plier Cluster A (Figure 9) and Buyer Cluster A and
Cluster B (Figure 10) cover: employee strength,
competitive capability, supply chain type, manu-
facturing process type, financial performance,
planning performance, market concentration, ISO
accreditation, and transaction scores related to the
respective supplier and buyer networks. This is a
vital pathway as it provides essential operational,
business performance, market focus and network
scores to inform workshops with client companies
exploring future Agendas for Change as described
below in the final Pathway 4.
Figure 11. Interdependent alliance between supplier and buyer (Source: Rodin Genoff & Associates
adapted from Managing the Supply Chain, Gattorna J. and Walters D (1996))
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141
Putting Clusters to Work

Pathway 4: Developing Future Action Agendas
This pathway outlines Potential future action
agendas and includes:
• Using on-line data visualisation software to
draw-down menus allowing interrogation
of particular companies, their Suppliers
and Buyer companies.
• Workshopping with client companies, their
supplier and buyer companies to facilitate
‘what if’ scenario testing of alternative de-
velopment options for the Aalborg region.
• It recommends sets of Connection Companies
to be read in conjunction with the sub-sets of
Supplier and Buyer Connector Companies.
• It aligns common capabilities and resource
requirements to support cluster development.
Figure 12. Connections triad (Source: Rodin Genoff & Associates, 2013)
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142
Putting Clusters to Work

• It provides background information on
companies through a filter feature on the
supplier and buyer network maps.
PART TWO: BUSINESS
COLLABORATION PROCESS
Using Clusters and Business
Networks to Create New Investment
and Business Opportunities
This section demonstrates how the ‘pathways
for future action agendas’ outlined above,
guides the practical application of Connector
Company Cluster development by marshalling
the energy, financial resources and vision of
potential joint ventures and business collabo-
rations. The application of this methodology
to the Hub North companies has created some
20 joint ventures illustrating how diversifica-
tion can create new opportunities for business.
Specifically, the case of Conlan (a traditional
electronics company operating in Aalborg)
illustrates how collaboration between Herman
Rokkita (a German industrial designer) and
Bigwheel (a local software developer) led to
the commercialisation of high security systems
for residential, commercial and industrial ap-
plications. This joint venture was undertaken by
the Hub North wind industry cluster program,
and is elaborated upon in Part Three Putting
Connectors to Work.
The author’s experience reveals that each joint
venture or business collaboration has its own
dynamic and own collective DNA! Unlocking
this energy and achieving a consensus between
companies to move forward requires a commitment
of time, people and financial resources, together
with patience, insight and leadership. And most
importantly it requires an understanding of the
benefits that business joint ventures can deliver
to the individual companies involved in what are
often transformative collaborative partnerships.
Strategic Collaborations
On a day-to-day basis all companies engage with
each other, from purchasing inputs to selling
goods and services. Some of this business is
purely transactional—they buy what they need as
cheaply as possible and sell to maximise profits.
For many companies it is more a matter of the
80/20 rule: 80 per cent of one’s business often
comes from only 20 per cent of customers. The
same can be said of the company’s suppliers.
It is often also the case that companies usually
develop long and deep relationships and histories
of doing business with their “key accounts” or
“20 presenters”.
It is with these “key accounts” that collabora-
tion of various kinds is most likely to be particu-
larly high. For example, working closely together
to jointly bid for contracts or even co-locating.
These strategic collaborations are often critical
for the efficient and integrated supply of inputs
to delivering contracts.
Joint Venture or Business Networks
to Underpin Strategic Collaborations
Generally a group of two or more companies come
together to collaborate by building scale or scope
of services and products; knowledge sharing and
group learning; sharing resources, risk and rewards
in development of joint projects; and through
activities such as these win contracts that each
company bidding alone would find unattainable.
Specifically these include for example:
• Input Collaborations: From joint pur-
chasing to R&D.
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143
Putting Clusters to Work

• Operational Collaborations: From joint
processing to co-location.
• Output Collaborations: From commer-
cialisations to export development.
(For detailed account of the benefits and the
reasons why companies work together see Genoff
and Sheather, 2010, Ledrum, Des Masters in Ge-
noff and Sheather, 2005; Green and Genoff, 1998).
Competition is between
Business Networks as much
as it is between Companies
There is increasing evidence that value chains
or networks of companies (including those “20
percenters” working shoulder to shoulder) com-
pete more effectively than individual companies
battling each other for market share. Hence the
now familiar term “collaborating to compete”.
In key industries from mining and provision
of large infrastructure and energy projects to
the automotive and food processing industries,
turnkey solutions are increasingly demanded by
customers. The ability to collaborate and integrate
a company’s capacities and capabilities is critical
for its strategic position in such major projects.
Companies that can collaborate most effectively,
that can reduce time to market and deliver projects
more efficiently than their competitors are those
that will win contracts and continue winning
projects into the future.
Figure 13. Critical success factors (Source: Rodin Genoff & Associates 2013)
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144
Putting Clusters to Work

Making Collaborations Work
Figure 13 summarises the critical success fac-
tors for making collaborations work and outlines
some of the reasons why business partnerships
fail. Foremost reasons for success are trust, cour-
age and a willingness to invest in a collaborative
future, while the reasons for failure are putting
self-interest above that of the network and the
lure of a quick buck at the expense of putting in
place the planning and systems needed to integrate
capacities and capabilities between the partnering
companies. For a detailed account of these factors
see Genoff and Sheather, 2010.
Ten Phases to Create
New Joint Ventures
Table 1 outlines the ten phases used over the past
decade to develop and create new joint ventures or
business networks on the ground. It also outlines
the major tasks to be undertaken by a company in
order to complete this process, which often require
specific operational plans in their own right.
Benefits of Developing Strategic
Collaborations or Joint Ventures
Developing strategic collaborations with one’s
suppliers and customers spins off many benefits
and sometimes these can be easily measured,
such as shorter lead times or higher profits.
Equally, what cannot be easily measured may
be just as, or even more, important such as the
competitive market advantages achieved through
greater flexibility or faster and improved deci-
sion making processes that result in winning new
contracts. At a time when delivering turnkey
solutions is so important to winning contracts,
effective partnerships between suppliers and
customers are paramount to meeting demands
of final end users.
It is crucial to remember that while companies
often think and plan in terms of single suppliers and
customers, significant competitive advantage and
benefits can be found in joint supplier and customer
arrangements. In fact a company may be part of
the glue that provides strategic competencies that
bind and integrate those arrangements together.
Joint Ventures and
Business Collaborations are
Dynamic and Evolving
The previous section stepped through the process of
creating joint ventures and business collaborations.
This section addresses the issue that the form and
nature of the collaboration can take many guises.
The important thing to remember is that it is a dy-
namic and evolving process. For instance, a more
informal collaboration that wins new contracts can
easily step up a notch or two leading the compa-
nies involved to formalise their collaboration and
partnership arrangements. In doing so, this may act
as a catalyst to begin the process of working differ-
ently together; from integrating their capacities and
capabilities to co-locating to maximise economies
of scale or scope or logistics.
Some successful collaborations and joint ven-
tures may even result in mergers, acquisitions or
lead to the creation of new companies. These new
start-ups may be a vehicle to support sales and
marketing of joint products or services, or they
may be a strategic move from the need to market
or brand products right through to commercial-
ising new intellectual property or the fruits of a
research project. The reality is that joint ventures
and business collaborations evolve. Sometimes
they blossom while at other times they dissipate.
They may simply be a “marriage of convenience” to
win projects, with companies going their separate
ways until some new project brings them together
again. Figure 14 plots the progress of an evolving
joint venture or business collaboration.
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145
Putting Clusters to Work

Ta
bl
e
1.
T
en
p
ha
se
s
to
c
re
at
in
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w
jo
in
t v
en
tu
re
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or
b
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es
s
co
lla
bo
ra
tio
ns
(S
ou
rc
e:
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od
in
G
en
of
f &
A
ss
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s
20
13
)
P
ha
se
1
:
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rm
ul
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ig
P
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2
:
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na
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lo
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l a
nd

Te
ch
no
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I
nd
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tr
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T
re
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s
P
ha
se
3
:
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nd
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F
it

of
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it
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it
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:
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us
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N
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, a
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nd
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’s
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is
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pi
ct
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e.

C
re
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n
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to
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di
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.
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rm
ul
at
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a
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“
dr
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w
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(s
ee
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or
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an
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2
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.
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nd
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th
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in
in
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de
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as
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th
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w
ith
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s.
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et
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’s
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fr
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nd
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co
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s
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is
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to

co
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bo
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et
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bu
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ss
a
ct
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w
he
re
jo
in
t v
en
tu
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si
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ss

co
lla
bo
ra
tio
ns
w
ill
a
pp
ly
.
M
ak
e
a
de
ci
si
on
–
go
a
lo
ne
,
ou
ts
ou
rc
e,
a
cq
ui
re
, m
er
ge
o
r
co
lla
bo
ra
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.
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st
ab
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h
cr
ite
ri
a
th
at
p
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en
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rt
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rs
m
us
t m
ee
t t
o
ac
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ev
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st
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gi
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fi
t.
If
n
ec
es
sa
ry
, u
se
in
te
rm
ed
ia
ri
es
to

se
ar
ch
fo
r p
ot
en
tia
l p
ar
tn
er
s;
s
uc
h
as
in
du
st
ry
a
ss
oc
ia
tio
ns
, b
us
in
es
s
ad
vi
se
rs
.
E
st
ab
lis
h
th
e
st
ra
te
gi
c
fi
t o
f
pa
rt
ne
r(
s)
a
nd
h
ow
th
is
w
ill
b
e
us
ed

in
n
et
w
or
ki
ng
o
r e
st
ab
lis
hi
ng
a
jo
in
t
ve
nt
ur
e.
U
nd
er
st
an
d
th
e
m
ar
ke
ts
a
nd
b
us
in
es
s
op
po
rt
un
iti
es
o
f t
he
c
us
to
m
er
’s

cu
st
om
er
.
R
es
ea
rc
h
th
e
in
du
st
ry
, t
re
nd
s,

te
ch
no
lo
gy
o
f t
he
ir
m
ar
ke
ts
.
In
co
rp
or
at
e
th
ei
r i
ns
ig
ht
s
an
d
as
se
ss
m
en
ts
in
to
th
e
fo
rm
ul
at
io
n
of

ef
fe
ct
iv
e
st
ra
te
gi
es
a
nd
re
la
tio
ns
hi
ps
.
E
xp
lo
re
h
ow
to
s
up
po
rt
y
ou
r
cu
st
om
er
’s
c
us
to
m
er
w
in
c
on
tr
ac
ts

an
d
in
cr
ea
se
v
is
ib
ili
ty
e
.g
. a
t t
ra
de

m
is
si
on
s
an
d
fa
ir
s.
P
ha
se
6
:
E
xp
lo
ri
ng
H
ow
th
e
N
ew

C
ol
la
bo
ra
ti
on
C
an
T
ak
e
A
dv
an
ta
ge
o
f N
at
io
na
l a
nd

In
te
rn
at
io
na
l I
nd
us
tr
y
D
ev
el
op
m
en
t a
nd
I
nn
ov
at
io
n/
R
es
ea
rc
h
P
ro
gr
am
s
P
ha
se
7
:
Fo
rm
al
is
in
g
th
e
C
ol
la
bo
ra
ti
on

an
d
G
re
en
L
ig
ht
to
P
ro
ce
ed
P
ha
se
8
:
Fo
rm
ul
at
in
g
an
A
gi
le
a
nd

D
yn
am
ic
C
ol
la
bo
ra
ti
on
S
tr
at
eg
y
an
d
B
us
in
es
s
P
la
n
P
ha
se
9
:
D
ev
el
op
in
g
In
te
rn
al
a
nd
E
xt
er
na
l
C
om
m
un
ic
at
io
ns
S
tr
at
eg
ie
s
P
ha
se
1
0:
A
nn
ou
nc
in
g
C
ol
la
bo
ra
ti
on
o
r
Jo
in
t V
en
tu
re
, o
r
N
ew
C
on
tr
ac
ts

in
th
e
M
ed
ia
a
nd
I
nd
us
tr
y
P
ub
lic
at
io
ns
a
nd
E
ve
nt
s
M
aj
or
T
as
ks
M
aj
or
T
as
ks
M
aj
or
T
as
ks
M
aj
or
T
as
ks
M
aj
or
T
as
ks
R
es
ea
rc
h
go
ve
rn
m
en
t p
ro
gr
am
s
th
at
c
an
s
up
po
rt
b
us
in
es
s
an
d
m
ar
ke
t d
ev
el
op
m
en
t;
re
se
ar
ch

an
d
de
ve
lo
pm
en
t;
ed
uc
at
io
n
an
d
tr
ai
ni
ng
; e
xp
or
t f
ac
ili
ta
tio
n
an
d
th
e
lik
e.

A
ls
o
re
se
ar
ch
g
ov
er
nm
en
t
pr
og
ra
m
s
th
at
re
la
te
to

cu
st
om
er
s
an
d
th
e
cu
st
om
er
’s

cu
st
om
er
.
R
es
ea
rc
h
op
po
rt
un
iti
es
to

pa
rt
ic
ip
at
e
in
u
ni
ve
rs
ity
a
nd

al
um
ni
tr
ai
ni
ng
a
nd
re
se
ar
ch

pr
og
ra
m
s.
E
st
ab
lis
h
tr
us
t:
bu
ild
a
nd
m
an
ag
e
re
la
tio
ns
hi
ps
b
et
w
ee
n
th
e
pa
rt
ie
s.

A
gr
ee
o
n
bu
si
ne
ss
s
tr
at
eg
y
an
d
bu
si
ne
ss
m
od
el
.
U
nd
er
ta
ke
fe
as
ib
ili
ty
a
na
ly
si
s
of
o
bj
ec
tiv
es
a
nd
th
e
st
ru
ct
ur
al

ap
pr
oa
ch
.
E
st
ab
lis
h
C
od
es
o
f C
on
du
ct
,
E
th
ic
s,
P
ol
ic
ie
s
an
d
R
ul
es
.
D
ev
el
op
le
ga
l a
gr
ee
m
en
ts
b
et
w
ee
n
pa
rt
ie
s.
Fo
rm
ul
at
e
an
o
pe
ra
tio
na
l b
us
in
es
s
pl
an
.
D
ev
el
op
a
n
op
er
at
io
na
l f
in
an
ci
al

pl
an
.
Im
pl
em
en
t t
he
b
us
in
es
s
pl
an
a
s
a
gr
ou
p.

M
on
ito
r a
nd
b
en
ch
m
ar
k
pr
og
re
ss
:
ne
ed
to
b
e
fl
ex
ib
le
a
nd
a
gi
le

to
re
sp
on
d
to
c
ha
lle
ng
es
a
nd

su
cc
es
se
s.
D
ev
el
op
a
n
op
er
at
io
na
l m
ar
ke
tin
g
an
d
co
m
m
un
ic
at
io
ns
p
la
n.

R
es
ea
rc
h
th
e
“b
ro
ad
er
”
in
du
st
ry

re
ga
rd
in
g
ex
po
s,
tr
ad
e
fa
ir
s,

co
nf
er
en
ce
s,
g
ov
er
nm
en
t a
nd

in
du
st
ry
e
ve
nt
s.

M
ak
e
th
e
co
nn
ec
tio
ns
w
ith
th
e
m
ed
ia
.
In
cl
ud
e
yo
ur
s
up
pl
ie
rs
a
nd

cu
st
om
er
s
on
m
aj
or
p
ro
je
ct
s.
D
ev
el
op
a
d
et
ai
le
d
pl
an
to
la
un
ch
/
an
no
un
ce
th
e
ne
w
jo
in
t v
en
tu
re
o
r
bu
si
ne
ss
c
ol
la
bo
ra
tio
n.

L
au
nc
h
th
e
ne
w
in
iti
at
iv
e
an
d
en
su
re

fo
llo
w
-u
p
th
ro
ug
h
im
pl
em
en
ta
tio
n
of

th
e
m
ar
ke
tin
g
an
d
co
m
m
un
ic
at
io
ns

pl
an
.
Fo
rm
ul
at
e
co
m
m
un
ic
at
io
ns
p
la
ns
to

pr
om
ot
e
ne
w
p
ro
je
ct
s
or
w
in
n
ew

co
nt
ra
ct
s.

In
co
rp
or
at
e
re
su
lts
a
nd
n
ew

co
nn
ec
tio
ns
in
to
c
om
pa
ny
’s
jo
in
t
ve
nt
ur
es
, C
R
M
s
tr
at
eg
y
an
d
ac
tiv
iti
es
.
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146
Putting Clusters to Work

PART THREE: PUTTING
CONNECTORS TO WORK
This section presents some practical examples
that have led to company transformations, forma-
tions of new companies and joint ventures, and
companies doubling their turnover, as a result of
effective application of the BOSP methodology
and the Business Collaboration Process (BCP)
models to sets of Connector Companies within
the Hub North region.
Transforming Connector Companies into New
Business Networks that Create New Investment
and Business Opportunities: Selected Case Studies
Tooling Company Finds
Niche in Industrial Design
Herning Tooling in Central Denmark’s industrial
region responded to the global financial crisis
(GFC) by transforming its capacities and capa-
bilities and diversifying into new markets from
Figure 14. Creating new joint ventures: Transformative collaborations (Source: Rodin Genoff & As-
sociates 2013)
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147
Putting Clusters to Work

furniture making and niche production, prototyp-
ing and industrial design. It merged with Meteor,
an exclusive home heating company, and a former
steel company, All Round, with whom it had previ-
ously collaborated closely, while making formal
collaborations with three of Denmark’s leading
industrial designers.
Through smart collaborations it built on exist-
ing competencies, in this case tooling, and shifted
into high value added and more profitable niche
markets and revenue streams. The company had
in effect moved out of a market where as a tool-
ing company they were price takers to one where
they could not only set the price but have a greater
degree of autonomy over the quality and nature
of the work they undertook.
Heavy Engineering Company
Spins Off Medical Division
Bilcon is a traditional heavy engineering company
located in Aalborg and specialising in manufac-
turing fuel tanker and transport equipment for
the defence industry. It participated in a cluster
project that brought together Aalborg’s life sci-
ences cluster, ICT cluster, regional authorities,
and an industrial design company to develop
mobile breast screening units and mobile blood
banks, to meet growing demand for strengthen-
ing community health delivery services. This is
a powerful example of working across clusters to
develop turnkey solutions, not only to diversify
their market base but create highly profitable new
niche markets. Consequently, this heavy engineer-
ing company now has its own medical division
competing in the global market place with sales
to the Middle East, Sweden and Switzerland.
It is also an excellent example of the European
triple helix cluster approach at work where the
City of Aalborg forged the institutional connec-
tions to the health authorities, life sciences and
ICT cluster. This institutional linkage provided
the basis for fast tracking an innovative investment
and business opportunity for Bilcon.
Putting Software and
Industrial Design to Work
Conlan, a traditional electronics company lo-
cated in Aalborg Denmark, collaborated with
Herman Rokkita, an internationally recognised
and award winning German industrial designer,
and Bigwheel, a local software developer, to
commercialise a new high security system for
homes, offices and industrial uses. The new
MyKey product was launched at an international
ITC expo held in Essen in October 2012. This
collaboration built on Conlan’s existing product
range. The major outcome for the company was
a new high end and premium product range made
possible through a deep collaboration with Rokkita
and a new generation of technology developed
through sophisticated software programming that
interfaces with IT platforms of smart buildings of
the future. This example shows how SMEs like
Conlan with only around 20 staff can successfully
develop products normally reserved for much
larger or global companies.
The collaboration was undertaken through the
Hub North wind industry cluster program and is
a good example of companies spinning off new
opportunities in clusters other than their own. The
outcome for the company was greater profitability
in niche markets that strengthened Conlan’s long
term economic viability. For the cluster, the en-
hancement of the company’s technical and design
competencies added to the overall competitiveness
of the wind industry cluster.
Helped “To Double Our
Turnover” Børsen (Denmark’s
Daily Financial Newspaper)
Doubling Borsen’s turnover was a result of stra-
tegic and at times opportunistic collaborations
with sub-suppliers to, and customers for, the
engineering company, Stalindustri, located in
central Denmark. Its business networks make a
strong return on investment. This is a company
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148
Putting Clusters to Work

that ‘strikes while the iron is hot’ and is a great
example of what happens when a company’s
broad supplier and customer base is put to work
in a structured and collaborative manner.
Anchoring Stalindustri’s success are close long
term collaborations with a dozen engineering sub
suppliers that complement its activities, while
developing strategic collaborations with globally
recognised industrial design houses like the award
winning CPH Design located in Copenhagen. CPH
Design is both the company’s customer on some
projects, and collaborator on others. Stalindustri
has learned to strategically push upward and re-
define its commercial relationships with its larger
customers in a collaborative and profitable manner.
CONCLUSION: LESSONS
LEARNT FROM PUTTING
CLUSTERS TO WORK
Strategic Industry Intelligence
The major failure of traditional economic and
cluster analysis is that it doesn’t gather the strategic
industry intelligence required to put individual
networks of companies and their supply chains
to work, that is, to activate new business, market,
research or investment opportunities. Hence:
• Any attempt to map the relationship between
major production and service delivery com-
panies requires a systematic framework for
capturing these relationships and mapping
the patterns and relative strength of these net-
works. Unless such a systematic framework
is used to capture real time performance data
and the existing exchange arrangements be-
tween OEMs and their multiple supplier and
buyer networks, it is difficult, if not impos-
sible, to activate new business opportunities
and jobs on the ground.
• A key lesson demonstrated by applying the
BOSP framework, and then implementing
action/business networking programs with
companies identified as central players in
regional industrial networks, is how to do
both stages.
• A major outcome from the BOSP and BCP
approaches is the development of a suite of
tools that can translate cluster theory into
bottom-up business outcomes. As a result
of the application of the models new busi-
ness and development opportunities at the
individual SME and company level are
generated.
Need for Responsive and
Agile Policy Framework
Cluster experiences vary from country to country.
A high cost economy like Sweden funds its clusters
for up to 10 years because they understand that
the process is just as much about behavioural and
cultural change as it is about strengthening and
creating new opportunities for companies inside
the cluster. For others, like the Offshore Centre
Denmark cluster, it has galvanised a strong mar-
keting and promotional architecture to help its
companies win new contracts in emerging energy
markets such as Brazil. Conversely, Hub North,
a wind industry cluster in Denmark, employs a
bottom up approach to network SMEs so that
they can work together to bid for larger and more
technically complex contracts.
Countries such as these believe that clusters
are powerful agents of investment and regional
development while others point to Silicon Valley
and believe that markets are best left to themselves.
Nonetheless, governments from countless coun-
tries around the world invest in cluster programs
both large and small.
Having undertaken cluster analysis to create
business opportunities and develop clusters from
the bottom up, as practitioners, our experience
indicates that:
• Current experience with both conceptu-
alising the process of analysis and then
implementing programs based upon the
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149
Putting Clusters to Work

recommendations emerging from that real-
time data is scarce and fragmented.
• Except in some exceptional examples with-
in the European arena, most prescriptions
for defining or creating industry clusters
focus on broader industry issues ranging
from innovation, labour market and infra-
structure issues and export market devel-
opment and B2B networking activities.
This is particularly true of Australia.
The case studies presented in Part Two of this
chapter demonstrate how the two components of
a comprehensive cluster analysis, namely, an ap-
plication of a systematic framework for capturing
the existing situation, and how to build on these
recommendations, in order to achieve sustainable
sets of likeminded companies that can form alli-
ances (clusters), produce benefits from collabora-
tion with R&D exchanges, product development,
innovation, market penetration, supplier and
customer management.
Those clusters outlined above have directly
incorporated the activities of creative industries or
new media alliances to support industrial design,
commercialisation, product diversification and
re-branding through marketing and communica-
tions companies. One salient lesson is that it is
just as important to work between clusters, as
within the cluster itself. In fact, it is often forgot-
ten that a company’s suppliers and customers are
often themselves in other clusters. Putting this
dynamic to work has been at the heart of creating
new business and investment opportunities for the
companies participating in our projects.
Test of Relevance for Companies
In conclusion, the major challenge for cluster
policy makers is to ensure that their programs are
relevant for all companies in the cluster. Large
companies become members because they need to.
Cluster organisations offer them opportunities to
interface with government, industry associations
and the like and participate in the formulation of
industry wide programs such as labour market or
innovation initiatives that can support the industry
as a whole.
The CEOs of SMEs have limited time to
participate and are all too often disengaged. It
is essential to offer real business outcomes ‘on
the ground’ that lead to new business and invest-
ment opportunities. Such SMEs can then become
powerful agents of change as they themselves are
transformed through the clustering process and
enter new markets and in turn become role models
for others to emulate. This is why in the major
cluster projects undertaken we ensure new joint
ventures are formed, contracts signed and that
these results feature in the financial press and, in
so doing, co-brand the companies’ new directions
and the success of “Putting Clusters to Work”.
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cluster inspired regional development: Innovative
regions facing the challenges of globalisation.
Brussels: European Union Publishing.
Porter, M. (1990). The competitive advantage of
nations. New York: The Free Press.
Porter, M. (1996, November-December). What is
strategy. Harvard Business Review.
Porter, M. (1998). On competition. Boston: Har-
vard Business Review Books.
Porter, M. E., & Sölvell, Ö. (1998). The role of
geography in the process of innovation and the
sustainable competitive advantage of firms. In
The dynamic firm. Oxford, UK: Oxford Univer-
sity Press.
Rosenfeld, S. A. (1995). Industrial-strength
strategies. Washington, DC: Regional Business
Clusters and Public Policy.
Sabel, C. F. (2002). Diversity, not specialization:
the ties that bind the (new) industrial district. In
Complexity and industrial clusters. Physica-Verlag
HD. doi:10.1007/978-3-642-50007-7_7
Slack, N., Chambers, S., Harland, C., Harrison, A.,
& Johnston, R. (1998). Operations management
(2nd ed.). London: Pitman Publishing.
Sölvell, Ö., & Williams, M. (2013). Building the
cluster commons: An evaluation of 12 cluster
organizations in Sweden 2005–2012. Stockholm:
Ivory Tower Publishers.
Spoehr, J. (Ed.). (1999). Beyond the contract state:
Ideas for social and economic renewal in South
Australia. Wakefield Press.
Worrall, L. (1993). Networking as an industrial
strategy. In Making the future work: Crisis and
change in the South Australian economy. Allen
& Unwin.
KEY TERMS AND DEFINITIONS
Action Plans: From the audit analysis, key
strategies are developed to improve a region or
industry’s competitive advantage, providing op-
portunities to attract investment and a skilled work-
force. Action plans focus on: exploring current
resources; creating new business and investment
opportunities; profiling connector companies in
the cluster; outlining processes to support a region
or industry; strengthening connections between
suppliers and buyers. This provides a basis for
developing future action agendas.
Business Alliances: Are agreements between
businesses, usually motivated by cost reduction,
technology innovation, and improved service for
the customer.
Business Collaboration Processes: Are
utilised to create business partnerships and joint
ventures between companies.
Business Networks/Strategic Collabora-
tions: Generally involves a group of two or more
companies that collaborate to build scale or scope
of services or products. It involves knowledge
sharing and group learning, plus sharing resources
and the risks and rewards in development of joint
projects. Such joint activities help win contracts
unattainable as single firms.
Cleantech Industries: The Copenhagen
Cleantech Cluster (CCC) project, defines clean-
tech industries as those activities (including con-
sultancy and research) which develop products or
implement new or improved processes in the fields
of (1) Energy, including green energy, energy
infrastructure, energy efficiency, energy storage,
and (2) the Environment, including sustainable
materials, water and wastewater, air and environ-
ment, waste and recycling.(Source: http://www.
cphcleantech.com/about/q–a-about-cleantech).
Cluster Audits: Involve surveying a popula-
tion of OEMs and their first tier suppliers/buyers to
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Putting Clusters to Work

record their competitive performance (on selected
business KPIs) and their inter-firm transactions,
to identify networks of connector companies to
create potential industry clusters.
Clusters: Are geographically close groups
of interconnected companies and associated
institutions in a particular field, linked by com-
mon technologies, skill sets, and complimentary
products and markets.
Collaborative Networks: Describe the pattern
of relationships between companies operating in
multi-level supply/buy networks and can take five
principal forms, namely: Negotiator, Resourcer,
Leader, Enabler, and Integrator. Details can be
found in the main text.
Connector Companies: Are identified
through spatial mapping and plotted from inter-
firm transactions between OEMs and their first
tier suppliers and buyers. Connector companies
are the leading companies (usually the top 10%)
with a high degree of interconnectedness between
their suppliers and/or buyers.
ETM: An acronym for Elaborately Trans-
formed Manufactured products applying advanced
manufacturing technologies.
Kanban: A method of Just-in-Time production
that uses standard containers or lot sizes with a
single card attached to each. It is a pull system in
which work centres signal with a card that they
wish to withdraw parts from feeding operations or
suppliers. The term is often used synonymously
for the specific scheduling system developed and
used by the Toyota Corporation in Japan.
Manufacturing Process Types: There are
five generic types of manufacturing processes
differentiated according to process configuration
or choice, the level of flexibility and depend-
ability. Companies use a mix of manufacturing
processes across various product or service lines.
They include Project, Jobbing, Batch, Line, and
Continuous Processing. Details can be found in
the main text.
Networks: Are identified through spatial
mapping and are patterns of relationships be-
tween combinations of OEMs, supplier and/or
buyer firms, operating to the mutual benefit of
all participants.
SCM: An acronym for Supply Chain Manage-
ment systems. Digital Supply Chain Management
systems send messages electronically up and
down the supply chain through fully integrated
links between customers, producers, and suppli-
ers. Essential to demand management processes.
Social Network Analysis: Is a statistical
methodology applying graph theory concepts of
nodes, ties and degrees, to record and score inter-
relationships between sets, individuals, groups
or organisations to reveal underlying patterns of
association between participants.
Supply Chain Types: There are five generic
types of supply chains differentiated according
to ‘predictability of demand’, from high to low,
against the ‘relationship with the customer’, from
tight to loose. They include Lean, Fully Flexible,
Agile, Continuous Improvement, and Digital
Services. Detailed explanations can be found in
the main text.
Zones of Competitive Capability: Measure a
company’s competitive position across seven key
capabilities (price/cost, flexibility, quality, deliv-
ery dependability, service, speed and innovation.)
against industry best practice in these capabilities.
The scores illustrate how effective a company’s
competitive strategies are in ‘winning orders’
against the ‘performance of its major competitors’.
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153
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 6
DOI: 10.4018/978-1-4666-5828-8.ch006
Confronting the Productivity
Challenge in the High
Cost Economy:
Evidence from the Australian
Oil and Gas Industry
ABSTRACT
This chapter reports research findings into the productivity challenge facing the Australian oil and gas
industry. This industry has been experiencing cost overruns indicating a productivity decline that puts
future projects and investment at risk. Using world-class survey methodologies developed by the Centre
for Business Research at Cambridge University and adapted for the oil and gas industry, an evidence-
based view on business decisions and conditions is provided and linked to performance. While many of
the productivity challenges facing the Australian oil and gas industry are beyond immediate managerial
control, this research shows that key productivity drivers are in the realm of the firm to influence. The
research reported in this chapter shows that improvements in innovation, collaboration, and deeper
competitive capabilities are the best levers to lift business productivity and to build a growth pathway
for the future for this industry.
Jerad A. Ford
University of Queensland, Australia
John Steen
University of Queensland, Australia
Martie-Louise Verreynne
University of Queensland, Australia
Bradley Farrell
Ernst & Young, Australia
Gerald Marion
Ernst & Young, Australia
Seelan Naicker
4Sight Group Pty Ltd, Australia
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Confronting the Productivity Challenge in the High Cost Economy

INTRODUCTION
Recent years have seen soaring investment in
natural gas resources in Australia. A mix of
conventional and unconventional natural gas
projects are at the heart of this expenditure with
a majority of projects focused on exporting Liq-
uefied Natural Gas (LNG) to Asia. Conventional
gas projects include offshore gas field develop-
ments like Chevron’s Gorgon project in Western
Australia. Unconventional gas projects include
Queensland’s Coal Seam Gas (CSG) projects,
which will bring together distributed gas wells
from across a vast geographic distance to par-
allel LNG processing plants on Curtis Island,
Gladstone, Australia. Taken together, Australia
has more than $US190b in LNG export projects
under construction (Reuters, 2013), placing Aus-
tralia on track to becoming the world’s largest
exporter of LNG by 2025 (OECD, 2012). A list
of the major projects, expected to be completed
by 2020, is provided in Table 1.
Cost overruns in these projects have become
commonplace in the Australian oil and gas in-
dustry. In 2012 Chevron announced a $9 bn cost
overrun on its Gorgon gas project with the final cost
now estimated to be $52 bn (MENA, 2012). This
represents a 40 per cent increase on the original
2009 project budget in US $ terms. In 2012, cost
overruns from Chevron, Woodside, BG, Santos
and Exxon Mobil totalled $25 bn (Ker, 2012). This
pattern has continued into 2013 with the Conoco/
Origin joint venture APLNG announcing a more
modest seven per cent overrun of $US1.3 bn (Re-
uters, 2013). The BG group’s QCLNG project has
witnessed a $US5 bn overrun (Chambers, 2013).
Explanations for cost overruns usually focus on
external factors, which all relate in various ways
to productivity. Logistical challenges of remote
locations, access to overseas labour (Bloomberg,
2009), wage costs, regulatory complexity and
technical challenges are all commonly cited as rea-
sons for these overruns. Together these represent
various facets of the productivity challenge facing
the industry. The received wisdom is that these
challenges contribute to the overall inefficiencies
of the LNG megaprojects and to declining pro-
ductivity. The threat of the productivity decline
is that future projects might not be invested in, or
worse, delivered at unnecessarily high cost (BCA,
2012). Faced with this prospect, investors will seek
better capital returns on projects outside Australia,
signs of which are already becoming evident. For
instance, recent reports show that comparable
investments in gas projects might be up to 30 per
cent less expensive in east Africa (Ellis, Heyning,
& Legrand, 2013). Executives from several major
energy companies warn that steps need to be made
Table 1. Australian LNG projects expected to start through 2020 (Reuters, 2013)
Projects Under Construction Developer(s) Capacity
(mtpa)
Cost
($US
bn)
Development Type
Gorgon 1,2,3 Chevron 15.6 52 Conventional, off-shore
Queensland Curtis Island (QCLNG)
1, 2
BG Group (QGC) 8.5 20.4 Coal Seam Gas
Gladstone LNG (GLNG) 1 2 Santos/ PETRONAS/ Total / KOGAS 7.8 18.5 Coal Seam Gas
Australia Pacific LNG (APLNG) 1, 2 Conoco Phillips / Origin 9 25.4 Coal Seam gas
Icthys 1, 2 Inpex / Total 8.4 34 Conventional, Offshore
Prelude FLNG* Shell / KOGAS 3.6 12.6 Conventional, floating
offshore
Wheatstone 1, 2 Chevron 8.9 29 Conventional, Offshore
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155
Confronting the Productivity Challenge in the High Cost Economy

to reduce labour costs, cut regulation and deliver
a stable political environment, or the next wave of
investment in Australian LNG will be in serious
jeopardy (Daley and MacDonald-Smith, 2013).
Therefore, the Australian Oil and Gas industry
is at a crucial turning point. Another $150 bn in
LNG investment hangs in the balance and depends
on the capacity of the industry to generate competi-
tive investment returns (Daley and MacDonald-
Smith, 2013). Already Woodside has shelved the
Browse LNG project and is considering cheaper
alternatives including floating LNG technology,
and Shell has raised doubts about the viability
of its Arrow LNG project citing cost pressures
(Kelly, 2013). Future projects that are at risk are
shown in Table 2.
ADDRESSING THE PRODUCTIVITY
CHALLENGE AT THE FIRM-LEVEL
Economic studies of labour or multi-factor pro-
ductivity can point to the problem but are too
high-level to present solutions for oil and gas
executives to act upon quickly. Some of these
productivity challenges come from factors beyond
immediate managerial control. Exchange rates,
industrial relations, remote locations and skills
shortages are systemic problems in this regard.
For instance, the most significant cost reduction
target regarding LNG competitiveness in Australia
was shown to be tax related (Ellis et al., 2013).
Ultimately however, productivity is determined
by what happens in businesses and there are po-
tential routes to improving productivity regardless
of broader macroeconomic constraints. While
Australia confronts wider national productivity
challenges, such as the regulatory burden, taking
remedial action at the firm-level is an important
step forward.
Leading firms are not ‘lame ducks’ in this
constrained environment. Rather, our research
shows how productivity improvements relate to
innovation, collaboration and deeper competitive
capabilities that are in the realm of the firm to
influence. It is these three levers of performance
that provide the best opportunities for managers
to lift business productivity, and build a growth
future for the industry over the next decades.
These findings are relevant to all oil and gas firms
in our sample; applying equally to operators and
the rest of the supply chain, and to those with
Table 2. Future LNG projects that may be at risk (Reuters, 2013)
Projects May Be Finalised in 2013+ Developer(s) Capacity (mtpa) Est. Start
Browse 1, 2, 3 Woodside 12 2018
Arrow 1,2 LNG Shell / PetroChina 8 2017
Sunrise FLNG Woodside 3.5 2018
Bonaparte FLNG GDF Suez / Santos 9 2018
Expansions
Gorgon 4, 5 Chevron 10 2018+
Pluto 2, 3, 4, 5 Woodside 4.3 each 2015+
Wheatstone Chevron 16.1 ?
Darwin 2 ConocoPhillips 3.5 ?
Arrow LNG 3,4 Shell PetroChina 10 ?
Queensland Curtis Island LNG 3 BG (QGC) 3.5 ?
Australia Pacific LNG 3,4 Origin / ConocoPhillips 9 ?
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Confronting the Productivity Challenge in the High Cost Economy

business interests in conventional and unconven-
tional oil and gas1. Our survey delineates between
operators and the rest of the supply chain, and is
diverse in terms of focus: over half of surveyed
firms report being in the conventional business,
a third unconventional, and nearly a quarter
both2. The representativeness and diversity of
the sample suggest these findings are pervasive
and applicable to many firm types.
Focussing attention on improved collaboration,
effective innovation and improving competitive
capabilities will provide the best outcomes for
firms in this industry. These findings are in line
with broader productivity findings conducted
across all sectors of the Australian Economy
(Australian Innovation System Report, 2012).
Using world-class survey methodologies de-
veloped by the Centre for Business Research at
Cambridge University and adapted for the oil and
gas industry, an evidence-based view on business
decisions and conditions is provided and linked to
performance. To bring these productivity drivers
to life we provide real cases of organisations that
have successfully implemented capability devel-
opment, innovation and collaboration strategies.
THE DAWN OF A GOLDEN
AGE OF GAS OR A MISSED
OPPORTUNITY IN THE MAKING?
Energy is the lifeblood of economic growth and
will be a critical resource in the ‘Asian Century’.
An estimated US$37 trillion will be spent glob-
ally on energy supply infrastructure in the next
decade (OECD, 2012). Australian megaprojects
will contribute directly to satiating this global
demand, tripling natural gas production3 by 2035
(OECD, 2012).
While the production of LNG from conven-
tional gas has been ongoing in Australia since
1989, the emerging demand from Asia has seen
a raft of projects that link Australian gas fields
to international markets. With domestic prices
falling as low as $2.5/mmbtu a few years ago,
export markets represent a much better margin for
conventional gas from Western Australia where
long-term supply contracts to Asia can fetch around
$15/mmbtu (Global LNG: Will new demand and
new supply mean new pricing?, 2013).
In tandem with the rise in LNG export prices,
there has been a revolution in extraction of gas
from unconventional sources with the development
of hydraulic fracturing technology and horizontal
drilling. Coal, shale and tight sands are all possible
sources of gas. This has meant that the eastern
Australian coal seams have the potential to support
large LNG export terminals. Consequently three
LNG plants are being constructed on Curtis Island
near Gladstone, again bolstered by the relatively
high price for LNG exports.
Three threats are emerging that may curtail the
Australian gas boom. First, the same technologies
that have created new sources of gas are also
available to other nations, particularly Russia and
China which have vast reserves of coal and shale.
While these countries will take time to develop
their resources using such technologies, ultimately
it will have downward pressure on the costs of gas
in the international market.
Second, while the Australian export gas price
is still linked to the oil price, the disparity between
US gas prices and the export price will eventu-
ally put pressure on the oil-gas price link with
the outcome of lower prices for Australian gas,
potentially making new LNG projects economi-
cally unviable. The estimated breakeven cost of
Australian LNG projects is around US$12/mmbtu
(Ellis et al., 2013).
Third, eating away at this already slim mar-
gin, the cost of doing business in Australia has
been rising steadily. A new LNG project is now
20 to 30 per cent higher than North America or
East Africa (Ellis et al., 2013). Wages, materials,
remote locations, poor infrastructure, the strong
Australian dollar, regulatory burden, and tax policy
have all been cited as factors contributing to re-
duced international competitiveness of Australian
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157
Confronting the Productivity Challenge in the High Cost Economy

industry. As mentioned previously, these factors
are also blamed for the spate of cost overruns in
major gas projects.
A recent survey of the industry by Ernst &
Young and the University of Queensland Business
School shows several of the common factors at the
centre of the cost competitiveness debate being
highly cited by managers in oil and gas industry
(Ernst & Young, 2013). Figure 1 shows the per-
centage of firms citing several industry-specific
factors as critical or crucial barriers to meeting
business objectives in the past three years.
Figure 1 reveals that several firms commonly
cite governmental factors as severe challenges
to meeting business objectives, such as approval
processes and regulations, which are outside the
typical sphere of influence of managers. In con-
trast, several labour related factors and high cost
of doing business bring the productivity discussion
at the firm level centre stage.
Where the Australian oil and gas industry goes
from here depends on its ability to attract interna-
tional investment capital. If better risk-adjusted
returns can be found elsewhere, then the Australian
industry could cease to expand after the current
round of projects are completed, despite extensive
unconventional reserves that rival those in the US.
Clearly a concerted effort involving government
and industry is necessary to raise productivity. Our
purpose here is to delve into how these various
factors relate to the productivity challenge and
what can be done at the firm level to overcome
these challenges.
REFRAMING THE PRODUCTIVITY
AGENDA: WHAT CAN FIRMS
DO IN THIS ENVIRONMENT?
One of the challenges confronting oil and gas
productivity is the general lack of sophistication
in the productivity debate in Australia. Produc-
tivity is a reasonably simple concept in that it
measures the ratio of inputs to outputs, but this
becomes complicated with different ways to cal-
culate productivity. Economists typically measure
Figure 1. Australian oil and gas industry firms citing barriers to business objectives
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Confronting the Productivity Challenge in the High Cost Economy

labour productivity, capital productivity and total
or multi factor productivity. Labour productivity
is usually calculated as hours worked per unit of
output. Less straightforward is capital productivity
where the input measured is the productive value of
capital stock, which can include plant, equipment,
software and capitalised exploration expenditure.
It is argued that capital productivity matters
more for industry performance in the resources
sectors, such as oil and gas, where labour costs
are a relatively small proportion of expenditure
(McKinsey 2011). Multifactor productivity (MFP)
attempts to measure the combined productivity
of labour, capital and the residual inputs such as
economies of scale and technological change but
the ambiguous nature of these inputs makes MFP
hard to interpret (Eslake & Walsh, 2011).
Despite the multi-faceted and complex nature
of measuring productivity (Eslake & Walsh, 2011),
the default position in the popular business media
is to equate productivity with labour productiv-
ity. One outcome of the dominant logic around
labour productivity being the culprit for poor
performance is a narrow focus on industrial rela-
tions, and therefore the leap to consider lowering
wage bills as a remedy. Besides the tenuous nature
of the relationship between industrial relations
and productivity (Hancock, Bai, Flavel, & Lane,
2007), the trouble with this approach is that it
not only ignores capital productivity, but it also
neglects the other side of the global resources
industry. Capital can move to other nations to
get better returns, but so can labour. Attempts to
lower wages may therefore accelerate the flight
of talent beyond Australia.
Recent commentary on the productivity chal-
lenge also warns against the view that productivity
improvements result from labour intensification or
simply working longer hours. To quote an influential
report from the Grattan Institute, “labour produc-
tivity growth is attained by working smarter, not
by working harder or longer” (Eslake & Walsh,
2011, p. 8). Thus Australia’s productivity challenge
is due at least in part to the apparent slowdown in
Australia’s adoption of productivity-enhancing
technologies, and this calls for a heightened in-
novation effort (Eslake & Walsh, 2011).
Fundamentally, innovation is the impetus
behind long-term productivity growth. GDP
growth in the US is directly attributable to the
impact of innovation produced during major in-
dustrial changes surrounding steam, electronics
and Internet (Gordon, 2012). Since the Industrial
Revolution innovative activity has also played a
central and sustaining role in per capita economic
growth in Britain. Research and development
intensity, when sustained at levels proportional
to the population growth, explains the steady
productivity rate increases observed during this
time (Madsen, Ang, & Banerjee, 2010). Research
like this demonstrates that productivity has more
to with innovation than wage bills, workplace
flexibility or motivating employees.
The link between innovation and productivity
can be seen in the oil and gas industry and the
way that innovation has continuously reshaped the
industry. In one interview for this study, a director
of oil and gas for a world-leading management,
engineering and development consultancy (Firm
M) commented that without innovation in the in-
dustry, the global economy would have ground to
a halt decades ago due to stiflingly high oil prices.
According to this director, the tension between
growing global demand and the challenges the
industry faces “… is that you can’t continue as is,
because if you continue as is, then your revenues
stop, money runs out, resources will disappear and
accidents will start happening… The only way you
can square the circle, or reconcile these opposing
forces is to create new solutions and paradigms
and that’s where the innovation comes in.”
Our aim in this chapter is to show the relation-
ships between business activities (like innovation)
and productivity, using primary data collected
from the Australian oil and gas industry. The
chapter is organised as follows, first we describe
our research methods including the data analysis.
We then describe the main results from the models
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Confronting the Productivity Challenge in the High Cost Economy

and the most significant drivers of productivity.
Finally, these results are discussed with the aid
of case study examples to demonstrate how these
drivers can be managed in real businesses.
METHODS
Survey Instrument
A well-tested survey instrument for measuring
firm performance, innovation and collaboration
originally developed by the Cambridge Business
Research group (Cosh, Fu, & Hughes, 2012) and
based on the Oslo Manual guidelines (OECD,
2005) was augmented to capture important infor-
mation specific to the industry. In particular, new
questions were developed to elicit information
about labour productivity, capital intensity, indus-
try position and sources of revenue, contracting
methods, regulatory environment, community
relations, particular types of collaborations, and
open innovation measures. These adaptations to
the instrument were vetted externally by four ad-
visory partners from Ernst & Young, two senior
executives from major Australian energy firms
and the Chief Operating Officer of the Australian
Petroleum Production and Exploration Associa-
tion (APPEA) eastern region. Before release, the
survey instrument was soft tested with a subset
of the industry network to resolve any remaining
issues with the survey instrument before the full
launch.
The survey was administered by phone to the
senior executives of APPEA’s membership over a
period of several weeks in August and September
2012. In total, 290 member firms were solicited
and 80 responses were received, resulting in a
27.6 per cent response rate – close to the average
response rates when targeting top management
(Baruch, 1999). Age, size and industry position
characteristics show that a very representative
sample was obtained as summarised in Table 3
and Table 4.
Data Analysis
In addition to exploratory analyses using de-
scriptive statistics, exploratory factor analysis
was conducted, followed by regression analysis.
Logistic regression techniques using IBM SPSS
19 were used to determine how influential various
predictors are towards firms achieving productiv-
ity improvements. We also conducted a number of
interviews with senior managers from the industry
about productivity and innovation, using a standard
set of questions so we could compare responses.
Logistic Regression
Logistic regression models were created to ex-
plore the relationship between several factors
and productivity in our sample of firms from the
Australian oil and gas industry. Selected variables
were entered into SPSS version 19 and a predictive
Table 3. Representativeness of sample vs. sample
frame
Type Sample Sample Frame
No. Per
Cent
No. Per Cent
Operators 25 31 94 32
Service 55 69 203 68
80 100 297 100
Table 4. Firm ages and size
Firm Age (Years) Per Cent Firm
Size
(Staff)
Per Cent
0-5 13.8 0-4 6.3
5-9 23.8 5-19 26.3
10-19 21.3 20-199 38.8
20-29 18.8 200+ 16.3
30-59 12.5 1000+ 12.5
60-175 10.0
100 100
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Confronting the Productivity Challenge in the High Cost Economy

model was developed using maximum likelihood
estimation techniques. The predictive model
resulted in relative importance (odds) placed on
each independent or explanatory variable. The
odds are the contribution of each factor toward
achieving the dichotomous outcome (e.g. achiev-
ing a productivity increase).
Odds ratios have an intuitive interpretation in
that each additional incremental increase in the
independent variable, the odds of achieving the
outcome category increase or decrease by the
odds ratio. Broadly, a factor with odds larger than
one means increases in that factor improves the
chances of achieving the outcome (alternatively
the probability is greater than 50 per cent). Odds
of one are neutral toward achieving that outcome
(probability is 50 per cent exactly). Factors with
odds less than one mean increases in that factor
decrease the chances of achieving the outcome
(probability is less than 50 per cent) (See Table 5).
Odds and probabilities have a simple relation-
ship (see Equation 1 and Table 5).
Exploratory Factor Analysis
Of primary concern to managers and industry
observers regarding productivity are the myriad
‘barriers to meeting business objectives’. Our
survey asked about 19 distinct barriers on a Likert
scale ranging from 1 ‘insignificant limitation’ to 5
‘crucial limitation’. These 19 factors were submit-
ted to exploratory factor analysis using Varimax
rotation. This resulted in three latent factors that
we termed External Constraints (α=.920, eight
items), Labour Constraints (α= .750, three items),
and Competitive Constraints (α=.693, four items)
(see Figure 2).
In addition, we asked firms about 11 key
differentiators in their business. We asked re-
spondents to rank the 11 items on a Likert scale
ranging from 1 ‘not a competitive advantage’ to
5 ‘key differentiator’. This resulted in one factor
with an α=.811; containing four items, which we
term Competitive Skills (see Figure 2).
Model Development
The logistic regression models utilised a dichoto-
mous outcome variable (dependent variable),
indicating whether productivity increased (1) or
did not (0) in the past year.
Table 5. The relationship between probability
and odds
Probability Odds
0.10 0.1
0.20 0.3
0.30 0.4
0.40 0.7
0.50 1.0
0.60 1.5
0.70 2.3
0.80 4
0.90 9
0.95 19
0.98 49
Equation 1. Relationship between odds and probabilities
odds o
p
p
probability p
o
o
� �and�( )=
−( )
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Confronting the Productivity Challenge in the High Cost Economy

Independent variables included innovation
and collaboration, which have been shown to
positively influence productivity (Australian In-
novation System Report, 2012; Eslake & Walsh,
2011; Gordon, 2012). The innovation variable was
operationalised as a binary variable, taking the
value of one if the firm reported any innovations
in the past three years. Innovation included any
of the types shown in Table 6. Collaboration was
operationalised as a binary variable measuring
whether the firm maintained any formal engage-
ments in the past year. Collaborative engagement
in our survey was defined as engagements that are
beyond the normal day-to-day operations of the
firm, and are intended to improve some aspect
of the business.
Figure 2. Regression model and construct definitions
Table 6. Innovation types measured in survey,
introduced in prior three years
Innovation
Type
Description
Product Technologically new or significantly improved
physical product / technology.
Process Technologically new or significantly improved
methods of producing a physical product /
technology.
Distribution Technological improvements in supply, storage
or distribution systems for physical product /
technology.
Service New or significantly improved ‘service
product’.
Service
Delivery
New method to produce and deliver your
‘service product’.
Managerial New organisational/managerial processes or
marketing methods.
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Confronting the Productivity Challenge in the High Cost Economy

Independent variables, including the constraint
constructs, are shown in Figure 2. These blocks of
constraints reflect the factors frequently debated
in research and the media as directly responsible
for reduced productivity in the industry. Based on
the popular press we would anticipate these factors
to negatively influence productivity increases at
the firm level.
Finally, we included the competitive skills
construct as an independent variable in order to
reveal whether firm-level capabilities are respon-
sible for productivity increases. We anticipated a
positive relationship between these capabilities
and productivity increases.
Controls in the models included a binary vari-
able indicating whether (1) or not (0) the firm
conducts research and development (R&D), the
natural log of firm size, and an industry control
we termed ‘service’, which is binary and delin-
eates between oil and gas operators (0), and all
other firms in the sample (1). The base model is
shown in Figure 2 with the theorised direction of
relationships (indicated by + / -).
RESULTS AND DISCUSSION
General Findings
The descriptive statistics revealed surprising find-
ings, such as the fact that most firms do not track
their own productivity (Figure 3). Fewer than
half of the businesses in our sample reported any
type of productivity measures (outputs per unit
input). However, firms that did measure labour
productivity had growth intentions twice those
of firms that did not measure productivity. We
interpret this finding as firms with a productivity
focus lay the foundations for profitable growth.
The descriptive statistics revealed that 21 per
cent of the sample reported productivity increases.
Firms in the oil and gas industry were highly in-
novative with 80 per cent having introduced some
type of innovation in the past three years. Firms
in the sample were also very collaborative with
73 per cent engaging in formal developmental ef-
forts. These figures were much higher than typical
samples of Australian industry (Verreynne, 2012).
Looking at how the variables used in the mod-
els correlated with each other, it can be seen that
productivity increases were strongly and positively
correlated with competitive skills. Interestingly
external constraints, including a range of industry
business constraints, were negatively correlated
with competitive skills. One could interpret this
result to mean that firms with higher competitive
skills are more adept at handling external con-
straints. However, it was also clear that there were
some industry segmentation differences, such that
non-operators were most aligned with competi-
tive skills and competitive constraints, but were
negatively related to external constraints. Thus
non-operators may not be as affected by industry
or governmental regulations, but are affected by
the nature of contractual relationships and com-
petition. Also, very large firms appeared to be
Figure 3. Measuring productivity (Ernst & Young, 2013)
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Confronting the Productivity Challenge in the High Cost Economy

more collaborative, had higher competitive skills
and were also dealing more with labour related
constraints, but this appeared to be regardless of
industry position (see Table 7).
Model Results: The ‘Big Three’
Productivity Relationships
The first model very clearly revealed the impor-
tance of innovation, collaboration and deepening
competitive capabilities with regard to productiv-
ity increases (Figure 4). These can be summarised
as follows:
• Innovation included managerial and ser-
vice related innovations and product and
process innovations. Innovations were also
classified as incremental (new to the firm)
and novel (new to the industry) items. The
odds revealed that if the firm innovated in
the last year, the odds were 7.3 greater that
productivity increases would exist (~88 per
cent probability).
• Collaboration was important regardless of
industry position. Collaborations around
supply chain (infrastructure, joint material
inputs, new equipment and overall stream-
lining of supply chain) and outsourcing
were important for productivity, as were
collaborations with peer-firms. The odds
were 8.2 that a collaborating firm might
achieve productivity increases (~89 per
cent probability).
• Deepening competitive capabilities meant
that both breadth and depth of specialised
offerings, supply chain integration and ex-
Table 7. Correlations of variables, Spearman’s Rho
N M S.D. 1 2 3 4 5 6 7 8 9
1 Productivity
Increased
80 .21 .41
2 Innovation 80 .80 .40 .183
.052
3 Collaboration 80 .73 .45 .183 .112
.052 .161
4 Competitive
Skills
80 .00 1.00 .328** .158 .001
.002 .080 .496
5 External
constraints
80 .00 1.00 -.153 .066 -.027 -.350**
.088 .279 .407 .001
6 Labour
constraints
80 .00 1.00 .028 -.074 .224* .014 -.032
.401 .256 .023 .451 .390
7 Competitive
constraints
80 .00 1.00 -.095 .171 .093 .143 -.023 .018
.202 .065 .205 .103 .419 .437
8 R&D 80 .55 .50 .101 .239* .174 .076 -.018 -.023 .021
.186 .016 .061 .251 .435 .420 .428
9 Service firm 80 .69 .47 .152 .135 .008 .421** -.414** .048 .392** .041
.089 .117 .474 .000 .000 .335 .000 .360
10 Log Size 80 4.29 2.25 .054 .072 .286** .319** -.100 .326** .142 .243* .124
.318 .264 .005 .002 .188 .002 .105 .015 .136
**. Correlation is significant at the 0.01 level (1-tailed).
*. Correlation is significant at the 0.05 level (1-tailed).
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164
Confronting the Productivity Challenge in the High Cost Economy

ecuting projects well in a large-scale proj-
ect environment were strongly related to
productivity increases. For each increment
of increase in these competitive skills, the
odds increased by 4.5 that productivity in-
creases would occur (~81 per cent chance).
• Interestingly we found no statistically sig-
nificant relationship between two of the
three industry constraint factors in terms
of stifling productivity. We did find that
Competitive Constraints were negatively
related to productivity increases. Odds
were .5 (~33 per cent probability) that
each incremental increase of competitive
constraints would relate to a productivity
increase.
A second model (Figure 5) was devised,
which expanded the labour constraints construct
to observe the ‘labour productivity’ item. This
model revealed that those firms facing challenges
finding managerial talent were more likely to
have productivity increases. However, it did not
reveal any relationship between perceived labour
productivity challenges and the ability to actually
achieve productivity increases.
The second model, better fitting than the first,
increased the odds for the existing relationships.
That is, the importance of innovation moved to
odds of 29 (from 7.3), collaboration nearly doubled
to odds of 16 (from 8.2), as did competitive skills
to 7.5 (from 4.5). A slightly stronger negative re-
lationship between Competitive Constraints was
Figure 4. Logistic regression results for model 1
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Confronting the Productivity Challenge in the High Cost Economy

also revealed. Finally, one of the control variables
revealed that very large firms are slightly less likely
to achieve to productivity increases.
DISCUSSION
Interpretation of
Quantitative Findings
Our models show that many factors in the domain
of the firm are strongly related to productivity
increases. This finding clashes with the conven-
tional wisdom and media reports that consistently
point to external factors relating to government
bureaucracy as detracting from productivity. In
the external constraints construct, which is a col-
lection of firm-level business constraints that are
overwhelmingly governmental in nature, we found
no negative relationship to productivity. It should
however be noted that models that included the
individual constraint factors in a previous study, do
show a negative influence of red-tape specifically
(Ernst&Young, 2013). Similarly the construct of
labour constraints had to be unpacked in order
to find a significant relationship to productivity,
and the one we found in this study was positive.
Our findings further challenge received
wisdom by revealing that intramural activity of
firms in the industry detract from productivity,
Figure 5. Logistic regression results for Model 2
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Confronting the Productivity Challenge in the High Cost Economy

refocussing the productivity discussion to col-
laboration issues. Our ‘competitive constraints’
construct, which included items around contrac-
tual factors in the competitive landscape, was
the most likely reason for productivity declines
in the models. Firm size, perhaps indicating
inertia which diminishes firms’ ability to adapt
to constraints, was also shown to detract from
productivity increases.
Taken together, these models suggest that im-
proving productivity is a challenge for managers,
not governments. Although there is no denying
that externalities, like regulations around migrant
worker visas, or red tape (Ernst & Young, 2013),
might adversely impact firms’ ability to achieve
productivity increases, our models show that
together external factors cannot explain the pro-
ductivity challenge in the face of strong internal
promoters like innovation, collaboration and in-
creasing competitive skills. Further, the fact that
intramural concerns like inequitable risk sharing
in contracts (part of the competitive constraints
construct) is an indictment on firms themselves
and the contractual norms they maintain. Risk
sharing practices between firms are clearly in the
domain of managers and not governments and we
show these practices are partly responsible for
declining productivity.
Narrative Exemplars
From our research we found that only 45 per
cent of firms actually measured productivity, and
only a further 21 per cent witnessed productiv-
ity increases. But what does an explicit focus on
productivity look like in practice?
Taking the results of the models as a starting
point, we next explore the interview data collected
from interviews with Australian oil and gas firm
executives. We organise this discussion around
those themes identified earlier.
Innovation and Productivity
Our models clearly demonstrated the central role
that innovation plays in the productivity discus-
sion at the firm level. If the models are taken as
accurate reflections of the industry, the produc-
tivity step-change needed from the industry can
only come through innovation. Almost all of 20th
century global economic growth can be attributed
to innovation and it is important that the oil and
gas productivity challenge is also framed as an
innovation challenge (Gordon, 2012).
By innovation we mean the full spectrum of
the ‘successful application of new ideas’ such as
innovation in products (e.g. improved geophysics
software), services (e.g. rapid land rehabilitation),
processes (e.g. continuous pipeline construction)
and management (e.g. better methods of safety
monitoring and training).
Looking expressly at this single relationship,
from our data we see firms that reported any in-
novations were five times more likely to report
productivity improvements. The models that
incorporated other factors illustrated that the im-
portance of innovation is even greater in context.
The central role of innovation in the ability of firms
to improve productivity is a well regarded fact in
line with other country-wide studies (Australian
Innovation System Report, 2012). In our models
innovation was inevitably a strong contributor
to the variance in productivity increases at the
firm-level.
Despite the indications of the role of innova-
tion in the industry, a director of oil and gas of
a world-leading management, engineering and
development consultancy (Firm M), cites the
forces of corporate and cultural inertia that exist
and that cause companies to continue doing what
they have always done. If you add on top the risk
aversion and the investment portfolio planning and
business planning practices, the director stated
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“preference will always be to carry on doing stuff
they’ve always done, and not to come up with
big innovations.” Innovation must be a conscious
choice that is embedded in the company strategy.
The biggest spur for innovation is the chal-
lenging operating conditions that many businesses
are facing. In other models not shown here, we
find firms with a broad portfolio of innovations
were likely to cite uncertainty around future in-
frastructure availability, ability to access overseas
markets, inequitable risk sharing on contracts and
the high cost of doing business in Australia as
performance obstacles.
Successful firms were tackling problems and
finding new ways to do business and leveraging
their competitive skills in the process. These firms
were also more likely to reach out to R&D-based
institutions such as universities and organisations
like CSIRO (models not shown here). We found
that the largest firms in the sample were not in-
novating broadly, and they were also much less
likely to see productivity increases. Lifting the
innovation performance of larger firms is key to
improving the competitiveness of the industry
as a whole.
However, firms with a clear view of key
performance drivers were able to focus their in-
novation efforts. One vice president (VP) for a
Queensland CSG operator (FIRM A) highlighted
fresh thinking behind business innovations on
their CSG to LNG implementation project. The
drilling intensity and significant upfront capital
flows in the CSG arena had prompted new think-
ing about organisational structures and production
processes divergent from traditional gas plays:
“We tend to focus on innovation and technology
but there’s also a huge amount of innovation to
make these projects work and particularly when
they are dispersed geographically.”
FIRM A’s CSG to LNG implementation
challenge involved overcoming the propensity to
approach risk as in traditional gas plays. The VP
said that, “drilling is the biggest single activity
this company does,” which quite naturally resulted
in a focus on subsurface risks and up-front costs
within the project team, and triggered the natural
mitigation practices associated with keeping these
risks in check. However, the economics of the
project were dwarfed by the economics of filling
the LNG plant and selling, saying it “far outweighs
actually the CAPEX in terms of sensitivity analy-
sis”. So a shift of focus to a balanced approach to
risk was necessary.
FIRM A’s VP said, “It’s just so critical…to
throw out the old way of thinking, look at the
problem, and then write your management process
around the problem, not the other way around…It’s
about thinking differently and placing your project
in its current environment as opposed to it.” Giv-
ing a specific example, the VP emphasised that
in this context, “drilling becomes a value driver.
Just simply by changing your company manage-
ment structure to reflect that, actually changes the
way you operate as a company.” This has led to a
significantly more modular and repeatable drill-
ing processes, including a process the VP called
the “well-factory,” and water recycle innovations
supporting pit-less drilling.
“So, it’s really going back to real fundamentals
and… thinking almost from first principles and
not being scared to do that. That’s what we’re
trying to drive in FIRM A, is to really think about
fundamentally as a company, what is it that we’re
trying to do…This company is not about building
assets. It is right now, but it won’t be and what you
have to do is build the company for the future so
it is sustainable and that’s where this well factory
actually is the single biggest thing we do.” Another
critical area for the business in the high labour
environment was, “really understanding…how do
you lean processes out, how do you for instance
take the labour out of those processes whether
it’s the processes in the company or actually the
processes of doing the job in the field.”
Innovation and Collaboration
Collaboration was directly related to innovation
performance and productivity in our modelling.
This was a strong relationship with collaborating
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firms being between eight and 16 times more
likely to report improved productivity than firms
without collaborations. This presents a strategic
opportunity for both operators and service com-
panies. Firms engaging in different types of col-
laboration were almost certain to be innovative,
particularly in product innovation or logistics
innovation. The larger operators therefore have
an opportunity to shape the business ecosystem
through collaboration and rewarding the supply
chain for innovation.
One case in point is the collaboration between
a drilling company (FIRM B) and CSG operators.
FIRM B had reduced the duration of CSG drilling
operations from 14 days down to three. According
to FIRM B’s Chief Operating Officer (COO) the
innovations contributing to this feat were based
on hands-on engineering as opposed to traditional
R&D, “It’s not the sort of typical R&D you have
where it’s a lab. You don’t see much of that.” “In
reality, every day is an R&D day”.
The demand and high frequency of well drill-
ing in the CSG to LNG business means FIRM
B’s clients were seeking to reduce the time spent
drilling, “It’s a factory approach. When you work
offshore you drill a $100M well. It’s a one asset
thing. In these projects we’ve got thousands of
wells. It’s a volume game… so you’re looking at
cycle times, you’re looking at getting incremental
costs down.”
Behind the reduction of cycle times the COO
talked about “micro-innovations” that when added
up, resulted in big savings. For instance, FIRM B
had incorporated hydraulically operated walkways
and handrails into their rigs, reducing set-up times
to 30 minutes down from three hours. Every min-
ute counts in the CSG drilling business. A small
time saving might mean, “nothing for one single
well, but across a thousand wells it makes a big
difference”. “You add those up…and you chop
days off your programs.”
The importance of trust between the clients
and suppliers underpinned FIRM B’s ability to
deliver drilling productivity innovations. “What
works really well is when you’ve got a client
that you work hand in glove with… and when
you’ve got that level of trust, … and the good
communication, ideas come from both sides.” In
addition, he said that, “long-term relationships
make a big difference” in this respect. “People
are driven to get a better outcome and you get a
much better outcome when you can collaborate
with your clients and with your suppliers.” The
ability to have open and honest communication
is key to FIRM B’s continued success. Working
through any issues with clients and suppliers in
real time had underpinned FIRM B’s contributions
to productivity in the industry.
On the construction side, collaboration was
also a driver of innovation and productivity. A
project manager (PM) from an engineering and
services provider (FIRM C) said that close and
early collaboration with the client and design
firms was important to maximizing productivity
across the industry. “If we can get that relationship
working, then we think that that’s where we bring
our greatest innovation.” The PM said, “innova-
tion to us doesn’t come by this magnificent idea
and it solves all our problems… it comes through
the little things, which added together that really
drives productivity”.
FIRM C is developing standard designs
where possible, resulting in manufacturing cost
economies of scale, and subsequently in sharper
pricing for its clients. This type of repeatability
creates efficiencies on the job site as well. The
process of forming foundational concrete now
includes adjustable steel forms, eliminating time
spent building timber forms. As the PM said, this
is an accumulation of innovations rather than the
big breakthrough, “Now, you know, that doesn’t
sound brilliant in the way of innovation, but it has
a dramatic effect on your base cost elements that
go into your pricing.”
Collaboration between larger established play-
ers and innovative small companies also has the
potential to pull new technology into the industry.
One notable case of this is a geophysics company
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Confronting the Productivity Challenge in the High Cost Economy

(FIRM D). They have built their business around
reducing drilling risk for their clients. The owner
was now taking the technology into the unconven-
tional gas realm with its patent pending software.
The basics of the technology were summarised
by the CEO as, “taking qualified broad brush
structural geology and turning it into quantified
accurate numbers.” The software was a work flow
assist tool that took existing 3D seismic interpreta-
tions and converted them into quantified data to
produce highly accurate pressure-depth graphs.
The approach offered a way to reduce drilling risk,
which is particularly relevant to firms involved
with Australia’s current gas boom, and could be
critical to improving productivity in the industry.
The original inception of the technology was to
help explain reverse fault seals in the North Sea,
and the CEO supported international big oil and
gas players in their reinterpretation of seismic data
after some drilling failures in the 90’s. In 2000s
several smaller firms were critical to proving out
the technology.
Deepening Competitive Capabilities
In the survey we asked executives about sources
of competitive advantage ranging from breadth
and depth of offerings, reputation, and the abil-
ity to execute projects in a timely manner. Firms
that rated themselves highly in these competitive
capabilities were more likely to have productivity
improvement. These firms were also more likely
to innovate, suggesting a close link between com-
petitive advantage, innovation and productivity.
As an example in improving capabilities in the
project delivery dimension, one executive from a
Queensland CSG joint venture (JV) (FIRM E) de-
scribed the productivity and innovation challenge
as a gap they are steadily closing through improved
management approaches that encourage creative
problem solving and team work between contrac-
tors. Leadership had been critical to transcending
traditional risk mitigation practices and “finger
pointing” triggered by unforeseen challenges in
the project implementation, opting instead to com-
mission focused problem-solving teams.
FIRM E’s LNG construction contractor uncov-
ered a critical path issue that would have delayed
completion of a vital piece of LNG infrastructure.
Leadership from the JV stepped in and brought
together a core group of engineers to address the
challenge. In just four days the team developed an
alternative solution to the problem. The project
was now slated to be delivered 30 days ahead of
schedule.
FIRM E’s leadership is driving the onus of
decision making toward smaller autonomous
groups to facilitate adaptive and creative problem-
solving. The importance of leadership in this
process of change was critical, with one execu-
tive saying, “the primary role of leadership is to
push the organisation to get a better answer… to
not just accept the answers.” In this way, FIRM
E is focusing attention on the next generation of
young leaders to ensure they have the experience
to deliver large complex projects, the courage to
challenge prevailing wisdom and the supporting
organisational culture in which to do it.
The Productivity Flywheel
Our analysis revealed three productivity drivers
but it also shows that they reinforce each other.
Innovation related strongly to productivity when
competitive capabilities and collaboration are
considered in tandem. This flywheel effect can
underpin profitable growth in the Australian oil
and gas industry in all parts of the supply chain.
The implication of this relationship is that fac-
tors that impede these drivers have a flow-on effect
to other drivers. For instance, competition is good
in that it focuses the industry on building competi-
tive capabilities. Likewise, policy initiatives that
create incentives to collaborate, particularly in the
areas of infrastructure and R&D will also have
a positive impact on the productivity flywheel.
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Confronting the Productivity Challenge in the High Cost Economy

The Potential of Australia:
The New Norway of the
Unconventional Gas Industry?
It is clear that the future of the Australian oil and
gas industry depends on how the productivity
challenge is addressed. The unconventional gas
resource in Australia is vast and the potential
of Australia to be a long-term exporter of LNG
depends on being cost-competitive. However,
the other prize for creating national wealth will
be creating a new technical services industry
with specialist high-value expertise in manag-
ing unconventional gas project development and
production. As the director of oil and gas business
for a world-leading management, engineering and
development consultancy (Firm M) noted, we need
to remember that producing LNG from unconven-
tional sources is a new industry that will require
different skills and capabilities. The director said,
“These end to end LNG projects…are extremely
interesting to us. What they are showing us is the
kind of innovation Australia will need. But more
importantly it’s demonstrating a model that can be
applied elsewhere. I think some of these technolo-
gies and developments will be sellable abroad, and
over the next five years or so Australia is probably
going to become the Norway of the gas industry.
They’ll be developing new techniques… having
a lot more expertise and capability that will be
of extreme interest abroad. Australia really is at
the frontier in a number of fields and people are
watching very closely, particularly being able to
monetize CSG and Shale gas as LNG, which has
enormous potential in other parts of the world.”
After the gas reserves are depleted, there is
still the possibility that the expertise and indus-
trial network that will be left behind will continue
to generate value-added income and high-wage
employment for decades to come.
ACKNOWLEDGMENT
This research was funded by a Collaborative In-
dustry Engagement Fund (CIEF) grant from the
University of Queensland with additional support
from EY and the UQ Centre for Coal Seam Gas.
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business/billions-in-cost-blowouts-wreak-havoc-
with-export-gas-projects-20121206-2ay8l.html
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ENDNOTES
1 Industry control variables for supply chain
position and supplemental cross-tabulations
between firms participating in conventional
and unconventional oil and gas, show no
significant relationship to productivity im-
provements.
2 Nineteen firms were unclassified in this re-
gard but these data were missing completely
at random according to Little’s MCAR’s test
(all model variables included) and cross-
tabulations between firm age groups, firm
size groups and non-response revealed no
statistically significant relationship.
3 To 160 billion cubic meters (5.65tcf).
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172
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 7
Strategic Roadmapping as a
Policy Tool for Meso-Level
Industrial Transformation:
The Case of Cellulosic Fibre Value Chain
in the Green Triangle, South Australia
ABSTRACT
This chapter illustrates the use of strategic roadmapping as a policy tool for regions or industry sectors
to formulate a strategy to renew and transform their industrial base when faced with structural decline,
diminishing opportunities, and intensifying competitive pressures. This approach is illustrated by the
case study of the forest and wood products industry in the Green Triangle region in the southeast of South
Australia, both the road maps produced and the staged policy recommendations made for immediate,
short, and long-term action. The chapter concludes by summarising the key arguments for the use of
strategic roadmapping as policy tool for industrial transformation, and identifying some future avenues
for strategic roadmapping in the forest and wood products industry and in manufacturing industry in
general.
INTRODUCTION
When exposed to fierce global competition manu-
facturing industries working in high cost operating
environments face the risk of becoming locked
in low value add products, outdated production
technology and eroding competitiveness. With
insufficient capacity to innovate and adopt new
technologies companies, industries and entire
regions can fall into a self-enforcing spiral of
industrial decay having negative repercussions on
firm profitability, supplier industries, employment
and local communities.
Policy makers need to select their strategy
among three basic options. They can allow the
force of creative destruction to take its toll by
Toni Ahlqvist
VTT Technical Research Centre, Finland
John Kettle
VTT Technical Research Centre, Finland
Ville Valovirta
VTT Technical Research Centre, Finland
Nafty Vanderhoek
VTT Technical Research Centre, Finland
DOI: 10.4018/978-1-4666-5828-8.ch007
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

letting uncompetitive industry dwindle and hope
more cost effective operations will grow to replace
it. This laissez-faire approach has a high economic
and social cost in the short run. It provides no
guarantee that more competitive businesses will
emerge to replace the vanishing ones. Large stocks
of local natural and human resources may also be-
come redundant. Alternatively, policy makers can
start providing financial and fiscal support to the
troubled industry in order to improve viability of
the industry and maintain it in its current operation.
While this option might be politically attractive
in order to save jobs it also has a high economic
cost and holds no guarantee in the longer run. If
anything, it puts back the necessary transforma-
tion thus making it even harder to deal with the
inevitable changes at a later stage.
The third option for governments is to take an
active role in catalysing transformation towards
a new technological trajectory with a view to
developing higher value add products for future
markets. This is a challenging task for public policy
makers to undertake. Governments are notoriously
ill equipped to identify opportunities with long
term prospects. They are also not in a favourable
position to direct industry towards new pathways.
Nonetheless, when encountering severe economic
challenges this option holds the best odds.
In this chapter, we present a strategic roadmap-
ping approach to assist governments and industries
to identify future pathways towards higher value
add and assist them in initiating transformation
through innovation and adoption of new technolo-
gies. We demonstrate the use of our approach with
a case roadmapping process carried out in South
Australia’s forest industry. The forest and wood
products industry and associated value chain,
along with many other Australian manufacturing
industries, has experienced a very difficult decade,
peaking in recent times from the exceptional
circumstances created by the global financial
crisis and increased globalisation. Coupled with
internal factors such as a lack of re-investment,
aging equipment and poor management decisions
have resulted in a significant reduction in industry
profitability and a loss of employment opportuni-
ties that have combined to create an atmosphere
of doom and gloom in the crisis situation that
exists today.
The Regional Development Australia Lime-
stone Coast has met this challenging situation by
pursuing an agenda of economic diversification
to broaden the economic base of the South East
through the initiative of The Limestone Coast
Economic Diversification Forum. In turn, the
South Australian government have felt compelled
to act and sought the assistance of VTT Techni-
cal Research Centre of Finland, as experts in the
forest product value chain, to develop grounded
pathways for the renewal of the industry, both
in the short (3–5 years), medium (5–10 years)
and long-term (greater than 10 years), through a
roadmap exercise.
This chapter is based on South Australian
Cellulosic Fibre Value Chain Technology Road-
map project conducted in 2012 and 2013 in the
Limestone Coast region, South Australia, which
forms part of a wider region known as the Green
Triangle. The objective of the project was to
provide the region with a future strategy to renew
its industrial basis. The project was funded by
Department of Manufacturing, Innovation, Trade,
Resources and Energy (DMITRE) and led by VTT
Technical Research Centre of Finland (Ahlqvist
et al., 2013a, 2013b).
The paper is structured as follows. In the next
section we briefly discuss how industrial trans-
formation and related policies can be catalysed
through foresight and strategic roadmapping. In
the third section we outline the contexts of our
case study, forest and wood products industry
in the Green Triangle, South Australia. In the
fourth section we present the strategic roadmaps,
constructed to open future-oriented perspectives
in forest and wood products industry. In the fifth
section we depict the recommendations crafted
on the basis of the roadmaps – this stage was an
important one, because especially the roadmaps
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

beyond the five year horizon require some tan-
gible directions on where to head in the short to
medium term. The sixth and final section wraps
up the key arguments and delineates some future
avenues for strategic roadmapping in the forest
and wood products industry, and in manufacturing
industry in general.
STRATEGIC ROADMAPPING,
POLICIES AND INDUSTRIAL
TRANSFORMATION
Catalysing Policy Changes
through Foresight
In the last two decades or so, foresight has increas-
ingly become identified as a strategic practice and
a process for catalysing industrial transformation
and related policies. It is commonly discussed that
foresight can be realised in different “modes,”
and in the context of different spatial scales and
industrial sectors. For example, foresight could
focus on the strategic options of a single organisa-
tion or a single technology. This mode could be
called micro-level foresight rationale. Foresight
could also consider multiple organisations and
technological trajectories in the meso-level of an
industry. This mode could be called meso-level
systemic foresight rationale. In this rationale
especially two perspectives are of importance.
The first is the stimulation of systemic capaci-
ties. Foresight stimulates two types of systemic
capacities (see Ahlqvist et al., 2012a). Firstly,
foresight provides actors with information and
signals outside the immediate environment and
helps to identify potential threats and opportuni-
ties. It helps the actors in the system to overhaul
market lock-ins. Secondly, foresight stimulates
new social structures and linkages that could be
useful in fostering the circulation of information
in the system. The increased circulation of infor-
mation helps actors to anticipate potential system
failures. System failures can be approached as
outcomes of “rigidities and mistakes of innovation
agents” and “a lack of linkages and fragmenta-
tion between innovation actors” (Georghiou and
Keenan, 2006, p. 763).
The adoption of a more future-oriented ap-
proach in policy processes initiates changes in the
policy practice accordingly. Indeed, Weber et al.
(2009, p. 955) argue that policy processes have
gone through a conceptual shift in which a linear
model of policy-making has been replaced with a
more learning based cyclical model. In this set-
ting, foresight is a process that aligns expectations
and builds a “self-fulfilling prophecy”. Foresight
can thus be viewed as “an integral element of
networked and distributed policy making”. This
is realized through three functions of foresight:
informing, strategic counselling and facilitating
(Weber et al., 2009, p. 956).
In the context of policy-making, foresight
can also have different rationales. Georghiou and
Keenan (2006, p. 766) distinguish three policy
rationales of foresight. The first is the provision
of policy advice by accentuating the long-term
perspective. The second is the building of advo-
cacy coalitions. Foresight builds up an “interac-
tion space” by stimulating new networks and
communities through the formation of a common
vision. The third foresight rationale is providing
social forums. The foresight process provides a
“hybrid forum” between public and private actors
for strategic reflection that broadens the range of
participation on policy issues.
In the systemic settings, policy processes
become increasingly matters of policy design. In
our usage, policy design refers to an adaptive and
experimental approach in which a selected variety
of policy instruments are applied either simultane-
ously or successively. What these instruments are
and how their sequential flow is organised depends
on the characteristics of the system under policy
intervention. These system characteristics are, for
example: actor assemblages, enabling technologies
and related infrastructures, a temporal scope of the
system (e.g. what is short-term, what is long-term)
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

and spatial scales of the system (e.g. local, regional
and national). In policy design, multiple policy
instruments are adapted and tested in parallel.
Thus policy design aims to increase the resilience
of the policy practices in the systemic contexts by
allowing space for policy experimentation.
When policy design is augmented with a
foresight process or set of processes, the outcome
could be called forward-looking policy design
(Ahlqvist et al., 2012b). Foresight has six func-
tions in the practice of forward-looking policy
design, adapting Da Costa et al. (2008, p. 369).
Accordingly, the functions of foresight are to 1)
inform policy, that is, to generate research-based
views on futures; 2) facilitate policy implementa-
tion, that is, to widen the change capacities in a
certain policy community; 3) make policy-making
more participatory; 4) support policy definition by
transposing results of foresight processes towards
policy practice; 5) re-orient the policy system
towards long-term perspectives; 6) create a shared
and collaboratively interpreted ground for policies.
STRATEGIC ROADMAPPING AS
A MESO-LEVEL POLICY TOOL
In this section we outline a framework of strategic
roadmapping to be utilised as a policy tool in meso-
level industrial transformation. The framework
derives from the view that roadmapping can be
considered both as a line of strategic thinking
and as a collaborative process methodology.
Our argument draws on three somewhat distinct
theoretical tenets. The first of these is the classic
theory of dynamic capabilities, as defined by Teece
et al. (1997). In their seminal paper they defined
a “dynamic capability” as: “the firm’s ability
to integrate, build, and reconfigure internal and
external competences to address rapidly chang-
ing environments” (Teece et al., 1997, p. 516). It
is important to notice that dynamic capabilities
are linked to the managerial processes, strategic
position and organisational path. Thus, the notion
of dynamic capability provides a theoretical basis
for organisational transformation that connects the
transition to contextual historical understanding.
The second tenet is the literature on strategic
foresight. It has been suggested that in the context
of strategic management, foresight contributes to
different value creation forms (Rohrbeck, 2012,
p. 441). For example in the context of innovation
management foresight can have different roles,
such as the roles of “the initiator,” “the strate-
gist” and “the opponent” (Rohrbeck, 2012, p.
442). Strategic foresight can also be deployed to
develop new business fields for companies (e.g.
Heger & Rohrbeck, 2012). The third tenet is the
organisational strategy crafting (e.g. Whittington
& Cailluet 2008, Heracleous & Jacobs, 2008),
which makes the argument that strategies should
not be viewed as locked-in paths to some pre-
determined goals, but rather as organic schemes
that are always partially open and available for
alternative options, multiple instruments and
“side-schemes”. This definition opens a possibil-
ity for a forward-looking experimental approach.
On this basis, roadmapping can be utilised as
a nexus for building a continuous and dynamic
foresight practice for organisations. Roadmap-
ping combines different modes of knowledge
with specific activity layers (Kostoff & Schaller,
2001, Phaal et al., 2004). Roadmaps are tools for
the combination of organisational knowledge that
may be “unlinkable” with other strategic methods
(see e.g. Petrick & Echols, 2004, Phaal et al.,
2006). It is possible to make a distinction between
two roadmapping cultures. First is the culture of
technology roadmapping in which the roadmap-
ping is approached as a normative instrument to
identify relevant emerging technologies and to
align them with explicit product plans and related
action steps (see e.g. Phaal et al., 2001). Second
is the emerging culture of strategy roadmapping
which is perceived as a more dynamic and iterative
process that produces weighed crystallisations,
usually in a visual form, of an organisation’s long-
term vision, and short- to medium-term strategies
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

to realise this vision. It is based on the idea that
roadmaps are like visual narratives describing the
most critical paths of future developments (Phaal
& Muller, 2009). This visual emphasis enables the
use of roadmaps as crystallised strategy charts that
open simultaneous perspectives both on macro-
level currents and micro-level developments (see
Blackwell et al., 2008).
Roadmapping, especially in its strategic form,
is an adaptive process-based methodology well
suited for systemic contexts (see Ahlqvist et al.,
2012b): its visual format enables the transparent
formulation of visions with explicit linkages across
the temporal spectrum (present, medium term, and
long term) and roadmap layers (such as drivers,
markets and enabling technologies) (see Figure
6). In the systemic context, roadmapping refers to
a continuous and transparent process, not a single
exercise, which produces a hermetic chart of the
future with a sealed vision. Therefore, the vision
should be understood as a temporarily locked target
that is systematically verified and re-formulated,
either based on an organisation’s strategy clock
or when a critical need emerges such as a change
in the environment. For industrial firms, a vision
which is shared between geographically bounded
economic and political actors may provide a risk
reducing mechanism by aligning development
activities of interdependent organisations.
Strategic roadmapping, as we define it here,
has two basic elements: cognitive and collabora-
tive. The cognitive element provides a method
for producing and analysing strategic intelligence
about the current economic state of affairs, fore-
sight on markets and technologies, and policy
options. The strategic roadmapping is an approach
to structure knowledge in a temporally sequenced
representation with systemic linkages between the
elements. The collaborative element of strategic
roadmapping provides a process for mobilis-
ing relevant stakeholders to set transformation
processes in motion. Knowledge alone is a weak
tool to initiate change, but when brought into
collaborative processes between industrial value
chains, government, and knowledge providers such
as local universities or research organisations, the
knowledge becomes a powerful instrument to as-
sist actors to arrive at shared understandings of
potential future pathways.
Strategic roadmapping can be applied to
forward-looking policy design in multiple ways
(see Ahlqvist et al., 2012a). The first way is
through the building of a common vision. The
building of a collaborative vision stimulates the
commitment and embeddedness of the long-term
goals. In innovation policies a common vision is
required, because, for example, commercialization
of innovations is usually dependent on investments
and development activities realized by multiple
actors. A joint vision can direct these interlinked
activities towards joint goals and align their timing.
The second way to apply a strategic roadmap-
ping approach in policy design is to facilitate sys-
temic change by identifying those societal needs
which create a potential demand for new products
and services. With regard to a set of pressing
“grand challenges” such as climate change, an
aging population, depletion of mineral resources
or shortages of food and water, roadmapping can
identify latent societal demand, for example, in the
context of environmental sustainability (Könnölä
et al. 2011). Particularly when large sunk costs
have been incurred in existing technologies and
infrastructures, an industry can become locked
into technological solutions which are socially and
environmentally suboptimal. Industrial systems
may stop responding to demand signals from the
marketplace. Under these conditions a transfor-
mation process can be set in motion by carefully
guided public policy. Roadmapping can articulate
these needs more explicitly and link them with
emerging technological and industrial develop-
ment, and with different policies, e.g. regulation
and taxes, and public procurement based instru-
ments (Wieczorek & Hekkert, 2012).
The third way is to anticipate how and when
the demand could be articulated towards the emer-
gence of a new market. There are several reasons
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

why the existence of a market for new products
cannot be taken for granted. In some cases, adopt-
ing new technologies is very slow due to high
switching costs (David, 1985; Arthur, 1989). In
other cases, the market does not develop because
a pricing mechanism for the benefits is missing.
This is common, for example, in environmental
problems when product prices do not adequately
reflect negative externalities on the environment
(Faber & Frenken, 2009). Social and economic
costs created by emissions and pollution are not
always easy to allocate to those who generate them.
A pricing regime for these externalities has to be
established before a market can emerge. When
executed well, a roadmap synthesizes and depicts
purchasers’ and suppliers’ common understanding
of future societal and market needs (Georghiou
& Cassingena Harper, 2011).
The fourth way to use roadmaps is with vi-
sionary strategizing. This refers to a “cross-over”
knowledge that builds on understanding the in-
terfaces between the layers of the roadmap, for
example societal drivers, markets, solutions and
technologies in a certain timeframe. A roadmap
can create an analytic structure for understanding
how and when the “push” created by new tech-
nologies and the “pull” driven by market demand
are likely to match, and under which conditions.
There are several policies and policy instruments
to support visionary strategizing, like facilitating
the commercialization of public research and
technology development, providing validation and
feasibility assessment, creating demonstration and
piloting environments or setting product certifi-
cation and labelling schemes and requirements.
The fifth way is to identify specific innovation
targets, either singular technologies or logical tem-
poral sequences, in the roadmap structure. When
the business environment follows the systemic
logic of a value network rather than the more linear
logic of a value chain, it is important to identify
all the elements and linkages in a network (Adner
and Kapoor, 2010). Single or sequential targets
could be very important for identifying preferred
partners in a value chain or when formulating a
sourcing strategy.
In the next section we will focus on the case
study, realised in the Green Triangle, South Aus-
tralia, that demonstrates how strategic roadmap-
ping can be utilised as a meso-level instrument for
supporting industrial transformation and related
policies.
CASE STUDY: THE PRESENT
STATE OF CELLULOSIC FIBRE
VALUE CHAIN IN THE GREEN
TRIANGLE, SOUTH AUSTRALIA
Acknowledgements
The authors would like to acknowledge the con-
tribution of the following representatives and
organisations for their constructive feedback and
one-on-one discussions enabling the roadmapping
project underpinning this case study to reach a
successful outcome: Prof Göran Roos, Advanced
Manufacturing Council & Chair of the Project
Steering Committee; Len Piro, Department for
Manufacturing, Innovation, Trade, Resources and
Energy (DMITRE); Stuart West, Department of
Primary Industries and Regions South Australia
(PIRSA); Mike Ryan, Regional Development
Australia (RDA); Prof. Gil Garnier, Monash
University; Trevor Smith, South Australian Forest
Industry Advisory Board; Laurie Hein, Green Tri-
angle Forest Products; Brad Coates, Construction,
Forestry, Mining and Energy Union (CFMEU);
Allan O’Conner, University of Adelaide; Dermot
Cussen, Department for Manufacturing, Innova-
tion, Trade, Resources and Energy (DMITRE);
Noel Richards, Department of Primary Industries
and Regions South Australia (PIRSA); Peta Crew,
Department of Primary Industries and Regions
South Australia (PIRSA); Steve Chapple, Regional
Development Australia (RDA); Jennifer Kelly,
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

AusIndustry; Andrew Trainer, Department of
Industry, Innovation, Climate Change, Science,
Research and Tertiary Education (DIICCSRTE);
Mark McShane, South East Local Government
Association (SELGA); Forest and Wood Products
Australia; Parsonson & Parsonson; NF McDon-
nell & Sons ; Timberlink; Whitehead Timber
Sales; Green Triangle Forest Products; Geddes
Management; Whiteheads; Round Wood Solu-
tions; Hancock Victorian Plantations Pty Ltd;
LV Dohnt; International Timber Solutions Pty
Ltd; Green Triangle Bark & Mulch; South East
Pine; Tabeel Trading; KC & MR Boult; SERIC;
Badenoch Integrated Logging; Biogro; Blackbird
Industries; Kimberley-Clark Australia; Southern
Tree Breeding Association; Banner; Forestry SA.
Setting the Scene
Forests cover approximately 19 per cent of Aus-
tralia’s land area. The Green Triangle estate is
the largest plantation based wood fibre producing
region in Australia. The Green Triangle straddles
the state borders of South Australia in the South
East and Victoria in the South West. The Green
Triangle hosts approximately 355,000 ha of planta-
tions, half softwood (SWD) Pinus radiata, and the
balance hardwood (HWD) Eucalyptus globulus.
The South Australia portion of this estate (known
as the Limestone Coast) is 188,100 ha of plantation
resources, of which 128,400 ha is of softwood and
59,700 ha of hardwood (12.5% and 6.1% of Aus-
tralia’s total respectively) (Cunningham, 2011).
South Australia’s forest and wood products
industry is being significantly challenged as
production levels fall due to declining export com-
petitiveness and accordingly means for improving
the industry’s competitiveness are being sought.
It cannot be overstated that the forest and wood
products industry in the Green Triangle region is
currently highly challenged and even, according
to some, in a state of crisis. Several company clo-
sures and the transforming situation in the forest
resource have left the region in an uncertain state.
The forest sector thus needs actions to boost and
renew the industry to a new level.
Achieving world class productivity in existing
businesses combined with the development of
higher value-add products are keys to creating a
sustainable future for the forestry industry. The
South Australian Cellulosic Value Chain Technol-
ogy Roadmap project, on which this case study is
based, aims at developing the full potential of the
forestry resources in the Limestone Coast region
of South Australia (see Ahlqvist et al., 2013a,
2013b). The project was funded by Department
of Manufacturing, Innovation, Trade, Resources
and Energy (DMITRE) and led by VTT Techni-
cal Research Centre of Finland.1 The study was
a prime initiative of the State Government’s
Manufacturing Works strategy, and is also one of
the key actions identified in the Limestone Coast
Economic Diversification report (MW, 2012).
The project had two objectives. The first objec-
tive was to provide the South Australian govern-
ment with a roadmap describing how current pro-
cesses can be made more efficient using existing
or commercial ready technological advancements
(efficiency gains) and to potentially diversify into
other new and high value products (effectiveness
gains) using the raw materials available in the
region, while taking into account relevant local
issues. The second objective of the roadmapping
exercise was to identify suitable companies that
would consider locating in the region with VTT
as their local and global research provider and
supporter in accessing global value chains. The
overall goal was to identify new business opportu-
nities for the region as well as raising technology
levels to meet the requirements of a competitive
modern fibre-based industry.
Why the Study was Conducted
The Green Triangle, incorporating South Austra-
lia’s Limestone Coast region and adjacent parts
of Western Victoria is Australia’s premier wood
production region. The SWD plantations yield
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

3.2 million m3 of logs annually, approximately
two-thirds sawlogs and one-third pulplogs. In
Green Triangle, there is a well-established forest
and wood products industry cluster developed to
grow, harvest and transport, and process these logs.
However manufacturing capacity has been declin-
ing with notable facility closures in the last several
years. Chronic underinvestment for most facilities
has left the majority of the remaining industry
relatively uncompetitive versus state-of-the-art
domestic or international competitors. This sector
has experienced poor markets for key products,
especially low-grade sawnwood, residual chips and
surplus roundwood. Consequently, the whole value
chain has struggled to generate adequate returns.
Increasing SWD log exports are an outcome, as
growers seek to re-balance log demands with the
log mix produced from their forests.
The HWD plantations produce mainly pulp-
wood logs. The plantations were developed
by ad-hoc planting during the last decade by
Managed Investment Scheme (MIS) promoters,
many of which have gone into receivership. The
estimated volume of logs to be yielded from these
plantations will exceed 4 million green metric
tonnes (GMT)/year by the middle of this decade.
Significant volumes of HWD pulpwood supplies
will be available for the following 10 years. Aside
from chipping, there is no domestic processing
of these logs. Chips are currently exported from
Portland destined for Asian pulp mills (Figure
3). Export of HWD roundwood logs is a recent
and growing phenomenon. At present, the Port of
Portland’s dock facility capacity represents a (po-
tential) constraint on chip exports. Infrastructure
will limit HWD chip exports to approximately
3.4 million GMT/a.
Asian markets are currently oversupplied with
HWD chip and pricing is well below the level
required to deliver adequate returns to growers.
Consequently, industry observers expect around
half of Australia’s current HWD plantation estate
Figure 1. A softwood plantation (Pinus radiata) in Green Triangle (Authors)
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

Figure 2. A hardwood plantation (Eucalyptus globulus) in Green Triangle (Authors)
Figure 3. Logs waiting to be exported in the Portland dock (Authors)
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

will not be re-planted. This will include planta-
tions in the Green Triangle. The area replanted
will affect the HWD pulpwood volumes available
beyond 2025.
In addition to the supply of SWD and HWD
logs, the region can also generate an estimated
500,000 m3/a of woody biomass. This material
comprises the tops and branches of trees left after
harvesting.
The situations outlined above for the cellulosic
value chain require urgent actions. At the Stage 1
report (Ahlqvist et al., 2013a) of our case study
we found that few of the current players had initia-
tives in place to address either the fundamental
problems in the existing sector, or to capture the
region’s unique opportunities. For example, there
is currently no pulpmill in the region. Govern-
ment grants have underpinned investments that
are planned. However, as far as we can determine
not all of the grants have been deployed in ways
that have enhanced the region’s competitiveness.
The current SWD industry can benefit from
investments to improve its competitiveness, and
to develop value added uses for currently under-
utilized components of the log and residuals sup-
plies available. On the positive side, the quality
of the region’s logs, proximity to key markets and
the potential to achieve world competitive scale
facilities means this is a unique opportunity in
Australia.
The HWD pulpwood supplies yielded from the
region represent a globally significant volume of
high quality, certified fibre. The current owners of
these plantations are actively looking to diversify
uses away from the current low paying export chip
markets. In addition, Australia is the only region
with a long term surplus of cellulose.
In the Green Triangle, a more strategic per-
spective to the cellulosic value chain is needed.
This perspective would be particularly crucial
for forest owners and sawmillers. Rethinking the
industry would in the best case scenario result
in more capital to invest in the region’s process-
ing assets. Renewing the technologies employed
and diversifying into new sectors have long term
positive effects across the cellulosic value chain.
The traditional sawn timber production indus-
try must continuously improve and develop to
ensure world-class productivity, but in an emerging
global bioeconomy this is not enough. The new
opportunities presented by bioenergy, biochemi-
cals and biomaterials must be captured, in addi-
tion to further developing opportunities in more
traditional but evolving areas like construction
elements, wood residue laminates, wood plastic
composite products, and value added packaging
materials etc. This could mean, for example, that
in addition to the focus on developing the existing
industry through productivity improvements and
product extensions, next-generation biorefineries
could be established in the region, utilising side
streams or under-utilised raw material streams
from the forest and wood products industry as input
for the production of bioenergy, biochemicals and
biomaterials. The eventual goal must therefore be
to identify new business opportunities suitable
for local companies as well as raising the techno-
logical level of the region’s industry to meet the
requirements of a competitive modern fibre-based
industry. The vision is to make the Limestone
Coast a significant player on the global integrated
biorefinery stage and to raise the employment and
skills level in the region.
The roadmap study also covered the produc-
tion of biofuels, bioenergy, biochemicals and
biomaterials from a biorefinery. Biofuels and
bioenergy are seen as lowest value per volume
of the co-products from a biorefinery but are
important, as supplementary sources to existing
fuels assuming sufficient levels and mandates are
available. However, it is clear from recent reports
by Parrat & Associates and CSIRO in 2011 that the
petroleum and petrochemical industry refineries
need higher value co-products to make them eco-
nomically viable (e.g. 80–90% of the profit from
crude oil processing comes from the 10–20% of
materials produced as chemicals and downstream
products). This study includes an analysis of the
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Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

bioenergy opportunities, together with the pro-
duction of chemicals and plastics from biomass,
even though the authors are concerned that there
are no obvious related industries in the area. The
biofuel opportunity could well be impacted by a
recent study (Cook et al., 2013) indicating that
Australia’s shale gas deposits are far more abun-
dant than previously expected, though their remote
location could make extraction a costly prospect
except where infrastructure already exists like in
the Cooper Basin. How this plays out in the longer
term could well be critical.
The Green Triangle case study also investigated
the “low hanging fruits” or more immediate oppor-
tunities for the forest and wood products industry.
In the Limestone Coast Region this sector has
declined in recent years. Member companies, and
the sector as a whole, urgently need to improve
their efficiency and effectiveness leading to new
business opportunities. To help address these
issues, the study proposed the development of
a woody biomass-based value chain facilitated
by the clustering and cooperation of the existing
industry and supported by applied (primarily
process and equipment) research, development
and engineering in the region to explore selected
product opportunities relevant to these existing
businesses.
Another focus of this study was to evaluate
the commercial and technical feasibility of sug-
gested biorefinery options under the proposed
carbon price. The rapid pace of development in
the bioeconomy sector worldwide coupled with
the significant changes in the global agricultural
and manufacturing environments must also be
kept in mind, particularly what is happening in
Asia, North and South America and the European
Union (EU).
The Green Triangle region currently exports
wood chips and logs to Asian markets. This
Figure 4. Parts of the deconstructed Tantanoola pulp milll. The pulp mill was shut down in December
2010 (Authors).
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183
Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

source material could be used just as profitably
in the region with the right investment, mandates
and legislation in place. Indications are that in
the Limestone Coast region, the lignocellulosic
material (woody biomass from radiata pine and/
or Eucalyptus) is available in sufficient quantity
and reliability of supply to warrant future invest-
ment in integrated biorefineries. However, it is
clearly understood that the establishment of a
biorefinery based on forestry biomass would need
to compete directly for access to the resource at a
competitively stable price, volume and supply at
least equivalent to alternative uses such as mulch
or particleboard.
The Current Situation in the Green
Triangle Softwood Processing Sector
The Green Triangle Region enjoyed significant
investments during the period between the 1970s
and the mid-1990s. The major assets, including the
two largest sawmills and the particleboard plants,
were state-of-the-art when built. However, the
lack of investments, particularly since 2000 means
the region’s sawmills have lost competitiveness
relative to domestic and international competitors.
The existing sawmills’ internal layouts reflect the
operating requirements of the day. However, these
layouts now constrain efforts to update these mills
to take advantage of new technologies such as
in-line scanners to improve recoveries and lower
the costs. The region’s sawmills produce a range
of products, primarily structural timber sold into
the domestic construction sector. The region also
produces a large array of non-structural products
including boards, pallet and landscape timbers
and millwork.
The region’s sawmilling industry has been
challenged by the combination of the slow do-
mestic housing markets and competition from
imported structural timber. This has kept timber
prices relatively low, while costs, especially la-
bour and electricity, have increased. The region’s
sawmills’ lack of investment has meant the mills
have relatively higher labour and power costs
versus state-of-the-art competitors. The sawmills’
dated technology also produces higher levels of
non-structural sawn products that typically attract
relatively lower prices. In addition, the current
market for sawmill chips is limited and prices are
low. This combined has impacted adversely on the
financial performance of the region’s sawmills.
The typical outputs for Green Triangle’s large
and small sawmills are contrasted with a hypotheti-
cal Australian best practice mill sawing the same
logs (as available to the large sawmills) (Table
1). The hypothetical mill employs curve or shape
sawing technologies and state-of-the-art scanning
technologies that allow such sawmills to generate
higher yields of product and a higher proportion
of structural product than either of the typical mill
types in Green Triangle. The best practice mills
typically have lower labour and energy costs per
unit quantity of timber produced. The present
average labour use in large sawmills is 800 m3/a
per person.
Consequently, the key challenges facing the
Green Triangle region’s sawmills include improv-
ing the recovery of higher value products. The
large Green Triangle sawmills could potentially
lift recovery of structural grade product by up to
5% by investing in curve sawing and advanced
scanning technologies. Additional opportunities
exist to improve prices achieved for fall down
products, and to reduce key input costs. The South
Australian Government’s A$ 27 million South
East Forestry Partnerships Program is providing
direct grants to the existing sawmill operators. At
the time of making the case study, the program
has earmarked A$ 17 million in grants, with A$
10 million remaining which may be partially used
to support new initiatives.
Timberlink’s Tarpeena sawmill is one of
the large Green Triangle sawmills and was last
upgraded in any major way about 30 years ago.
Timberlink and the South Australian Government
have announced planned investments at the mill.
The State Government has committed a A$ 7.8
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184
Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation

million grant to be matched dollar for dollar by
the company. The new investment is expected to
increase sawlog processing volume from 460,000
to 575,000 m3 annually (two shift basis). It is un-
derstood that Timberlink are considering installing
a Quad Reducer Bandsaw as the primary machine
centre, while at the same time undertaking a major
upgrade of the sawmill waste handling system. The
benefits anticipated include improved productiv-
ity, and lower manufacturing costs. Investments
will also be made in the drying kilns, and drymill.
As is typical for sawmills built during the 1980s,
there is very limited space between the machine
centres in the mill. This limits the ability of the
owners to implement the latest in-line scanning
and related technologies. In the specific case of the
Tarpeena sawmill, the low initial investment made
by the current owners (New Forests) coupled with
the generally good quality of the logs processed by
the mill means that the benefits accruing from a
major reconstruction and reinvestment are unlikely
to justify the significant additional investment
costs needed to bring the sawmill up to the best
practice standards.
Timberlink has identified another potential
initiative for the Tarpeena site. The company
is in the early stages of assessing the potential
to develop a combined heat and power (CHP)
facility at the Tarpeena location. Such a facility
would take the residues from the sawmill, plus
additional biomass and wood waste from other
sources, as fuel.
CHH operates the Green Triangle’s second
large sawmill (Jubilee Highway) and has a partially
mothballed sawmill at Lakeside. The company
also operates two particleboard mills in the re-
gion at Lakeside and White Avenue. The Jubilee
Highway sawmill facility benefits from its supply
of arguably Australia’s best quality sawlogs as
measured by average diameter, sweep and knot
size. The sawmill equipment was upgraded in
1994/95 and is among the largest (by throughput)
sawmills in Australia. As previously noted above,
the prevailing sawmills configured in the 1990s
and earlier have constrained the current owners
in terms of their ability to incorporate the lat-
est in-line technologies. As with the Tarpeena
sawmill, this disadvantage is partly offset by the
Table 1. The typical large and small Green Triangle sawmills benchmarked against hypothetical Aus-
tralian best practice
Output Component A Typical Large Green
Triangle Sawmill
(>500,000 m3 log Input/a)
Av 42.0% Dry Dressed
Recovery
Hypothetical Australian Best
Practice Large Softwood
Sawmill
(>500,000 m3 log Input/a)
Av 47.0% Dry Dressed
Recovery
A Typical Small Green
Triangle Sawmill
(<100,000 m3 log Input/a) Av 48.0% Green Sawn Recovery = <40% Dry Dressed Recovery Structural grades (MGP 10 or better) 29% 35% 5% Non-structural boards 7% 6% 26% Non-structural core wood 6% 6% 17% Woodchips 28% 25% 28% Shavings/dockings 18% 17% 10% Sawdust 11% 11% 15% TOTAL 100% 100% 100% Bark 7% 7% 7% EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 185 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation consistent high quality of the sawlogs processed by the Jubilee Highway sawmill. Consequently, while the product recovery and costs achieved by this mill are not up to best practice standards, the likely investments needed to achieve these benchmarks may not be justified on the basis of the improved returns generated. The small Green Triangle sawmills are typi- cally family-owned and operated. These enter- prises are capital constrained, and have developed sawing systems that are robust, flexible and with relatively lower (capital) cost. The businesses have adapted their processing equipment to al- low them to process the log mix available, and to meet often niche markets not serviced by the larger operators. The Current Value Network in the Green Triangle Figure 5 presents a generic outlook on the present forest industry value network in the Green Triangle forest and wood products industry. The bases were laid out in the stage 1 of the case study (Ahlqvist et al., 2013b). To reiterate, the key functions of the present value network can be divided into the activities of forest owners and supporting actors, notably actors in breeding and genetics, machine suppliers, and data analysis providers. All these actors provide inputs for utilisation and renewal of the resource base in the region, mainly formed of pine and eucalyptus plantations. This set of activities forms the first loop of the value network. Figure 5. Representation of the forest and wood products industry value network in the Green Triangle region. The shaded green colour depicts the key functions in the value network, the shaded purple depicts key output directions, and shaded blue colour designates key external inputs. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 186 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation The first loop acts as an input to the second loop, that is from hauling and harvesting to the downstream sawmills. The key present products of Green Triangle sawmills are sawlogs, pulp logs, roundwoods, woodchips, sawmill and wood residues and barks. Important external inputs for this second loop are skilled labour and cost-related factors such as electricity and fuel. In the third loop, the sawmills act as provid- ers to different customer industries, the first of which is direct exports of woody materials such as logs and woodchips, mainly to Asia. Some of this material is later imported back to Australia as value-added products. The second is the traditional pulp and paper industry that has been in decline in the Green Triangle region. The pulp and paper industry uses mainly pulp logs and wood chips as material for the production of cellulosic pulp and, subsequently, paper products. The third customer industry is the construction and building industry that produces sawn timber, panels, engineered wood products, posts and treated timber. In addi- tion, the industry produces furniture, fencing and other products. There are also residual products, like mulch and potting mix, but these do not con- tribute significantly to the present value network. On the basis of our analysis, the side streams are currently under-utilised and provide a clear op- portunity for the region. In the current value network, the functions of the four actor groups in the study (forest owners, hauliers, sawmills, specialised suppliers) can be summarised as follows. The core business of for- est owners is to take care of the renewal of basic resources, production of timber (softwood and hardwood), and the core functions related to this. The hauliers and harvesters persevere with their core business of hauling, harvesting and transport. The sawmills produce processed timber, gener- ally at low levels of added value. The specialised suppliers provide services and products both for business-to-business and business-to-customer. There are currently services, for example, in breed- ing and genetics, machine supply, data analysis and geoinformatics, but their potential in the present Green Triangle forest and wood products Figure 6. The generic roadmap structure EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 187 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation industry is not fully realised because there is a lack of advanced demand and demanding customers. STRATEGIC ROADMAPS TO CATALYSE INDUSTRIAL TRANSFORMATION IN THE GREEN TRIANGLE The Roadmap Structure and Lenses This section presents the strategic roadmaps constructed to catalyse the industrial transfor- mation in the Green Triangle. The roadmaps were constructed at stage 2 of the project by the VTT experts in three workshops during 2013 (see Ahlqvist et al., 2013b). The process applied generic roadmap structure utilised at VTT Tech- nical Research Centre of Finland (Figure 6). In the roadmap structure, the level of drivers refers to wider socio-economic issues that could have particular impacts on the roadmap topic. These could include megatrends, like climate change or ageing, but also more specific things related to roadmap topic, like standards or specific policies. The level of markets is based on the information of emerging market trajectories and dynamics rel- evant in the roadmap topic. The level of products and solutions maps the key emerging products, applications and services in the roadmap topic. The level of technologies focuses especially on technologies that enable the emerging products and solutions. In order to contextualise the roadmapping to the specific context of forest and wood products industry, we adopted a so-called “lens-based” approach. In this case it means that we analysed the futures of forest and wood products industry through four lenses2 (Figure 7). The idea of lenses was to get a grip of the global cutting edge in forest industry development, and build strategic roadmaps on the assessed state-of-the-art. To Figure 7. Roadmap lenses and their connection to the regional knowledge base EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 188 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation structure the roadmapping process, four strategic developments paths were formed based on the “lenses” described in Figure 7, and detailed mate- rials provided to the VTT experts participating in the workshops. These included information on the general drivers affecting the fibre-based industry from a 10 year perspective, collection of most important solutions and enabling technologies as identified from a literature review, and presentation of key aspects from the stage 1 report. The first perspective in roadmapping was a mass lens: it emphasised a more efficient tradi- tional forest and wood products industry. Basically, the question was about making the existing type of forest and wood products industry more efficient by formulating strategies for how to modernise old technology and how to make production processes more efficient. This is the lens that underpins the present traditional logging, wood chip and timber sector in Australia. The mass lens represents a lowest level of value adding and is somewhat vulnerable in a high operating-cost environment. The second was an energy lens. This lens fo- cused on the potentials of industry renewal through energy biorefinery. It focused on how the forest production side streams, like branches, bark or excess chips, can be turned into energy. This lens also underpins the existing and emerging industries that focus on heat and energy generation, as well as ethanol and biodiesel production (normally via a first generation bio-refinery). In the lens, there are pockets of high value opportunities such as biodiesel, bioethanol and aviation fuel. The third was a molecular lens, emphasis- ing radical industry renewal through diversified second and third generation biorefineries. This is the lens that shows emerging opportunities based around second and third-generation bio-refineries that have the potential to replace existing chemi- cal production based industries. The lens could include specialty chemicals that are recyclable such as bioplastics for soft drinks bottles. The fourth was an atomic lens, with a focus on radical industry renewal through new biomass and fibre-based production. This lens is high value- added and requires exceptional technological understanding and R&D. The lens enables the production of a wide range of new or modified materials such as biodegradable lightweight cel- lulose nanocrystals (CNCs) with a tensile strength exceeding that of steel or cellulose foams as insula- tors for the construction industry, and transparent paper replacing petroleum-based materials, like plastics. Mass Lens: More Efficient Traditional Forest and Wood Products Industry • Vision Statement for the Mass Lens: A modern and globally competitive mechani- cal forest and wood products industry that provides high value added products for dif- ferent industries and customers such as the furniture and construction industries. The key present drivers for the increased use of wood are resource scarcity, sustainability and emission policies (Figure 8). In the medium term new policy incentives could emerge at the federal and state level to favour wood as a raw material in different industrial settings. Also, the need for an affordable, safe and comfortable societal environ- ment is rising. In the long term a new driver will be energy efficient buildings. Presently, large scale markets exist for wood- based construction and high-rise housing in the US and Europe, coupled with an increasing need to attain low cost timber of premium quality. In the medium term, the uses of the wood in the construction industry will develop and vary. For example, wood could be used in building bridges. There is also a rising need for construction mate- rials that enable industrial production of prefab- ricated components. In the long term, advanced zero energy and easy-to-modify buildings with specific parameters will emerge. There will be specific needs to control acoustics in wooden constructions. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 189 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Fi gu re 8 . R oa dm ap 1 – M as s le ns : M or e ef fic ie nt tr ad iti on al fo re st in du st ry . EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 190 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation It would be important to start a state-wide PR (public relations) process for marketing wood as widely applicable and sustainable resource. For Green Triangle, the critical issue is to formulate a joint regional strategy among the key players in the region. The key players from the regional perspective are the saw mill owners as well as technology providers. In the medium term, it is important to continue the state-wide PR process. Also, the Green Triangle joint strategy develop- ment should be continued and intensified. In the long term, it can be envisioned that Green Triangle will have a new industry cluster specialising in value added fibre-based production. To realise the new value-added fibre-based production, the key present objective is to develop value added products from raw materials and side streams. The following processes, applied in Scandinavian sawmills, could be transferred to Green Triangle: specialisation also in small logs, applying modern equipment to e.g. produce oriented strand board or veneer based engineered wood products, X-ray scanning and geometric scanning, using improved sorting, using thinner blades, practising outsourcing, and developing new grades. In the medium term, the creation of value added products from raw materials and side streams is emphasised. Innovative construction technologies and solutions for public premises and housing are rising in importance. There is also an increasing emphasis for the diversifica- tion of wood production. In the long term, new products such as materials to control microclimate in buildings and wood-based easy-to-use technolo- gies for modifying structures on site will emerge. In the construction sector, new foam-fibres will be used as insulation, and these will be related to the development of wood components. Also, 3D-manufacturing of building components will gain prominence together with new fibre board technologies. The present state-of-the-art enabling technolo- gies apply modular thinking that could be key per- spectives, along with enhanced process efficiency, when forming a joint regional strategy in Green Triangle. A key state-of-the-art enabling technol- ogy is the vision recognition of timber, which should be integrated with new planning systems and integrated information system models. Other state-of-the-art enablers in this category are X-ray scanning combined with artificial intelligence. In the medium term, new enabling technologies that aim for the production of cross-laminated wood and massive glued beams will grow, while the utilisation of ICTs (information and communica- tion technologies) will intensify. In the long term, the new enablers will be novel wood composite materials and emerging bio-based protective treat- ments for wood products. Energy Lens: Industry Renewal through Energy Biorefinery • Vision Statement for the Energy Lens: Energy lens focuses on a modern biore- finery facility that produces energy and other value adding products. The biorefin- ery utilizes Green Triangle’s biomass, and complements the globally competitive me- chanical forest and wood products industry that provides high value added products for different industries and customers, e.g. fur- niture industry and construction industry. The key present driver is a resource scarcity that widely affects societies and industries (Figure 9). It will push the industrial system towards the efficient use of raw materials; to use raw materials sustain- ably throughout the entirety of the lifecycle. The active CO2 market is the secondary driver. Climate agreements and the related policy incentives to lessen the dependence on fossil fuels act as critical drivers in the energy lens. In the medium term, the drivers such as resource scarcity, CO2 market, climate agreements together with related policy incentives, and development of fuel standards will collectively increase in impact. In addition, new drivers such as competition for biofuels will EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 191 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Fi gu re 9 . R oa dm ap 2 – E ne rg y le ns : I nd us tr y re ne w al th ro ug h en er gy b io re fin er y. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 192 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation play a more important role. In the long term, the competitiveness of biofuel will become a key driver, as biofuel production reaches maturity. Markets and consumer needs are currently regulated by the need for electricity. Today, it is important to fulfil biofuel requirements in a safe way i.e. biofuels should be compatible to or complementary with existing fuels. In the medium term, new affordable biobased fuels in some form will be available in the market. Second generation biofuels are emerging rapidly. As these enter the market, there will be increasing competition be- tween land for food and land for fuel production. In the long term, the question of biofuel pricing and pricing mechanism will rise in importance, coinciding with enhanced competition among the players. International agreements currently set the standards in the field. The key players in the present and medium term are grid owners and utility companies. The forest and wood products industry, with logistics of biomass, will become an increasingly important player and sawmills will also play a key role. Already, the mining industry is a key user of biofuels in their fleets. In the medium term, the question of fuel blends, and community acceptance of biofuels as a local solution will be crucial. In the long term, and provided the question of blending is resolved, the mining industry will be the major beneficiary of local biofuel capacities. New players will enter the field, such as energy and biofuel companies. The state-of-the-art present solutions include solid biofuels, made from sawmill side-streams towards simple products, like fuel for CHP (com- bined heat and power), pellets, and charcoal. However, production is still at an early stage and the scale is small. In the medium term, the liquid biofuels, mainly pyrolysis oil to boilers, emerge as state-of-the-art solution. In the medium term, gaseous biofuels can also be produced, for ex- ample, by gasifying fuel gas to CHP. The field of gaseous biofuels will develop and solutions to convert syngas to SNG (synthetic natural gas) will emerge. In the long term, solid biofuels will move from torrefied wood to the use of lignin for energy purposes. In order to achieve this, the lignin will be separated from the bioethanol process. The liquid biofuels consist mainly of hydro-treated pyrolysis oil, low cost biomass to ethanol, DME (dimethyl ether), and FT-liquids. More advanced liquid biofuel technologies are emerging, such as biomass fractionation to yield ethanol and other products from the hemicelluloses and lignin components. In the case of gaseous biofuels, the main process will be converting syngas to SNG (synthetic natural gas). In the long term, the biofuel production will be integrated with petrochemical production. Current enabling technologies include methods for harvesting the biomass on site, with drying technologies for pyrolysis and gasification being particularly important. The enabling technologies focus on first generation bioethanol and biodiesel, and on the second generation biodiesel through thermochemical or biochemical routes. In the medium term, new enabling technologies will emerge. Initially, enzymatic processes will de- velop further, and progressively novel separation/ fractionation technologies will emerge, together with technologies that enable methanol to be con- verted to gasoline. In the long term, the advanced enzymatic processes will emerge. Other interesting technological opportunities include the possibility of making ethanol by total hydrolysis and combin- ing it with the fermentations from sawmill waste. Several new catalytic and biotechnical processes may also be industrially implementable. Molecular Lens: Radical Industry Renewal through New Biorefineries • Vision Statement for the Molecular Lens: A diversified second and third gen- eration biorefinery facility that utilizes state-of-the-art technological solutions. The facility provides a diverse set of green chemicals, and different side-streams. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 193 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation The key present drivers are biomass/biofuels regulations and directives (Figure 10). The second driver is the benefit of using renewable resources that minimize the dependency on fossil fuels. The third driver is the emergence of new business op- portunities that are based on nature’s chemistry. In the medium term there will be regional and national bioeconomy strategies. New business models via partnering and joint ventures will increasingly act as drivers. Replacement of oil based plastic materials with renewable ones will be a crucial driver, as will be the developing performance chemicals. In the long term, the bioeconomy will be increasingly regulated and standardised. The availability of cheaper energy has the potential to be a significant driver. The markets and consumer needs currently emphasise the business models of partnering and joint ventures. The biodegradable plastic market is focusing on packaging. In the medium term there will be more products that are based on current biochemicals, bioplastics and high performance products. There will also be service businesses related to these. In the long term, the demographic changes in South-East Asia will increase demand of materials. Presently, large enterprises and SMEs are particularly active in the field. Brand owners currently use “green” for differentiation purposes. There are also new players in the field, like food and agricultural companies, seeking added value for their side streams. There is the requirement in the longer term for better coordination between government, academia and industry at the R&D, pre-commercial (pilot-scale providers) and com- mercial level. In the medium term, there will be increasing joint ventures between the forest and wood products, biofuels and chemical industries. SMEs will have an important role to play in specialty technologies and niche products. Large chemical companies will enter the market with biopolymer and material solutions. In the long term, the impact of technical development will be significant and will require the involvement of both industry and academia. Coordinating these alliances will become increasingly important to achieve positive outcomes. The key state-of-the-art solutions are bio-based platform chemicals and polymers. Another solu- tion is bioethanol from wood hydrolysis that could potentially be used in lignin fractionation. New products and derivatives, such as those from or- ganosolv pulping and fractionation processes, are entering markets. In the medium term, new isola- tion and conversion technologies will be applied. Simultaneously, bio-based drop-in replacements, like green-PE and bio-PET will offer new market opportunities. All fractions should be utilised, for example thermo-mouldable lignin, cellulose fibres, and fibres suitable for food productions. In the long term, the range of biobased products will increase. New fully bio-based chemicals, materi- als and other products will emerge. Combinations of fibre materials and new biopolymers will find emerging markets, particularly in packaging ap- plications. Organosolv pulping and fractionation processes will be commercialised and various by-products isolated, for example sulphur-free lignin for polymers. In the long term, the advanced processes, like catalytic pyrolysis, will emerge. The present enabling technologies emphasise chemical and enzymatic technologies with strong process control. These technology platforms are currently advancing at a significant pace, as are existing biorefineries with improved fraction- ation and separation technologies. In addition, raw material handling, sorting and compacting has improved significantly and is being realised through fully optimised logistics. In the medium term, the enabling technologies will focus on complementary biofuel production through side streams. New and emerging enzyme technologies to transfer cellulose to starch will emerge. A new generation of thermal processes will be developed on a major scale. There will also be novel cascade concepts and zero-waste biorefining technolo- gies. In the long term, new enzyme technologies for transforming cellulose to starch will emerge. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 194 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Fi gu re 1 0. R oa dm ap 3 – M ol ec ul ar le ns : R ad ic al in du st ry r en ew al th ro ug h di ve rs ifi ed s ec on d an d th ir d ge ne ra tio n bi or ef in er ie s. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 195 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation A new generation of thermal processes will be developed on a major scale. In the long term, a more radical vision could be to remove biomass and utilise CO2 from the air. Combinations of syn- thetic biotechnology with chemical engineering and polymer science will have a market impact. Atomic Lens: Radical Industry Renewal through New Biomass- Based Production • Vision Statement for Atomic Lens: A novel form of biomass and fibre-based in- dustry producing high value added nano- materials, packaging solutions, bioplastics, and chemicals. The industry uses a mix of first, second and third generation biorefin- ery technologies. The key drivers of the atomic lens can be linked to generic drivers affecting the global economy, like climate change and energy policy, the rising demand for renewables and the transition towards a bio-economy (Figure 11). In the medium term, there will be new potential drivers, such as the emergence of regional and national bioeconomy strategies, and the potential for bio-premiums. New business models, partnering and joint ventures will increasingly act as drivers. In the long term, the development towards performance chemicals could be a significant driver for the industry in the medium term, as well as the need to replace starch-based products with cellulose equivalents. There is a strong potential for cellulose and fibre-based products and highly increasing inter- est in developing numerous novel cellulose-based technical and life-science related products. There are established and increasing markets for wood plastic composites (ca. 3 Mt 2012), and novel applications are constantly being explored. In the medium and long term, it is expected that global demand for textile fibres will increase by 80% by 2030, while stagnation in cotton production may increase the potential for cellulosic textiles by 15 Mt. The key present actors include the forest and wood products industry and chemical industry. Also, various actors in other industrial sectors, such as textiles, cosmetics, food, electronics, and construction are part of the value chain. However, there is still intensive research and development needed before the new value chains are in full operation. For this purpose, research co-operation is paramount. In the medium term, there will be evolving new value chains, with various op- portunities for new companies, including SMEs. These novel value chains will cover the complete spectrum from raw material (biomass) production to end-use development, testing and marketing, and require active collaboration between research providers and industries. In the long term, a key development could be the emergence of global virtual research centres with expertise in cellulose- based products. Currently, nanocellulose production has com- menced, but is still in its infancy. Another solution is in wood plastic composites (WPC) that can be used in multiple ways, including as extrusion for building industry, for injection moulding in the car industry, and in furniture and auxiliaries. Currently, there are different packaging solutions based on wood and cellulose fibres, and for coating and barrier materials. Different wood treatments, such as chemical and thermal treatments are cur- rently available. In the medium term, there will be an increased demand for cellulose particularly in the textile industry, but also for other applica- tions. This demand will generate new cellulose processes that will result in new cellulose-based products for use in agriculture, soil conditioning, water purification, tissue engineering, and insula- tion applications. In the medium term, numerous solutions for nanocellulose will emerge. Wood plastic composites (WPC) will continue to grow in importance. Different packaging solutions based on wood and cellulose fibres for coating and barrier materials will be high on the agenda. Functional packaging will advance and result in multiple product categories. In the long term, new products will emerge at the convergence EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 196 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Fi gu re 1 1. R oa dm ap 4 – A to m ic le ns : R ad ic al in du st ry r en ew al th ro ug h ne w b io m as s an d fib re -b as ed p ro du ct io n. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 197 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation of nanocellulose with printed intelligence, and nanocellulose with photovoltaics. There is a pos- sibility of developing optical photovoltaics, and combining nanocellulose and pharmaceuticals. Additionally, different water related solutions will become more common. Presently, the key enabling technologies focus on advanced, but existing, pulping and other processes that are suitable for different raw materials. Further enabling technologies include applications of material sciences, chemistry and biotechnology. In the medium to long term, the key enabling technologies will be novel pulping and fractionation processes, for example hot water systems and use of ionic liquids. These will en- able optimal separation and uses of all biomass constituents. A further enabling technology is for new polymer and fibre blends, and for composites. FUTURE PATHWAYS FOR THE GREEN TRIANGLE IN SHORT AND MEDIUM TERM Key Pathways in 3 to 5 Year Time Horizon This section presents the short and medium term next steps as outlined in the roadmapping process. We created three pathways with a 3 to 5 year time horizon that collectively capture the opportunities for expanding the local forest and wood products industry. The opportunities were selected from among the very wide array of possible products and processes by applying the following selec- tion criteria: • Be practically implementable within a 3 to 5 year timeframe. • Add value to wood resources available within the region where such resources are not currently being used by domestic manufacturers. • Be of sufficient scale to make a difference at a regional level. • Raise the competence levels of regional forest and wood products industry. • Create opportunities for long term invest- ments and new jobs in the region. • Renew the industry and raise its competitiveness. Figure 12 presents central pathways and recommended next steps. It must be mentioned that the next steps are not in any particular order of preference, but are presented as options to be compared and explored further. The following three pathways with a 3 to 5 year horizon were identified: Pathway 1: New wood products from under- utilised Green Triangle log supplies. Pathway 2: Value-adding opportunities for con- struction industry using existing outputs. Pathway 3: Biorefinery – value adding opportuni- ties for underutilised wood fibre and residues. The study also defined four pathways that have a temporal horizon beyond 5 years: Pathway 4: Absorbents and membranes for local opportunities. Pathway 5: Cellulose fibres in textiles. Pathway 6: Bio-based chemicals and polymers. Pathway 7: Opportunities in nanocellulose. A workshop for embedding the recommenda- tion in the Green Triangle regional setting was organised in December 2013. The workshop in- cluded ca. 40 participants representing the major local companies and regional policy makers in the region. As a preliminary task for the workshop, the participants prioritised the key next steps that would have, in their perspective, specific role for the Green Triangle region. The prioritised next steps were the following: 1) X-ray scanning, 2) Cross-laminated timber, and 3) Power and heat by gasification. We use these steps as examples. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 198 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Pathway 1: New wood products from under- utilised Green Triangle log supplies, Im- proved sorting and better yields by X-ray scanning. X-ray scanning of logs to be processed is not a new technology and has been used for at least 10 years in several sawmills in Scandinavia. The simple advantage is that by being able to “see” inside a pine log, better and more efficient saw- ing is possible, e.g. splitting the round wood to sawn timber pieces of highest possible quantity and quality. The logs with inner defects can be sorted to different sawing patterns before sawing and thus the end products are of the best possible quality and volume. Investment of X-ray scanners is quite modest, A$ 2–4 million, but may also require investment in additional ICT and some- times extra log sorting and mill layout. Payback time is very short, usually within 1–2 years. The best result can be reached through stem terminal, but this needs higher investment costs and can be utilized beneficially only in large sawmills. The next step would be to contact X-ray technology suppliers and establish what yield improvement is achievable through real time measurement on local radiata pine logs at one of the larger mill sites with good log sorting facilities. Labour safety regulations concerning the installation and use of scanners should also be checked. The value yield increase can be best verified through use of equip- ment in local mills. Ultimately the stem terminal solution can be adjusted and verified during this process, but this needs more research work for logistics etc. Only then can the value of the yield increase be estimated, not only for the sawmill, but for the total forest biomass. Pathway 2: Opportunities in construction indus- try using existing outputs, Cross-laminated timber (CLT) and high storey houses. Cross-laminated timber (CLT) is an innovative- engineered wood product that is not currently produced in the Green Triangle. Imports of CLT are growing and the national and international market is predicted to grow. CLT is presently rapidly growing in Europe, but has still only a very low share of the construction material mar- ket. It can be expected that the same trend will be replicated in Australia and hence a good business case can be made for increasing the production Figure 12. Three main pathways in a nutshell: The time span is 3–5 years (shaded boxes depict the steps described in this chapter). EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 199 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation of CLT. There is enough material for a new CLT plant that should be co-located with one of the existing sawmills. The investment for a 60,000 m3 capacity plant is approximately A$ 30 million with a payback of 3 to 5 years. The next step would be to consider in detail the recent experiences in Europe and initiate contact with CLT equipment and adhesive suppliers. It would be necessary to work with FWPA (Forest and Wood Products As- sociation Australia), South Australia Government and other groups to modify relevant building codes to permit use of CLT in a range of applications including in the construction of high-rise CLT buildings. Training programs to build compe- tence in wooden building skills and encourage use of CLT in public construction projects would need to be initiated. The value chain of building code authorities, sawmill, CLT site, construction companies and eco-marketing companies needs to be developed. As a consequence tall wood buildings will be part of the next generation of high-performance sustainable buildings. This is a trend that South Australia should not miss, but could if locally produced CLT is not available. Beyond the potential profitability of construction with CLT, South Australia will produce a safe, carbon-neutral and sustainable alternative to the conventional structural materials of the increas- ingly urban world. Pathway 3: Biorefinery - opportunities for un- derutilised wood fibre and residues, Power, heat and biofuels by gasification. Gasification is a key future energy biorefinery technology that has many different application areas. Gasification of forest residues has been demonstrated at an industrial scale. Large amounts of unused wood and forest biomass in the Green Triangle is a potential raw material base for elec- tricity and, in the future, for conversion of syngas into transportation fuels or chemicals. Revenues of over A$ 100 million are possible for a facil- ity processing 1,000,000 m3/a biomass when FT (Fischer-Tropsch) diesel is produced. The next steps to consider would be to identify the most suitable incentive or capital investment subsidy programmes for supporting first implementations of liquid transportation fuels production and for motivating bio-based electricity production, to de- velop contacts and co-operation with fuel produc- ers and distributors, to establish a well-operating low cost biomass supply chain for supporting the large biomass demand of gasification based bio- fuels production, and to identify by-product heat integration possibilities. A successful progression could see the first gasification based heat and power plants being realised in 3–5 years and a major part of unused forest biomass valorised. Policy Actions in Short and Medium Term In order to catalyse the industrial transition to- wards a higher value production in cellulosic fibre value chain, we suggested three long term policy trajectories. The advanced biomass based industry is unlikely to achieve a successful outcome or be severely hindered without the right policies and incentives in place, as has been the case in North America, Europe and elsewhere. Therefore, the technologies and processes identified and priori- tised in our study should be supported with sets of well-planned policies. This could be challenging in the Australian context where for the biomass industries there exists currently regulatory and legislative uncertainty and even fragmentation between different jurisdictions and government departments. Clearly, where duplication or confu- sion exists, every effort should be made to allevi- ate or eliminate the complexity. Policy Action 1: Promoting and increasing the use of wood in society. Wood and wood fibre should be encouraged as a generic option for industries. There are many ar- guments to endorse the use of wood. For example, EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 200 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation wood is a logistically credible solution as it can be sourced locally and weighs less than steel. Wood is a green, renewable and a sustainable material. Wooden constructions are good containers of carbon dioxide and the construction can also be unequalled in energy efficiency. Promoting wood across society should be encouraged through different pathways, with the prime consideration to affect building legisla- tion and building codes that will enable the use of wood in construction options such as house construction, public buildings, bridges, high-raise apartment buildings and the like. This can be enhanced through networking and collaboration within and between industries (forest, wine and mining), policy makers, research units (CSIRO, universities and appropriate international organi- sations) and non-government bodies. Any program should aim to build on the mo- mentum created by the Wood: Naturally Better™ campaign initiated by Forest & Wood Products Australia (FWPA; http://www.fwpa.com.au/). Launched in 2008, this industry initiative, together with associated programs, has actively promoted, with considerable success, the many benefits of wood to working professionals as well as the general community. The collaboration can take place in workshops aimed at training and raising awareness, cross- industry workshops, creative projects between like-minded industries that are biomass based (such as the forest and wine industries) that share best practice philosophies and by developing sup- plier development measures. Another approach would be to create networks between producers, consumers and other potential partners, including forest owners, harvesters and hauliers, integrated sawmill operators, biorefinery owners, ship own- ers and the mining industry. There are good examples of such collaboration in Finland, with the SHOK system; national strategic centres of excellence and especially the Bioeconomy SHOK being the prime example. Additionally, different public-private partnership structures, such as European initiatives SPIRE (Sustainable Process Industry through Resource and Energy Efficiency; http://www.spire2030.eu/) or BRIDGE (Biobased and Renewable Industries for Development and Growth in Europe; http://bridge2020.eu/), can be used as potential benchmarks. The longer term target for Green Triangle should be the creation of cross-industrial col- laboration groups as, for example, between the forest, wine, agricultural and mining industries, and possibly other value-chain sectors centred on cellulose-based products and utilising virtual concepts. The Finnish Centre of Nanocellulosic Technologies is based on such a system and is a good example to evaluate. Policy Action 2: Building education strategies for cellulose based industries. The key for the entire Limestone Coast is to build capabilities and skills commensurate with the needs of both the existing and proposed new industries. The education system should pay at- tention to the training of architects and construc- tion engineers able to plan and build facilities from wood. It should also be capable of training engineers with a specific focus on biomass-based industries via new education programmes in the universities, exchange schemes for workers in forest and products industry, and transformation programmes for engineers currently employed in related fields and wishing to be re-trained. Realising these demanding targets will require communication and interaction between universi- ties, industry across the full value-chain, indus- try associations and policy-makers. Successful relationships can be found in Europe, notably in Finland, Sweden and Austria. The starting point from the perspective of Green Triangle is that whatever the focus of the education and training programmes, they should be modular and allow distance education. To organise the training, one should consider set- ting up a national training network in cellulosic EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 201 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation industries - composed of companies, universities and government actors - that would aim towards modular programmes through systematic identi- fication of educational gaps. Buy-in from the union movement, and particu- larly those intimately associated with the forest- product and allied value chains, is a necessary pre- requisite for success. Unions in Australia (South Australia included) are strong advocates of skill improvement for its members and any programs they have should be modified to reflect the new opportunities identified in this report. State government has a role to play as an initia- tor of training programmes in co-operation with universities, research organisations and compa- nies. The programmes could be distributed through industry organisations to ensure a more business focus. In order to realise the education target, there should be strong links with like-minded interna- tional research bodies and appropriate visiting programs for industrial practitioners and academ- ics at all levels. The European Union provides a good example of where different programmes, such as COST actions, stimulate the exchange of ideas and co-operation across Europe. Many research projects funded by the European Union require collaboration across the jurisdictions as a necessary pre-requisite. Another good example is the Finnish Distinguished Professor Program (FiDiPro) that enables distinguished researchers, both overseas and local, to team up with the best and so make a difference. At the very least, the education strategy needs to reverse the disastrous trend of the last few years that has seen a significant reduction in the forestry and forest product scientific research capacity in Australia across all the major players; private companies, universities, CSIRO and state govern- ments. The impact of this change has been well documented in a position paper recently prepared by the Australian Forest Products Association (AFPA; http://www.ausfpa.com.au/site/). Their proposal for government to commit $50 million over 4 years to create a National Institute for Forest Products Innovation (NIFPI) and to better organise/enhance current capacity is worthy of serious consideration and debate, as would other suggestions that have been advocated from time to time i.e. the recommendation from the Pulp & Paper Industry Strategy Group to fund a Biorefin- ery Research Institute or the advocacy by others for a Biorefinery CRC. Policy Action 3: Creating targeted government policies and policy instruments. When considering targeted public policy measures to influence industrial development, all policy measures should be carefully selected to fit with the maturity of technology, product life cycle, identified entry barriers for new products in the marketplace, and capacity of local firms to take advantage of new opportunities. Optimally, the policy measures should aim at influencing both supply for and demand of new products based on novel technologies. In the following, policy measures are outlined for each roadmap lenses (mass, energy, molecular, atomic). The policy actions discussed here are based on the presumption that sawmill process improve- ments and technology upgrading, presented in the previous sections, are already being implemented in some form. Available policy should aim to build industrial capacity by subsidizing training pro- grammes, initiating awareness raising campaigns together with relevant industrial associations, and promoting international benchmarking of best available technologies. Financial policy instru- ments can be used to facilitate large investments associated with any technology upgrade. The gov- ernment can also support research and education institutions to build technical competencies and develop relevant technical services to industrial firms (see Roos, 2012a, 2012b). Creating incentives for the local industry to diversify to value-added products for the construc- tion sector along the second lens (energy) can be supported by various policy measures lowering EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 202 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation entry barriers of new products to the marketplace thus promoting their demand. The main objective of the policy should be to reduce risks associated with adopting new wood material components in construction industry where buildings have a very long life cycle. Building codes and other regula- tions impacting use of new wood-based products can be revised by implementing performance- based norms in construction. Performance-based norms regulate functional properties of building materials (e.g. durability, fire resistance) but are neutral with regard to technical properties of ma- terials used. This will create room for alternative materials such as wood-based building compo- nents meeting these functional requirements. Government may also facilitate new product entry by ensuring availability of technical testing and verification services and promotion of product standards. Collaboration with bodies granting certificates for green building ratings systems should promote recognition of environmental credentials of wood-based products. Direct de- mand for wood-based construction materials can be stimulated by public procurement when investing in municipal buildings (schools, health care facilities) and infrastructure (bridges). Aware- ness raising campaigns can be used to influence perceptions among professionals and the public at large about benefits and safety of wooden-based constructions. Finally, as large markets for some of the added-value construction products are found overseas (e.g. Japan), export promotion measures should be also considered when the industry is ready to introduce new products. As for the third lens (molecular), the primary target of policy measures encouraging industry to move towards value-added products for bioenergy should be twofold. First, policy should support industry to build technical skills and production capacity in biorefinery technologies. As imple- mentation of biorefinery concepts at industrial scale requires sizable investments the government can share some of the risk in building the technical capability by co-financing demonstration sites and industrial pilots. These pilots can also be used as training facilities for professional capacity build- ing purposes with local educational institutions. Second, policy should facilitate emergence of a market for bioenergy products. The most intensive policy measures include environmental obliga- tions and fiscal measures such as tax incentives. Communication campaigns can also be considered to assure the public that risks associated with adop- tion of new technologies with potential hazards (e.g. explosion risks) are minimized. Finally, as some of the potential biorefinery technologies, most notably pyrolysis, has potential applications also in metal industry, government can provide support to building cross-industry capabilities through knowledge transfer programmes. Policy recommendations concerning the fourth lens (atomic) towards advanced biorefinery are built on the assumption that a second generation biorefinery industry has taken off in the region. The principal target of policy is to support building technical capacity in the industry and supporting institutions to shift into next generation biorefinery concepts along the maturation of technologies. Knowledge base can be strengthened with sup- port to research and development, education, and testing and piloting facilities. Institutional environment can be strengthened by promoting standardisation of biorefinery products based on wood fibre such as biocomposites. The regulatory environment should also be revised not to maintain any unnecessary barriers to advanced sustainable biorefinery products such as biocomposites in comparison with conventional products based on fossil resources. DISCUSSION AND CONCLUSION In the first part of this chapter we outlined a per- spective on how strategic roadmapping could be applied as a policy tool in the meso-level industrial EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 203 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation transformation. We depicted the different roles that strategic roadmapping could play in catalysing industrial and policy changes, and elaborated on how to craft explorative policy strategies on the basis of the roadmapping results. In the second part of the chapter we presented an analysis of cellulosic fibre value chain in the Green Triangle, South Australia, as a case study. Through the case study, we wanted to highlight three points. Firstly, the roadmapping process aimed at meso-level industrial transformation should begin with a stage that contextualises and embeds the analysis in a particular regional and industrial setting. It is of high importance that local specific realities, like key historical lineages and actors, are taken into account in analysis. Secondly, the stage of strategic roadmapping should be explorative and focus on the global state of the art and long term R&D potentials in the industrial horizon. Only when focusing on these long term future potentials can the local opportunities for local industry can be unravelled. In our case study, we realised this explorative stage by preparing strategic roadmaps in four lenses (mass, energy, molecular, atomic) with different emphases and different future vi- sions. Thirdly, the stage of strategic roadmapping should be augmented with a stage that integrates and re-embeds the key results of the strategic roadmaps to the particular regional setting. This is an important stage, because without this stage the results could easily be too “far out” for the regional actors. In our case study, we realised this re-embedding by making two kinds of future pathways: pathways with a 3 to 5 year time horizon and pathways with over 5 year time horizon. The 3 to 5 year pathways were further divided into four short to medium term recommendations, which were created specifically from the perspective of the regional industry in the Green Triangle. In order to assess our methodology we would stress that it is of critical importance that all of the study stages (contextualisation, exploration, inte- gration) should be realised systematically, and with the best possible knowledge and process expertise. In our case study, for example, we devoted a major part of the project to really grasp the specificities of the local industrial setting. For the first stage report (Ahlqvist et al., 2013a) we interviewed 23 local companies through a specific functional framework. We also developed a multi-criteria assessment procedure to rank the relative competi- tive positions of these companies (see also Dufva et al. 2013). When we moved to the explorative stage, and towards preparing the roadmaps, we first realised an extensive background study (see Ahlqvist et al., 2013c) and then organised three expert workshops at VTT Technical Research Centre of Finland to construct the roadmaps. In the integrative stage, we further deepened our knowledge about the raw materials in the Green Triangle region, constructed calculation models to compare different bioenergy routes and to as- sess flows of raw material in the local system, and then crafted the future pathways in 3 to 5 year term and beyond 5 year term. We set particular emphasis on this integrative stage, because the previous stages of the study (contextualisation, exploration) had revealed that the gap between the local realities and the global state of the art was wide, and because it was necessary to point out the critical next steps in order to push the regional industry away from the downward spiral it had faced for the last decade or so. In the stage 1 and stage 2 reports (Ahlqvist et al., 2013a, 2013b), there was discussion on how the regional actors could stimulate their collaboration, and move from the present value network structures towards industrial cluster structures (see also Ahlqvist et al., 2013d). The stage 2 report, in which the future- oriented information of the strategic roadmaps was translated into embedded local knowledge, was actually the most critical and laborious stage EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 204 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation of the process. However, it is not too common in foresight process to focus on how the results of the analyses could be implemented and embedded in a particular study setting. It is also important to notice that there is a large variety of public policy instruments available to influence industry transformation. But each mix of policy tools needs to be carefully selected for each transformation pathway envisioned. Local capabilities, market characteristics, and maturity of targeted products along the life cycle all matter to the composition of effective policy tools. There are no one-size-fits-all policy recipes, and a tendency to rely on conventionally used instruments should be resisted. Expectations should be realistically set by matching policy time-to-impacts with product time-to-market experienced by the industry. In understanding the realistic temporal time scales roadmapping has proved a useful method. We conclude by making three more generic comments on the possibilities of the strategic roadmapping as a meso-level policy tool. Firstly, strategic roadmapping is a flexible method that fits well with the emerging policy orientations that increasingly emphasise use of evidence and future-oriented knowledge. Secondly, strategic roadmapping is highly dependent on two organisa- tional and personal assets: the available expertise and the capacity to run the process in a way that enables a perfect fit between the short term and long term aspects. Strategic roadmapping is an expert-oriented tool that requires the right kinds of experts to join the process in order to produce meaningful, and creative, results. Thus, every organisation does not possess alike capacities for entering into a strategic roadmapping process in all topic areas. Thirdly, the strategic roadmap- ping process, especially when complemented with purposeful contextualisation and integration stages, provides highly useful new knowledge to be utilised in policy-making. By using the right process mixture, it creates a possibility to move from a reactive industrial policy towards forward- looking and resilient policy design. ACKNOWLEDGMENT The authors would like to acknowledge the De- partment for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) for support in putting the case study together and Prof Göran Roos, Chair of the Advanced Manufacturing Coun- cil for constructive comments and contributions. REFERENCES Adner, R., & Kapoor, R. (2010). Value creation in innovation ecosystems: How the structure of technological interdependence affects firm perfor- mance in new technology generations. Strategic Management Journal, 31, 306–333. doi:10.1002/ smj.821 Ahlqvist, T., Dufva, M., Kettle, J., Vanderhoek, N., Hytönen, E., Niemelä, K., et al. (2013d). Strategic roadmapping, industry renewal, and cluster creation: The case of cellulosic fibre value chain in the Green Triangle, South Austra- lia. Paper presented at the 6th ISPIM Innovation Symposium – Innovation in the Asian Century. Melbourne, Australia. Ahlqvist, T., Halonen, M., Eerola, A., Kivisaari, S., Kohl, J., & Koivisto, R. et al. (2012a). Sys- temic transformation, anticipatory culture, and knowledge spaces: Constructing organisational capacities in roadmapping projects at VTT techni- cal research centre of Finland. Technology Analysis and Strategic Management, 24, 821–841. doi:10. 1080/09537325.2012.715490 EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 205 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Ahlqvist, T., Kettle, J., Hytönen, E., Niemelä, K., Kivimaa, A., Vanderhoek, N., et al. (2013b). South Australian cellulosic value chain technology roadmap: Stage 2: Future options for the cellulosic fibre value chain in the Green Triangle, South Aus- tralia: Strategic technology roadmaps, business cases and policy recommendations: Report and executive summary (VTT Customer Report, VTT- CR-04761-13). Retrieved from http://www.dmitre. sa.gov.au/manufacturing_works/programs_and_ initiatives/cellulose_fibre_chain_initiative Ahlqvist, T., Kettle, J., Hytönen, E., Niemelä, K., Kivimaa, A., Vanderhoek, N., et al. (2013c). South Australian cellulosic value chain technology roadmap: Stage 2: Future options for the cellulosic fibre value chain in the Green Triangle, South Aus- tralia: Strategic technology roadmaps, business cases and policy recommendations: Appendices (VTT Customer Report, VTT-CR-04761-13). Retrieved from http://www.dmitre.sa.gov.au/ manufacturing_works/programs_and_initiatives/ cellulose_fibre_chain_initiative Ahlqvist, T., Valovirta, V., & Loikkanen, T. (2012b). Innovation policy roadmapping as a systemic instrument for forward-looking policy design. Science & Public Policy, 39, 178–190. doi:10.1093/scipol/scs016 Ahlqvist, T., Vanderhoek, N., Dufva, M., Kettle, J., Valovirta, V., Kivimaa, A., & Loikkanen, T. (2013a). South Australian cellulosic value chain technology roadmap: Stage 1: Assessment of the present state and future potential of forest industry in Mt Gambier region, South Australia (VTT Customer Report, VTT-CR-02233-13). Retrieved from http://www.dmitre.sa.gov.au/ manufacturing_works/programs_and_initiatives/ cellulose_fibre_chain_initiative Arthur, W. (1989). Competing technologies, increasing returns, and lock-in by historical events. The Economic Journal, 99, 116–131. doi:10.2307/2234208 Australian Forest Products Association (AFPA). (2013). Retrieved from http://www.ausfpa.com. au/site/ Blackwell, A. F., Phaal, R., Eppler, M., & Crilly, N. (2008). Strategy roadmaps: New forms, new practices. In G. Stapleton, G., J. Howse & J. Lee (Eds.), Diagrams 2008 (pp. 127–140). Berlin: Springer-Verlag. BRIDGE Biobased and Renewable Industries for Development and Growth in Europe. (2013). Retrieved from http://bridge2020.eu/ Cook, P., Beck, V., Brereton, D., Clark, R., Fisher, B., Kentish, S., et al. (2013). Engineering energy: Unconventional gas production. Report for the Australian Council of Learned Academies. Retrieved from http://www.acolasecretariat. org.au/ACOLA/PDF/SAF06FINAL/Final%20 Report%20Engineering%20Energy%20June%20 2013 Cunningham, D. (2011). Australia’s role in Asia- Pacific forestry. In Proceedings of ABARES Out- look Conference. Canberra, Australia: ABARES. Da Costa, O., Warnke, P., Cagnin, C., & Scapolo, F. (2008). The impact of foresight on policy-making: Insights from the FORLEARN mutual learning process. Technology Analy- sis and Strategic Management, 20, 369–387. doi:10.1080/09537320802000146 David, P. (1985). Clio and the economics of QWERTY. The American Economic Review, 75, 332–337. EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 206 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Dufva, M., Ahlqvist, T., Kettle, J., Vanderhoek, N., & Valovirta, V. Loikkanen, T., & Roos, G. (2013). Future pathways for radical transformation of an industry sector: The case of South Australian cellulosic fibre value chain. In Proceedings of the 6th ISPIM Innovation Symposium – Innovation in the Asian Century. Melbourne, Australia: ISPIM. Faber, A., & Frenken, K. (2009). Models in evo- lutionary economics and environmental policy: Towards an evolutionary environmental econom- ics. Technological Forecasting and Social Change, 76, 462–470. doi:10.1016/j.techfore.2008.04.009 Forest & Wood Products Australia. (2013). Re- trieved from http://www.fwpa.com.au/ Georghiou, L., & Cassingena Harper, J. (2011). From priority-setting to articulation of demand: Foresight for research and innovation policy and strategy. Futures, 43, 243–251. doi:10.1016/j. futures.2010.11.003 Georghiou, L., & Keenan, M. (2006). Evaluation of national foresight activities: Assessing rationale, process and impact. Technological Forecasting and Social Change, 73, 761–777. doi:10.1016/j. techfore.2005.08.003 Heger, T., & Rohrbeck, R. (2012). Strategic foresight for collaborative exploration of new business fields. Technological Forecasting and Social Change, 79, 819–831. doi:10.1016/j.tech- fore.2011.11.003 Heracleous, L., & Jacob, C. D. (2008). Crafting strategy: The role of embodied metaphors. Long Range Planning, 41, 309–325. doi:10.1016/j. lrp.2008.02.011 Könnölä, T., Scapolo, F., Desruelle, P., & Mu, P. (2011). Foresight tackling societal challenges: Im- pacts and implications on policy-making. Futures, 43, 252–264. doi:10.1016/j.futures.2010.11.004 Kostoff, R. N., & Schaller, R. R. (2001). Sci- ence and technology roadmaps. IEEE Transac- tions on Engineering Management, 48, 12–43. doi:10.1109/17.922473 MW 2012 = Manufacturing Works. (2012). Manu- facturing works: A strategy for driving high-value manufacturing in South Australia. Department for Manufacturing, Innovation, Trade, Resources and Energy. Petrick, I. J., & Echols, A. E. (2004). Technol- ogy roadmapping in review: A tool for making sustainable new product development decisions. Technological Forecasting and Social Change, 71, 81–100. doi:10.1016/S0040-1625(03)00064-7 Phaal, R., Farrukh, C. J. P., & Probert, D. R. (2004). Technology roadmapping – A planning framework for evolution and revolution. Techno- logical Forecasting and Social Change, 71, 5–26. doi:10.1016/S0040-1625(03)00072-6 Phaal, R., & Muller, G. (2009). An architec- tural framework for road-mapping: Towards visual strategy. Technological Forecasting and Social Change, 76, 39–49. doi:10.1016/j.tech- fore.2008.03.018 Rohrbeck, R. (2012). Exploring value creation from corporate-foresight activities. Futures, 44, 440–452. doi:10.1016/j.futures.2012.03.006 Roos, G. (2012a). Manufacturing into the future. Government of South Australia. Adelaide Thinker in Residence 2010−2011. Retrieved from www. thinkers.sa.gov.au Roos, G. (2012b). Manufacturing into the future: Summary of recommendations. Government of South Australia. Adelaide Thinker in Residence 2010−2011. Retrieved from www.thinkers. sa.gov.au EBSCOhost - printed on 10/25/2020 2:32 AM via STRAYER UNIVERSITY. All use subject to https://www.ebsco.com/terms-of-use 207 Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation Sustainable Process Industry through Resource and Energy Efficiency (SPIRE). (2013). Retrieved from http://www.spire2030.eu/ Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynam- ic capabilities and strategic management. Strategic Management Journal, 18, 509–553. doi:10.1002/ (SICI)1097-0266(199708)18:7<509::AID- SMJ882>3.0.CO;2-Z
Weber, M., Kubeczko, K., Kaufmann, A., &
Grunewald, B. (2009). Trade-offs between policy
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Wieczorek, A., & Hekkert, M. (2012). Systemic
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doi:10.1093/scipol/scr008
ENDNOTES
1 VTT is a leading multi-technological re-
search organisation in Northern Europe,
with world-class R&D competencies in
forest-based industries, including biorefin-
ery, bioenergy, biochemicals, nanocellulose,
sawmilling, and wood-based construction as
well as conventional pulp, paper and packag-
ing.
2 These lenses were suggested by Prof. Roos,
Chair of the Project Steering Committee.
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Section 3
Responses for Enterprises and
Workplaces
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 8
DOI: 10.4018/978-1-4666-5828-8.ch008
Business Innovation:
Beyond Technology
ABSTRACT
This chapter presents the case for a wider understanding of innovation beyond technology and beyond
novel products and processes. It examines the dynamics of Business Model Innovation, which refers
to fundamental changes to the total formula for business success. New approaches to value creation
and appropriation through business model innovation are particularly vital in times of turbulence and
realignment faced by firms in high cost operating environments. Business model innovation can create
new and sustainable sources of competitive advantage for firms, securing their survival and growth. The
chapter discusses the evidence for the role of business model innovation in the growth of leading firms
and in the restructuring of markets. It provides an overview of the frameworks for characterising and
analysing business models. The options for different types of business models likely to be successful in
high cost environments are described.
INTRODUCTION
There are periods in history when necessity and
opportunity drive a rapid exploration of new
approaches to value creation and appropriation.
Firms in high-cost environments are particularly
vulnerable to these rapid realignments. But when
they do pursue the new opportunities and design
new approaches they find that they often have
strong competitive advantages.
The transformation of markets and industry
that is underway overturns the assumptions that
have underpinned many well established business
models. Many analysts have sought to describe
and raise awareness about these shifts. Marsh, for
example, considers the fifth and current stage of
industrial development is one characterised by
‘mass personalisation’ – the ability to produce
near unique products to precise personal criteria
in mass1.
At the same time there is a wealth of oppor-
tunity: the growth of the middle class in China,
India and Indonesia opens major new markets;
there are more channels to these and other markets;
Don Scott-Kemmis
University of Technology, Sydney, Australia
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there is a rich array of new technologies with the
potential for diverse applications; and there is an
increasing range of capable firms with comple-
mentary capabilities.
In this context, driving greater cost reduction
and product or service innovation in the current
business model is unlikely to be a strategy for
growth or survival. Experience shows that a com-
mitment to an old business model is the cause for
declining returns to investment and R&D in firms
and the failure of others.
In Section 2 of this chapter we discuss the evi-
dence for the role of business model innovation in
the growth of leading firms and the re-structuring
of markets. Many firms that have used innovative
business models to enter mature markets have been
extraordinarily successful. In the US, for example,
both discount retailers and low cost airlines have
captured the majority of the market, while Delta,
Northwest, United, Continental, ATA, and USAir,
among others, declared bankruptcy. This section
also discusses the drivers of change that diminish
the power of old business models, noting that these
drivers are not transient but becoming stronger.
Section 3 provides a brief overview of frame-
works for characterising and analysing business
models. Many forms of innovation are vital for
sustaining competitiveness in high cost environ-
ments: technological innovation in products
and processes; service innovations based on IT
applications; and organisational and managerial
innovations based on lean production, continuous
improvement and high performance workplaces.
But these are most effective when integrated as
components of a more systemic re-framing at
the level of the business model. Section 4 is the
core of this chapter and outlines three archetypal
families of business models for firms in high cost
environments: the ‘bookend’/ outsourcing model;
the product-service solutions model and the high
value niche strategy.
Section 5 draws on firms’ experience of busi-
ness model innovation to provide a roadmap for
designing, testing, implementing and upgrading
a new business model. It emphasises gaining in-
sight into market dynamics and often unexpressed
customer preferences. The need for experiment
and rapid learning while evolving a new business
model has vital implications2 for management
capability and organisational culture. Analysing,
planning, experimenting and learning must find a
level of inevitably uncomfortable synergy. While
the chapter recognises the challenges of business
model innovation for established firms, this section
also emphasises the advantages that most firms
in high-cost environments have in accessing high
quality human resources and research organisa-
tions, and in collaborating with leading edge users
and capable suppliers. Of course public policy
has a vital role in ensuring that high-cost is also
high-opportunity – and also in assisting firms to
identify and pursue those opportunities.
THE CHANGING CONTEXT:
DRIVING THE NEED FOR
NEW BUSINESS MODELS3
The rapid growth of mass production in the mid-
1900s centred on the growth of large factories,
reaping economies of scale and clustered with
their suppliers in a few regions and supplying
domestic and export markets. The follower East
Asian countries such as Japan and Korea sought to
replicate this model, using protected home markets
to build the full assembly of suppliers, eventually
reaching the global frontier of efficiency, quality
and innovation. However, the diffusion of ICT,
more open markets and lower transport costs has
led to unbundling these sectors, lowering the barri-
ers to entry into these now mature industries. The
evolution of global supply chains is summarised
in Figure 1. To participate in the global supply
chain, a firm does not need to master an entire
production process, but to excel in a specific phase.
In this context a primary driver of business
model innovation is the pervasive diffusion of
information and communication technologies
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Business Innovation

(ICT), and the impacts of this diffusion on prod-
uct and process technologies, the organisation
of production and the dynamics of markets. Not
surprisingly, a 2005 Economist Intelligence Unit
(EIU) survey concluded:
To succeed, characteristics of flexibility, open-
ness, collaboration and speed will be increasingly
critical. Many of these attributes will depend on
information technology (IT), which is regarded
by more than 80% of respondents as critical to
their ability to change their business models over
the next five years. It is also coming to be seen as
more of a competitive tool than simply a driver
of cost efficiency.4
As shown in Figure 2 the impact of these un-
derlying drivers cascades through three proximate
drivers: changing patterns of demand; changes in
the organisation of production; and innovation.
The overall context drives the search for spe-
cialisation. But sustained competitiveness depends
increasingly both on the resources a company
controls and on the insight and capability in finding
and mobilizing the resources of others in order to
add more value for customers. Hence, the drive to
specialisation is at the level of products or services
and also in positioning in complex value chains
and business ecosystems, Figure 3.
An outstanding example of these patterns of
specialisation is the garment industry: retail chains
focus on the customer interface; firms such as
the Chinese firm, Li and Fung focus on supply
chain coordination and they orchestrate produc-
tion networks based on 7,500 business partners
(suppliers of fabrics and materials for apparel,
designs and garment cutting and assembly) in 37
countries. Li and Fung knows the capacities and
capabilities of each supplier and can rapidly and
flexibly configure a network to meet complex
demands from major retailers in the US and else-
where. Each supplier can specialise in a specific
product or service and receive feedback from
the network coordinator (Li and Fung) about the
Figure 1. Evolution of gobal supply chains (Source: Fung Global Institute)
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Figure 2. Drivers of business model Innovation
Figure 3. Specialisation in value chains and business ecosystems
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Business Innovation

patterns of demand and hence focus on capability
building. Capable, innovative and at least semi-
independent partners contribute to the network’s
ongoing strength.
Rising Awareness
Several surveys have now charted the rising
importance of business model innovation: EIU
surveys in 2005, 2006 and 2010; the 2006 IBM
Global CEO Survey; and a 2008 Business Week/
Boston Consulting Group (BCG) Innovation
Survey. This latter study found that business
model innovators achieved a substantially higher
shareholder return compared to product or service
innovators. It found that business model innova-
tors achieved total shareholder return averaging
8.5% over three years, compared with 1.7% for
product/service innovators. The study also found
that this superior relative performance had been
sustained over 10 years.
The growing importance of changes in the busi-
ness model was evident in the first three editions
of the Deloitte governance surveys of ASX 200
companies (Board Effectiveness: The Directors
Cut). In the fourth (2013)5 edition business model
issues moved much higher up the agenda of the key
issues raised by Directors and CEOs. The emphasis
on business model innovation arose from the need
for new strategies for growth and productivity,
and the impacts of digitisation. However, Deloitte
concluded that the firms’ approach to business
model change was reactive. They found little
evidence of firms actively seeking opportunities
for disruptive business model innovation.
Firms are often reluctant to reassess, rethink
and change their business model. This arises in
part from a reliance on established ‘industry reci-
pes’ such that the business model was essentially
copied as ‘the way things are done’ rather than
consciously and purposively designed. It is a
reluctance that has proven costly for many firms.6
The trends we have noted above have stimulated
a growing literature on the role of business models
in competitive and innovation strategy (Johnson
et al, 2008, Casadesus-Masanell & Ricart, 2010,
Teece, 2010, Zott & Amit, 2010, and Roos, 2013).
BUSINESS MODEL OPTIONS
While there is broad agreement on the business
model concept there are many complementary
frameworks7. The essence of a firm’s business
model is how and for whom it creates, delivers
and captures what value, with the aim of achieving
sustainable competitiveness. Hence, a business
model is a conceptual tool which integrates a:
…set of elements and their relationships and allows
expressing the business logic of a specific firm. It
is a description of the value a company offers to
one or several segments of customers and of the
architecture of the firm and its network of partners
for creating, marketing, and delivering this value
and relationship capital, to generate profitable
and sustainable revenue streams. (Osterwalder,
Pigneur and Tucci, 2005)
Hence, a firm’s business model defines the
who, what and how of the business architecture:
• Who are our targeted customers – whose
problems do we aim to solve?
• What is the value proposition we offer to
these target customers?
• How and with whom do we generate and
provide the offering, and how do we (and
our stakeholders) capture value from the
business?
Table 1 shows two familiar business models;
contrasting them in terms of these dimensions.
Table 2 goes further, elaborating key components
of each of these dimensions. Figure 4 illustrates
the functional inter-dependence among these
components and suggests the importance of a
closer synergy for competitiveness. An integrated
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and aligned business model, with high level of
distinctiveness in the product or service, and in
the capabilities, processes and relationships that
support the offering, is also more difficult to copy8.
The Australian wine firms Casella Wines and
Jacob’s Creek provide examples of effective busi-
ness models. The former was carefully crafted for
the mainstream US market (the who). A similar
combination of product attributes (the what) had
previously proven effective for wines such as
Jacob’s Creek in the European market. In these
cases decades of investment, research and training
in Australia, and relationships with distributors,
retailers and marketers, provide the foundation of
the ‘how’ enabling both to produce consistently
good quality, low cost bulk wines of wide appeal.
Yellow Tail became the number one imported
wine in the US market in 2003, and Casella Wines
expanded capacity ten-fold9.
Few business models are likely to retain their
virulence for long. Experience shows that firms
will need to retain a capacity to improve a business
model through ongoing innovation, to extend a
business model, often through leveraging some
of the key assets into complementary business
models, and to design new business models10.
Close relationships with suppliers and customers,
and the active engagement of staff, will often be
vital for generating the insights and the capabili-
ties that enable such innovation.
BUSINESS MODELS FOR
HIGH COST ECONOMIES
Firms in high cost economies can seek to remain
competitive by either or both finding ways to
lower costs or to raise the value of their offering
as perceived by the customer11 – Figure 5.
There are often diminishing returns to pursu-
ing either of these paths in an old business model
– which is why surveys consistently find that, in
the new global context, the profitability of firms
prioritising business model innovation exceeds
that of firms focusing on product/service inno-
vation only12. We characterise three archetypal
Table 1. Henry Ford’s Model T – an example of
a disruptive business model
Business
Model
Traditional Auto
Firms
Henry Ford and the
Model T
Who Wealthy clients Middle Class (a growing
market)
What Expensive luxury
cars
Simple, robust cheap
cars
How Handmade with hand
tools, by craftsmen
in low volume
Standardised design and
parts, assembly line with
division of labour
Table 2. Generic components of a business model
(based on Osterwalder and Pigneur (2010))
Dimensions Components
Who Target Customer: The distinctive segment
of customers to which the value proposition is
targeted.
What Value Proposition: The overall bundle of
products and services that generate value for the
customer.
How Customer Interface:
• Distribution Channel: The mechanism for
delivering value to the customer.
• Relationship: The kind of link or interface
established with the customer.
Capabilities & Networks:
• Capabilities: The in-house capabilities
necessary to create value for the customer – ie
to design, produce and deliver the product or
service.
• Partner Network: Linkages with other
firms or organisations that access external
capabilities.
• Value Chain Positioning: The configuration
of value chain activities that provide value
creation or support those activities.
Financial Dimensions:
• Cost Structure: The sources of cost involved
in generating value.
• Revenue Model: The way money is made
through a variety of revenue flows and how
profit is gained.
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Business Innovation

business models for high cost economies, each
providing a different approach to the challenges
(see also Figure 6):
• Bookend: This model focuses on the prod-
uct/service design and the marketing and
customer support activities. One of the
best known examples is that of Apple and
its family of products based on its success-
ful computers, iPod, iPad and iPhone.
• Integrated Solutions: Firms that have of-
ten been producers and suppliers of full
systems such as equipment or computing
migrate downstream to take on a range
of service activities based on the use of
equipment, for example IBM’s transforma-
Figure 4. Business model components
Figure 5. Potential elements of competitive strategy
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tion as a solutions provider. The growth of
this business model reflects the extensive
outsourcing by customers as they special-
ize, focusing on their core competencies.
• Niche: Niche business models are based
on supplying to specific user segments,
but often maintaining extensive participa-
tion in some of the specialized elements
of the supply chain. Globalisation has pro-
vided the opportunity for growth through
focusing on global niches, as many of the
German Mittelstand have done. A hybrid
of the niche and bookend business mod-
els is the low-cost strategy, for example
the Aldi supermarket strategy is highly
focused, and achieves low costs through
detailed control of the supply chain and a
high level of standardisation of the product
and the retail service system. This is an ex-
ample of a market where several business
models co-exist.
These alternatives are quite similar to those
identified in the recent review of development
strategies for the Australian Textiles, Clothing
and Footwear Industry – see Box 1.
CONTROLLING THE VALUE CHAIN
THROUGH THE BOOKEND MODEL
The ‘bookend model’ focuses on the high value
adding design/product development stages and
the final marketing and product support stages.
In the case of Apple, they design: the product
(although with substantial collaboration with
design specialists such as Ideo); the production
system (who will supply what components and
who will manufacture and handle logistics); the
value system (the added value to product platforms
through iTunes, Apps and connectivity); and they
closely coordinate (many would say control) all
activities. Apple also leverages (ie re-uses) their
Figure 6. Archetypal business models (*The level of emphasis on value chain activities is indicated by
shading)
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key assets (design, branding and marketing)
through a range of linked products. In terms of the
positions in Figure 4, Apple’s strength is product
design, where ‘product’ includes all dimensions
of the value proposition, which extends well be-
yond the physical product. This is one key point
of differentiation from Nokia, for whom product
excellence was more hardware-based.
When Apple introduced the iPod/iTunes in
2003 there were other digital music players already
in the market – the product itself was not an in-
novation. But the Apple iTunes/iPod product and
service brought an entirely new value proposition
and overall business model. While this was far
from the lowest cost digital music platform, it
was deeply disruptive for the established firms.
Apple differentiated its offering by providing easy
access to music and video for downloading. Most
of the technical and aesthetic design of the iPod
was done for Apple by others and almost all of
the components came from suppliers and all of
the manufacturing was done off-shore.
Within a short time Apple had 80% of the US
digital music player market. By 2007 the iPod/
iTunes combination delivered income of US$10
billion and accounted for almost 50% of Apple’s
turnover, leading to a transformation of Apple’s
market capitalisation from US$1billion to US$150
billion.
The essence of the new value proposition of
the iPod was a distinctive and aesthetically ap-
pealing platform that provided expanding value
creation through iTunes. Apple designed a prod-
uct, a global supply and marketing chain and a
customer-focused value creating system – from
which Apple captured an ongoing stream of profit.
This business model innovation transformed Apple
and the industry, enabling value creation and the
orchestration of a value network linking producers
of recorded music to PC owners. The iPod/iTunes
value proposition has several key value dimen-
sions: content, mobility, convenience, choice, Web
technology, communication technology, artists.
An analysis of the value chain and value ap-
propriation for Apple products (iPhone in Figure
7 and iPad in Figure 8) is particularly instructive.
In both cases components are sourced from sup-
pliers in many countries, including the US, but
assembly is in China. Two aspects are striking:
although Chinese firms ‘make’ these products
Chinese workers capture a tiny share of the value
created; although they ‘make’ nothing Apple
captures the overwhelming share of the profits.
In addition, by 2012 Apple iPhones had captured
less than 10% of the smart phone market, yet their
premium product captured over 70% of the profit
of all smart phone producers13.
As a result of this business model the majority
of high paying professional jobs (and payments
to workers in Apple and suppliers) are in the
US – Table 3.
Apple’s growth also opens opportunities for
innovative US firms with a competitive position
based on product excellence. For example, Corn-
ing produces the glass for the iPhone, reviving
a factory in Kentucky14. Companies around the
Box 1. Business Model Changes in the Textiles
Clothing and Footwear Industry (Sources: Green,
R. (2008) Building Innovative Capability: Review
of the Australian Textile Clothing and Footwear
Industries, DIISR; OECD (2007); Webber &
Weller (2001))
Repositioning in the value Chain – Specialisation and
Outsourcing.
Residual, difficult to automate activities are outsourced while
the firm focuses on creating value through design, marketing
and orchestration of the value chain. Remaining production
activities are automated to ensure flexibility, quality and lower
labour intensity. By redesigning the production system firms
can increase their capacity to respond to demand, be profitable
with short runs and customize their products.
Shifting down the value Chain.
Secure market access by developing retail and/or direct factory
outlets, perhaps moving to outsource all production and
become an importer.
Shifting to another value chain.
Move out of commodity production and focusing on the
high-value fast moving fashion segment of the market, or
moving into specialized products where technical product
characteristics are the basis for competitiveness. Process and
product innovation, and close relationships with users and
market channels, are essential to sustain competitiveness.
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Figure 7. Distribution of value for iPhone, 2010 (Kraemer et al, 2011)
Figure 8. Distribution of value for iPad (Kraemer et al, 2011)
Table 3. Worldwide iPod-related jobs, 2006 (Source: Kraemer et al (2011))
Production Retail/Non-Professional Engineering/Professional Total
U.S. 30 7,789 6,101 13,920
Non-U.S. 19,160 4,825 3,265 27,250
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Business Innovation

world copying the iPhone have also increased
demand for Corning, leading to sales of over
US$700m in 2011 and over 1000 jobs. Corning
has also increased production of strengthened
glass in its plants in Japan and Taiwan, close to
their customers.
A similar distribution of value occurs in the
case of a men’s sports jacket manufactured in
China. The material and labour costs account
for only 9% of the value-added, whereas design,
transportation, logistics, marketing and retail ac-
count for the overwhelming majority of the final
price and capture the majority of the profit. As in
the case of Apple, controlling design, branding,
supply chain management and retailing is a far
more profitable position than manufacturing. This
is because the manufacturing tasks are relatively
simple, there are many suppliers competing for
apparel manufacture services and there is little to
differentiate them.
An Australian example, Beacon Lighting (Box
2), moved from production and retailing to a de-
sign and distribution model. Over time, and with
continuous improvement, an integrated business
model developed, and Beacon has leveraged its key
assets (in this case its logistics system and product
and market knowledge) through a family of linked
business models. In addition to the chain of retail
outlets, Beacon provides services based on design
and installation of home and commercial lighting.
It has also begun international sales.
INTEGRATED SOLUTIONS:
PRODUCT – SERVICE
COMBINATIONS
In the systems integration or ‘solutions’ model, the
firm supplies and supports whole and often com-
plex technical systems and in some cases provides
the services based on those systems. Due to the
increasing commodification of the industry, IBM
transformed its business into supplying services
– maintenance, problem solving, consulting (and
particularly strategic advice and support to help
firms re-think their business models in the light
of the opportunities arising from IT). A segment
that had been a minor part of the business became,
within a decade, the source of more than half of
IBM’s revenue.
The US firm Best Buy looked beyond its prod-
ucts to focus on customer needs. They realized
Figure 9. Shifting value added (Source: Li & Fung, Fung Global Institute)
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that in purchasing computer-related goods most
customer wanted ongoing support for mainte-
nance, upgrading and problem solving, not simply
a one-off sales. However, the highly competitive
market had led most retailers to lower costs through
a focus on the transaction – ie pushing product.
Best Buy developed a service which provides an
on-going relationship.
Other examples include Rolls Royce (selling
aeroengines but also offering full through life
support – ie ‘power by the hour’) and Althsom
(selling trains but also, like Rolls Royce, providing
full through life support and hence the availability
of serviceable rolling stock).15
There are several examples of ‘integrated
solutions’ business models in the Australian min-
ing industry. In the 1980s and 1990s most of the
major mining companies changed their business
models to focus on mine development and mineral
marketing. As a result they became increasingly
reliant on service providers for exploration, the
design of mines, the management of construction
Box 2. Beacon Lighting – A ‘Bookend Business Model’ with Continuous Innovation (http://www.bea-
conlighting.com.au/pdf/Beacon_CorporateProfile )
Beacon lighting was founded in 1974 and opened its first franchised store in Victoria in 1989. In 1998 the company expanded into
Queensland and NSW, and later to all States.
The traditional industry recipe in the lighting industry involved the local production of long standing designs and of designs based on
copying those of international firms, along with some importing of light fittings from international suppliers. This limited and slow-
changing product range was marketed through specialist lighting shops and through department stores.
Demand for lighting products has grown and changed over the past 20 years as houses expanded, outdoor living increased, lighting
became an important aspect of housing design, energy efficiency grew in importance and tastes widened. Customers building new homes
or undertaking renovations are more likely to take an active role in choosing their light fittings. At the same time manufacturing in
Australia became very expensive due to labour costs and the trend toward shorter production runs.
The essence of the business model of Beacon Lighting is a greater focus on design, logistics, customer service and capturing feedback
from the market for ongoing product and service development. This model enabled, and required, a sustained increase in volume and the
rate of change – but it also responded to the changes in demand and to the availability of low-cost offshore suppliers. The elements of the
model include:
• Manufacturing is outsourced to several firms in China – some branded products are also imported;
• A strong product design team has been developed in Melbourne drawing on design trends internationally – “When we discover a new
trend, we’ll develop and design the product to meet Australian standards, then have it manufactured and in stores within months” ;
• Quality Control is based on Beacon engineers, in Melbourne and Hong Kong;
• The product range widened and changed more frequently;
• There is a focus on energy-efficient lighting;
• Staff are trained to be able to provide professional advice to customers;
• The centralised, automated stock management systems with internal e-commerce supports efficient and speedy logistics;
• Stock ordering systems based on sales history, seasonal and trend factors and business intelligence tools enable rapid re-stocking while
limiting inventory;
• The products are marketed through 65 stores owned by Beacon Lighting and through franchise arrangements.
Continuing Business Model Developments:
• The Wholesale Division developed a large IT-based warehouse for incoming logistics and distribution, including fulfilling international
orders.
• Beacon Lighting Commercial is developing a dedicated trade product range and new commercial offices in Melbourne, Sydney,
Brisbane and Townsville. Beacon Lighting Commercial creates specialist lighting solutions for large developers, architects, contractors
and specifiers for use in hotels, conference centres, retail outlets, offices, schools, warehouses and private residences.
• Beacon Solar, launched in 2008, offers grid connected photovoltaic solar power systems, ranging from 1kw and upwards including
expert installation.
• Beacon Lighting Installations, launched in 2005, provides full service solutions from lighting design advice to product selection and
installation.
• International Sales – from 2008 Beacon, which has become the leading retailer in Australia, has begun to distribute globally. Products
are designed to meet the standards of specific markets.
Beacon Lighting won The Age|D&B Victorian Business Award for the Retail Category in 2007 and 2009 and were also the Overall
Award Winner in 2007.
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and for the operations of mining. As a result, the
Australian mining equipment, technology and
services (METS) industry has grown rapidly and
is increasingly active offshore. The sector in 2012
includes over 270 firms, employs over 250,000,
generates over A$70bn in sales and its exports
exceed A$12 bn16.
One outstanding example is Orica Mining
Services (Box 3), which has evolved from a
supplier of explosives, a commodity product,
to a supplier of ‘designed explosions for ma-
terials transformation’ contracting to convert a
rock structure to fragments of a specified size
range. This business model evolved over time
as the firm built the capabilities to provide the
services and as the customers were prepared to
outsource a wider range of activities to Orica. It
has also leveraged off these assets (an intimate
relationship with the customer, growing mining
knowledge and reputation) to provide a wider
range of mining-related services.
GLOBAL (AND LOCAL) NICHE
BUSINESS MODELS
The global niche model aims for control of the
value chain, while often outsourcing standardised,
value-add elements. Perhaps the most outstanding
examples are the many specialised German Mit-
telstand firms supplying industrial machinery.18
Many of these firms have prospered in the glo-
balising markets, building and retaining leading
positions in specific market segments, with close
links to and support for customers. The opening
of global markets drives users of capital goods to
seek those suppliers who can best support their
product/service quality and productivity. In this
model the control of manufacturing by the equip-
ment producer is often essential to ensure quality
and to implement continuous product and process
innovation. High levels of automation, investment
in workforce skills and flexible work systems en-
able high productivity in a high cost economy19.
Box 3. ORICA Mining Services (Sources: Sequeira and Ryans (2008) Orica Mining Services. IMD Case
Study. IMD-5-0725; Dick and Merrett (2007); Kumar (2006); Jobson’s Yearbook of Public Companies.
2005 Dun & Bradstreet.)
The core of Orica’s business is its Mining Service Group, although it remains involved in a range of chemicals sectors. Orica was formed
in 1998 after purchasing the majority shareholding in ICI Aust. and NZ from ICI Plc. At that time the explosives industry had become
commoditized. Orica has progressively moved out of fertilizers and consumer products sectors and is now the world’s leading supplier of
commercial explosives and explosives services.
A large proportion of the explosives were used in mining and quarrying industries. Orica developed electronic blasting systems and
software that could enable customers to better manage their blasting. Orica began to supply explosives as an emulsion in bulk form which
was mixed to the required specification on-site. But users were generally not willing to pay for these additional products.
Orica then began to use laser technology to survey and model rock faces to identify the optimum location of drill holes for blasting.
“The exacting combination of laser technology, detonation software and emulsion explosives resulted in both significant cost savings
and improved yields. The broken rock was of a more uniform and optimal size from the operator’s perspective.”17 The combination of
capabilities led to Orica offering ‘tailor made’ solutions to customers, eventually moving from ‘selling kilograms of explosives to billing
customers according to quantities of broken rock’ that meet customer’s specifications – ie to selling solutions.
Managing blasting on the site of customer’s operations gave Orica detailed data and increased the intimacy of the business relationship.
Similarly, operating mining services in many different contexts around the world substantially strengthened Orica’s knowledge and
capability base – which is partly embodied in their IT tools.
In 2006 Orica acquired the global explosives operations of Dyno Nobel, consolidating its position as the dominant global supplier of
blasting solutions.
Operating globally, Mining Services is Orica’s largest business, offering a range of blasting products, services and technology to the
global mining, quarrying and construction industries.
Orica focuses on leveraging technical superiority, innovation and scale to achieve growth. Orica’s services enabled customers to reduce
downtime for drilling and blasting and due to better rock fracturing reduced their processing costs. Orica has invested in R&D to develop
explosives, detonators, site measuring equipment and software to improve the productivity of blasting.
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The majority of Germany’s 3.7 million firms
are SMEs (and could be considered Mittelstand)
family-owned (95%), and managed by their owner.
Such firms account for over half of Germany’s
total economic output. Many Mittelstand firms
have strong positions in narrow niches and hence
are effectively oligopolists – 90% of them operate
in the business-to-business market. These niches
are diverse: high quality microphones (Sennheiser)
printing presses (Koenig & Bauer), licence plates
(Utsch), snuff (Pöschl), shaving brushes (Mühle),
flycatchers (Aeroxon), industrial chains (RUD)
and high-pressure cleaners (Kärcher), castors
for hospital beds (Tente), ovens for professional
kitchens (Rational), cleaning equipment (Hako).
There have been several analyses of the continuing
success of the global niche strategies of Germany’s
Mittelstand20. The key factors underpinning their
sustained competitiveness have been identified as:
• Focus: Specialisation, at the level of who
and what, is an essential element of suc-
cess. The who is increasingly global, en-
abling these firms to remain specialised
while continuing to grow. For many firms
the core competencies are also an oppor-
tunity for closely related diversification.
For example, the main product of the
Brandstätter Group is its Playmobil toy
figures, but their capabilities in moulding
plastic have been applied to new prod-
uct categories such as self-watering plant
containers. For the white goods producer
Miele that ‘second leg’ is a professional
line for commercial applications. 21
• Cluster Support: Many Mittelstand
evolved over many decades based initially
on local cluster dynamics – close links to
customers and strong support from local
banks, technical training and research or-
ganisations. Even today almost a half of
Germany’s high school students undertake
dual training in one of the more than 300
specialised trades that provide a high qual-
ity supply of skilled workers.
• Production Excellence: The how of these
business models is based on continuous in-
vestment in plant and training supporting
high standards of quality and productivity.
Collaborative industrial relations within
plants and well organised supply chains
enable lean manufacturing. Outsourcing to
lower cost suppliers is frequently for stan-
dard materials and components.
• Innovation: The Mittelstand pursuing ef-
fective global niche business models em-
phasise innovation and constant improve-
ment to stay ahead of potential rivals and
they are protective of the core competencies
that underpin effective innovation. Close
links with customers, including providing
ongoing services contributes to shaping in-
novation. As with all aspects of strategy,
the family ownership and deep specializa-
tion leads to a long term perspective.
• Customer Relationships: Many of the
Mittelstand are also consolidating their
positions with customers by providing
maintenance and other services. Even in
this highly specialised capital goods area
there is a trend toward ‘hybrid value-add-
ed’ where the ‘product’ is the outcome
sought by the customer not the equipment
that enables that outcome. The capacity to
provide such a hybrid product/service re-
quires a much deeper knowledge base than
that required to replicate machinery. In fact
many Mittelstand make the majority of
their revenue from services, as in the ‘solu-
tions’ business model.
Many Nordic companies have also thrived in
well-defined global niches, most not ‘high tech’,
but nevertheless innovative: mining and related
equipment (Sandvik and Atlas Copco), retail
(IKEA and H&M.), lifts and escalators (Kone),
toys (Lego), high-quality lorries (Volvo Trucks)22.
Sweden has many world-class firms, Denmark is
the world’s 8th-biggest food exporter and Norway
is a world leader in oil services and fish farming.
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Like Germany’s Mittelstand the high levels of
family ownership lead to firms taking a long-term
perspective rather than pursue short-term profits.
Again like the German firms, the successful Nordic
firms emphasis innovation and training, a focus on
customer needs, and a consensus-based approach
to management that supports continuous improve-
ment and high levels of automation.
The success of the many specialised German
and Nordic SMEs shows that traditional strengths
in “old-fashioned” industries can be the basis for
building what may appear to be small niches into
large global markets.
The women’s fashion clothing chain, Zara,
(Box 4) is also an excellent example of a business
model where the ‘how’ dimension has been care-
fully developed to support the value proposition
for the target market. The firm closely monitors
what customers are buying in its shops as well as
assessing fashion trends. It has built a supply chain
that is extraordinarily flexible and it has an inter-
nal culture that supports experiment and change.
Local Specialisation
J. Robins (Box 5) is an example of a niche busi-
ness model, but one which is (at least at this
stage) local rather than global. It competes in the
women’s fashion shoes industry through offering
current styles of designer shoes. The minimum
supply time for the high volume offshore suppli-
ers which dominate the Australian retail market
is three months, but J. Robins can take a new
design from concept to sale in one week. The
how of that model involves extensive investment
in equipment and training and the development
of a new organisation and culture of production.
Kimberly Kampers (Box 6) is a second example
of a niche business model that is also at this stage.
The design of this business model was consciously
based on the international niche business models.
Low Cost Models
The low cost business models are a hybrid of
the niche and the bookend models because they
include a higher level of standardisation at the
level of product/services or processes. Low cost
strategies generally begin by focusing on a market
segment and on the product/service attributes
valued by those customers. As in the example of
Yellow Tail wine, that may mean reducing the
emphasis on other dimensions valued relatively
less by the targeted customers – Johnson suggests
initially focusing on the four main barriers to
consumption – wealth, skills, access, and time –
and assessing which one of these is a significant
barrier to purchase for the targeted customers.23
Such low-cost models must be supported by ef-
ficient business processes. A good example is the
supermarket chain, Aldi, which stocks less than
1000 lines, largely reliable quality private label,
compared with more than 20,000 in a major su-
permarket, and with substantially lower mark ups
than those of the main supermarkets24.
Table 4. Ingredients of a business model that
disrupts incumbents
There is scope for a new business model to rapidly gain market
share if:
• There is a significant user group whose needs are
underserved or not met;
• This user group is growing or indicates the direction of
overall market trends;
• The value proposition for this user group is compelling
and substantially different from the standard offering in the
industry;
• The business model is scaleable so as to enable rapid growth
after a period of de-bugging and tighter alignment;
• The value proposition leverages unique and deeply rooted
capabilities or is based on resources which are not accessible
to followers;
• There is a strong alignment between the offering, the
business processes, the capabilities and the accessible
resources;
• There is a high level of ‘freedom to operate’ in the new
business model unencumbered by the values, structures and
processes of the old business model; and
• There are strong barriers to entry and growth for others
seeking to copy this business model.
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CHARACTERISTICS OF
SUCCESSFUL BUSINESS
MODEL INNOVATORS
There is much variation within each of these four
main business model types. While each of the sev-
eral cases of business model innovation discussed
above is unique, the approaches to dealing with
survival and growth in a high-cost environment
have some common characteristics:
• All have focused on providing a superior
value proposition to specific market seg-
ments, and in doing so most have developed
a strong relationship with their customers.
These relationships help to generate in-
sight about customer preferences that in-
Table 5. Identifying opportunities for new busi-
ness models
• Identify significant user groups whose problems are not
being addressed by current market offerings.
• Identify the key dimensions of the business model space
drawing on insight about the likely evolution of the industry,
the changing patterns of potential user needs/wants (and the
most useful way of segmenting user groups), the evolution
of potentially relevant technologies and the likely directions
of regulatory change.
• Reassess how each element aligns with trends in customer
preferences and competitor positioning, in emerging market
segments. [Are any alternative business models emerging
and gaining customers in some market niches or in similar
markets?]
• Reassess how emerging technologies might enable a
different approach to each element of the business model.
• Identify and discuss buyer behaviour in the broad target
market – explore trends and events and seek to understand
whether they might signal new imbalances, new trends.
• Review successful business models in other industries,
particularly those of new entrants who are gaining market
share.
Box 4. Zara – A Well integrated Business Model (Source: Van der Heyden, L., ‘M&S vs Zara: Case
Analysis’ 2007; Harlé, N., Pich, M., and Van der Heyden, L., ‘Marks & Spencer and Zara: Process
Competition in the Textile Apparel Industry’, INSEAD, France, 2002; Santos, J., Spector, B. and Van
der Heyden, L., ‘Toward a Theory of Business Model Innovation within Incumbent Firms’ 2009/16/
EFE/ST/TOM, 2007.)
Zara’s business model shows why it has grown rapidly taking market share from the high fashion stores (too expensive) and the
department stores (too out-of-fashion).
• Target Users
• Young fashion conscious consumers – Zara avoids being out of the price range or out of fashion for its target market.
• Defining the What:
• Customization with low cost.
• Combination of low cost, reasonable quality – fast changing to reflect current fashion.
• Business Model Design Dimensions Addressed:
• Accessing current designs – scan, select, copy & simplify current fashion.
• In-house designers modify and develop based on customer purchasing.
• Avoiding excess demand to which a slow supply chain cannot respond.
• Developing a supply chain/demand chain that it highly responsive.
• Enabling rapid feedback from customers purchasing to product designs.
• Create an in-store experience.
• Limited but fast changing range of clothes.
• Cost saving through avoiding the excess supply that must be discounted, little advertising, copying design from ‘the market’, reduced
range of types, sizes and colours enables low overhead with fast turnover reduces working capital.
• Developing the How – Critical Capabilities:
• Lean enterprise.
• Developing sharp competencies in picking fashion trends.
• Managing a very fast and responsive supply chain.
• IT – library of designs on CAD/CAM.
• Small and flexible sewing shops in Spain, with outsourcing some activities
• Key Lessons of the case:
• The importance of market focus.
• Quality is in the eye of the customer.
• The power of lean and flexible supply chains for mass customization.
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form both improvements to the product/
service but also ideas for related products
and services.
• Business model innovation has been used
defensively to extend the competitiveness
of an established business. It has particular
benefit when it is used to open a new path
for business development – enabling a shift
to higher value-added activities, products
or services to escape commodification or
to engage with an emerging growth market.
• In most cases those market segments/ user
groups have become more international
over time.
• To enable the competitive production and
delivery of the product or service the firms
have had to often transform their internal
processes to achieve greater efficiency and
Box 5. J.Robins – Manufacturing Shoes in Australia. (Sources: Roberts, P (2009). ‘Shoemaker puts best
foot forward’. Australian Financial Review. 26 May.; James, D. (2006). ‘Process of Creativity’ Australian
Business News. Oct.; Warnock A. (2006) ‘Fashion Manufacturing’ ABNews. Oct/Nov.)
The only volume producer of women’s shoes remaining in Australia. The firm developed a new strategy following the tariff reductions
of the 1980s and the inevitable rise in competition from offshore low-cost producers. Spurred by the realization that major change
was essential, the firm benchmarked world’s best practice. It drew in particular on lessons from the Japanese auto industry to develop
a stronger alignment between business processes and the creation of customer value. ‘Just in time’ and ‘lean manufacturing’ using
production cells (teams) and modular manufacturing were the foundations of a new approach.
J. Robins survives by focusing on mass customization. It cannot compete with the low-cost offshore producers on price, but it can provide
high quality shoes to customer specifications in a fraction of the time that it takes offshore producers to supply, through:
• Small batches;
• Designed range of shoes set out in a catalogue and on a website;
• Radical reduction in ‘work in progress’ and in lead times;
• Advanced equipment with CAD/CAE/CAM to support quality and the most efficient cutting of leather;
• Outsourcing of the most labour-intensive work overseas;
• Increased vertical integration to give control over leather supply;
• Multi-skilled workers in self organising teams (production cells) with staff moving around work stations to produce the product;
• Devolving to teams decisions about training and internal organisation;
• Rapid turnaround from order to dispatch;
• Enabling retailers to carry less stock and hence have lower risk of unsold inventory;
• Focus on customer specifications;
• Selling through a range of retailers including fashion brands.
This performance is supported by investment in training and by organisational innovation. It is also enabled by investment in high
quality German and Italian machinery. Achieving high performance in a team organisation required a focus on the social relations in the
workplace. The team-based approach and concern about social relations has led to a very low turnover of staff.
As other Australian shoe manufacturers ceased production in Australia the survival of the local suppliers of components and services was
threatened.
Table 6. Engaging customers in the search for Business Model Innovations
Pursuing the dominant industry recipe means being a rule follower and almost certainly means focusing on the articulated ‘needs’ of the
mainstream customers. It usually leads to minor variations on the established business models. To identify new opportunities, ensure that
design, product development and production personnel as well as marketing, are involved in user interactions and explorations.
• Getting out to engage with users:
      o Ethnography – see how people actually behave;
      o Bringing people together – active and open focus groups.
      o Bringing users into the creation process:
      o Design workshops with customers.
• Identify leading edge users:
      o Find users who are pushing the product/service beyond its design space, but adapting it themselves to generate new value.
      o Test your product/service design.
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Business Innovation

flexibility often through higher levels of
delegation along with training and invest-
ing in comprehensive capability and pro-
cess upgrading. In most cases the trans-
formation to a successful new business
model has required substantial increases in
knowledge-intensity. While technological
innovation is an important aspect of some
new business models, it is neither neces-
sary nor sufficient.
Box 6. Kimberley Kampers – Customer focused, design-led supply chain(Sources: Jenny Dillon, J. (2009),
‘Changes make for happy Kampers -, Daily Telegraph, 22 July; Loxton, Bruce, pers comm; http://www.
kimberleygroup.com.au)
Kimberley Kampers designs, makes and distributes camper trailers, off-road caravans, modified long-wheelbase vehicles and roof-top
tents at its factory in Ballina, NSW. Kimberley has been manufacturing off-road accommodation since 1994, with over 5000 trailers and
caravans shipped. The Managing Director and owner since 2003, Bruce Loxton, is an engineer with extensive international experience of
management in the engineering sector, including Managing Director of Asea Brown Boveri in Australia. He has led a process of business
model innovation that has resulted in a profitable and growing firm exporting to five countries. The framework of the business model
is a customer-focused, design-led supply chain strategy. The innovations it has introduced range from design of the equipment through
to the supply chain and distribution network, all modelled on the successful European H&M clothing chain and the approach of Harley
Davidson in the US.
• Who: Travellers – particularly older ‘grey nomads’ who want the option of travelling and camping in remote off-road locations.
• What: A range of 8 models of high quality and innovative trailers and off-road caravans.
• How: The integrated components of the ‘how’ are set in the following diagram and include:
     o The design-led supply chain strategy focuses on a product of high value to customers, based on fit for purpose, ease of use,
robustness, light weight, environmental features (eg low energy use and renewable energy options). The quality of the design and
manufacture of the product contributes to a high re-sale value.
     o The extensive use of IT enables the integration of design and manufacturing software, enabling automation and accuracy in
procurement, clear communications and efficiency in all operations.
     o The location in the small town of Ballina contributes to the capacity to retain staff, but this is supported by investments in training, a
flat structure and team-based working.
     o The overall factory and organisational design for lean manufacturing, with work teams and ‘Kanbans’ supports efficiency and a
greater level of customer option choice within a limited product range.
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• The approach to developing the value
proposition, the value chain, the internal
processes and the overall business model
can be seen as business design, in the now
wider use of that term. There are many
alternative designs but some are more co-
herent, robust and flexible. In many cases
the business model (and the design of the
subsidiary components) has evolved over
time. Outsourcing has been selective and
firms have maintained control over key
segments of the value chain.
• The firms have continued to evolve their
value proposition, often deepening the
value potential and widening the market
scope, and in many cases developed com-
plementary business models based on le-
veraging key competitive and differentiat-
ing assets.
DESIGNING AND MANAGING
BUSINESS MODEL INNOVATION
FOR HIGH-COST ECONOMIES
The message of many recent surveys is that the
capability to design and implement innovation at
the level of the business model is now often es-
sential for growth and, in high-cost environments,
decisive for survival. This section focuses on the
processes of developing new business models and
the capabilities required to do so.
Established firms often find it challenging to
assess and manage the risks and uncertainties of
business model innovation. The existing business
model, often based on the mainstream industry
‘recipe’, will be deeply embedded in routines and
norms, and largely taken for granted. Understand-
ably, firms tend to take a cautious approach, em-
phasising the forms of product/service innovation
they have pursued in the past, and filtering out
disruptive ideas. New product or service concepts
or technologies that require new business models
are often not pursued. It is tough for a new busi-
ness model to be born and nurtured within an old
business model – and attempts to do so are likely
to be precipitated by crises of survival.
Introducing a new business model involves
insight, experiment and adaptation. Complexity
and uncertainty means that planning cannot re-
move risk or the requirement for incubating the
new model and an element of learning-by-doing.
An overall strategy for business model inno-
vation, whether modifying an existing model or
developing a new model, involves a series of stages
from exploration and assessment, to identifying
and evaluating the options for the elements of
the business model and their overall alignment,
selecting the best fit and specifying the linkages,
processes and capabilities required, through to the
tasks of implementation. A framework for such a
strategy is summarized in Figure 10. In practice,
as with any innovation process, these stages are
not necessarily linear – a good deal of iteration,
forward and backward, may be involved as issues
become clearer and some lines of development are
closed. In the following we discuss each of these
stages in more detail.
SCAN AND SCOPE
Envisioning and creating new business models
in an established firm calls for a clear vision
and strong leadership. Some firms locate new
business models in new companies, sharing only
some corporate assets – for example, full service
airlines launching low-cost carriers, such as
Qantas and Jetstar. This is also the reason why
new firms, without corporate ‘baggage’ (legacy
systems and culture), are often the champion of
new business models.
Experience shows that the design of potential
new business models for high cost environments
can be developed through four complementary
approaches:
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• Systematic Analysis: An analysis of in-
dustry, market and technology trends may
identify new customers, offerings or ways
of creating and capturing value. Analysis
of the value curve along with a review of
the options for each component of feasible
business models will help to identify op-
tions for new models.
• Building on Exemplars: Having identi-
fied the need for a new direction, many
firms have developed a new business mod-
el from an exemplar, often from a different
industry.
• Evolutionary Responses: A third ap-
proach is essentially evolutionary, re-
sponding to emerging customer needs
and technological opportunities, within an
overall strategy that shapes the direction of
change.
• Focusing on an Unmet Need: This is less
about predicting the future and more about
identifying significant perhaps emerg-
ing market segments whose needs are not
well met by current offerings. The efficacy
of this approach was a conclusion of the
2001 Deloitte study of business models.
Figure 10. Overall strategy for developing business model innovation (Developed from Deloitte Re-
search, 2002)
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Another major study found that most suc-
cessful business model innovators devel-
oped their approach by targeting customers
who were under-served or even ignored by
established firms – underserved because
the dominant assumptions were that it was
not possible, too risky or unprofitable to
address their needs or preferences:25
…creating blockbuster new business models
doesn’t require you to predict the future. Rather,
it calls for an ability to redefine the present…
To be truly innovative, businesses have to go
far beyond identifying the next big product in-
novation. They have to start by identifying an
un-served or under-served market segment (i.e.
changing just the ‘who’). Each of the companies
also carefully designed and built the ‘what’ (the
product or service offering), and the ‘how’ (op-
erations and supplier relationships) of its model
to produce extraordinary customer value. The
innovators also captured sustainable competitive
advantages and preyed upon competitors’ inherent
disadvantages.26
Surprisingly, there are many cases of business
model innovators rapidly building market share in
mature industries with high levels of competition
but little diversity in business models. In such
mature industries, the dominant firms are often
vulnerable to, but often underestimate, new en-
trants who change the focus of competition. The
business model innovators in these cases were
often not leaders in technological innovation, but
had a clearer grasp of how available technologies
could create value and how new business models
could capture a higher share of that value.27
The emergence of new customer segments
is often related to regulatory, technological or
socio-demographic trends, and a clear focus on
an under-served customer group (rather than
the trend) can be the foundation for a niche or
‘solutions’ business model which wins market
share and changes the nature of competition in an
established industry – see Table 4.
A customer-centric perspective is usually
essential for effectiveness in all of these four
approaches: investing in customer research, and
exploring new ways to deepen understanding of
customers. Whichever approach is taken it is clear
that a strategy for business model innovation must
address developing:
• A clear strategic vision;
• An internal culture that can support change,
accept uncertainty and learn rapidly; and
• A capacity to handle disruption and the
risks of destabilization.28
Competitive new business model innovation
can lead to new answers to the ‘what business are
we in?’ question. This can be difficult to answer as
the Kodak struggle to find a place in the camera/
film/image/chemical industry shows.
Approaches to identifying opportunities for
new business approaches are summarised in
Table 5.
RETHINK AND REDESIGN
Identifying opportunities for new business models
is helped by making explicit the components,
and related assumptions, of the current business
model. As noted previously, some of the founda-
tions of the established model are likely to be
taken for granted and hence have largely implicit
assumptions, beliefs and values. Bringing these
out facilitates both re-assessment and creative
thinking about alternatives.
The re-assessment (and visioning) process
involves:
• Unpackaging the dominant business mod-
els in the industry in terms of who, what
and how and identifying the assumptions
in each of these dimensions;
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• Recognising the strengths and limitations
of the current business model – why does
it work? What are the weaknesses of the
current business model – why do these re-
main weaknesses? Are the reasons why the
business model was designed that way still
valid?;
• Assessing the longevity of the current
business model;
• Reassessing how each element aligns with
current customer preferences, competitor
positioning, technology trends (What com-
promises does the current business model
force customers to make? Do any competi-
tors offer a superior value proposition?);
• Identifying underserved or dissatisfied cus-
tomer groups (Why are those who don’t or
who stop using our offering dissatisfied?);
• Identifying assets (eg customer loyalty, or
process strength) that could be leveraged
into new business models;
• Encouraging a preparedness to identify
and question the assumptions of the cur-
rent model and to creatively consider
alternatives.
A strong and intimate market focus is often
a place to begin, and this can be explored and
developed by:
• Identifying Customer Needs and
Assessing the Value Curve that Might
Best Address their Priorities: Many
firms have effectively brought employees
into the search for improvement and new
ideas, rewarding them for their initiative
and commitment. In larger firms with
many business units, the ‘collective intel-
ligence’ of the different businesses may be
able to identify new business model op-
portunities and tap into distributed assets
in the group.29
• Exploring the Scope of the Apparent
Opportunity: Does this gap indicate a
broader opportunity? Is this customer
group growing? Does this group signal
shifts that will shape the general market?
• Assessing Possible Business Models:
What models could underpin an effective
integrated high value solution for the op-
portunity area?
SPECIFY AND ASSESS
Specifying, building, leveraging and aligning
internal and external assets, including customer
relationships, are the core of activities at this stage:
• Identifying How to Develop Deep
Customer Relations and Value Chain
Links: Are there opportunities to devel-
op high customer value and strong links
to other organisations in the value chain/
value network that provide a second level
of integrated competencies?
• Experimenting with the Elements and
Alignment of the Who, What and How:
It is often essential to experiment, to assess
the outcomes of these experiments and
pursue further experiments in promising
areas and perhaps for specific segments.
It is often possible to test elements of the
new business model through small scale
experiments. This may be much easier to
manage in a new organisation with select-
ed staff and will often require a separate
line of funding. Many firms have success-
fully brought customers into the process of
exploring new market segments and new
value propositions – see Table 6.
• Scaling Up New Models: Scaling-up after
testing the assumptions of a business mod-
el design will be important whether the
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new business model replaces the old model
or targets a different market segment and is
developed as a separate business line. New
venture entrepreneurs also need to test the
assumptions of their business model prior
to any detailed business planning. The new
venture business plan is likely to evolve
in some or many dimensions as the entre-
preneur engages with potential customers,
suppliers, investors and tests the assump-
tions of the model.
PLANNING AND IMPLEMENTING:
ACTIVITIES AND CAPABILITIES
A strategic approach to business model innova-
tion was summarised in Figure 10. Management
and leadership competencies will often be vital
for dealing with such major risks as:
• A strategic vision that rapidly becomes
unviable due to unpredicted change in the
business environment. According to the
EIU an increasing number of companies,
recognizing the turbulence in their envi-
ronment, formally review their business
model regularly;30
• A slow re-orientation as the culture, values
and routines of the old business model con-
tinue to shape approaches and expectations;
• Employee resistance to restructuring –
particularly (and understandably) where
change involves outsourcing;
• Underestimating the time and resources re-
quired to follow through with the develop-
ment of the new offering and the support-
ing business processes.
These risks point to three difficult challenges
for leadership and management. First, clarity of
vision and focus is essential – but that is par-
ticularly demanding in a context of uncertainty.
Second, understanding what will be involved in
redesigning the business model, implementing
change and predicting barriers requires a high level
of managerial insight, before and during change.
Third, selling a new approach to employees (and
other stakeholders, including alliance partners)
and developing an open discussion of changes and
impacts demands a high level of management skill.
Focusing on the capabilities required for busi-
ness model innovation we can draw on the previous
discussion to identify five areas of capability that
have been essential for the effectiveness of many
business model innovations:
• Customer Insight: Insight into value from
a customer’s perspective will provide the
key focus, the sense, of the business mod-
el. By encouraging a wide range of staff to
understand the customer’s use of the firm’s
products, a deeper foundation of insight can
be built.
• Exploration and Experimentation: Ima-
gining future scenarios, conducting low
cost low-risk experiments of the potential
business model elements, encouraging an
exploratory approach by staff and (where
appropriate) delegate decision-making that
does not need to be centralized, and brain-
storming new ideas for developing busi-
ness model innovation teams. Some firms
have drawn customers and suppliers into
the process of exploring and experiment-
ing with new business models.
• Business Design: The competencies and
processes for effectively identifying, devel-
oping, aligning and managing the compo-
nents of a business model are critical. While
the specific capabilities will depend on the
context and the change, these may include,
for example: market analysis and marketing,
building collaborative links with customers,
forms of strategic alliance management,
outsourcing, and supply-chain manage-
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ment, acquisitions and spin-outs. This also
involves the capabilities that underpin the
wider changes needed to support the core
business model, eg in R&D, operations, cul-
ture, leadership skills, training, incentives,
metrics, information systems.
• Acquiring New Competencies: In several
of the examples of business model inno-
vation discussed, the firm has had to build
new capabilities, usually through hiring and
training. In the case of Orica its develop-
ment of mining services involved a substan-
tial investment in research and staff recruit-
ment to build strengths in IT.
• Managing Change: The rising significance
of business model innovation is increas-
ing the importance of high quality strategic
leadership and of multifunctional structures
and teams. The typical directions of change
in business models increase the importance
of managing emergent strategy develop-
ment and implementation, and hence more
internal entrepreneurship. Managing culture
change, supporting rapid learning and en-
suring clarity and communications are vital
as in any change process.
CAPABILITY FOR ONGOING
BUSINESS MODEL INNOVATION
For both technological and business innovation a
key issue is how firms upgrade their capabilities
more quickly and more effectively than com-
petitors, and in directions more relevant to future
competition31. Four key mechanisms contribute to
ongoing capability upgrading (Figure 11):
• Knowledge acquisition from firms and or-
ganisations such as research organisations
– this is one of the advantages of locating
in a dynamic cluster;
• Interaction with dynamic suppliers – some
industries such as process industries and
mining are particularly dependent on their
suppliers, and indeed even more so as they
have tended to outsource technology provi-
sion to suppliers;
• Learning by ‘doing’ (actually by changing,
experimenting, monitoring, innovating –
rather than any type of passive accumula-
tion by doing the same thing day after day);
• Close relationships with ‘leading edge’
customers.
Figure 11. Key mechanisms for capability development
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For firms in the traded goods and services sec-
tors of high cost economies, survival will require
building stronger positions in global value chains
or creating new value chains. There are advantages
to being earlier movers as there are increasing
returns due to positive feedbacks – firms which
develop close links with customers or win strong
positions in value chains are likely to learn more
rapidly, and also more quickly discover sustainable
niches or value chain segments32. In either case
the development of dynamic capabilities – the
capabilities that guide and support upgrading a
firm’s resources – will be vital. However, it must
also be recognised that strategies for upgrading
capabilities and building linkages in value chains
face an increasingly more complex organisational
and knowledge context. The required transfor-
mations are challenging for management, at the
strategic and operational level:
• Firms may fail to develop the appropriate
strategies, or become locked-in to relation-
ships and value chain partners that do not
lead to sustainable positions and effective
learning; or
• Firm may not be successful in forming and
managing commercial and strategic rela-
tionships (with suppliers and customers)
or may not manage the processes of inter-
nal re-organisation and capability building
necessary for those external relationships
to be effective.
CONCLUSION
The ability to innovate, at an accelerated pace,
will be the most important capability differenti-
ating the success of countries and companies….
Talented human capital will be the most critical
resource differentiating the prosperity of countries
and companies.
The Future of Manufacturing: Opportunities to
Drive Economic Growth, A World Economic
Forum and Deloitte Touche Tohmatsu, April
2012, p.4
The term business model has emerged as a
strategic analytical framework. As new concepts
like this evolve, aiming to capture the essence of
complex changes, there are several antecedent
or complementary concepts and insights: value
networks, value curves, business or innovation
ecosystems. All of these concepts aim to provide
a way to re-imagine and re-assess strategy beyond
the level of the enterprise and above simplistic
models of value creation and appropriation. In
an increasingly customer-centric, networked and
collaborative world a strategic framework must
cover both the firm and its network relationships.
And these relationships are likely to play vital
roles in value creation and value appropriation.
The infusion of IT into almost all business activi-
ties has often dramatically lowered transaction
costs creating more options for those activities
– whether they are done, who does them, where
they are done, how they are done, on what basis
they are remunerated etc.
Business model innovation usually involves
a range of specific innovations, some small and
low risk and others more dramatic, for example in
products, services and/or processes and business
activities, that together are intended to develop
or transform the business. The impact of each
specific change is amplified through synergy
with the other changes, which is why business
model innovation can be transformative in terms
of performance and returns. New technological
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innovations often languish in the market until a
new business model captures the potential for
value creation and appropriation.
Several overall conclusions emerge from this
discussion of the experience of business model
innovation by firms in high cost economies:
• Business model innovation has played a vi-
tal role in re-building or creating the com-
petitiveness of many firms from high-cost
economies.
• Deep changes in the competitive land-
scape, due to the globalisation of markets
and industry, and the transformative role of
IT in general, of the Internet in particular,
have rapidly eroded the competitive foun-
dations of many long established business
models. For this reason re-assessing the
current business model, making explicit
the assumptions on which it is based, can
ignite innovation. But changes in the busi-
ness context have also opened many new
markets and business model possibilities –
and it is firms that have explored these pos-
sibilities that have often been remarkably
successful. Those pioneers remind us that
innovation in any aspect of the value chain
– organisation, management, processes,
internal services, etc – can contribute to
the resilience of a business model. And in
high-cost contexts, such diverse forms of
innovation are often vital elements of busi-
ness model changes and frequently criti-
cal for the effective commercialisation of
new technologies, and for appropriating
a high share of the value created by new
technologies.
• Business models must now often be more
complex, particularly as they are likely to
involve greater specialisation (in terms
of market and value chain segments and
products/services), closer integration of
components, a stronger focus on the ser-
vices and customisation dimension of the
offering, deeper change in firm culture
and processes, greater mobilisation of the
engagement and creativity of staff, and
higher levels of interdependence with ex-
ternal collaborators. Higher levels of inter-
nal staff diversity and external networking
are likely to contribute to innovation. A
business model is hard to copy, and hence
more likely to be sustainable, if it is also
based on unique elements, deeply embed-
ded in the firm and its business ecosystem,
along with particularly strong synergies
among the components. Business models
of firms in high-cost economies are much
more likely to be competitive and resilient
when they make effective use of the strong
assets of their context – human resources,
knowledge centres, networks etc.
• As firms from emerging economies narrow
the capability gap with leaders from high-
cost economies, the costs of maintaining
leadership rise while the lead-time gained
from technological innovation declines.
This is why competitive performance
rooted in a number of unique and interde-
pendent assets (like firm culture, links to
research organisations and suppliers, staff
competence, reputation, feedbacks from
customers that drive innovation) within
a complex business model can sustain
competitiveness.
• A firm in a high-cost context facing declin-
ing competitiveness might be able to ex-
tend the viability of the existing business
model through re-alignment and the modi-
fication of some components – eg adding
on-line distribution and marketing, out-
sourcing some standardised activities. But
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such defensive change can usually only buy
time for the development of a new business
model platform and a deeper transforma-
tion of the firm.
• The capabilities to assess, design and im-
plement business model innovation are
an increasingly important but demanding
competence, and will often be essential for
survival and growth in high-cost countries.
The starting point for business model in-
novation is often recognising an unmet or
under-met need, along with an insight into
a feasible value proposition. Innovating at
the level of the business model involves
learning – from analysis, imagination, ex-
periment, and successful models elsewhere
– and hence planning to learn.
• Finally, many of the assets that contribute
to the productivity and innovation of firms
in high-cost economies are outside these
firms – world class education and train-
ing organisations, research organisations,
networks among firms, quality of life that
attracts talented people, infrastructure that
supports competitive services. They are
largely dependent on enlightened public
policy.
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KEY TERMS AND DEFINITIONS
Bookend Business Model: A business model
in which the firm outsources much of the routine
low value-adding activities, which are typically
those involved in the direct production of goods
or services, while retaining control of the overall
value chain and particularly the design of the
value proposition and the direct interaction with
customers.
Business Model Innovation: As a business
model is not only a set of elements, but an in-
tegrated system in which both unique elements
and unique overall architecture contribute to both
differentiation and sustainability. Business model
innovation involves change in the overall design or
architecture of the business model and also often
change in significant elements.
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Business Model: A business model is a con-
ceptual tool which specifies the essential design
or architecture of a business based on what value
it creates for whom and how it creates, delivers
and captures that value, with the aim of achieving
sustainable competitiveness.
Cluster Dynamics: The key cluster dynamics
are those that contribute to the continuous strength-
ening of a cluster – investment in innovation and
capability upgrading, increased specialisation,
entry of new firms, growth of new organisations
for coordination and for knowledge acquisition,
creation and diffusion, interaction and collabora-
tion among firms and organisations.
Customer-Centric: A customer-centric ap-
proach aims to ensure that the firm understands
the perceived value of products or services from
the customer’s perspective, and hence creates and
provides products or services that customers will
want and value.
Integrated Solutions Business Model: A
business model in which the firm specialises
in providing customers with a fully functional
system for the production of goods or services,
and in some cases managing and/or maintaining
that system. The components integrated into the
overall solution may come from many suppliers,
including the solution provider itself.
Leading Edge Customers: Customers, typi-
cally with strong technological capabilities, who
use a product in demanding applications, often
modifying the product to improve performance,
and whose needs signal future directions of evolu-
tion in the wider market.
Lean Manufacturing: A management philos-
ophy drawn from the Toyota plant manufacturing
process, which involves the reduction of waste,
minimising inventory, and empowering workers
in the process of producing more output.
Niche Business Model: A niche business
model is highly specialised in a specific and
demanding market segment where reputation
and deep competence, based on technological
mastery and strong customer relations, underpin
competitiveness.
Value Chain: A model of the sequence of
activities of a firm, from receiving inputs, using
these in processes and finally providing goods or
services to customers, that are intended to create
value for the firm and its customers.
Value Proposition: The good or service
offered to potential customers, where value is
perceived from the perspective of the customer.
ENDNOTES
1 Marsh (2012) a, similar analysis is in Hagel
et al, (2010)
2 Leszinski and Marn (1997)
3 This chapter draws in part on a study of
business model innovation in Australian
industry, this study also provides a more
comprehensive discussion of business model
innovation, see; Scott-Kemmis, 2012.
4 EIU (2005)
5 Deloitte Australia (2013)
6 Reeves (2007), Teece (2010), KPMG (2006)
7 See for example: Scott-Kemmis (2012); Roos
(2013)
8 Some approaches to competitive strategy
are relevant to business model analysis, for
example the Value Innovation approach of
Kim and Mauborgne (1997). This approach
tends to lead to radical market segmentation,
eg low cost/service airlines. Amit and Zott
(2012) emphasise the role of complementari-
ties, such as having PayPal with eBay, and
efficiency through the logistics supporting
a low cost strategy
9 Kim and Mauborgne (2005
10 Scott-Kemmis (2012), Teece (2010) Mitchell
and Coles (2004)
11 Porter (1998), Mintzberg, (2003)
12 They key point here is that technological,
economic, social and regulatory change
stimulates often deep change in markets
(segments, preferences) and in the strategies
of competitors (eg specialisation), such that
all elements of a business model need to be
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Business Innovation

open to review and change, and to much
tighter re-alignment: Chesbrough (2006),
(2007), KPMG (2006), Teece (2010)
13 Apple reached 75% of profit share, nearly
40% of revenue share and 9% of units share;
Samsung, Apple, Nokia and the smartphone
dogfight.
14 Economist (2012c)
15 Davies (2001), (2004)
16 Scott-Kemmis, (2013).
17 Sequeira and Ryans (2008) p.2
18 Economist (2012b)
19 Simon (1996), Venohr & Meyer (2009),
Meyer (2010, Rothgang (2008
20 Simon, (1996, 2009); Rommel (1995);
Venohr & Meyer (2009)
21 Bryant (2012
22 Economist (2013)
23 Johnson, M. (2010); Kim & Mauborgne
(2005)
24 Kumar (2006)
25 Deloitte Research, 2002
26 Deloitte, 2001.
27 Deloitte Research, 2002.
28 KPMG, 2006.
29 Santos, et al, 2009.
30 The 2006 EIU survey found that almost 50%
of the companies they surveyed reviewed
their business model annually.
31 EIU, 2006.
32 There is an important public policy issue
here concerning the level of spillover from
early movers. To what extent and in what
ways might learning by early movers create
positive externalities. There appear to be
three levels of spillover: first, early movers
that have leading roles in value chains where
many segments are located in the domestic
economy can drive innovation, upgrading
and specialisation in the value chain; second,
early movers can signal to other firms and
to upstream suppliers the key directions of
knowledge accumulation and the overall
strategic imperative, eg their business model
innovations might influences others to also
undertake business model innovation; third,
the managerial, organisational and relational
innovations developed by early movers may
also provide roadmaps for followers.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 9
DOI: 10.4018/978-1-4666-5828-8.ch009
Design-Led Innovation:
Overcoming Challenges to Designing
Competitiveness to Succeed in
High Cost Environments
ABSTRACT
This chapter focuses on demonstrating the role of Design-Led Innovation (DLI) as an enabler for the
success of Small to Medium Enterprises (SMEs) within high growth environments. This chapter is targeted
toward businesses that may have been exposed to the concept of design previously at a product level and
now seek to better understand its value through implementation at a strategic level offering. The deci-
sion to engage in the DLI process is made by firms who want to remain competitive as they struggle to
compete in high cost environments, such as the state of the Australian economy at present. The results
presented in this chapter outline the challenges in the adoption of the DLI process and the implications
it can have. An understanding of the value of DLI in practice—as an enabler of business transformation
in Australia—is of benefit to government and the broader design community.
OVERVIEW
The importance of design to a firm’s innovation
has been the subject of much research particularly
in the design and development of new products.
More recently it has become widely understood
that design can add significant value to a firm’s
strategic capabilities beyond the development of
a product or service. Design continues to repo-
sition itself from a downstream manufacturing
related activity to one which adds strategic value
to business. This union of design and strategy is
referred to as Design-Led Innovation (DLI). DLI
is a process for business transformation, provid-
ing a mechanism where businesses are able to
manufacture or create an alternative competitive
Sam Bucolo
University of Technology, Sydney, Australia
Cara Wrigley
Queensland University of Technology, Australia
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advantage to that of operating in low cost environ-
ments – especially low labour cost environments.
In Australia, the small to medium enterprise
(SME) sector is currently at a crossroads. Techno-
logical advancements have in many cases lowered
start-up costs for many new businesses and by vir-
tue of their size, SMEs are able to react relatively
quickly to changes in the business environment
(Condon, 2004). However, the high Australian
dollar combined with low total factor productiv-
ity and high labour unit costs increases operating
costs, making it very difficult for SMEs to grow
to meet increasing demand (Moufarrige, 2012).
SMEs are more prevalent in Australia repre-
senting (98.3%) of total business in comparison
to other key OECD nations such as the US
(87.4%) and the UK (94.6%). The Australian
Government has emphasised the importance
of increasing productivity, using creativity and
design-based thinking to solve complex problems
(DIISR, 2009; Australian Government, 2012). In
its broadest view, DLI provides businesses with
an opportunity to increase productivity through
business transformation, to overcome comparative
costs disadvantage, and contribute to overall cost
reduction (Samson, 2010 p.40).
In a low cost economy, a common route to
success in manufacturing business is imitation,
whereas in a high cost environment it is innova-
tion. In a low cost environment, most factors of
production are available at lower or similar cost
compared with other locations. With the develop-
ment of technology and increased globalisation,
the share of factors of production available at simi-
lar cost increases, making the remaining factors
of production available at lower cost increasingly
valuable as a basis for the firm’s competitive ad-
vantage. These remaining factors tend to be linked
to national or regional comparative advantages,
such as minerals, agricultural land or produce,
low population-density land, biodiversity, and
university educated people.
In a high cost environment, this development
when combined with the increasingly shorter lead-
time for codification of tacit knowledge, tends to
continuously undermine firm competitiveness.
To stay competitive, firms in high cost environ-
ments must either shield some valuable pieces of
knowledge from becoming globally accessible, or
be able to create, acquire, accumulate and utilise
codified knowledge faster than firms in more
favourable cost locations. This ability is strongly
supported by close interaction with suppliers,
customers, and rivals. Furthermore, processes
of knowledge creation are strongly influenced by
specific localised capabilities such as resources,
institutions, social and cultural structures.
Traditionally, the answer to the question of
what drives productivity in advanced econo-
mies has been the technological change and
innovation embodied in capital equipment,
but more recent evidence suggests that non-
technological innovation is just as, if not more,
important. These include: design and branding;
new business models and production methods;
systems integration and the firm’s absorptive
capacity; and the development of high per-
formance work organisation and management
capabilities. While ingenuity may be found in
many Australian workplaces, Australia lags
behind other advanced economies in these areas
including investment in intangibles (defined
as R&D, ICT, Organisational Structures, Busi-
ness Models, Design, Brand Equity, Education
and Training).
This chapter outlines the value of Design-Led
Innovation in supporting SMEs to compete in a
high cost environment. Based on an analysis of
Australian SMEs who have begun their adoption
of DLI to remain competitive, challenges are
revealed. This highlights the key activities which
must be undertaken to enable this approach to
competiveness in a high cost environment to be
scaled across the SME community.
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WHAT IS DESIGN-LED INNOVATION
AND HOW DOES IT FACILITATE
BUSINESS TRANSFORMATION?
The term ‘design-led’ is defined by Bucolo and
Matthews (2011) as the tools and approaches
which enable design thinking to be embedded as
a cultural transformation within a business. Being
design-led requires a company to have a vision
for top line growth within their business, which
is based on deep customer insights and expanded
through customer and stakeholder engagements,
with the outcomes being mapped to all aspects of
the business to enable the vision to be achieved.
One of the first studies to outline the broader
benefits of design was by Mozota (2003) who
found that:
• Design accelerates time to market.
• Design improves cooperation among
agents.
• Design changes relationships with suppliers.
• Design improves coordination between
marketing and production.
• Design creates a new market.
• Design develops care for the customer in
innovation.
• Design generates technology transfers.
• Design allows the company to sell at a
higher price.
• Design contributes to benefits perceived by
consumers.
Recent research indicates that companies who
use design in their business perform better eco-
nomically in the marketplace (Cox, 2005; Borja de
Mozota, 2002; Dell’Era, Marchesi and Verganti,
2010; Moultrie and Livesey, 2009). There is
significant international evidence to indicate the
positive contribution of design to both firms and
the broader economy. The UK Design Demand
(2012) program review indicated that:
• Every £100 a design alert business spends
on design increases turnover by £225.
• On average, design alert businesses in-
crease their market share by 6.3% through
using design.
• Shares in design-led businesses outper-
form key stock market indices by 200%.
• Businesses that see design as integral don’t
need to compete on price as much as oth-
ers. Where design is integral, less than half
of businesses compete mainly on price,
compared to two thirds of those who don’t
use design.
• 51 per cent of Queen’s Award for Export
Achievement winners in 2002 directly at-
tributed overseas sales success to their in-
vestment in design.
• Over 90 per cent found that design was val-
ued by their international customers and 86
per cent indicated that design helps them to
compete internationally.
This evidence is supported by programs un-
dertaken in several nations. Much of this work
focuses on European and Asian nations (Fleet-
wood, 2005; Marsili and Salter, 2006; Moultrie
and Livesey, 2009; Nussman, 2006; Raulik,
Cawood and Larsen, 2008; Ward and Runcie,
2009). Specific reported programs and examples
are highlighted below:
• Between 2002 and 2005, the Finnish gov-
ernment invested 30 million Euros in de-
sign research and development in Finland.
• Other countries such as Spain and the
Netherlands are expanding their design pol-
icy focus to gain competitive advantages.
• Similarly, design capability is being nur-
tured and developed to create competitive
advantages across industries in the Asia-
Pacific regions, where countries that his-
torically based their economies on mass
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Design-Led Innovation

production now recognise that design is
key to product and service differentiation,
Japan, Taiwan, South Korea, and China in
particular.
• New Zealand has achieved proven eco-
nomic benefit from programs in “Better by
Design”.
• The Design Singapore Council is focused on
Singapore becoming a hub for design, and
Singapore introduced a 250% Productivity
and Innovation Credit (PIC) for Investments
in Design in their 2010 budget.
Business transformation activities are not
solely dependent on Design-Led Innovation. Sev-
eral management programs and tools exist which
can assist firms in getting access to its markets
and developing a strategic mindset. However,
there are three key differentiators between these
well documented approaches and the design-led
approach discussed in this chapter: firstly the
process in which tools are applied; secondly it
is the mindset, where the meaning of design is
described as a verb, rather than as a noun (or
outcome); and thirdly it is the ability to fold in
business model innovation objectives to these
mindsets and processes.
The underpinnings of the Design-Led In-
novation process is commonly described as
design thinking. The value that design thinking
brings to an organisation is a different cultural
philosophy, of framing situations and possi-
bilities, doing things and tackling problems:
essentially a cultural transformation of the way
it undertakes its business. The work of Martin
(2009) has clearly highlighted the generalised
differences between design thinking and busi-
ness thinking, highlighting many instances of
where these differences have been overcome,
but also noting the many obstacles of trying to
unify both approaches within an organisation.
Liedtka (2010) encourages firms to try and
persist in overcoming these barriers as she has
noted that “business strategy desperately needs
design … because design is all about action and
business strategy too often turns out to be only
about talk … fewer than 10 percent of new strate-
gies are ever fully executed”. While some tools
and concepts on which Design-Led Innovation
is based may appear similar to those of other
management tools, it is the combination, ap-
plication and uptake of the tools, processes and
mindsets by the firm which achieve sustainable
innovative value.
Although the value of a DLI approach has
been explored by various countries over the past
decade, Australia is lagging behind in its adop-
tion of such an approach. Therefore the necessary
data to inform the broad based uptake of this ap-
proach to Australian SME manufacturing firms is
currently unavailable. A recent study by the UK
Design Council noted that new research should be
built on the evidence of design impact on business
performance, particularly in the broader context
of innovation (UK Design Council 2008).
As noted earlier, Design-Led Innovation is
defined as the tools and approaches which enable
design thinking to be embedded as an element of
cultural transformation within a business (Bucolo
and Wrigley, 2011; Bucolo et al. 2012). Applying
the DLI process within a business leads to the
outcome of being Design Integrated. In practice
this may lead to:
• New business model creation;
• New methodologies for stakeholder
engagement;
• Re-alignment of the organisation’s value
proposition;
• Facilitating organisational structural change.
The above four changes require the business
to identify a need to increase top-line growth. In
this regard, DLI varies from other business im-
provement processes, which focus on a reduction
in the bottom-line, or seek to improve an existing
process to reduce variance or defects yet produce
the same outcome. Top -line Growth is one of the
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four criterion identified in Figure 51. Together
with Strategic Mapping, Provoking, and Deep
Customer Insights consideration of these criteria
constitute the DLI process.
As shown in Figure 1, these four criteria are
inter-related. All four are necessary components
of the DLI process. Within the DLI process the
remaining three components are:
• Deep Customer Insights: Identifying and
understanding the market’s latent needs
and values beyond those understood to be
“known”.
• Provoking: Deliberately confronting
stakeholders for the purpose of gauging
their true emotional response to a radical
new business model proposition.
• Strategic Mapping: Evaluating how
changes to a company’s product or service
offerings affect the overall organisation.
The DLI approach developed by the authors
consists of three integrated stages and ten sub-
stages (Figure 2). These are:
• Dissect (understand, reveal and ask);
• Learn (propose, prototype, provoke and
re-frame);
• and Integrate (design, share and transform).
This approach provides an overarching frame-
work by which each business transforms and
differentiates its culture by design, individually
Figure 1. Design-led innovation (DLI)
Figure 2. Design-led innovation (DLI) framework
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Design-Led Innovation

aligned with innovation economic theory. This
framework is a non-linear process, acting merely
as a guide. The extent to which this framework
is applied is dependent upon the specifics of the
organisation, including size, industry, market
position and corporate culture.
RESEARCH APPROACH
The motivation for this research originated from
the authors’ experiences as design practitioners
and educators. Over the past five years, they
have witnessed a significant transformation in
the role of design in business. This timeframe
also coincides with a period of significant input
cost increases in the Australian economy, during
which the authors have been engaged with 50+
SMEs spanning various industries and sectors
including medical devices, consumer electronics,
agriculture, manufacturing and service delivery.
The common theme that linked these companies
was a realisation that their market share was being
eroded as they no longer had a significant point
of difference in the market, that is, their offerings
had been commoditised.
Though DLI is not the only possible response
to this challenge, it reduces the reliance on process
improvement methodologies e.g. Lean or Six
Sigma and allows firms to increase the speed of
new to the world offering releases above the speed
of commoditisation.
The goal of this chapter is to reveal the chal-
lenges companies face, or are perceived to face
in embedding of DLI and provide general recom-
mendations to address these.
Using the DLI framework (Figure 2) as a foun-
dation, the challenges (both perceived and actual)
of adopting a DLI approach were investigated.
Using Schön’s Reflection in Action Paradigm,
observations (captured through discussions with
firms during the authors’ business immersion
through the practice of raising DLI awareness)
are categorised and analysed. As Schön (1983)
notes “practitioners do reflect on their knowing-
in-practice. They may do this in a mood of idle
speculation, or in a deliberate effort to prepare
themselves for future cases. But they may also
reflect on practice while they are in the midst of it.
Here they reflect-in-action … (however) the pace
and duration of episodes of reflection-in-action
vary with the pace and duration of the situations
of practice”. These reflections are collectively
analysed using a thematic approach (Braun &
Clarke, 2006) to uncover consistent themes for
discussion. These themes are presented in the
following sections of the chapter.
WHAT ARE THE PRACTICAL
CHALLENGES OF ADOPTING
A DESIGN-LED INNOVATION
APPROACH?
Findings indicate a myriad of challenges that in-
hibit the ability of firms to undergo a design-led
approach. These include:
• Cultural challenges (resistance to change
either of habits or thinking);
• Communication challenges (describ-
ing business and articulating the need for
change);
• Educational challenges (barriers to imple-
mentation and education of both staff and
customers);
• Integration challenges (confusion and po-
larisation surrounding tools, methods and
the time required to implement) and re-
source challenges.
It is important to note that the Design-Led
Innovation process cannot be seen and/or treated
as a discrete event, or a series of steps or stages,
nor can it be delegated. Rather the whole busi-
ness model needs to be in focus to achieve ho-
listic, sustainable innovation while encouraging
a different way of thinking (Pozzey et al. 2012).
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The challenges identified through this study are
outlined below and are supported through quali-
tative insights, which reinforce the key thematic
challenge. These challenges are not exhaustive
and aim to highlight the series of activities that
must be considered by firms seeking to use DLI
as a source of competitiveness in a high cost en-
vironment. Further, these key themes point to the
programs, which must be developed in order to
support firms along this journey to DLI adoption.
Cultural Challenges
Changing the culture of any organisation is a slow
process especially for firms that have a strong fam-
ily history and an engrained way of doing things.
Isolation of departments is a large barrier that limits
knowledge dissemination and collective action on
strategy. Firms identified departmental isolation
and weakness in communication, yet attributed
it to daily routine and personality differences.
Working in isolation on new projects stems from a
need to expedite projects and compliments a sense
of control over the activities involved. Pursuing
greater collaboration was suggested as:
…a massive culture shift for a lot of us…people will
sometimes take power from holding information
and you know, obviously dealing with different
personalities in the company…I think that would
be a challenge for a lot of people.
Creating dialogue between colleagues to
avoid assumptions and create consistency was
considered difficult partly due to the low level
of policy and procedural enforcement. For many
long-term employees, the firm has a unique and
strong culture of community, which has led to a
‘local language’ between departments and indi-
viduals in the company. This presents a difficulty
with the dissemination of knowledge and raising
all employees to an even knowledge platform.
When embarking on a design-led initiative it was
made clear, “we need to talk the same talk and
speak the same language otherwise it’s going to
be impossible.”
Communication Challenges
The largest adoption challenge identified was the
empowerment and optimisation of communica-
tion skills necessary for growth within a firm.
Decentralising decision-making within a growing
firm can enable greater efficiency of projects
and encourage ownership of roles throughout
the company. It was found that even when firms
placed empowerment as a priority, there was
limited translation of that throughout the firm.
‘Upper management might be trying to empower
people…but people don’t feel empowered and they
feel they need to get the collective ok.’ Maximis-
ing allegiance within the design and engineering
department specifically was seen to be a key
factor in enabling innovation to occur. One par-
ticipant noted, ‘Ideally if you want to keep those
people (design and engineering) here and keep
them entertained…it’s the perfect opportunity to
capitalise on those skills they have.’ Cultivating
those skill-sets should lead to a level of increased
responsibility and authority.’
Also taking the opportunity to involve a wider
group of people from the organisation in discus-
sions was seen as a key area to leverage. An aver-
sion to involving employees outside the immediate
scope of a project or problem because they may not
be of direct contributory value to the discussion,
risks discouraging and undervaluing the people
of the organisation. The opportunity to gain valu-
able insight and knowledge was noted by using
methods other than meetings. One business said:
…one of the ways to go forward would be to in-
ternally have a lot more conferences …I mean the
other word for it is training…but when you say
that it seems to have such a bad feeling… I’ve got
bucket loads of information and you’ve got bucket
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Design-Led Innovation

loads of information… if we could all use all of
that stuff I think we’d be in a much better space
and that’s training. It’s sharing for the purpose
of training.
Educational Challenges
An important finding was a consensus that the
firms had the correct people with the appropriate
skill sets available to lead a design-led approach,
but had difficulty in finding avenues to utilise
these skills more effectively. A designer stated,
The people and the resources are here, the drive
and tools are here, but are stuck in current thinking
and models.” Another participant with potential
to influence change explained his inability to fully
engage in additional projects, ‘Trying to get new
innovations while project managing people as well
as a project pile that big which we’re constantly
trying to tick off…it’s like treading water.
When discussing a strategy to create some
organisational buy-in and begin integrating a
Design Led approach, the preferred strategy
focused on individual work spheres and the least
time intensive approach. A willingness to share
the learning, tools and processes within their own
work spaces was evident as described here by a
product manager:
I can adopt the ideas of Design-Led Innovation
and use it in training and presentation with new
and old employees to bring about change.
Ultimately, this barrier presents a very difficult
but not uncommon challenge facing firms tackling
any sort of change initiative. This reinforces the
fundamental need for commitment and visible
engagement by higher management to empower
employees to allocate sufficient time and energy
into implementing change strategies. As indicated,
these barriers are not borne out of ignorance,
and recognition of the need to act is not lost on
management. As a participant expressed:
…well definitely it’s more important than any-
thing else we do right now, it perpetuates through
everything… we need to actually pause to think
critically.
Integration Challenges
Another result that emerged is the polarising
position workers felt between the need to pursue
a design-led approach but also maintain existing
responsibilities to the core business. Limited time
and pressure to deliver meant that sufficient trac-
tion in any change initiative either was disbanded
through other demands or simply could not get a
sufficient number of people to focus on building
growth. Especially within family owned busi-
nesses, the decision to trade off existing core
activities with those that build strategies for the
future, needs leadership to drive (and permit)
engagement. Still, even those leaders who wholly
recognised the need for innovation in a globalis-
ing economy, ‘…we no longer have this buffer of
the ocean that’s protecting us from — you know,
protecting us from us proving ourselves’, found it
difficult to step away from the present to discuss
the future. This further emphasizes the major
challenges in developing an implementation
framework that can get traction for real change yet
maintain the current business model sufficiently
in the interim. The challenge to overcome this is
described by one participant as, “Short term cash
out trumps the vision.”
Resource Challenges
Defining the customer and their true problems
is a key challenge facing firms. This is vital in
adjusting the structure and workflows to enable
better allocation of resources to meet customer
needs. As a fundamental and central competency
of the Design-Led Innovation approach, workers
noted the need to prototype more consistently
and frequently throughout the design process
for the sake of delivering a product that exceeds
customer expectations. The repercussion of not
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Design-Led Innovation

giving priority to this prototyping is that the value
proposition is tested predominantly through the
fully materialised product in the market. This
incurs added cost, time and risk to the firm’s
brand. A standout characteristic used to describe
the firm in light of the aforementioned behaviour
was “fault tolerant”. One participant noted that
the case firm was receptive to “killing a project
at the 11th hour” through being realistic about the
availability of profitable market space. There was
consensus that decisions like this are made because
of a gap in the case firm’s ability to effectively
‘predict returns on innovative concepts’ in the
early stages of project conception.
IMPLICATIONS FOR FIRMS TO
BECOME DESIGN INTEGRATED
AND NEXT STEPS
Many business cultures have political, social and
operational complexities that require thorough
navigation and consideration of factors that have
traditionally remained outside the scope of design.
Therefore understanding the internal barriers and
challenges to adoption when becoming design-led
are imperative. The need to effectively articulate
the advantages of pursuing a design-led approach,
in a way that is meaningful to business discourse
is one such challenge. This is critical in ensuring
firms are able to internalise and subsequently steer
the wheel of innovation autonomously.
Design-Led Innovation is a proven approach
to compete in a high cost environment. There is
sufficient international evidence to validate the
DLI approach to enhancing a firm’s competive-
ness. However, there is a significant lack of data to
support its uptake in the Australian context. This
initial study has revealed some of the challenges
in adopting DLI as part of the innovation culture
of firms. Strategies to overcome these challenges
are required if a broad based adoption of DLI is to
be achieved. Currently, a systematic approach to
addressing these issues is not evident within the
national innovation eco-system. Therefore, this
study is only the beginning and further research
is required which focuses on building programs
and activities which aim to enable a broad based
adoption of DLI to help firms compete in a high
cost environment.
Given the rapid rate of structural economic
change within the Australian economy, a sense
of urgency now exists to collect the necessary
evidence, develop support programs and build
capability and leadership within organisations.
As developing DLI is only one aspect of the in-
novation agenda, this activity must develop in
parallel with all other innovation activities (such
as enhancing technological capabilities) and not
be seen as separate or competing. This will be a
difficult challenge, as the role of design has not
typically been seen as key to enhancing competi-
tiveness at a strategic level in a firm.
Based on the evidence from the firms who have
been early adopters of this approach in Australia,
businesses are willing to explore this approach;
however, it is clear that they will require the support
across the innovation eco-system to ensure they
are able to realise the value of DLI in the future.
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KEY TERMS AND DEFINITIONS
Deep Customer Insight: A profound under-
standing gained about a customer or group of
customers through comprehending their problems
and latent needs.
Design-Led Innovation: Leveraging deep
customer insights, in order to capitalise on new
market opportunities that result in the transforma-
tion of new business models.
Design Thinking: The process and methods
that designers use to ideate, prototype and prob-
lem solve in order cultivate a more creative and
human-centred company culture.
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Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 10
The Effects of Six Sigma
Quality (SSQ) on Innovation
and Organisational
Ambidexterity in a High
Operating Cost Environment
ABSTRACT
This chapter explores the effect of Six Sigma Quality (SSQ) on innovation and organizational ambi-
dexterity in a high operating cost environment. Multiple-cross case analysis revealed that SSQ seems
to align very well with process innovation, where the organisation has a well-defined process output to
control. However, some tension exists between SSQ and product innovation, particularly in terms of the
time expectation for SSQ to deliver results. Furthermore, the study shows that SSQ could have a positive
impact on organizational ambidexterity in a high operating cost environment, as long as management
recognizes that innovation approaches require their own formula for success. Management needs to
establish a team that could manage the tension between “getting it right the first time” as part of man-
aged innovation and “learning from failure” as part of entrepreneurial innovation.
INTRODUCTION
In this section we introduce the Six Sigma Quality
(SSQ) program, by providing a brief background,
outlining its objectives and developing a research
question. The objective of Six Sigma Quality
(SSQ) is to manage process ‘Variation’ in order
to reduce defects to 3.4 per million opportunities
(DPMO) (Blakeslee, 1999; Linderman, et al.,
2003). SSQ requires that companies build their
business around an in-depth understanding of
their customers’ requirements (Blakeslee, 1999).
It could be argued that SSQ is grounded in the
fundamental principles of Total Quality Manage-
ment (TQM) (Evans & Lindsay, 2008). However,
SSQ goes beyond TQM, particularly with its
Milé Terziovski
Curtin Graduate School of Business, Australia
DOI: 10.4018/978-1-4666-5828-8.ch010
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

disciplined approach to training and achieving
‘stretch goals.’ (Antony & Banuelas, 2002).
The concept of implementing SSQ was pio-
neered at Motorola in the 1980s as part of their
successful application for the Malcolm Baldrige
National Quality Award (MBNQA) (Evans &
Lindsay, 2008). Despite Motorola’s success with
SSQ, it was not until the late 1990s that large US
companies such as General Electric recognized
the corporate benefits of SSQ. For example, CEO
Jack Walsh described his vision for SSQ in GE’s
1997 annual report as the “centre-piece of GE’s
dreams and aspirations.” GE’s payoff reached
more than $750 million in the first year that SSQ
was implemented.
Despite the resounding success achieved by
large companies with the SSQ methodology, many
companies today operate at 3-sigma. This trans-
lates to 67,000 Defects Per Million Opportunities
(DPMO), or cost of poor quality of 20-30 per cent
of sales. Manufacturers frequently achieve 4-sigma
while service firms are often at 2-sigma (Antony
& Banuelas, 2002; Byrne, 2003; Zu, Fredendall,
& Douglas, 2008; Hoerl, & Gardner, 2010).
Notwithstanding its profit potential, SSQ has
led to problems for innovative organisations such as
3M. In a Business Week article, Hindo (2007:10)
stated that “..efficiency programs such as Six
Sigma are designed to identify problems in work
processes-and then use rigorous measurement to
reduce variation and eliminate defects. When these
types of initiatives get ingrained in a company’s
culture, as they did at 3M, creativity can easily
get squelched.” Hindo (2007: 14) further asserts,
“There has been little formal research on whether
the tension between Six Sigma and innovation is
inevitable.” Benner and Tushman in Zhang, Hill
and Gilbreath (2011:48) support this view by
stating that “diffusion of process management
technologies favours exploitative innovation at
the expense of exploratory innovation.”
A recent article by Zhang et al. (2011) de-
velops an agenda for Six Sigma research. The
authors challenge the academic and practitioner
communities to work collaboratively to find
practical research-based answers to each of their
eight research questions that they propose in their
published article. The aim of this chapter is to shed
new light on the relationship between SSQ and
innovation, adding to the SSQ research agenda
developed by Zhang et al. (2011). The general
question we address in this chapter is: can SSQ
coexist as part of an ambidextrous organisation
in a high operating cost environment?
LITERATURE REVIEW AND THEORY
In this section, the literature on SSQ, innovation
and ambidexterity is reviewed in order to define
various terms and to identify research proposi-
tions, which would provide a clear purpose for the
empirical and theoretical discussion throughout
the chapter.
Six Sigma Literature
Linderman, Schroeder & Zaheer (2003) contend
that Six Sigma is a phenomenon that is gaining
wide acceptance in industry, but lacks a theoretical
underpinning (Braunscheidel, Hamister, Suresh,
& Star, 2011). Linderman et al., (2003) argue
that rigorous academic research of Six Sigma re-
quires the formulation and identification of useful
theories related to the phenomenon. For example,
Linderman et al., (2003) argue in their theoretical
paper that most managers use explicit goal setting
to motivate performance with SSQ projects, which
creates the illusion of it being a technical issue.
However, the authors believe that goal setting
also requires behavioral considerations. Thus, an
important literature finding is that SSQ success
requires technical and behavioral understanding
(Linderman et al. 2003).
Zhang et al. (2011) conducted extensive
research of the academic and practitioner SSQ
literature, coupled with numerous focus group
meetings with expert practitioners, and senior
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

managers, in order to develop a research agenda
for Six Sigma research (Zhang et al. 2011). The au-
thors identified five different views of Six Sigma:
• Metric View: Focuses on the sigma met-
ric, other process capability metrics and
“balanced –scorecard” metrics.
• The Tool View: Emphasizes statistical
tools, causal mapping, process mapping
etc.
• Project View: Emphasizes project man-
agement tools, for example, project sched-
uling and project control, and the DMAIC
stage-gate method for managing improve-
ment projects (define, measure, analyze,
improve, and control).
• Program View: This view emphasizes
generating, selecting, resourcing, control-
ling, and closing a portfolio of projects.
• Philosophy View: Focuses on the under-
lying philosophies and how they affect the
values and culture.
The authors conclude that all five views
are critical in understanding SSQ and propose
a research agenda that focuses on the program
view “..given that Six Sigma is an organisational
improvement program, researchers can approach
Six Sigma as an organisational intervention. This
program view is broader than the metric, tool, and
project views and more concrete than the phi-
losophy view.” The authors make an observation
that SSQ practices can be divided into core and
discretionary principles. The core principles are
necessary for a process improvement program to
be considered as an SSQ program. A theoretical
paper by Blakeslee (1999) articulates several core
principles for successful implementation of SSQ.
Principle 1: Committed leaders drive a successful
SSQ implementation.
Principle 2: The integration of SSQ with existing
initiatives and business strategy.
Principle 3: A framework of process thinking
needs to support SSQ efforts.
Principle 4: The gathering of customer and market
intelligence is crucial.
Principle 5: SSQ project must produce real sav-
ings or revenues.
Principle 6: A thoroughly trained core of team
leaders directs the SSQ effort.
Principle 7: The continuous reinforcement and
rewarding of leaders who support initia-
tives and improvement teams that carry the
initiatives out is required to sustain SSQ
implementation.
We can ascertain from the SSQ principles
above that several traditional theories play a role
in SSQ implementation such as leadership, busi-
ness strategy, process improvement, teams, finan-
cial rewards and recognition (Evans & Lindsay,
2008; Zu, Robbins, & Fredendall, 2010). These
principles are supported by Wiklund & Wiklund
(2002) who outline many of the already under-
stood concepts and elements of SSQ; such as the
use of Master Black Belts, Black Belts and Green
Belts, the DMAIC (Define-Measure-Analyse-
Implement-Control) approach. The authors also
articulate some of the benefits that can be obtained
by implementing SSQ in a high operating cost
environment including cost savings, improved
customer satisfaction and increased productivity.
The importance of quality education, train-
ing and participation are presented as being key
to the success of SSQ implementation, coupled
with cultural changes that reinforce the learning
cycle. These SSQ principles outlined by Blakeslee
(1999), together with the discussion by Wiklund
& Wiklund (2002), are used as a basis for the
development of the case study protocol, and are
subsequently used in the discussion of the quali-
tative results.
Definition of Innovation
It is important to define the different types of
innovation that are likely to be affected by SSQ
in an organisation (Yusr, Othman & Mokhtar,
2011). However, innovation is not an easy concept
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

to define. Camison-Zomoza et al., (2004, p.334)
assert that a global definition of innovation does
not exist. Different definitions of innovation are
appropriate under different circumstances. “One
common element in all definitions of innovation
is that it is a new idea that is put into practice
while paying special attention to its usefulness.”
Extending this broad definition, innovation in-
volves the application of knowledge to offer new
products or services to customers through lower
costs or improved attributes (Damanpour, 1992).
These improvements can be achieved through new
product innovation or process innovation.
A more encompassing definition of innovation
is provided by Damanpour (1991), who defines
innovation as “the adoption of an idea or behaviour,
whether a system, policy, program, device, pro-
cess, product or service, that is new to the adopting
organisation.” This could be explained further if
we consider Schumpeter’s (cited in Narayanan,
2001: 85) two-phase innovation theory of entre-
preneurial innovation and managed innovation.
The entrepreneurial innovation phase relates
to new product development, for which organic
characteristics are necessary. On the other hand,
the managed innovation phase relates to cost
efficiencies through process innovation (Terzi-
ovski, 2010). Based on the literature findings it
is reasonable to speculate that Six Sigma would
facilitate managed innovation in a high operating
cost environment and would be less conducive to
entrepreneurial innovation (Narayanan, 2001).
Eng (2011) provides a link between theoretical
concepts of organisational innovativeness and
market orientation to SSQ.
SSQ practices provide a balance between short
and long-term goals, which can enhance organi-
sational innovativeness, which are imperative in
a high cost operating environment.
SSQ provides a tool for the successful imple-
mentation and measurement of market orientation.
SSQ ‘champions’ have an important role in
creating opportunities for performance enhance-
ment through collaboration across organisational
boundaries.
Positive brand outcomes resulting from SSQ
practices can be utilised in marketing in order
to strengthen customer perceptions and enhance
customer value.
High-tech firms demonstrate a significant
correlation between SSQ e-business practices and
SCA in contrast to the insignificant correlations
for low-tech firms. This suggests highly varied
perceptions of the impacts of SSQ on e-business
processes between low and high-tech firms.
New Product Innovation
and Process Innovation
Pisano (1996) argues that there is a strong link
between New Product Development (NPD) and
process innovation. The author identifies “process
driven” sectors, which predominantly consist of
large firms such as commodity chemicals, steel
and paper where there is little product innovation.
In these sectors process innovation is required to
reduce cost, cycle time, and to improve quality of
products. This is where SSQ is expected to play
a key role. Changes in process innovation would
lead to human resources practices, logistics and
marketing functions (Narayanan, 2001).
On the other hand, Pisano (1996) identifies
“product driven” sectors such as software, com-
puters, assembled products, where new product
innovation would help firms to compete for new
customers. This is where Design for Six Sigma
(DFSS) is more likely to be implemented. Evans &
Lindsay (2008:590) in Zhang et al. (2011) define
DFSS as: “a set of tools and methodologies used
in the product development process for ensuring
that goods and services will meet customer needs
and achieve performance objectives, and that the
processes used to make and deliver them achieve
Six Sigma capability.” According to Zhang et al.
(2011) some organisations implement DFSS as
part of an integrated SSQ program, while others
implement DFSS as an independent methodology
(Sony & Naik, 2012).
Parast, (2011) uses theories from process
management and innovation to establish whether
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

SSQ projects can improve firm innovation, and
if so, how? The author suggests that SSQ acts
as an effective tool for translating the needs of
the customer into improvement projects that ul-
timately enhance technological innovation. The
well-known fact that SSQ aims to reduce defects
through customer feedback is used to support
the proposition that if a firm is oriented heavily
towards its existing customers then SSQ is likely
to lead to highly incremental innovation and a
low level of innovation for new customers. The
authors suggest that a stable customer base and
environment allow SSQ to have a greater impact
on performance.
Consequent to the above discussion, I have
adopted Zhang et al. (2011) proposition and
recommendation to further explore the relation-
ship between SSQ and innovation, both product
and process. Proposition 1: The implementation
of Six Sigma improves both product and process
innovation for organisations.
Ambidexterity
Given our earlier discussion that success with SSQ
requires technical and behavioral understanding;
the ambidextrous model is a useful tool to interpret
technical and behavioral considerations. Benner
& Tushman (2003: 247) define the ambidextrous
organisation as: “…composed of multiple tightly
coupled subunits that are themselves loosely
coupled with each other. Within subunits the tasks,
culture, individuals, and organisational arrange-
ments are consistent, but across subunits tasks and
cultures are inconsistent and loosely coupled.”
For example, O’Reilly III & Tushman (2004)
in Hindo (2007), based on a research study of
35 organisations, found that ambidextrous struc-
tures were successful 90 per cent of the time and
were able to separate new exploratory activities
from traditional exploitative activities (Benner
& Tushman, 2003). The successful companies
established an executive team to manage the
two sub-cultures by separating exploratory and
exploitative activities.
Consequent to the above discussion, a paradox
has emerged between the need for efficiency and
the management of process variation, which is
fostered by SSQ, and on the other hand, the need
for risk-taking and learning from failure. Hindo
(2007: 16) reinforces the paradox by stating, “Six
Sigma fosters a very low tolerance for risk because
risk increases variation. Innovation, on the other
hand, seeks to brave undiscovered, uncertain
territory. Such fledgling efforts are inherently
inefficient. Innovation requires a tolerance for
risk-taking and failure.”
Another way to interpret the paradox is that
SSQ leads to more incremental innovation at the
expense of more breakthrough innovation (Burgel-
man, et al., 2004). Benner and Tushman (2003) ar-
gue that competitiveness in organisations depends
on the ability of an organisation to be ambidex-
trous by balancing exploitation and exploration
so that it is better suited to deal with a dynamic
environment. Zhang et al. (2011) proposes that
SSQ may provide an interesting context for the
study of organisational ambidexterity because
of its balancing mechanism between structural
control and structural exploration. Zhang et al.
(2011) express concern that “The mechanism for
maintaining this balance is unclear.” Zhang et al.
(2011) have summarized their previous discussion
by the following proposition: Proposition 2: The
implementation of Six Sigma leads to a higher
level of organisational ambidexterity.
The qualitative data is expected to shed new
light on the research question and the two proposi-
tions articulated by Zhang et al. (2011) (O’Reilly
III & Tushman, 2004; Benner & Tushman, 2003;
Schumpeter’s (cited in Narayanan, 2001)).
RESEARCH METHODOLOGY
Case Study Protocol
Given the explorative nature of this study, the fol-
lowing questions are articulated from the literature,
and form the basis for the Case Study Protocol
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

(CSP). A multiple cross-case analysis is conducted
with respect to each of the CSP questions.
• Which factors stimulated your organisation
to adopt SSQ?
• What is the nature of the change process
adopted – new product innovation or pro-
cess innovation based on SSQ?
• What are the barriers to implementing SSQ
and how were these barriers addressed?
• What is the impact of SSQ on the organisa-
tion’s innovation culture?
• What are the perceived and actual out-
comes of SSQ?
The Unit of Analysis
The unit of analysis in this study is defined as the
Strategic Business Unit (SBU). An organisation
can have any number of SBUs that implement
their own versions of Six Sigma. The case stud-
ies provide a longitudinal analysis of the process
of SSQ implementation in a high cost operating
environment and the culture of innovation, the dif-
ficulties encountered by each organisation over a
three-year time frame. In particular, primary data
was sought from the case study organisations.
Respondents
The case study protocol was used to interview
senior managers from each of the companies. The
respondents are typically the General Manager or
person responsible for the implementation of Six
Sigma within the case study organisation (Yin,
1989). A letter of invitation was sent to each of the
interviewees seeking participation in the project.
The letter explained the purpose of the research
and explained the methodology and addressed the
ethical undertakings by the researchers to each
organisation. The interviews were taped using a
digital recorder after permission was sought from
the interviewees. Interviews typically ran for two
hours, and in some cases longer. The researchers
collected relevant documentation from the inter-
viewees and respective Internet sites.
MULTIPLE-CROSS CASE
ANALYSIS (MCCA)
Lindeman et al., (2003) argue that rigorous
academic research of Six Sigma requires the
formulation and identification of useful theories
related to the phenomenon. Multiple cross-case
analyses have been conducted based on the case
study protocol questions developed from the
literature. The seven SSQ principles (Blakeslee,
1999), and the Five Core elements of SSQ articu-
lated by Zhang et al. (2011) are used to support
the qualitative analysis. The two propositions are
explored through the common themes identified
through the MCCA (Eisenhardt 1989; Evans &
Lindsay, 2007).
The Factors Which Stimulated
the Organisation to Adopt SSQ
The factors, which stimulated the four case study
companies to adopt SSQ all varied in nature.
However, the underpinning factor was to increase
the bottom line, given the high operating cost en-
vironment in which the four SBUs were operating.
This is consistent with principle 5: SSQ Projects
must produce real savings or revenues (Blakeslee,
1999). This is also consistent with the Metric Focus
articulated by Zhang et al. (2011:43) “Six Sigma
emphasises metrics in either customer or financial
terms. It also emphasises rigorous tracking of
the metrics to ensure that benefits are obtained
from improvement projects.” For example, the
operations department initially introduced SSQ
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

at Securency. After strong results in the opera-
tions area, SSQ was expanded to accomplish the
strategic goals of the organisation.
The main factor which motivated senior man-
agement to implement Lean Six Sigma at Qantas
Engineering was the positive word of mouth from
their key suppliers, General Electric and Boeing,
who had very successful SSQ programs. Lean
Six Sigma is an integral part of the Engineering
Group’s business strategy and spread gradually
to other parts of the organisation.
The main champion for Six Sigma at Rio
Tinto came from a senior executive at Comalco
Aluminium Ltd, a strategic business unit within
the Rio group, who quickly won CEO buy-in.
He was the initial ground-breaker and explorer
who went out and studied the methodology and
formulated the value proposition.
The Copper Group followed a similar learn-
ing model, which received support from the CEO
which was essential for beefing up the structures,
engaging managers, conducting training and
implementing projects. However, the same de-
gree of commitment was not present across all
Product Groups at Rio Tinto. This is consistent
with Principle 1: committed leaders drive a suc-
cessful SSQ implementation (Blkeslee, 1999).
Furthermore this finding aligns well with Zhang’s
core element of Leadership Engagement, which
argues that the success of a process improvement
program requires strong top management support,
where senior executives act as champions and are
directly involved in projects. This ensures that
the right projects are selected (Blakeslee, 1999;
Zhang et al., 2011).
The motivation for implementing SSQ at
Rio Tinto varied according to how advanced the
Product Group was with its process improvement
practices. For example, in the more organised parts
of the business such as Comalco, SSQ was accepted
as part of the leadership development program.
At Comalco and the Copper Group managers
were convinced that Six Sigma played a key role
in their competitive strategies. The initiation of
full-time positions at the two product groups was
to link the Six Sigma program with the business
planning. This finding is consistent with Principle
2: The integration of SSQ with existing initiatives
and business strategy (Blakeslee, 1999).
At Caterpillar Underground Mining (CUM),
SSQ was driven by the parent company Caterpil-
lar from the USA, which was heavily focused on
quality with a philosophy of getting things right the
first time and resolving field issues. The manag-
ers at the Burnie, Tasmania plant had a good core
group performing the functions and knew what
was going on with Quality and Business Process
Improvement. SSQ had received prominence as
part of the significant amount of changes that were
taking place at the Fabrications and Assembly site
over a period of six months.
Caterpillar implemented SSQ by motivating
their employees through incentives. Caterpillar
promised their Black Belts that after 2 years
as a Black Belt they would be promoted. This
is consistent with Principle 7: The continuous
reinforcement and rewarding of leaders who
support initiatives and improvement teams that
carry the initiatives out is required to sustain SSQ
(Blakeslee, 1999).
The strategy worked quite well for the first
18 months; however, the promise of promotion
yielded limited results at the Burnie plant, hence
the motivation shifted to using Six Sigma as a
development opportunity for employees rather
than a process improvement methodology. This is
an interesting shift from Principle 7 to Principle 6:
A thoroughly trained core of team leaders directs
the SSQ effort. This supports Zhang’s third core
element of a dedicated improvement organisa-
tion. Zhang concluded that it is convention in Six
Sigma to select some of the organisation’s best
employees to fill the Black Belt positions (Eckes,
2000; Harry & Schroeder, 2000; Pande, Neuman
& Cavanagh, 2000).
It is important to note that one of the factors that
contributed to the acceptance of Six Sigma at the
CUM plant was the existing quality strategy and
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

innovation culture of risk taking and experimen-
tation. This is a critical finding in the context of
the ambidextrous organisation; supporting Benner
& Tushman’s (2003) theory that competitiveness
depended on the ability of an organisation to be
explorative and exploitative at the same time. The
other important message that emerged from the
CUM case study is that SSQ does not need to be
implemented throughout all functions in order to
be of value, as long as the SSQ project produces
value to the organisation as stated in Principle 5:
SSQ project must produce real savings or revenues
(Blakeslee, 1999).
SSQ and the Change Process
Adopted New Product Innovation
and/or Process Innovation
The nature of SSQ and the change process adopted
also varied across the four case study companies.
For example at Securency, the repetitive processes
had to be standardised in order to get some gains
and stability in the process. Principle 3 supports
this: a framework of process thinking needs to
support SSQ efforts (Blakeslee, 1999). Zhang
(2011) argues as part of his structured method
that adhering to a standard method helps to create
a common language across the entire organisa-
tion, which facilitates knowledge creation and
dissemination.
At Qantas Engineering, certain changes were
required with the existing management systems
in order to achieve alignment with Six Sigma.
Qantas has many different departments with good
internal processes within a department structure.
Management discovered that by comparing the
processes end to end across all the departments,
many opportunities for incremental innovation
emerged. This is a critical finding from a process
innovation perspective and reinforces the impor-
tance of SSQ in a specific departmental structure.
This finding aligns very well with Principle 3, a
framework of process thinking needs to support
SSQ efforts (Blakeslee, 1999). This finding is
also supported by Zhang et al. (2011), through
his structured method stating that “..the method
supports structured exploration of root causes and
structured control of the process to produce the
desired output.”
Following the experience with several SSQ
projects, Qantas Engineering decided to imple-
ment Lean Six Sigma, a term used to describe
continuous improvement (Evans & Lindsay,
2008). Lean seeks to create “more value with
less work”. Lean is a generic process manage-
ment philosophy derived mostly from the Toyota
Production System (TPS). According to Liker &
Hoseus (2008:461) “The term ‘lean production’
was coined in the book titled The Machine that
Changed the World to refer to the next generation
manufacturing company..Toyota did more with
less and continuously improved. The focus was
on adding value to customers at every step in the
process from raw materials to finished goods, to
give customers and society more with less.”
An internal team, reporting directly to the
Executive Manager, was established to implement
Lean Six Sigma at Qantas Engineering. Responsi-
bility for Lean Six Sigma was gradually transferred
to the business units. Senior managers stepped
back and transferred ownership to the business
units while at the same time they maintained full
support for the new program. This finding aligns
well with Zhangs’ core element of Leadership
Engagement. Zhang et al (2011) stated, “The
success of process improvement program requires
strong top management support. Six Sigma puts a
systematic mechanism in place to ensure that the
leadership team is engaged and Six Sigma stays
on the organisation’s dashboard..”
Qantas Engineering combined Toyota’s lean
philosophy with its own modus of operations. One
of the benefits of going with the lean approach was
that it called for Total Integration. Qantas found
the best way to implement Lean Six Sigma was
to focus on a smaller area of the organisation like
Engineering, then make it a real shining example
of what could be done throughout the rest of the
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

organisation. The Six Sigma deployment strategy
revolved around implementation strategy in order
to achieve successful Six Sigma outcomes.
The above is consistent with earlier find-
ings that SSQ does not have to be implemented
throughout all functions of an organisation in
order to be of value. Zhang et al. (2011) supports
this finding by stating that “..Six Sigma projects
must have clearly defined goals, expressed in
metrics such as critical-to-quality. Each project
is carefully audited on its intended and realised
benefits, usually in financial terms and certi-
fied by the organisation’s finance department.”
(Schroeder et al. 2008). At Rio, Lean Six Sigma
was also implemented with a significant emphasis
on eliminating waste and being more efficient.
This is consistent with Pisano (1996) who as-
serted that process innovation is required to
reduce cost, cycle time, and to improve quality
of products. The focus on waste elimination re-
sulted in a tidier work place; however, this was
not related well to productivity improvement.
An important question emerged from the Rio
case study, which was consistent with the key
question, addressed in this paper: does SSQ help
or hinder innovation and ambidexterity? (Zhang
et al., 2011). There was strong support for SSQ
at Rio from a process innovation perspective, be-
cause it enabled employees to work in a standard
way using a standard methodology and tool set.
However, the main concern was that the standard
approach might have a negative effect on creativity
and innovation. This concern was not confirmed
with strong evidence.
On the contrary, in some Product Groups, SSQ
was a core component of delivering the business
plan from a product and process innovation per-
spective. This is supported by Zhang et al. (2011:
43) core elements of ‘structured method’ and
‘metric focus.’ “Six Sigma is highly prescriptive
in demanding that each project must strictly fol-
low the DMAIC structured method. The method
supports structured exploration of root causes and
structured control of the process to produce the
desired output.”
The Barriers to Implementing
SSQ and How These Barriers
Were Addressed
This question produced some interesting qualita-
tive results, which have shed new light on the role
of SSQ in organisational ambidexterity as defined
earlier by Benner & Tushman (2003). The barri-
ers to implementing SSQ at the four case study
companies were mainly cultural in nature. For
example, at Securency, some of the major barri-
ers and how they were overcome included freeing
up key people to implement projects, overcom-
ing resistance to change exhibited by qualified
workers such as Printers who had been taught to
operate in certain ways and problems associated
with rapid growth of business from central banks
around the world. This is consistent with Zhang et
al (2011:42) conclusion that Six Sigma philosophy
can be summarised as “assigning some of our
best people to our most important problems and
requiring data-based decision making.”
This result shows that management was aware
of the tension between the two cultures of man-
aged innovation (process) and entrepreneurial
innovation (product innovation) (Narayanan,
2001). Securency is another good example where
SSQ had a positive effect on organisational am-
bidexterity. For example, SSQ was a catalyst to
promote exploitation through process innovation
and exploration through new product development.
Securency have demonstrated that through SSQ
implementation they were able to standardise their
current processes, and at the same time, they cre-
ated new customers in different parts of the world,
with their unique product for note printing, which
they developed through DFSS.
Lean Six Sigma implementation at Qantas
Engineering was mixed. While there was a very
supportive leadership team in the Engineering
Group, in other areas, there was uncertainty as to
whether SSQ was worthwhile or not. There were
employees at all levels of Qantas Engineering that
had healthy scepticism. Some of the greatest risks
perceived in implementing Lean Six Sigma were
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that in the early stages of implementation often
the cost savings would not be obvious.
This finding is supported by Zhang et al.
(2011: 44) who articulate the true challenge that
organisations are faced with when implementing
SSQ “The aggregated results of many successful
Six Sigma projects are an improved bottom line
for an organisation, as manifested by the savings
reported by many companies. This suggests that
Six Sigma can also lead to improved financial
performance.” However, the authors go on to
articulate the challenge for SSQ implementation
stating that “The true challenge, however, is em-
pirically validating Six Sigma’s effectiveness.”
These findings are further reinforced by the
Rio case study. The greatest risk perceived at Rio
Tinto in the early days of implementing Six Sigma
was the concern that the organisation may not be
in a position to deliver on the bold financial prom-
ises. One of the major barriers to implementation
of Six Sigma was the attitude that even without
Six Sigma the same performance improvements
could have been achieved. The Black Belts tried
to overcome that attitude by articulating how extra
value was created using cross-functional teams.
Interest in Six Sigma at Rio was found to drop
off significantly the moment trainees could not
see relevance to their projects. In some Product
Groups at Rio Tinto, Six Sigma did not get cred-
ibility up front because it took up to two years
to show the bottom line results. Therefore, the
challenge for Six Sigma champions was to make
it clear upfront to staff at all levels that it may
take up to two years for a project to show results.
Another barrier to SSQ implementation at Rio
Tinto was creating awareness at senior manage-
ment level what commitment meant for a signifi-
cant change program such as SSQ. Although it
was relatively easy to agree on a solution it was
a lot harder to implement the solution. One of the
major barriers to implementation was the need
for Six Sigma to demonstrate its benefit delivery
capabilities. This finding aligns with Zhang et al.
(20011:45) comment, that “The true challenge,
however, is empirically validating Six Sigma’s
effectiveness.”
The Impact of SSQ on the
Organisation’s Innovation Culture
Zhang et al. (2011: 45) asks the question “How
should Six Sigma be implemented in different
organisations?” The multiple cross-case analyses
revealed that SSQ had a different impact on the
culture of each case study company. For example
at Securency the impact was positive. The growth
of new international customers required new
processes that Securency did not have, which
required a lot of technical input. The rigour as-
sociated with Six Sigma helped the organisation
in the context of large technologically complex
projects through Failure Mode Defects Analysis,
What If Scenarios? and Risk Management.
The major challenge for the Qantas Engineer-
ing Group was the fact that the airline was going
through a lot of change at the time that the Lean
Six Sigma was being implemented. The critical
question was whether Lean Six Sigma could be
prioritised alongside other change programs.
Unlike GE and Boeing, Qantas Engineering
has not found it necessary to modify its reward
structures in order to implement Lean Six Sigma.
Compared to GE and their rigid promotion policy,
which makes attainment of Black Belt status a
precondition for promotion, Qantas’s approach
was more a ‘preferred’ policy, which states that
it would be good if managers have a Black Belt
(Pande et al. 2000).
Qantas Engineering examined the style used
by former GE CEO Jack Walsh, which was based
on compulsory implementation of Six Sigma, and
decided that their approach needed to be suited to
their organisational culture. Culture was identi-
fied as one of the major reasons why it took so
long to implement change at Qantas Engineer-
ing. Consequently, Qantas adopted a policy of
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

promoting Lean Six Sigma as a desirable skill
set for employees and encouraged employees to
express interest in learning. Jack Walsh used the
‘push’ approach from the ‘top’ to implement SSQ,
whereas Qantas used the ‘pull’ approach based
on need and the Qantas culture.
Continuous innovation was part of the Qantas
Engineering mission statement, but the word
‘quality’ had always been part of Qantas’ strate-
gic principles. Lean Six Sigma had made Qantas
Engineering more flexible and competitive by
enabling it to become more customer oriented.
Zhang et al. (2011:43) has articulated customer
orientation as one of the five core elements of
Six Sigma, stating “At the organisational level,
customer orientation is used as a principle to
select and prioritise projects by the project selec-
tion committee.”
At the time of the case study interview, Six
Sigma was still evolving at Rio Tinto with at least
two years needed for SSQ to be imbedded into
the culture. Structural changes were required with
the existing management systems at Rio for Six
Sigma to work properly such as the creation of
full-time positions to support the deployment of
the program. Schroeder et al. (2008) in Zhang et
al. (2011) outline a “parallel-meso” structure as
the most effective organisational structure for a
SSQ program. This refers to a parallel organisa-
tional structure, which enables SSQ projects to
be formulated and implemented, without affect-
ing the organisation’s normal operating structure
(Zhang et al., 2011).
The ability of an organisational culture to
accept new job design changes is critical in the
successful implementation of SSQ. Six Sigma
had a positive impact on corporate culture at Rio
by allowing more people to become involved in
improving the organisation. For example, SSQ
empowered the operations people and helped them
to gain more respect from senior management.
Once the lines of communication were opened
up at Rio, team members were able to understand
the ‘internal customer concept’ that some of the
outputs from one process were inputs in another
process. This tended to create a cause and effect
relationship (Evans & Lindsay, 2008).
The Outcomes of SSQ
Blakeslee (1999) identified Principle 5: SSQ
projects must produce real savings or revenues
as critical for successful SSQ implementation and
survival. Zhang et al. (2011:43) have identified
Metric Focus as one of their core elements of Six
Sigma, emphasising either customer or financial
metrics. Zhang et al. (2011) reinforce that the
metric view not only focuses on the sigma met-
ric, but also on other process capability metrics,
and high-level “balanced-scorecard” metrics, as
outlined by Kaplan & Norton (1996).
One of the most positive impacts that Lean
Six Sigma has had on the Qantas Engineering
Group has been the reinforcement of a culture of
ongoing improvement and innovation. Lean Six
Sigma has allowed Qantas Engineering to vali-
date its strategic model by fine-tuning its metrics.
Leading indicators that were introduced as part of
Lean Six Sigma supported Qantas’s strategic plan
and mission. This helped to increase profitability
and assisted in the marketing and communication
efforts. Overall, Lean Six Sigma allowed Qantas
Engineering to improve customer service and to
lower their costs.
Although the financial benefits for every single
project were not immediately evident at Rio Tinto
people learned something new from each project
and from each other. Sometimes the benefits of Six
Sigma have been difficult to quantify in a short
period of say three to six months. Net Present
Value was the key measure used to assess invest-
ment in projects. There is a growing realisation
within Product Groups that there are going to be
some benefits that are non-tangible.
At the time of the case study interview, achiev-
ing Six Sigma, 3.4 defects per million opportuni-
ties, was not something that was expected at Rio
Tinto. What was known and measured was that
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Six Sigma had produced significant cost savings
over time. For example, for every dollar invested
the organisation gets four dollars back as a return
on investment. Nine to 12 months was perceived
as a reasonable time frame for a six-sigma project
to start delivering quantifiable results.
Six Sigma helped CUM to think more strategi-
cally and make decisions based on data and facts.
According to Byrne, Lubowe, & Blitz (2007); the
parent company Caterpillar introduced Lean Six
Sigma (LSS) as a way of improving processes,
and facilitating continuous, customer-driven
innovation. Changes were introduced as part of
LSS, which ranged from the development of a vi-
sion, based on customer, market and capabilities
data, to minor operational improvements, to the
development of new products. R&D processes
were redesigned to align more closely with cus-
tomer expectations and provide more targeted
products. Supply chain processes were also im-
proved through the deployment of innovative
new practices. The SSQ methodology has made
the organisation more flexible and competitive.
Leadership commitment was the single most
important factor for successful implementation
of LSS at Caterpillar.
Some of the major lessons learned from
engaging with Six Sigma at Rio Tinto revolve
around engaging and educating the leadership
team, finding sponsors and champions and train-
ing employees for Six Sigma roles. Six Sigma
had a positive impact on workplace culture,
with a greater recognition of the importance of
evidence-based management. The rigour of Six
Sigma helped the organisation to think more stra-
tegically. Furthermore, it has given managers the
confidence to close the gap between where they
are and where they need to be in terms of busi-
ness process improvement, waste elimination and
reduction of variation. Some of the major lessons
learned from engaging with Six Sigma at CUM
were the critical importance of senior manage-
ment, followed by providing early Black Belt
training for managers. Significant improvements
have been achieved at the Burnie plant and this
has contributed to creating a culture of fact-based
decision-making.
DISCUSSION AND ANALYSIS
OF PROPOSITIONS
The two propositions are discussed below based
on the literature synthesis and the qualitative
research findings. Hindo (2007: 10) states “..the
very factors that make Six Sigma effective in
one context can make it ineffective in another.”
We did not find sufficient qualitative evidence to
support Hindo’s theoretical claim. In fact, several
underpinning themes were identified in the mul-
tiple cross-case analysis that are common to both
process and product innovation. Therefore, there
is a need to balance exploitation and exploration.
The dilemma that has emerged is that SSQ tends
to be more exploitative innovation. A possible
solution to this dilemma is the concept of or-
ganisational ambidexterity (Benner & Tushman,
2003; Andriopoulos & Lewis, 2009) argued that
the tension between exploitation and exploration
should be viewed as a series of ‘nested paradoxes’
that should be treated as interconnected elements
across all levels of a firm.
The following section examines how SSQ
influences or manifests itself in organisational
ambidexterity. With respect to the second proposi-
tion, it is worth revisiting Benner & Tushman’s
(2003) basic definition of ambidexterity. “..an
ambidextrous organisational form would provide
the context for inconsistent activities to coex-
ist, such as new product innovation and process
innovation.” In other words, understanding the
mediating effects of the external environment
is also important in considering the impact of
SSQ. A stable environment and customer base
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

are more likely to produce greater impacts from
SSQ implementation, especially on sustainable
competitive advantage (Parast, 2011).
On the other hand, SSQ can encourage the
development of an organisational culture that
facilitates exploration as well as controlling
exploitation. For example, SSQ enabled the four
organisations to validate their strategic models
by fine-tuning their performance metrics with
leading project indicators within their business
plans. Secondly, SSQ reinforced an ongoing
learning culture, and enabled the four case study
organisations to leverage value from knowledge
generated through SSQ’s disciplined methodol-
ogy. For example, the rigour associated with Six
Sigma helped Securency to cope with the com-
plexities of a large technological project, which
helped them to create a new international market
for their product.
Inconsistent activities existed in all four or-
ganisations. On the one hand, where the process
output that was controlled was well known, SSQ
led to better quality, lower costs, and generally
more efficient processes (Zairi & Alsughayir,
2011). On the other hand, where the nature of the
problem was not well defined, we found Six Sigma
to have conflicting objectives with new product
innovation. This further highlights the need for
balance and integration with existing strategies
in implementing SSQ in order to mitigate any
possible negative effects during the explorative
innovation (Raisch, et al., 2009).
Based on the above discussion, it is reasonable
to support the second proposition, which states
that the implementation of Six Sigma leads to
a higher level of organisational ambidexterity.
However, the argument that SSQ and some type
of innovation could have conflicting objectives is
also true, and needs to be addressed. SSQ does
not have to be implemented throughout all func-
tions in order to be of value, as long as managers
are aware of the paradoxical cultures that exist,
particularly in terms of performance expecta-
tions. Understanding and effectively managing
these issues is important in fostering positive,
whole-organisation impacts from SSQ, such as
organisational learning, and integrating SSQ with
organisational ambidexterity.
CONCLUSION
With respect to the research question, the study
concludes that SSQ can coexist as part of an am-
bidextrous organisation in a high operating cost
environment. On the one hand, SSQ can be an
effective quality control tool for high operating
cost environments. SSQ improves process inno-
vation where the organisation has a well-defined
output that it would like to control to a high level
of quality. This is consistent with Deming in Evans
& Lindsay (2008), who argues that improvements
in quality lead to lower costs due to less rework,
fewer mistakes, fewer delays, and better use of
time and materials, which leads to productivity
improvements (Conding, 2013).
In a business context, Pande et al. (2000)
defines Six Sigma as a high-performance, data-
driven approach to analysing the root causes of
business problems and solving them. It ties the
outputs of business directly to marketplace re-
quirements. In the context of a high-cost operating
environment, SSQ companies would spend less
than 5 per cent of their revenue on fixing process-
related problems compared to 15-20 per cent of
their revenue fixing process-related problems of
4 sigma companies.
On the other hand, explorative innovation re-
quires a different mindset. Typically this type of
innovation is less efficient and requires a culture
of risk taking and learning from mistakes, as
shown by Sony & Naik (2012), while Wiklund
& Wiklund (2002) highlight the importance
of fostering organisational learning during the
implementation of SSQ. Based on a ‘best prac-
tice’ case study, Wiklund & Wiklund (2002) use
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

the term ‘Soft Sigma’ as a way of introducing
organisational learning into the SSQ program.
For example, Solectron provided its Black Belts
with training in leadership, change management
and learning, and implemented SSQ at the highest
level by employing a full time behavioral scientist
as a Master Black Belt. This allowed the Master
Black Belts to better understand and perform their
roles in finance and statistics as consultants and
facilitators with the aim of generating a culture
of organisational learning from the top-down.
The two approaches could coexist, as part of
an Ambidextrous Model, as long as management
establishes a team that could manage the tension
between the two cultures, one based on control
and the other one based on learning (Hindo,
2007; Benner & Tushman, 2003; Andriopoulos
& Lewis, 2009). In other words, while SSQ may
be better suited to enhancing exploitative inno-
vation practices, other positive benefits such as
enhanced organisational learning may be leveraged
to produce positive impact on the organisational
exploitation/exploration balance and organisa-
tional ambidexterity.
Implications for Managers
Wiklund & Wiklund (2002) demonstrate the need
to approach SSQ implementation as a company-
wide initiative that incorporates organisational
learning as a key element and outcome. Based
on the qualitative analysis, several implications
for managers have emerged:
• Senior Management Commitment:
Leadership commitment at the highest lev-
el and selling SSQ as a business improve-
ment strategy were found to be critical suc-
cess factors for SSQ implementation.
• Innovation Culture: SSQ has an impact
on corporate culture by encouraging em-
ployees to engage in continuous improve-
ment, constant learning and innovation as
a way of life.
• Goal Setting: Technical and behavioural
goal setting motivates performance in SSQ
Projects, where SSQ enables performance
metrics to be validated.
• Learning Culture: The SSQ methodol-
ogy reinforced an ongoing learning culture
and leveraging value from knowledge gen-
erated through SSQ projects.
• Training and Learning: SSQ changed
people’s perceptions and understanding of
the practice and generated interest in train-
ing and learning.
• Ambidexterity: SSQ supports ambidex-
terity subject to managers recognizing that
process innovation and new product de-
velopment require their own formulae for
success.
Following from the above discussion, the
main implication for practitioners is that SSQ
can be used effectively for firms to compete in
high operating costs environments by effectively
managing variation at the 6-sigma level of quality,
as part of an ambidextrous organisational culture.
This is consistent with the literature, for example,
GE initially focused on exploitation, using SSQ
to squeeze out significant inefficiencies before
they attempted exploration under the banner of
“Ecomagination.” (Hindo, 2007). The important
message for managers is that SSQ can encourage
the development of an organisational culture that
facilitates exploitation as well as exploration.
FUTURE RESEARCH AGENDA
The following propositions could be tested in
future cross-sectional research studies:
• Launching SSQ and entrepreneurial in-
novation at the same time would be very
difficult. What are the main impediments?
How should they be overcome?
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The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity

• Which leadership styles are most condu-
cive to successful implementation of SSQ
and entrepreneurial innovation?
• Would Design for Six Sigma bridge the
gap between managed innovation and en-
trepreneurial innovation phases?
• Would larger companies find it easier to
implement SSQ due to their formal culture,
structure and abundant resources?
• Is SSQ less effective in a low cost operat-
ing environment?
• Do ‘soft sigma’ practices contribute to in-
novation performance more than the ‘hard
sigma’ practices?
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Chapter 11
Managerial Practices in a
High Cost Manufacturing
Environment:
A Comparison with Australia
and New Zealand
ABSTRACT
This chapter explores the management strategies adopted by manufacturing firms operating in high versus
low cost economies and investigates the reasons for differences in the management practice choices. The
study reported in this chapter identifies a subset of countries that have either high or low labour costs,
with USA, Sweden, and Japan being high, and India, China, and Brazil being low labour cost economies.
The high labour cost manufacturing firms are found to have better management practices. In this chapter,
the authors find that Australia and New Zealand manufacturing firms face relatively high labour cost
but lag behind world best practice in management performance. The chapter concludes by highlighting
the need for improvement in management capability for Australian and New Zealand manufacturing
firms if they are to experience a reinvigoration of productivity, competitiveness, and long-term growth.
INTRODUCTION
Operating in a high labour cost environment
presents practical challenges for manufacturing
firms attempting to achieve a competitive ad-
vantage (Roos, 2012). The manufacturing sector
is particularly susceptible to changing competi-
tive pressures which over time can significantly
influence the nature of the economic landscape
in which it operates and thus its performance and
viability. The manufacturing sector’s productivity
and competitive advantage is also influenced by
Renu Agarwal
University of Technology, Sydney, Australia
Christopher Bajada
University of Technology, Sydney, Australia
Paul J. Brown
University of Technology, Sydney, Australia
Roy Green
University of Technology, Sydney, Australia
DOI: 10.4018/978-1-4666-5828-8.ch011
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269
Managerial Practices in a High Cost Manufacturing Environment

the labour-capital intensity of production, which
in turn is shaped by the local (national) economic
conditions. These conditions vary across countries
and are underpinned by structural differences
in the economy and society. They are the result
of a myriad of factors including legislative and
institutional which influence the cost of labour,
private and public investments in education and
research, capacity for technology and labour
transfer across national borders, industries and
firms, access to market information and efficient
mechanisms for managing risk and uncertainty.
Much has been written about the causes and con-
sequences of these structural factors, including the
investigation of actions taken by firms to maintain
competitive advantage when faced with structural
disadvantage (Deraniyagala & Fine, 1999). Green
et al (2012) suggested three integrated measures
to improve productivity, namely enhanced inno-
vation capability, participatory work organisation
methods and skills utilisation, and the adoption
of better management practices, as significant
alternatives to deliver productivity gains at an
organisational level.
With this backdrop, the objective of this chapter
is to provide descriptive evidence on the differ-
ences in management practices of manufacturing
firms, paying particular attention to Australia and
New Zealand and how these compare to manufac-
turing firms that operate in high and low labour
cost environments.
Understanding how management practices are
influenced and become adaptive to the environ-
ment in which they occur provides valuable lessons
for future productivity gains, commercial success
and contributions to economic growth and well-
being of a nation. Developing an understanding of
(and evaluation of) the causes and consequences
of management practices in different jurisdictions
has been expensive and difficult to do given the
absence of empirical datasets necessary for making
such comparisons.1 Given this problem, studies
which make available empirical data on similarities
and difference on management practices across
different institutional settings will take us closer
to developing evidence-based frameworks to
better understand these practices. In this context,
the management practices of Australian and New
Zealand manufacturing firms are of practical and
theoretical interest, as firms operating in these
economies face a number of contextualised chal-
lenges including the combination of factors such as
high labour costs, spatial distance affecting trans-
port costs and other legislative and institutional
considerations (including government policy
interventions on investment and infrastructure).
The potential benefits from investing in
management capability for innovation and or-
ganisational performance was emphasised in the
Australian context in a comprehensive report
on leadership and management skills by Karpin
(1995), Enterprising Nation. Subsequently, a se-
ries of Australian workplace employment relations
surveys (for example, Alexander & Green 1992;
Callus et al, 1990) demonstrated that superior
management behaviour and techniques have a
correlation with productivity gains. Similar argu-
ments have been raised in the New Zealand context
(New Zealand House of Representative, 2013;
Green et al. 2010; Agarwal et al. 2012). Given
the competitive pressures faced by Australian and
New Zealand firms, lessons may be learnt from
studying the organisations that have been able to
exist in this context. Therefore an understanding
of the management practice choices by firms
operating in countries such as Australia and New
Zealand provides valuable insights, especially
when benchmarked against countries operating
in high and low cost economic environments.
Since the work of Bloom & van Reenen (2007),
which introduced a new instrument to measure
and compare management practices within and
between economies, there has been a plethora of
benchmarking studies using the instrument under
the auspices of the World Management Survey
(WMS). Bloom & van Reenen (2007) developed
a unique approach which allows for firms to be
categorised as better or worse on 18 dimensions
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270
Managerial Practices in a High Cost Manufacturing Environment

of management performance. The Management
Practices Score (MPS) is the average of all 18
dimensions, with ‘better’ managed firms scor-
ing higher. Most of the studies in the emerging
literature have focused on either benchmarking
countries with the aim of evaluating their rela-
tive management performance, or evaluating the
causes and consequences of better management
practices (see Bloom & Van Reenen, 2007; Bloom
et al., 2007; Bloom & Van Reenen, 2010; Agar-
wal et. al., 2013; Green et al. 2009; Green et al.
2010). Our study exploits the findings from these
studies and the emergence of the WMS dataset by
allowing us to compare individual management
practices between countries where firms have
different operating cost structures.
The focus in this chapter is to compare Australia
and New Zealand’s manufacturing management
practices with those of manufacturing firms in
high and low labour cost economies. Our high
and low cost countries classification was deter-
mined through the use of average manufacturing
labour cost data (sourced from the US Bureau of
Labor Statistics). Our sample comprises of 2833
manufacturing firms from the WMS dataset for
the following eight countries: Australia, China,
India, Japan, New Zealand, Brazil, Sweden and
the United States. We find that the high cost coun-
tries have typically a higher average management
practices score (i.e. high-cost/high-performing)
while the low labour cost countries tend to have
a lower management practices score (low-cost/
low-performing). We find that both Australia and
New Zealand sit on the continuum between these
two groupings of countries.
Our analysis of individual management practic-
es provides a number of notable observations. We
find that the management practices of manufactur-
ing firms differ significantly between high and low
cost countries and this is primarily driven by differ-
ences in operations and performance management
strategies. The scores are less disparate on people
management practices, although different between
high and low cost countries. When we compare
Australia and New Zealand manufacturing firms
with the two country groupings, we find that they
share similarities with each. In particular, Aus-
tralia and New Zealand share similar approaches
on the adoption of lean manufacturing with the
high-cost/high performing countries while on the
other hand initiatives to instil a talent mindset and
retain high performers appear on par with the low-
cost/low-performing nations such as India, China
and Brazil. Our findings are consistent with the
argument that management practice choices are
influenced by institutional settings (e.g. the high
versus low cost environments). This suggests that
to be globally competitive, Australian and New
Zealand manufacturing firms may benefit from
lifting their game in the areas of performance and
people management. Failing to effectively instil a
talent mindset, to address poor performance and
to make efforts to retain high performers may see
the manufacturing sector become progressively
more uncompetitive and contribute to its gradual
decline as has been evident in recent years.
MANAGEMENT PRACTICES
IN MANUFACTURING
There has been considerable debate in the extant
literature on which management practices can
enhance value for organisations. Central to this
debate is the concept of best practice, where certain
management practices are proposed to increase
performance for firms who adopt them.2 Recog-
nising the problems associated with measuring
and evaluating management practices, Bloom
& Van Reenen (2007) pioneered a novel double
blind, double scored method which they used to
evaluate a range of firms on 18 dimensions of
management practice. Essentially, the double
blind/double scored method involved telephone
interviews with managers, which were conducted
in a conversational mode. The interviewer followed
a scoring grid which allowed them to classify
the management practises of the organisation,
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271
Managerial Practices in a High Cost Manufacturing Environment

without alerting the interviewee that they were
being scored, although the interviewees clearly
knew the topic of and overall purpose of the in-
terview.3 Also, a second interviewer listened in
on the majority of interviews and independently
scored the organisation, with high correlations
between the two scores noted. Table 1 presents
the 18 dimensions.4
Bloom et al. (2007) aggregate the 18 individual
management practice scores into the MPS, with a
proviso that some of the practices included may not
necessarily be ‘best practice’ for ‘all’ firms given
the context-dependent nature of management. The
MPS aggregated score is calculated by averaging
across the 18 dimensions and a management score
was also calculated across the three dimensions
of operations, performance and people manage-
ment comprising of seven, five and six manage-
ment dimensions respectively (see Bloom & Van
Reenen, 2007). These 18 practices are argued to
be on average better for manufacturing firms, as
opposed to being highly situational. Bloom et
al. (2007) classify these management practices
as ‘better’ or ‘worse’, as well as assume that the
effects of individual management practices are
additive, consistent with the approach of earlier
studies (e.g., MacDuffie, 1995).
It is beyond the scope of this chapter to review
all the literature that contributed to the selection of
each of the 18 MPS dimensions; however we do
present some key findings. In the field of ‘opera-
tions management’, best practices include reduc-
tion in waste, increasing efficiency and helping
improving substantially the quality of production
(Holweg, 2007; Krafcik, 1988). According to the
strategy literature, performance management prac-
tices include measuring goals and setting targets
such as the balanced scorecard (Kaplan & Norton,
1996), the performance prism method (Neely et al.,
2003) and the key performance indicators method
(Parmenter, 2007). These best practice dimensions
not only include setting goals and targets, but also
formulating and implementing strategy to effec-
tively integrate strategic objectives and operational
practices (Morita et al., 2011; Pinheiro de Lima et
al., 2009) and seeking continuous improvement
and change management in organisations (Pinheiro
de Lima et al., 2013). The human resource litera-
ture focuses on the acquisition and development
of human capital, workplace practices such as
benchmarking, recruitment strategies, the extent
of employee participation in decision making, and
the role of employee performance in mediating
the relationship between quality management
practices and firm performance (Sadikoglu & Ze-
hir, 2010; Huselid, 1995; Ichniowski et al., 1997;
Black & Lynch 2001). For this study best practice
in ‘people management’ focuses on identifying,
attracting, and rewarding high performers, while
addressing the shortcomings of poor performers.
For a more comprehensive discussion of the root
literature on management practices see Bloom &
Van Reneen (2007) and Bloom, Genakos, Sadun
& Van Reenen (2012).
There is considerable debate in the extant lit-
erature as to the reasons and effects of the adoption
of best management practices, and therefore the
validity of the WMS dataset has been subject to
evaluation. Numerous studies have revealed that
there is an association between the MPS and firm
level measures of performance and productivity
(see for example: Bloom & Van Reenen, 2007;
Bloom & Van Reenen, 2010; Agarwal et. al.,
2013; Green et al. 2009), which provides a level
of validity. In addition, prior research has found
that the MPS is associated with a range of firm
specific factors, such as the level of education of
managers and employees, firm size and owner-
ship structures (e.g. Bloom & Van Reenen, 2007;
Agarwal et. al., 2013). Further, the research has
shown that there is variation between sample
firms in different economies, with more developed
economies generally having better management
practices. In summary, the WMS stream of re-
search demonstrates that firms that have higher
MPS generally have higher levels of productivity
and/or performance and there is significant varia-
tion between countries.
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Managerial Practices in a High Cost Manufacturing Environment

Table 1. Management practices scoring dimensions (Source: Green, R., Agarwal, R., Van Reenen, J.,
Bloom, N., Randhawa, K., Brown, P. J. & Hao, T. 2010, Management Matters – How does manufactur-
ing measure up?” Report for the Ministry of Economic Development, New Zealand)
Operations Management
Adoption of Lean Manufacturing
Best practice: All major aspects of Lean have been implemented
Worst practice: Other than just-in-time, no other aspects of Lean have been introduced
Rationale for the adoption
Best practice: Lean was introduced to meet business objectives
Worst practice: Lean was introduced to catch up to competitors
Process problem documentation
Best practice: Exposing problems is integral to individuals’ responsibilities rather than ad hoc solutions Worst practice: No process
improvements are made when problems occur
Operations Performance tracking
Best practice: Performance is continuously tracked and communicated to all staff using a range of visual tools
Worst practice: Tracking is ad hoc, and measures being tracked do not indicate directly if overall business objectives are being met
Operations Performance review
Best practice: Performance is continuously reviewed, based on indicators tracked; follow-up ensures continuous improvement
Worst practice: Performance is reviewed infrequently and only success or failure is noted
Operations Performance dialogue
Best practice: Regular performance conversations focus on addressing root causes. Purpose, agenda, and follow-up steps are clear to all
Worst practice: Relevant data are often not present at meetings or discussion is based on data that is not meaningful. Agenda and purpose
are not clear
Consequence management
Best practice: Failure to achieve agreed targets drives retraining or moving individuals around.
Worst practice: Failure to achieve agreed targets does not carry any consequences
Performance Management
Types of goals
Best practice: Goals are a balance of financial and non-financial goals
Worst practice: Goals are exclusively financial or operational
Interconnection of goals
Best practice: Corporate goals increase in specificity as they cascade through the business units
Worst practice: Individual workers are not aware of how their contribution is linked to corporate goals
Time horizon
Best practice: Short-term goals are set so that they become a staircase to reach the long-term goals
Worst practice: Top management’s main focus is on short term goals
Setting stretch goals
Best practice: Goals are demanding for all divisions, and are grounded in solid economic rationale
Worst practice: Goals are either too easy or impossible to achieve
Clarity of goals
Best practice: Performance measures are well defined and well communicated; worker performance is made public to induce competition
Worst practice: Performance measures are complex and not clearly understood; worker performance is not made public
People Management
Instilling a talent mindset
Best practice: Senior managers are evaluated and held accountable on the strength of the talent pool they actively build
Worst practice: Senior management do not communicate that attracting, retaining, and developing talent is a top priority
Rewarding top performance
Best practice: The firm provides ambitious stretch targets with clear performance related accountability and rewards
Worst practice: People within the firm are rewarded equally irrespective of performance level
continued on following page
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273
Managerial Practices in a High Cost Manufacturing Environment

AGGREGATE MANAGEMENT
PRACTICES AND HIGH VERSUS
LOW LABOUR COSTS ECONOMIES
Given that firms which score higher on MPS tend
to have higher labour productivity, it would seem
logical that firms with higher labour costs would
have an incentive to introduce better management
practices when faced with competition from low
labour cost economies. To allow for differences
in management practice choices to be identified,
we have chosen eight economies which differ in
cost structure and MPS. The countries comprising
the ‘high cost’ economies in our sample include
Japan, Sweden and the United States, as well as
Australia and New Zealand, while the ‘low cost’
countries include China, India and Brazil.
Figure 1 presents a plot of the MPS on average
manufacturing wages for our sample of countries.
Australia is clearly in the higher cost group of na-
tions, whilst New Zealand is also a relatively high
cost country. The New Zealand overall manage-
ment performance score falls somewhere between
the high and low management performance scores
for the eight countries under consideration. Al-
though it is beyond the scope of this chapter to
rigorously test for the association, our figure sug-
gests that management practices could be jointly
determined with respect to relative labour rates,
despite the small sample size.
To elaborate on the importance of labour rates
with respect to investment into better management,
consider the following thought experiment. Suppose
two firms, both of which supply a similar product,
where one pays an average wage of $3 per hour,
and the other pays $30 per hour. If they have similar
production technology, the employees being paid
$3 per hour could take 10 times as long to complete
the same work as the firm paying $30 per hour;
with no loss in relative competitiveness. It would
appear that the $30 per hour firm would benefit more
from the implementation of management practices
to boost productivity, relative to the other firm, in
part because their survival is at stake. In addition,
the high labour cost firm has an incentive to invest
in technology to boost labour productivity, exit the
market, or move production to a low labour cost
jurisdiction. This thought experiment illustrates
the idea that in international markets, differences
in labour cost are likely to influence management
practice choices. What is not clear from the lit-
erature is what specific management practices are
chosen by firms operating in economies faced by
different labour cost.
Table 1. Continued
People Management
Addressing poor performance
Best practice: Poor performers are moved to less critical roles or out of the company as soon as weaknesses are identified
Worst practice: Poor performers are rarely removed from their positions
Promoting high performers
Best practice: Top performers are actively identified, developed, and promoted
Worst practice: People are promoted primarily upon the basis of tenure
Attracting high performers
Best practice: The firm provides a unique value proposition to encourage talented people to join the company instead of the competitors
Worst practice: Competitors offer stronger reasons for talented people to join their companies
Retaining high performers
Best practice: Managers do whatever it takes to retain top talent
Worst practice: Managers do little to try and keep the top talent
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274
Managerial Practices in a High Cost Manufacturing Environment

STRUCTURAL, INSTITUTIONAL AND
ECONOMIC FACTORS INFLUENCING
MANAGEMENT PRACTICES
The countries illustrated in Figure 1 imply that
structural, institutional and economic factors
impact on the nature of management practices.
The groupings of countries into high-cost/high-
performing and low-cost/low-performing also sug-
gest that there is a degree of similarity in individual
management practices within each of the groups.
Australia and New Zealand are shown (see Figure
1) to sit between these two clusters of countries,
indicating they may share similar management
practices. In this section we will review various
structural, institutional and economic factors that
probably contribute to the divergent management
practices illustrated in Figure 1. Table 2 provides
a ranking of countries according to a number of
broad areas designated as pillars, namely higher
education and training, labour market efficiency,
technological readiness, business sophistication
and innovation.
From Table 2, the United States and Sweden
rank highly across each of the pillars with all but
one ranking in the top 10. That said, incongruously
Sweden and Japan ranked relatively low in pillar
7 [Labour Market Efficiency] when compared to
the United States. Japan performed relatively well
on pillars 7, 11 and 12 [Labour Market Efficiency,
Business Sophistication and Innovation] but rela-
tively lower in pillars 5 and 9 [Higher Education
and Training and Technological Readiness].
The low MPS group countries in Table 2 per-
form much worse across each of the five pillars
listed in Table 2. Interestingly there is a range
of variations in the rankings across these three
countries. India performs poorly on pillars 5, 7
and 9 [Higher Education and Training, Labour
Market Efficiency and Technological Readiness]
Figure 1. Plot of average hourly wage for manufacturing workers on management practices score.
(Source: Labour rate data is the average hourly rate for manufacturing workers in 2009, from the US
Bureau of Labor Statistics [http://www.bls.gov/fls/ichccindustry.htm]; Source: MPS scores are sourced
World Management Survey dataset [http://worldmanagementsurvey.org/?page_id=183])
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275
Managerial Practices in a High Cost Manufacturing Environment

when compared to China and Brazil. On the other
hand, India is significantly ahead of China and
Brazil on pillar 11 [Business sophistication] and
better than Brazil on pillar 12 [Innovation], but
slightly behind China. When we consider China
we find that it performs better than India in four
of the five pillars, the exception being the pillar
on innovation. China’s performance however is
only marginally better than Brazil on pillars 5 and
11 [Higher Education and Training and Business
Sophistication].
In Table 3 we report the performance of each
country on a sub-set of dimensions constituting the
pillars listed in Table 2. This more disaggregated
Table 2. Selected summary information from World Economic Forum’s Global Competitiveness Report
2009-2010. (SOURCE: The Global Competitiveness Report 2009-2010© 2009 World Economic Forum)
WEF Pillars:
Country
(2009-10)
Pillar 5:
Higher Education
and Training
Pillar 7:
Labour Market
Efficiency
Pillar 9:
Technological
Readiness
Pillar 11:
Business
Sophistication
Pillar 12:
Innovation
Australia 14 9 20 26 20
New Zealand 11 11 23 34 23
High MPS
United States 7 3 13 5 1
Sweden 3 19 1 4 5
Japan 23 12 25 1 4
Low MPS
India 66 83 83 27 30
China 61 32 79 38 26
Brazil 58 80 46 32 43
Table 3. Selected detailed information from World Economic Forum’s Global Competitiveness Report
2009-2010©
WEF:
Sub-
Categories
By Country
5.02 Tertiary
Enrollment
5.08
Extent
of Staff
Training
7.04 Hiring
and Firing
Practices
9.02
Firm-Level
Technology
Absorption
11.07 Production
Process
Sophistication
11.09
Willingness
to Delegate
Authority
12.01
Capacity for
Innovation
Australia 13 18 62 16 23 13 26
NZ 8 20 90 18 25 9 24
High MPS
US 6 8 8 5 8 5 6
Sweden 12 1 102 6 4 1 4
Japan 32 5 116 2 1 16 1
Low MPS
India 100 34 103 30 43 36 35
China 80 50 77 47 50 65 22
Brazil 73 52 118 36 31 40 28
Note: ranking from a total of 133 countries
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276
Managerial Practices in a High Cost Manufacturing Environment

information provides some interesting compari-
sons across each of these countries. A glance at
the rankings across each of these dimensions for
the high MPS countries with those of the low MPS
countries would suggest why the MPS between
the two groups is so different.
The United States has an excellent university
system that collaborates with business in R&D
(Global Competiveness Report 2013-14), unlike
the experiences in some sectors in China, India
and Brazil. When we consider tertiary enrolments
for the United States and compare this to the low
MPS group of countries we find the gap to be
substantial. While the United States ranks in the
top 10 on student enrolments, China, India and
Brazil rank 80, 100 and 73 respectively. When
we consider the extent of staff training, we find
that the high MPS countries fall within the top 10
group of countries in developing capabilities of
their workers, which is still significantly different
to the performance of the low MPS countries. It is
interesting to note that the low tertiary enrolments
in the low MPS countries may be compensating
for low tertiary enrolments (and hence graduates)
by more extensive in-house staff training.
For “hiring and firing practices” it is interest-
ing to note that the high ranking countries such as
Sweden and Japan rank very low in this area – in
the same vicinity as India and Brazil. It is also
interesting to note that China ranks higher than
New Zealand, Sweden and Japan on this metric.
Another unique point is that Japan and India have
relatively low participation rates of females in the
workforce (Global Competiveness Report 2013-
14). This could point to a correlation, albeit weak,
that female labour is not culturally embedded in
the labour force of these countries.
AUSTRALIA AND NEW ZEALAND
MANUFACTURING FIRMS
The manufacturing sectors in Australia and
New Zealand operate in a relatively high cost
environment. Both countries are considered
relatively high-taxing and regulated countries
with high labour cost, which the business com-
munity often cites as being problematic for doing
business (Economist Intelligence Unit, 2013).
In Figure 2 we plot the manufacturing sector
wage rate (index) from 2001 to 2012. Over this
period the wage rate in Australia’s manufacturing
sector increased by approximately 50%, which
was higher in dollar terms than for most other
Australian industries. The manufacturing wage
rate in New Zealand also grew over this period
but at a much slower pace – just over 30% for
the period 2001 to 2012.
A productivity slowdown in Australia has been
obscured by windfall gains from a commodity
boom. Over the last 10 years, Australia has lost
over 100,000 manufacturing jobs with the excep-
tion of the period 1991-1996 which was evidenced
by growth in employment (Green & Roos, 2012).
New Zealand’s manufacturing industry is facing
a crisis with the trend in manufacturing volumes
declining since the latter half of 2007: it shed
40,000 jobs between 2008-09 and June 2012
(NZ House of Representatives, 2013). A recent
inquiry by the NZ House of representatives, titled
“Manufacturing: The New Consensus – A Blue-
print for Better Jobs and Higher Wages” (June
2013) sets out a path for policy change to correct
imbalances and barriers affecting manufacturers
in New Zealand. Cost reductions alone however
will not create the competitive advantage the in-
dustry is in need of. Reductions in costs through
efficiencies and innovative practice will produce
the long term benefits for the sector, and govern-
ment participation to help foster such practices is
heavily warranted.
When we compare Australia and New Zea-
land’s performance across each of the pillars in
Table 2 we find some interesting similarities and
differences with the high and low MPS group
of countries. We find that Australia and New
Zealand perform comparatively well with the
high MPS countries on pillars 5 and 7 [Higher
Education and Training and Labour Market Ef-
ficiency] however on pillars 11 and 12 [Business
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277
Managerial Practices in a High Cost Manufacturing Environment

Sophistication and Innovation], Australia and New
Zealand’s performance is comparable to that of
the low MPS countries and significantly below
the performances of the high MPS countries. This
suggests that Australia and New Zealand lack the
business sophistication and innovative practices
which are prudent for firms competing in high
labour cost contexts.
Table 3 provides some further granular data
for Australia and New Zealand’s performance
in Table 2. We observe that Australia and New
Zealand’s performance in tertiary enrolments
is comparable to the high MPS countries and
significantly better than the low MPS countries,
while on the other hand their performance on the
extent of staff training is not so good. Although
the extent of staff training is better than in the
low MPS countries, Australia and New Zealand’s
performance is certainly lagging behind the high
MPS countries. What is interesting however is the
fact that both Australia and New Zealand perform
on average better on hiring and firing practices
(with the exception of the United States) than both
the low and high MPS countries. On the other
dimensions [firm level technology absorption,
production process sophistication and willing-
ness to delegate authority] both Australia and
New Zealand perform between the low and high
MPS countries.
The use of this data illustrates that no individual
country has exemplary performance across all
areas and the results are derived from a complex
set of cultural, economic and other conditions
that show up in the various measures of manage-
ment practices across these countries. Critically
for Australia and New Zealand, capacity for in-
novation is considered on par to the low labour
cost countries. This does not bode well for these
manufacturing sectors, which may find themselves
unable to compete effectively in the future.
Figure 2. Wage rate index: Manufacturing sector. (Source: DX Database (Australia: Total hourly rate:
excluding bonuses: Private: C: Manufacturing: index; New Zealand: Salary & Ordinary Time Wage
Rates: Private: C Manufacturing: index)
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278
Managerial Practices in a High Cost Manufacturing Environment

MANAGEMENT PERFORMANCE IN
THE MANUFACTURING SECTOR
High vs. Low Costs Economies
To evaluate Australia and New Zealand’s manage-
ment performance in the manufacturing sector we
benchmark against two groups of countries that
we have identified as either high cost or low cost.
More recently, Roos (2012) when examining the
Australian economy defined high and low cost
economies as follows:
“In a low-cost operating environment the
primary basis for competitive success is low cost
and the key basis for competitive advantage is ef-
ficiency and access to inputs for which there exist
a comparative advantage. In a high-cost environ-
ment the primary basis for competitive success is
value for money arrived at through competitive
advantages grounded in constant innovation ap-
proached in an integrated way” (p.9).
Further Roos (2012) suggests that “a high
cost operating environment requires high man-
agement capability whereas a low cost operating
environment is not equally demanding” (p. 6),
implying that management practices are very
important. The analysis in Section 3 is consistent
with Roos (2012) that high labour cost countries
have higher performance in education, innovation
capability, management practices, and business
sophistication.
The 18 Dimensions of Management
Practices Scores: Comparing
MPS of High Cost Nations
with Low Cost Nations
In Figure 3 we plot the 18 dimensions of manage-
ment practice scores for the three high cost and
three low cost countries in our sample. Each of the
18 management practice scores for the high cost
countries are found to be significantly different
(at the 1% level) to each of the 18 corresponding
management practice scores for the low cost coun-
tries. For our sample the US, Sweden and Japan
are used as high cost countries, and India, China
and Brazil as low cost nations. Table 4 provides
the MPS score averaged across the three high
and three low cost nations as well as the average
management performance score for the three broad
areas of management: operations, performance
and people management. The largest performance
measurement gap between the high and low cost
economies is in operations management while the
smallest gap is in people management.
The country specific factors include the stage
of economic development; the relative labour-
capital intensity in manufacturing production: and
the various structural and policy profiles in each
country. Together they appear to play a notable
part in explaining the difference in management
performance as evident in Figure 3. The average
management practices score across each of the
18 dimensions for the three high cost and three
low cost countries is represented in Figure 3.
What is notable in Figure 3 is the similarity of
scores across the various dimensions of people
management compared to the various dimensions
defining operations management and performance
management across the two clusters of countries.
From Figure 3, it is evident that the average
management practice score for the high cost
countries (shown in blue) is consistently above
the management practices score for the low cost
countries (shown in red), although the difference
in scores on people management is relatively small
compared to operations and performance manage-
ment. Also, the average management practices
score for the high cost countries is found to be
statistically different (indicated by ***) to the
average management practices score for the low
cost countries across each of the 18 dimensions.
The largest of differences in the management
performance scores between the high cost and low
cost countries include the following dimensions.
In each of these cases the manufacturing firms in
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279
Managerial Practices in a High Cost Manufacturing Environment

Fi
gu
re
3
. M
an
ag
em
en
t p
ra
ct
ic
e
di
m
en
si
on
s
in
h
ig
h
an
d
lo
w
c
os
t c
ou
nt
ri
es
N
ot
e:
(*
**
) i
nd
ic
at
es
s
ig
ni
fic
an
t a
t t
he
1
%
le
ve
l.
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280
Managerial Practices in a High Cost Manufacturing Environment

the high cost economies have scored 3 or more
in each of the dimensions while the manufactur-
ing firms in the low cost economies have scored
less than 3.
• Adoption and Rationale for Adoption
of Lean: Manufacturing firms in high cost
economies have implemented various as-
pects of Lean whereas manufacturing firms
in the low cost economies have under in-
vested in lean approaches. This is consis-
tent with higher labour cost causing firms
to counteract these costs with investment
in technolgy and better management.
• Time Horizon: Senior management of
manufacturing firms in low cost econo-
mies appear to have a short term perspec-
tive in their planning horizon whereas se-
nior management of manufacturing firms
in high cost economies have a more longer
term perspective when planning their short
run strategies. This may be in part due to
high labour cost firms having to invest in
costly technology, human resources, and
management practices, and hence bearing
relatively more risk than low cost firms.
Such high labour cost firms would have an
incentive to plan and consider longer term
objectives.
• Types of Goals: Manufacturing firms in
low cost economies appear to focus heav-
ily on financial performance whereas man-
ufacturing firms in the high cost economies
tend to demonstrate a balance of effort on
both financial and non-financial goals.
Non-financial indicators of performance
can give a more accurate assessment of fu-
ture performance (focus on lead indicators
of performance), as compared to financial
information (often lag indicators of per-
formance) (Kaplan & Norton, 1996). The
focus on financial and non-financial per-
formance by high labour cost economies
is consistent with these firms adopting a
longer term focus, suggesting complemen-
tary management practices. In addition it
is common to adopt non-financial goals to
boost labour productivity as they can be
more inspiring and challenging than finan-
cials alone.
• Process Problem Documentation: The
results suggest that employees and man-
agement in manufacturing firms in high
cost economies tends to demonstrate a
degree of responsibility for exposing and
addressing problems while individuals em-
ployed in manufacturing firms in the rela-
tively low cost economies tend not to fol-
low process to the same extent.
The management performance scores of the
high cost and low cost countries where the dif-
ference is relatively small include the following
dimensions:
• Addressing Poor Performance: in both
cases, for the average firm poor performers
often stay in their current position for sev-
eral years, and are not typically removed
from their positions in a best practice
manner.
• Clarity of Goals: Although many firms
have well defined communicated perfor-
Table 4. Management practice score: Comparing
high and low cost countries.
Ave
(SW+JP+US)
Ave(CH+IN+BR)
Management
Practices Overall
Score
3.23 2.66
Operations
Management
3.47 2.82
Performance
Management
3.24 2.64
People Management 2.95 2.61
Notes: SW – Sweden; JP – Japan; US – United States; CH –
China; IN – India; BR – Brazil
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281
Managerial Practices in a High Cost Manufacturing Environment

mance measures, for most firms they are
rather complex and not clearly understood.
In only a minority of firms are individual
performance measures transparent.
• Rewarding Top Performance: Individuals
within many manufacturing firms are typi-
cally rewarded equally irrespective of in-
dividual performance levels. Relatively
few firms provide stretch targets and clear
performance-related accountability and
rewards.
• Retaining High Performers: Managers
typically do little to try and keep the top
talent although manufacturing firms in low
cost economies tend to under-perform on
this metric compared to the manufacturing
firms in the high cost economies.
Comparing MPS Scores of High
Cost and Low Cost Nations with
Australia and New Zealand
Table 5 provides the MPS score averaged across
Australia and New Zealand as well as the average
management performance score for the three broad
areas of management – operations, performance
and people management. As evident, the perfor-
mance measurement gap between Australia and
New Zealand is not so large, and the maximum
gap is in people management while the smallest
gap is in performance management.
The average MPS across each of the 18 dimen-
sions for Australia compared with the three high
cost and three low cost countries is represented in
Figure 4 (Note: values in parenthesis are p-values.
The first p-value evaluates how significantly dif-
ferent each of Australia’s 18 dimensions are to the
group of high cost countries while the second p-
value evaluates how significant the dimensions are
to the group of low cost countries), and in Figure
5 a similar comparison in made for New Zealand.
As evident from Figure 4, the average MPS
for Australia (shown in green) is consistently
below the management practices score for the
high-cost/high-performing countries and found
to be statistically significant. The two dimensions
which Australia scores higher (clarity of goals
and rewarding top performance), are found not
to be statistically different in any case. Australia
performs equally well on the dimensions of man-
agement practice relating to lean manufacturing
(adoption of lean manufacturing and rational for
adoption) when compared with the high-cost/
high-performing countries. Despite being a high
labour cost country, there are three dimensions
(instilling a talent mindset, addressing poor per-
formance and retaining high performance) where
Australia’s performance in is not different to the
low-cost/low-performing countries.
Figure 5 (Note: values in parenthesis are p-val-
ues. The first p-value evaluates how significantly
different each of New Zealand’s 18 dimensions
are to the group of high cost countries while the
second p-value evaluates how significant the di-
mensions are to the group of low cost countries)
shows the average MPS for New Zealand (shown
in green) is consistently below the management
practices score for the high-cost/high-performing
countries and is also found to be statistically dif-
ferent. There is one dimension of MPS where New
Zealand scores higher (clarity of goals), which is
found not to be statistically different in any case.
Importantly, New Zealand scores below the low-
Table 5. Management practice score: Comparing
Australia and New Zealand.
Australia New
Zealand
Management Practices Overall
Score
3.02 2.93
Operations Management 3.26 3.17
Performance Management 3 2.96
People Management 2.75 2.62
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282
Managerial Practices in a High Cost Manufacturing Environment

Fi
gu
re
4
. M
an
ag
em
en
t p
ra
ct
ic
e
di
m
en
si
on
s:
A
us
tr
al
ia
.
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283
Managerial Practices in a High Cost Manufacturing Environment

Fi
gu
re
5
. M
an
ag
em
en
t p
ra
ct
ic
e
di
m
en
si
on
s:
N
ew
Z
ea
la
nd
.
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284
Managerial Practices in a High Cost Manufacturing Environment

cost/low-performing countries in two dimensions
(addressing poor performance and retaining high
performance); where in each case the score is
found to be significantly lower for New Zealand.
For ‘rewarding top performance’, New Zealand
scores on par with the low-cost/low performing
countries. New Zealand performs equally well on
the dimensions of management practice relating to
lean manufacturing (adoption of lean manufactur-
ing and rational for adoption) when compared with
the high-cost/high-performing countries. This is
the same result found for Australia.
Comparing MPS of Australia
with New Zealand
Australia and New Zealand are both remotely
located nations when compared with the geo-
graphical positioning and access to markets of
other nations under consideration. Management
practice performance of New Zealand manufac-
turing firms is ranked lower than Australia in all
management areas (Green et al, 2010). However,
based on this analysis, the scores of New Zealand
and Australia are on statistical parity with each
other in the areas of overall management, opera-
tions management and performance management.
New Zealand performs statistically worse than
Australia in people management, an area where
there is significant scope for improvement. Figure
6 compares the MPS results for both Australia
and New Zealand and against each of the 18 di-
mensions listed we report the p-value evaluating
whether the performance management scores are
significantly different from each other. Seven of
the eighteen dimensions are found to be statisti-
cally significantly different between Australia and
New Zealand and for each except one (instilling
a talent mindset) Australian manufacturing firms
perform better than New Zealand manufacturing
firms. Both Australian and New Zealand firms
are relatively more operations-oriented than
people-oriented, confirming that there is scope for
improvement in the area of people management.
CONCLUSION
This chapter highlights the similarities and dif-
ferences in management practices adopted by
manufacturing firms in low versus high labour
cost economies. Our approach allows us to focus
on identifying weaknesses and strengths of varied
management skills and capabilities across econo-
mies. Specifically, this chapter compares Australia
and New Zealand’s manufacturing management
practices with those of manufacturing firms in
high and low labour cost economies, namely two
groups: US, Japan and Sweden, and India, China
and Brazil. Our findings suggest that the high
cost countries have typically a higher average
management practices score (i.e. high-cost/high-
performing) while the low labour cost countries
tend to have a lower management practices score
(low-cost/low-performing), and that both Australia
and New Zealand sit on the continuum between
these two country groupings. Based on this analy-
sis, the findings reveal that the management prac-
tices of manufacturing firms differ significantly
between high and low cost countries and this is
primarily driven by differences in the operations
and performance management strategies, and less
disparate across people management practices. On
comparing Australia and New Zealand manufac-
turing firms with the two country groupings we
find that there are similarities, which suggests that
to be globally competitive, Australian and New
Zealand manufacturing firms may benefit from
lifting their game in the areas of performance and
people management. Our findings are consistent
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Managerial Practices in a High Cost Manufacturing Environment

Fi
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with the argument that structural, institutional
and economic factors do have an influence on the
management strategies of manufacturing firms.
Our chapter contributes to the management
practices literature by providing evidence of the
different management strategies adopted by firms
in high versus low labour cost economies, and by
exploring a number of feasible reasons for the
observed differences. In particular, firms operat-
ing in low labour cost economies can consider
adopting the strategies of firms in high labour cost
to leverage labour, and hence potentially gain an
advantage over domestic competitors.
There are also a number of policy implications
for Australia and New Zealand. The presence of
strict regulation around labour laws allows re-
gional competitors such as India and China more
competitive advantage in terms of labour costs,
forcing Australian and New Zealand firms to adopt
management and innovative practices to boost
their productivity to remain competitive. They
also face other disadvantages. Firstly, both these
economies are small relative to other nations under
consideration, making economies of scale much
more difficult to achieve when catering for local
demand. Second, due to geographic isolation there
is more costly access to large markets. With this
backdrop, this chapter makes a significant policy
contribution and suggests that trying to compete
on labour cost alone is a dubious strategy. In this
context our findings endorse the internally focused
policy measures as affirmed by Roos (2012) and
Green et al (2012) and that the key strength of
both Australia and New Zealand lies in significant
enhancement of their firm’s innovative practices
and management capability, which are deemed a
necessary condition for reinvigorating productiv-
ity, competitiveness and long-term growth.
ACKNOWLEDGMENT
We would like to thank Dr Alexandria Pitsis for
her research assistance in developing this book
chapter.
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ENDNOTES
1 Further, there is a large literature which ar-
gues that cultural settings have an influence
on what management practices are chosen
and/or acceptable in different cultural set-
tings (see for example Hofstede (1991) and
Chiang & Birtch, (2005,2006)). Hence, the
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interpretation of the possible influence of
various management practices on produc-
tivity may be different between economies.
It is beyond the scope of this chapter to
adequately do justice to this literature, and
hence we note that our sample firms are from
economies with varied cultural settings.
2 In most instances, we use the term ‘better’,
rather than ‘best’. For a review of the best
manufacturing practices research, see Lau-
gen et al. (2006). For impacts of national
cultures on manufacturing practices, see
Wiengarten et al. (2011). For research of
‘best practices’ in related areas such as human
resource management, see Delery & Doty
(1996) and Geringer, Frayne & Milliman
(2002).
3 The research method used in the World
Management Survey has been approved
by the various research ethics committees
from the institutions where the research was
conducted.
4 For information on the scoring grid, see
Bloom and Van Reenen (2007) or http://
worldmanagementsurvey.org/ (URL: http://
worldmanagementsurvey.org/wp-content/
images/2010/09/Manufacturing-Survey-
Instrument ).
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290
Copyright © 2014, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Chapter 12
Supporting Entrepreneurship
in High Cost Economies:
What Can Governments Do?
ABSTRACT
This chapter sets out the findings of a comprehensive literature review that addressed three objectives:
to review internationally recognised and accepted methodologies of entrepreneurial human and firm
characteristics data collection and analysis; to formulate the contemporary view and latest research on
entrepreneurial characteristics and how these characteristics contribute to a model of entrepreneurial firm
behaviour; to examine developments in the literature that explain to what extent human characteristics
influence and predict the performance of firms. The implications of this work are that firms with high
potential in either innovation or market-based growth opportunities need to have the right environmental
settings in terms of social, political, regulatory, economics, and technology for firms with a high suc-
cess potential to realise this potential. The concept of stage progression and the relationship between
the characteristics of the individual, the firm, and the opportunity provide the elements of a framework
through which to consider government support programs and interventions.
INTRODUCTION
In the context of economic development for
regions, entrepreneurship displays a ‘U’ shaped
relationship with the increase of wealth within
nations (Kelley, Bosma & Amorós, 2010). Poorer
nations experience higher entrepreneurship activ-
ity as measured by the rate of early-stage new
venture start-up activity. This occurs as people who
have no better means of earning an income start
businesses to feed themselves and their families.
These are commonly referred to as necessity en-
trepreneurs. As a nation advances and scale-based
firms become more prevalent, much of the pressure
on unemployment is reduced and more people
find jobs as the industrial sectors of an economy
Allan O’Connor
University of Adelaide, Australia
Graciela Corral de Zubielqui
University of Adelaide, Australia
Mushui Huanmei Li
University of Adelaide, Australia
Manjula Dissanayake
University of Adelaide, Australia
DOI: 10.4018/978-1-4666-5828-8.ch012
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Supporting Entrepreneurship in High Cost Economies

become more pervasive and established. During
this period the rate of entrepreneurship generally
declines. As wealth continues to accumulate in a
country, inevitably capital seeks lower cost wage
economies for the scale-based firms that once
had an advantage. In this phase of development
entrepreneurship again increases as the basis of
the economy transitions toward a knowledge-
based economy that features firms with smaller
workforces are more automated and more active
within global supply chains.
Under these circumstances entrepreneurship
in high-cost economies plays an important role
in re-focusing an economy as it transitions from
scale-based production centred firms to smaller,
flexible and globally connected knowledge-
based businesses. Equipping a population with
the skills for this transition is a critical role of
government. This chapter sets out the findings of
a comprehensive literature review that addressed
three objectives:
• To review internationally recognised and
accepted methodologies for data collection
and analysis of entrepreneurial human and
firm characteristics.
• To formulate the contemporary view and
latest research on entrepreneurial charac-
teristics and how these characteristics con-
tribute to a model of entrepreneurial firm
behaviour.
• To examine developments in the literature
that explain to what extent human charac-
teristics influence and predict the perfor-
mance of firms.
The authors argue that there are various
economic perspectives and understandings of
entrepreneurship and that its relationship to eco-
nomic outcomes varies dependent upon which
perspective is adopted. Regardless, particularly in
more economically advanced economies, entrepre-
neurship is increasingly becoming accepted and
adopted by governments as a means to stimulate
fundamental development and growth within an
economy.
This chapter also acknowledges the differences
between entrepreneurship research agendas and
foci. Therefore this chapter not only considers
frameworks created for developed countries but
also frameworks created for developing countries.
It explores the individual characteristics of entre-
preneurs and the characteristics of their ventures
at various stages of development and growth.
Entrepreneurship is not completely separate from
its environment and policymakers also need to
assess the environment to create conditions that
stimulate and support entrepreneurs. Although
national entrepreneurial frameworks have been
created for different purposes, they represent a
broad picture of instruments used internationally
for assessing entrepreneurial activities. Analysing
the entrepreneur’s external environment is very
useful in recognizing the opportunities and threats
for developing and sustaining an entrepreneurial
ecosystem.
The review of the macro level analysis of
frameworks suggests that there are four main
concerns highlighted by international measures of
entrepreneurship. These are the leading indicators
that highlight the prevalence of human attitude and
aspirations for entrepreneurship; the operational
indicators that consider the framework conditions
(social, political, regulatory, technology and eco-
nomic), levels of activity, the barriers and ease of
entrepreneurship within an economic region; the
lagging measures that isolate performance and
impact; and lastly the government pro-activeness
indicators that reveal the extent to which a govern-
ment supports entrepreneurship through policy,
programs and infrastructure. These are summa-
rized in Table 1.
The review of the individual and firm level
literature reveals both consistent and inconsis-
tent findings with respect to the contribution of
individuals toward firm level outcomes. Entrepre-
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Supporting Entrepreneurship in High Cost Economies

neurship research is still in relatively early stages
with respect to uncovering the causal relationships
between individuals, firms and the socioeconomic
performances of any specific economic boundary.
Although there are varied conceptualizations
about the stages of development of a firm, the
researchers adopted an approach that considered
three phases that were representative and relevant
to the research objectives. In particular, firms will
only be started if there are individuals actively
engaged in exploring ideas and opportunities that
form the foundations of new firms. This stage of
activity is undertaken by nascent entrepreneurs,
those who are involved in activities of becoming
an entrepreneur. Assuming nascent entrepreneurs
identify with an opportunity and judge sufficient
benefit in pursing it through to business formation,
the priority of the subsequent stage is survival of
the new business. Those individuals who man-
age to sustain the business through this stage
may either choose to plateau or leverage the firm
into further growth following product, service or
market development opportunities. Alternatively,
some entrepreneurs may choose either volun-
tarily or, through unfavourable circumstances, to
withdraw from the business. Hence, in order for
entrepreneurship to deliver significant benefits
to an economy, government assistance should
consider strategies that identify firms with growth
ambitions and provide support and the removal of
barriers for entrepreneurs as they progress through
the stages of nascence, survival and growth, as is
necessary for promising new business ventures.
Entrepreneurship is not solely concerned with
individuals. Equally, significant research focus
is placed on entrepreneurial firms. The survival
and growth of a firm is unquestionably linked to
the capabilities and attributes of the entrepreneur
and their start-up team. Further, the way the firm
evolves through entrepreneurial management
capabilities and maintains an entrepreneurial
orientation toward the market and opportunities
will dictate the ongoing march toward success.
Adopting a firm level unit of analysis, by defini-
tion, implies a limit to this research to the factors
that contribute to progressions through the stages
of survival and growth as nascent firms tend to
be indistinguishable from the characteristics of
the nascent entrepreneur. However, any firm is
commenced on the perception of some sort of
opportunity regardless of the motivations of the
nascent entrepreneur. Therefore, in this chapter,
the proxy for the firm at the nascent stage is the
particular opportunity that the entrepreneur is
actively pursuing.
For the success of a firm, there are many factors
that are outside of the control of the entrepreneur
that need to be considered. Some of these factors
relate specifically to the nature of the opportunity
being followed and the demand, acceptance and
uptake of the product/service by a sufficiently
large group of customers with a requisite level
of innovation, uniqueness and differentiation.
Extending this further, the particular location and
context of the venture may equally be responsible
for the venture’s success or otherwise. The extent
to which the context is supportive or hostile in
terms of the market, industry and general social,
political, economic, regulatory or technological
environment can play a major role in determin-
ing whether a firm progresses through stages and
emerges as a successful venture or not. Related
to this is the access to the particular tangible and
intangible resources that are important for the
Table 1. Macro indicators of entrepreneurship
Leading Operational Lagging Government
Pro-
Activeness
Entrepreneurial
Population:
Behaviours,
attitudes &
aspirations etc.
Framework
conditions:
Social,
political,
regulatory,
technology
and
economic.
Firm
performance
and impact
measures.
Supporting
policy,
programs and
infrastructure.
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Supporting Entrepreneurship in High Cost Economies

venture, whether that be human resources, in
terms of labour, knowledge and skills; financial
capital; technology or a particular infrastructure.
Ultimately success is attained through manage-
ment of the opportunity and the ability of the team
to identify or create feasible opportunities that
can be transformed into feasible and sustainable
business models.
The implications to be drawn from this work
for government is that firms with high potential
in either innovation or market based growth op-
portunities need to have the right environmental
settings in terms of social, political, regulatory,
economics and technology for the firms that are
pre-disposed for success to flourish. Firms located
in different sectors and for that matter industries
will have different performance drivers. Some
firms will need particular attention in terms of
support and interventions that assist them to over-
come obstacles and constraints to achieve growth
outcomes. However, many small and medium
firms have low or no growth ambitions and need
little intervention from this perspective except
the maintenance of stability in the economic and
political environment. The major challenge is to
find the ways and means of helping the firms that
want and need assistance while leaving the firms
that don’t alone. The concept of stage progression
and the relationship between the characteristics
of the individual, the firm and the opportunity
provides the elements of a framework through
which to consider government support programs
and interventions.
This chapter is assembled and presented as
follows. First, an introduction that explains the
economic contexts, theories and background to
entrepreneurship is contained in Section 2. It is
apparent from this discussion that no one concep-
tion of economic theory has the power to explain
entrepreneurship in its entirety and therefore a
composite model of entrepreneurship becomes
necessary and a matrix approach is detailed that
connects the macroeconomic theories of entrepre-
neurship with the individual behavioural levels.
Section 3 explains common terminology and
concepts within entrepreneurship theory providing
the reader with a useful reference and explanation
of the recurring key terms and themes that will
be encountered throughout the chapter.
Section 4 explores the three current widely
accepted methodologies for measuring and
monitoring entrepreneurship at a national and/or
regional level. Each methodology has strengths
but also weaknesses. These are discussed in the
contexts of the presentation of reviews of the
literature in the following two sections, Section
5 on individual level characteristics and Section
6 on firm level characteristics.
The conclusion discusses the current status of
methodologies and the use of established instru-
ments that provide potential for use in government
monitoring of and filtering for support initiatives.
ECONOMICS AND
ENTREPRENEURSHIP
Entrepreneurship is a complex phenomenon which
is evidenced by the number of disciplines that have
contributed and at times converged in attempts to
explain it. Hart (2003), while noting the absence of
the political sciences in entrepreneurship research,
suggests that economics, geography, manage-
ment, psychology and sociology are the primary
areas producing research in the field. Similarly,
Audretsch (2004) claimed that ‘entrepreneurship
does not correspond nicely with any established
academic discipline…’ (p. 167) while Davids-
son (2003) referred to the diversity of interest
in entrepreneurship as a ‘societal phenomenon’.
Barreto (1989) conducted a thorough review of
the concepts of the entrepreneur and economic
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Supporting Entrepreneurship in High Cost Economies

theory and concluded that ‘entrepreneurship is
above ‘formalization’’, also noting that ‘it cannot
be neatly packaged within a mechanistic, deter-
ministic model’ (p. 141).
Entrepreneurship which is carried on in the
pursuit of business opportunities has been ac-
tively sought after as one of the major engines for
economic development, innovation, job creation,
new start-ups and existing business growth by
many governments and has been examined by
many researchers. The research perspectives of
entrepreneurship vary from individual, organisa-
tion to environment and these perspectives are
accompanied by various definitions of entrepre-
neurship that include new material combinations
(Schumpeter, 1934), new entries (Lumpkin, GT &
Dess, 1996), creation of organisations (Gartner,
1988) and the process of pursuing opportunities
(Shane, S & Venkataraman, 2000; Stevenson &
Jarillo, 1990).
Entrepreneurship as a process involves the
identification, evaluation, and exploitation of
opportunities (Shane & Venkataraman, 2000;
Teece, 2007) and this process has sub- processes
(Shane, 2012). Opportunities, being different
from business ideas, are widely considered as
objective phenomena (Eckhardt & Shane, 2003;
Shane, S, 2012), however the ideas, behaviours
and strategies to identify, evaluate and exploit
these opportunities are subjective phenomena.
An entrepreneurial opportunity does not have
to be new in every sense of the word; however
a commonly accepted view is that the pursuit of
entrepreneurial opportunity requires a recombina-
tion of resources (Shane & Venkataraman, 2000),
therefore entrepreneurship is also said to be the
process of resource recombination (Lumpkin &
Dess, 1996).
The outcomes of entrepreneurial processes do
not have to take the form of new firm creation, new
products/services, new technology etc (Shane &
Venkataraman, 2001), although these are still the
main foci of entrepreneurship research. At the heart
of the entrepreneurial process are the opportunities
identified, the activities and the methods and the
decision-making styles embodied in the resource
recombination processes (Lumpkin & Dess, 1996;
Ucbasaran, Westhead & Wright, 2001; Wiklund &
Shepherd, 2003). Thus, the entrepreneurial process
can take the form of market or hierarchy, new firms
or within existing firms and encompasses acts of
organisational creation, renewal or innovation that
occur within or outside an existing organisation
(Sharma & Chrisman, 1999).
Sectoral Perspectives
Many policymakers recognise the importance of
entrepreneurial activities in generating economic
development (Hannon, 2006; Jennings et al., 2005;
Martinez et al., 2010; Perren & Jennings, 2005;
Pittaway, 2005; Minniti & Lévesque, 2008; Yu-
suf, 2010). The recognition of opportunities and
the development of them lead to value creation
in economies. That value creation can lead to a
better standard of living for the whole population.
However, as noted earlier, entrepreneurship is a
complex phenomenon and this has led to some
researchers observing that ‘the concept of the
‘entrepreneur’ and the function of entrepreneur-
ship in society have ranged extensively within
theories’ (Pittaway 2005, p. 201). Significantly
though, Minitti & Lévesque (2008) have argued
that it is important that entrepreneurship be un-
derstood from the viewpoint of its origins as a
field of study in economics and how it generally
fits within that context.
O’Connor (2013) has elaborated different
economic conceptions of entrepreneurship with
respect to the various levels of analysis crossing
from micro to macro. A distinctive feature of this
argument is that entrepreneurship is considered
to operate from different vantage points and, in
line with this, with different means to influence an
economy. O’Connor (2013) draws on a number of
economists to articulate the points but the essential
argument is that entrepreneurs can either be en-
dogenous and act within existing market dynamics
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Supporting Entrepreneurship in High Cost Economies

or be exogenous actors outside of the established
market system. Endogenous entrepreneurs explore
and occupy established and operating markets
to discover, create and exploit unfilled gaps in a
market economy plying the principles of arbitrage
(either in costs or quality/differentiation) to seek
advantage in a market. Therefore, they improve the
productivity of the economic system by decreasing
costs and expanding product/service distribution
to meet unfulfilled demand with the same or
adapted versions of existing products. Exogenous
entrepreneurs on the other hand are acting outside
of established markets and are working with new
ideas, technologies and unproven concepts to
discover and create new products/services never
before seen in a market (significant innovations)
to introduce them into market dynamics. These
exogenous entrepreneurs introduce shocks via
innovation into the established market systems
displacing older goods and creating new layers
of economic activity.
Regardless of the endogenous or exogenous
origin of entrepreneurship, the economic interest
lies with the growth outcomes that are derived from
the activities of the entrepreneur. O’Connor (2013)
terms this as a third form of entrepreneurship which
is grounded in the expansionary and growth effects
that stem from the endogenous and/or exogenous
activities of entrepreneurs as it is the growth in
production of goods and services, employment
and wealth that are the tell-tale signs of an active
entrepreneurial economy. Further, it is important
to appreciate that entrepreneurs do not simply
disengage from market activity once the market
opportunity is identified and acted upon. Rather
the entrepreneur remains responsible for at least
the early stages of firm growth and just as likely
the longer term growth of the newly created firm
as he or she seeks to survive and prosper. There-
fore, the activity of the entrepreneur transitions
into strategic growth and business management
to expand and exploit the firm’s success.
O’Connor (2013) argues there are three key
sites for entrepreneurship development; firstly in
the corporate sector that includes all corporatised
small, medium and large firms where entrepre-
neurship will serve renewal and/or expansion
strategies for existing businesses to improve the
productivity of the market economy; secondly in
the knowledge sector where entrepreneurship will
assist individuals with new knowledge and technol-
ogy to enter new ventures into market economies
therefore contributing new businesses toward
development of the economy and thirdly in the
social sector where the aim is to use entrepreneur-
ship to develop market principles as an economic
utility lever to address social problems. O’Connor
suggests that the support for entrepreneurship
for economic development should be differenti-
ated from either economic productivity or utility
functions. He also argues that entrepreneurship
arising from all three sectors contributes to the
higher order goal of economic growth. Figure 1
expresses the relationship between these three
views on entrepreneurship and the relationship
to economic growth as the spinal cord of the
economy and also exhibits the areas of impurity
between these origins of entrepreneurship at the
intersections where the sectors overlap.
The Unit of Analysis
Perspective: Micro to Macro
Given that entrepreneurship examines the emer-
gence and growth of firms that impacts the macro-
economic status, the study of entrepreneurship
development also needs to cross levels of analysis
from the individual behavioural level to the firm
level to the social or economic level. As the unit
of analysis shifts in entrepreneurship theory so too
does the type of economic analysis. This shift can
be detected in the disputes over the appropriateness
of various economic theories for entrepreneurship
that result in such demarcations as expressed by
Endres & Woods (2006) between the neoclassi-
cal, Austrian and behavioural economists. The
Austrian economists distinguished themselves
by proclaiming that entrepreneurship is centred
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Supporting Entrepreneurship in High Cost Economies

on human action influenced by the conditions of
a market economy (Gunning, 1997). The empha-
sis by this group on the human element laid the
path for alternative explanations of the economic
model including evolutionary and behavioural
economics.
Evolutionary economics attempts to link macro
and micro economic explanations. However, evo-
lutionary economics is also positioned to explain
endogenous entrepreneurship within pre-existing
market structures, assuming economic behaviour
is governed by existing market forces. Behavioural
economics on the other hand attempts to account
for the psychophysical elements of human decision
making and judgement (Camerer & Malmendier,
2007) although it is generally also applied within
the confines of operating markets endowed with
maximising agents and equilibrium concepts
(Minitti & Lévesque, 2008). Notably, Schum-
peter’s theory of economic development stands
in stark contrast to both evolutionary and behav-
ioural economics by avoiding enclosure within the
boundaries of the neoclassical economic market
model. His entrepreneur is not endogenous or
contained within the market process but operates
outside of the market as an exogenous influence
ultimately introducing new dynamics that disrupt
the established market system.
In synthesizing these perspectives a matrix
is useful to understand the influence of entre-
preneurship given the different effects observed
at different levels of the economy and units of
analysis and to account for the different macro-
economic objectives aligned with the three differ-
ent market contexts endogenous, exogenous and
expansionary. O’Connor (2013) provides such a
matrix (see Table 2) and also introduces effectua-
tion arguments (Sarasvathy, 2008; 2005) as the
means of explaining the fundamental behaviour
of different entrepreneurs who are active in the
different market interventions.
The upper three rows of the matrix describe
the market economic distinctions discussed above.
The three lower rows build from and extend ideas
of two different theorists. With respect to organi-
sational form this concept is drawn from Schum-
peter (1961 [1934]) who argues for a distinction
between enterprise—the source of innovation and
disruption to markets and business—the means
of production within existing markets carried out
Figure 1. Entrepreneurship and sectoral relationships (Adapted from O’Connor, 2013)
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Supporting Entrepreneurship in High Cost Economies

by the firm. O’Connor (2013) extends the argu-
ment to cover the transitional state between when
enterprise either transforms into a functional busi-
ness or transitions into the routines of an already
operating business during which stage growth
becomes the primary economic objective.
The bottom two rows are attributed to Saras-
vathy (2008; 2005) who has more recently
expounded the theory of effectuation and dis-
tinguished human activities through different
reasoning and logic regimes. Sarasvathy (2008)
portrays the effectual reasoning of an entrepreneur
as that which drives behaviour in conditions of
uncertainty and exploration as the entrepreneur
is driven by the desire to create the future rather
than predict it. Sarasvathy places causal reasoning
at the other extreme where the entrepreneur’s role
can be framed as exploitation, coordination and
management of largely known and predictable
daily routines (see section 5 for further discussion
and development of this theoretical viewpoint).
Sarasvathy (2005) also offers a third perspective,
the creative causal reasoning, that describes en-
trepreneurs who have come to terms with some
uncertainty (that is the product or service is de-
fined) but struggle to survive under the pressures
of market uncertainty as they endeavour to gain a
foothold in a competitive landscape.
Many entrepreneurs or small business own-
ers operate with a causal logic running me-too
businesses and dealing with the daily grind of
delivering their marginally differentiated regular
products within a known market place as they
seek to maximize profits. The effectual logic
entrepreneur is comfortable with uncertainty, will
seek out innovation and will seek to challenge
the status quo of the existing market dynamics.
The entrepreneur with creative causal reasoning
adopts a strategic mind and experiments with the
business design to come up with a business model
that can deliver sustainable value creation.
Through this matrix a rationale is offered that
defines the direction of this review of research.
It is the aim of this chapter to explore the links
between micro-level behaviours of individuals and
firms and the macroeconomic outcomes sought by
policy-makers. This matrix hints at the complex-
ity within the task and explains why the research
team has adopted a dynamic lens to take to the
literature. In essence the skills and knowledge
needed by entrepreneurs will vary with the context
within which entrepreneurs are likely to work and
the research team has taken the approach that
depending upon the objective of policy, different
forms of support will be necessary to accommo-
date the development of an entrepreneur whether
Table 2. Behavioural distinctions across units of analysis (O’Connor, 2013)
Unit of Analysis Behavioural Distinctions
Economic objective Development Growth Productivity
Market context Exogenous Expansionary Endogenous
Firm level objective Innovation seeking Survival seeking Arbitrage seeking
Organisational form Enterprise Transitional
(enterprise to business
establishment)
Business
Team or group task Exploration and uncertainty
bearing
Experimentation and value creation Exploitation and
coordination
Individual form of reasoning Effectual Creative causal Causal
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Supporting Entrepreneurship in High Cost Economies

at the nascent stage (becoming an entrepreneur),
the survival stage (wrestling with the task of es-
tablishing a new business venture) or the growth
stage (embedding the recently established firm
into the established market dynamics).
In this chapter we adopt the view of entre-
preneurship that equates with an entrepreneurial
service originally proposed by Penrose (1959).
The entrepreneurial service is the set of behav-
iours that value-add to innovation. Innovation is
something new that creates value in the eyes of
the consumer (Sundbo, 1998). Innovation comes
in many different forms and can include, but is
not limited to, that which is associated with prod-
ucts, services, operations, organisational issues,
financial engineering, and/or marketing strategies
(OECD, 2005). The entrepreneurial service is
provided by one or a team of entrepreneurs who
recognise those innovations with potential and
then proceed to introduce the innovation into
market dynamics. From this perspective entrepre-
neurship involves the transformation of an idea
or invention into some form of novel application
or innovation and the entrepreneurial service is
responsible for recognising the potential value
creation of the novelty/innovation and introduc-
ing it into a market. Thus, entrepreneurship and
innovation are understood to be key elements for
competitive (national) economies (OECD, 2008,
p. 5). Furthermore, entrepreneurship is viewed as
an important element for achieving economic and
social growth (Yusuf, 2010). However, entrepre-
neurship research has been dominated by micro
level analysis predominantly using the firm or
the individual as the level of analysis (Brown,
Davidsson & Wiklund, 2001).
At the level of economic argument there has
been diversity of opinion about entrepreneur-
ship and how it contributes to macroeconomic
development and growth. Kirchhoff, Linton &
Walsh (2013) draw attention to this intense de-
bate in their article that examines the equilibrium
neo-Marshellian view with the disequilibrium
Schumpeterian view of economic contribution.
The article draws these opposing views together
through a prior article by Kirchhoff (Kirchhoff,
1994 cited in Kirchhoff, Linton & Walsh, 2013)
that proposes a figure that juxtaposes innovation
with the firm growth concepts anchored in the two
opposing lines of thinking. The figure, represent-
ing the dynamic capitalism typology, is provided
below (See Figure 2) and is instructive for this
Figure 2. The Kirchoff juxtaposition of innovation and firm growth concepts (Kirchhoff 1994 cited in
Kirchhoff, Linton & Walsh 2013)
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Supporting Entrepreneurship in High Cost Economies

work as it highlights the five types of firms that
constitute the entire pool of small and medium
firms functionally operating in a market and places
them into context with respect to entrepreneurship
and innovation.
The largest pool of small and medium enter-
prises occupies Quadrant I. These firms provide
the economic core of relatively stable employment
(subject to stability in broader economic factors)
but have generally low innovation and limited
growth. From an entrepreneurship perspective
these firms fall into the small business category
and hold limited interest to entrepreneurship
scholars except as they may transition to quadrants
II, III or IV.
At the opposite end of the growth dimension
are the firms with low innovation but with high
growth. Those firms in Quadrant IV manage to
identify market based gaps and opportunities,
exploiting growth through exceptional product
or price performance in response to untapped or
under-served market demand. Innovation may be
relatively minimal but growth can be spectacular
driven by the ambition and drive of the entrepre-
neur or the entrepreneurial team. The Australian
business Wotif characterizes this type of firm.
Quadrant III holds firms that are highly in-
novative and through this innovation are able to
gain high growth opportunities. These firms are
the glamour set of the entrepreneurship world and
Cochlear in Australia is a firm that may fall into
this category. Interestingly, although the firms
that occupy Quadrants III and IV receive most
of the attention with respect to the contributions
they make to an economy, they are the firms that
are least likely to need specific attention and are
the least in number. These firms are characterized
by both the strength of the fundamental oppor-
tunity and the entrepreneurial drive, spirit and
determination to succeed. From a government and
entrepreneur scholar perspective these firms are
instructive but are the very firms that are likely
to succeed with the least assistance or guidance
given that the basic social, economic, political,
regulatory and technological settings are favour-
able to the venture.
In some respects the quadrant that represents
firms facing the highest challenge and the strongest
need for intervention and support are the firms
in Quadrant II. These firms have high potential
but are unable to unlock that potential due to
either internal or external constraints. It would
be folly to believe that all firms in Quadrant II
could be leveraged into a high growth position
but certainly some firms would be well served
and would benefit from supportive frameworks
that assist them to overcome either the external
or internal constraints.
Drawing upon the works of O’Connor (2013)
and Kirchoff, Linton & Walsh (2013) discussed
above, it is important to acknowledge that entre-
preneurs may require different kinds of support
not only for their individual development as an
entrepreneur but also with regard to the sectors
of the economy from which they emerge and the
internal and external constraints that they endure
during the time of commencing and surviving the
early days of a newly created venture. Further,
support during the growth of their business as
it matures may differ again. There are different
stages of an entrepreneur’s development and the
new venture lifecycle encompassing nascent,
survival and growth (please refer to the defini-
tions section below) means that an entrepreneur
will need the right characteristics and skills to
navigate through each stage. The different devel-
opment stages of an entrepreneurial firm will call
for different strategies and policies both for the
venture and the governmental environment within
which it is operating in order to influence not only
entrepreneurial attitudes and capabilities but also
entrepreneurial opportunities. Recognising those
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stages can help to understand what type of support
can facilitate the entrepreneurial activities that
lead to socio-economic development.
However, in drawing distinctions between
different stages, there is an inevitable difficulty
for theorists and for policy-makers in clearly iden-
tifying them in individual firms. As Schumpeter
(1961 [1934], p. 77) argued ‘the entrepreneur’s
essential function must always appear mixed
up with other kinds of activity, which as a rule
must be much more conspicuous than the es-
sential one’. Viewing entrepreneurship through
the lens of stages is valuable for increasing our
understanding of a phenomenon that is broadly
recognized as having significance for advancing
and modernising economies. For a policy-maker it
requires acceptance of a broad generalization that
assists in targeting policies and programs for the
time when entrepreneurs identify with the stage.
In practice entrepreneurs and entrepreneurship
is not as clearly and as neatly delineated as the
theory would suggest.
THE KEY CHARACTERISTICS
OF ENTREPRENEURSHIP:
DEFINITIONS AND TERMS
This section presents the characteristics and defi-
nitions of key terms that are used in this chapter
for the purposes of exploring the link or relation-
ship between entrepreneurship and economic
development.
Entrepreneurship is centred on activities that
convert ideas into economic opportunities al-
lowing business growth. Entrepreneurship can
be defined as the identification, evaluation, and
exploitation of opportunities (Shane & Venkata-
raman, 2000). Entrepreneurs spur innovation and
accelerate the growth of the economy by disrupting
market equilibrium; a phenomenon referred to as
creative destruction (Harvard University, 1949).
This stimulus for competition through entrepre-
neurship is likely to increase the productivity and
employment levels and at large the national and
regional competitiveness (Fritsch & Schroeter,
2011). However, it is also argued by scholars that
just having many entrepreneurs, particularly when
broadly characterized as small business owners,
in an economy will not necessarily guarantee a
higher level of productivity or employment growth.
A typical small business start-up is not innova-
tive, creates fewer jobs and generates less wealth
(Shane, 2009, Stam & Wennberg, 2009) than an
entrepreneurial business that may be characterized
by high growth and a unique place in a market.
As a result, policy makers and academics around
the world focus on how entrepreneurship, with the
attributes of innovation and rapid growth, can be
nurtured amongst all firms to facilitate regional
and national competitiveness.
There have been many studies analysing the
link between entrepreneurship and performance of
regions (Audretsch & Fritsch, 2002; Reynolds, P,
Storey & Westhead, 1994; Reynolds, PD, Miller
& Maki, 1995). Furthermore, other authors state
that there is a link between entrepreneurship and
economic development (OECD, 1998; Verheul
et al. 2002). Some international institutions
claim that “entrepreneurship is one of the most
important drivers of job creation and economic
growth, and is crucial for the development of a
vibrant formal small and medium-sized (SME)
business sector” (United Nations Conference on
Trade and Development, 2012, p. 9). However,
the results of empirical analyses do not always
give clear causality. For example, Reynolds et
al. (1994) found a positive relationship between
entrepreneurship and regional economic growth
in the US. On the other hand, Audretsch & Fritsh
(2002) found a different story in Germany, where
the results show a negative relationship in the 80s
but a positive one in the 90s. Other studies show
empirical evidence of the connection between
entrepreneurial activities and national growth
(Audretsch & Fritsch, 2002).
Despite the limitations and inconsistency of
evidence, overall scholars have argued that having
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Supporting Entrepreneurship in High Cost Economies

an enabling ecosystem, primarily in developed
countries, plays an integral role in economic
growth. The importance of creating a policy
framework that includes but is not limited to in-
vestment in research and development, improving
the incentives for self-employment, stimulating
entrepreneurship education and promoting the
commercial exploitation of scientific findings
is paramount. Further educating the masses on
the importance of an entrepreneurship policy
framework should be a priority.
The Entrepreneur
An entrepreneur is the central figure of entrepre-
neurship. Acting on an identified opportunity that
is worth pursing is the primary role of the entre-
preneur (McMullen & Shepherd, 2006). While the
majority of entrepreneurs pursue opportunities in
well-defined markets, entrepreneurs can also take
on the role of defining new markets and market
segments, a process referred to as effectuation
(Sarasvathy, 2003). Entrepreneurs are involved in
an entrepreneurial process. Many scholars have
given attention to the entrepreneurial process
and have defined it as a process that includes
opportunity creation, opportunity discovery and
opportunity recognition. At times the same con-
cepts have been used in different processes and
at other times same processes have been charac-
terized by different concepts, all of which leads
to confusion (Baron, 2008). Alvarez and Barney
(2007) defined a simplified process resulting
from two main entrepreneurial sub processes;
the discovery process and the creation process.
The discovery process involves the entrepreneur
identifying existing opportunities or gaps in the
market whereas the creation process involves the
entrepreneur actively creating new opportunities.
In other words, unlike in the discovery process, in
the creation process, the opportunity does not exist
without the activity of an entrepreneur. Alvarez
and Barney argued that in order to carry out the
entrepreneurial process, the entrepreneur will un-
dertake such tasks as leadership, decision making,
managing human resource practices, developing
strategy, preparing the finances and marketing all
with a view to sustaining a competitive advantage.
During the execution of these tasks, entrepreneurs
interpret available information and give meaning
to it in different ways (Barreto, 2012), which gives
rise to variations in outcomes.
Entrepreneurial Characteristics
Different terminology has been used by prior
researchers when discussing characteristics that
positively influence entrepreneurial success.
Competency, skills, expertise and acumen are all
interchangeably used in the literature. Competent
behaviour results from a combination of fac-
tors including an individual’s personality traits,
knowledge or skill and therefore it is not surprising
that the boundaries of these terms are ill-defined.
According to Moore, Cheng & Dianty (2002), the
Management Charter Initiate UK and American
schools prefer the term competence. Competency
theory is based on examinations of the behaviours,
attitudes and skills of successful leaders. Boyatizis
(1982) defined competency as the underlying
characteristic of a person that leads to or causes
effective or superior performance. Considering
the above, this paper will refer to competency and
characteristics as interchangeable words.
Composite Entrepreneurial
Characteristics
Entrepreneurial success can be determined by
analyzing entrepreneurial characteristics at an
individual level. Entrepreneurial characteristics
and firm performance have positive links. Need
for achievement, internal locus of control, cogni-
tion and human capital have been found as the key
characteristics of an entrepreneur at a composite
level (Di Zhang & Bruning, 2011). There exists
an interplay among human capital, cognition and
learning that are possible to generalise to activities
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Supporting Entrepreneurship in High Cost Economies

and actions central to the entrepreneurial process
(Haynie, Shepherd & Patzelt, 2012). During the
entrepreneurial process the entrepreneur learns
various entrepreneurial competencies. Both the
ability of the entrepreneur to learn and being
able to access learning opportunities of support-
ing competencies are important concepts with
respect to entrepreneurial development (Aouni
& Surlemont, 2009).
Discrete Entrepreneurial Characteristics
Based on the literature, opportunity, risk pro-
pensity and human capital are the most widely
researched characteristics of an entrepreneur.
With respect to opportunity, opportunity alertness,
opportunity discovery, opportunity creation and
opportunity exploitation have been identified as
key characteristics that define an entrepreneur
(Baron & Ensley, 2006; De Carolis & Saparito,
2006; MacKo & Tyszka, 2009; Shepherd, Haynie
& McMullen, 2012; Tang, Kacmar & Busenitz,
2012; Welpe et al. 2012; Wiklund & Shepherd,
2011). Risk propensity and perception are also
shown to play an integral role in entrepreneurial
success (Barbosa & Fayolle 2010; Caliendo,
Fossen & Kritikos, 2009; Palich & Ray Bagby,
1995). Research shows that risk management dif-
ferentiates entrepreneurs from non-entrepreneurs
(Caliendo et. al., 2006). The concept of human
capital is perceived as taking multiple elements
into account including entrepreneurial experience,
education and social network (Baron & Markman,
2003; De Carolis, Litzky & Eddleston, 2009;
De Carolis & Saparito, 2006; Fischer & Reuber,
2011; Knockaert et al. 2011; Thornton, Ribeiro-
Soriano & Urbano, 2011; Wennberg, Wiklund &
Wright, 2011; Zheng, 2012). The human capital
dimensions play an integral role in opportunity
identification as well as opportunity exploitation
efforts.
Based on the different firm stages defined be-
low, the impact of entrepreneurial characteristics
on firm performance is discussed in subsequent
sections.
Entrepreneurial Capability
Entrepreneurial Capability is the capability to
identify an entrepreneurial/business opportunity
and to develop the resource base needed to pursue
the opportunity. In this chapter, we distinguish
between the individual and the firm level entrepre-
neurial capabilities and discuss each independently
in two different sections of the chapter.
The concept of the entrepreneurial capabilities
has become increasingly important in the field of
entrepreneurship theory, strategic management
theory, the resource-based view, organisational
learning and network theory. Consistent with the
existing entrepreneurial opportunity based entre-
preneurship research, we define entrepreneurial
capability as the capability to identify, evaluate,
exploit and/or explore entrepreneurial/business
opportunities. The concept of entrepreneurial
capabilities can be applied to individual entrepre-
neurial teams as well as established firms. Teece
(2007) has identified the capabilities required in
the entrepreneurial process to exploit opportuni-
ties at the organisational level as Figure 3 shows.
The review of the literature also reveals that
the concepts of entrepreneurial capability and
dynamic capability are overlapped or substitutable
in the strategic management literature. Arthurs &
Busenitz (2006) argue that while entrepreneurial
capabilities are referring to the capabilities to
identify a new opportunity and develop or acquire
the resources needed to pursue the opportunity,
dynamic capabilities on the other hand can be
viewed as the adjustment and reconfiguration of
the resource base in conjunction with an extant
opportunity. Figure 4 shows the differences be-
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Supporting Entrepreneurship in High Cost Economies

tween entrepreneurial capabilities and dynamic
capabilities. According to the statement of Arthurs
& Busenitz (2006) entrepreneurial capability is
opportunity oriented while dynamic capability is
change oriented.
Entrepreneurial Competence
Where entrepreneurial competency is concerned,
it is viewed as a specific group of competencies
relevant to exercise successful entrepreneurship
that is mainly associated with development of small
and new businesses (Colombo & Grilli, 2005;
Nuthall, 2002). Some scholars view entrepreneur-
ial competencies as necessary to start a business,
and managerial competencies as necessary to
grow a business. However, Man (2002) argues
that entrepreneurial competencies require skills in
both areas. Man & Lau (2005) reasoned entrepre-
neurial competencies comprise components that
are deeply rooted in a person’s background (traits,
personality, attitudes, social role and self-image)
Figure 3. Firm level elements for seizing market and technological opportunities (Adopted from Teece
(2007))
Figure 4. Entrepreneurial capabilities (linear) vs. dynamic capabilities (recursive demonstrated by the
dotted line) (Adopted from Arthurs & Busenitz 2006)
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Supporting Entrepreneurship in High Cost Economies

as well as those that can be acquired at work or
through training and education (skills, knowledge
and experience). They classify the competencies
into six areas as opportunity competencies, rela-
tionship competencies, conceptual competencies,
organising competencies, strategic competencies
and commitment competencies. Amhad (2007)
extended this model further by including ethical
competencies, competencies to do with social
responsibility and technical competencies. As
noted above, this paper will refer to competency
and characteristics as interchangeable words.
Entrepreneurial Behaviours
Entrepreneurial behaviours are those behaviours
that lead to a venture start-up which is the outcome
of an entrepreneurial process. The entrepreneurial
process is the process that includes identifying,
evaluating, exploring and exploiting entrepreneur-
ial opportunities. A new firm, in the earlier stage
of the start-up, is called an entrepreneurial firm
or entrepreneurial start-up which has a potential
of attaining significant size and profitability.
Entrepreneurial Opportunity
Entrepreneurial Opportunity refers to situations in
which new goods, services, raw materials, markets
and organising methods can be introduced through
the formation of new means, ends or means-ends
relationships.
The concept of opportunities has its roots in
Austrian economics and the role of entrepreneurs
in economic growth has been divided between
arbitrageurs (Hayek, 1945; Kirzner, 1973) and
innovators (Schumpeter, 1934). One of the fun-
damental questions of entrepreneurship research,
raised by Shane & Venkataraman (2000) is: why,
when and how opportunities for the creation of
goods and services come into existence and this
draws much research attention on the attributes,
forms, origins and life cycles of the entrepreneur-
ial opportunity. As such, research is increasingly
focused on the capabilities at individual, team
and organisational levels to identify, evaluate
and exploit/explore entrepreneurial opportunities.
The definition of entrepreneurial opportunity
is quite fragmented (Hansen, Shrader & Monllor,
2011) and lacks consistency in the entrepreneur-
ship literature. Hansen, Shrader & Monllor (2011)
review 19 years of entrepreneurial opportunity
related research and list six worthy composite
conceptual definitions as shown below. Accord-
ing to Table 3, an entrepreneurial opportunity is
viewed as a subjective perception or an objective
existence. This remains a controversial issue in
the entrepreneurship literature. In this chapter, we
adopt the argument of Shane (2003) and McMul-
len, Plummer & Acs (2007) that opportunities are
objective phenomena. Following the definition
of entrepreneurial opportunities given by Cas-
son (1982) and Shane (2000), entrepreneurial
opportunities are defined as situations in which
new goods, services, raw materials, markets and
organising methods can be introduced through
the formation of new means, ends or means-ends
relationship.
As stated above, opportunities take the form
described by Schumpeter (1934): new products/
services, new geographical markets, new raw
materials, new methods of production and new
ways of organising. Opportunities themselves are
heterogeneous in form or size, life cycle, profit-
Table 3. Composite conceptual definitions of
opportunity (Adopted from Hansen, Shrader &
Monllor 2011, p. 292)
1. The possibility of introducing a new product to the market
at a profit
2. A situation in which entrepreneurs envision or create new
means ends frameworks
3. An idea that has developed into a business form
4. An entrepreneur’s perception of a feasible means to obtain/
achieve benefits
5. An entrepreneur’s ability to create a solution to a problem
6. The possibility to serve customers differently and better
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Supporting Entrepreneurship in High Cost Economies

ability, and risks. Take “the opportunity for a hot
dog stand on a particular corner in Adelaide” as
an example. The opportunity is contained in the
form of “a new geographical market— a particular
corner in Adelaide; however the opportunity itself
is to sell hotdogs in that particular corner of an
Adelaide street. The opportunity is contained by
a small geographical market, and the opportunity
for an entrepreneur is defined as selling hotdogs in
a small market, for little profitability, in a highly
labour intensive business.
Holcombe (2003) proposes that entrepreneurial
opportunities arise from factors that disequili-
brate the market, factors that enhance production
possibilities and prior entrepreneurial activity.
Similarly, Shane & Eckhardt (2003) suggest that
the origins of entrepreneurial opportunities are
information asymmetry and exogenous (new
knowledge), supply and demand changes, and
productivity enhancing and rent seeking op-
portunities. These origins of entrepreneurial op-
portunity affect largely whether the opportunity
is objectively new or underexploited (McMullen,
Plummer & Acs, 2007). Taking “the opportunity
of selling hot dog” as an example again, if the
entrepreneurial opportunity comes from unmet
needs or demands due to a lack of food vendors in
the area, then the opportunity is an underexploited
market which requires little by way of entrepre-
neurial capabilities to acquire and combine the
resources. However, if the opportunity is coupled
with productivity improvement, such as a new
processing or packaging method that exploits
faster production and customer turnover in a high
traffic area serviced by traditional vendors with
long order queues the opportunity may have a
big potential for the entrepreneur to enjoy greater
profits by exploiting reduced costs or greater
turnover over the competition. Furthermore, this
entrepreneurial activity could generate other
entrepreneurial opportunities to open in other
geographical markets or opportunities in this or
other related product areas.
In conclusion, the size, life cycle, profit-
ability and growth potential of entrepreneurial
opportunities can largely determine whether they
are worth pursuing with any chance of success.
These characteristics of entrepreneurial oppor-
tunities are not stable; instead they interact with
the external environment and the entrepreneurs
pursuing them, which makes opportunity-based
research more complex.
The Entrepreneurial Firm
Research on entrepreneurship in established
companies has extended over the course of more
than three decades. Accordingly, the focus of
the research on entrepreneurship has gradually
shifted from identifying and describing individual
characteristics to the process of opportunity iden-
tification, evaluation and exploration/exploitation
undertaken by individuals and firms. A review of
the literature in the field of entrepreneurship evi-
dences substantial, implacable research outcomes
that justify the shift. However, due to research
definition, methodology and instrument limita-
tions, the current research shows divergent firm-
level entrepreneurship research outcomes. Many
entrepreneurship research theories intersect with
strategic management although entrepreneurship
research differs from strategic management as it
can take place at lower levels than the firm level
of analysis. Consequently a large proportion of
entrepreneurship literature focuses on the charac-
teristics of individuals in explaining entrepreneur-
ship and this chapter while acknowledging the
link to strategy and business management in the
existing firm context does not set out to explore
these vast areas of research contributions but
instead stays focused on entrepreneurship when
considering the established firm.
The process of pursuing entrepreneurial op-
portunity could take the form of a new venture, a
new product/service, a new firm and so on. When
the process involves starting a new firm which
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Supporting Entrepreneurship in High Cost Economies

has the potential of attaining significant size and
profitability whether from a spin-off, a merger
or independent entrepreneurial behaviours, in
the earlier stage of the new venturing it is called
an entrepreneurial firm or start-up (Bantel, 1998;
Bhide, 2000). Those new firms that are established
based on pursuing entrepreneurial opportunities
through the formation of new means, ends or
means-ends relationships may be considered en-
trepreneurial start-ups that contribute to economic
development objectives while other firms that are
based on market and demand gaps for existing
products/services are contributing to economic
productivity functions. Both sets of firms ulti-
mately contribute to economic growth as long as
they realise a potential for achieving significant
size and profitability.
When individual entrepreneurs start a new
firm to pursue entrepreneurial opportunities,
the survival of the new firm largely depends on
the entrepreneurial opportunity pursued since
opportunities occur within a limited time period
and this in turn determine profits and resources
needed in a dynamic fashion due to the interaction
between the entrepreneurial firm and its environ-
ment. Accordingly, entrepreneurs are required to
obtain certain capabilities to combine resources
to pursue these complicated/changing/not explicit
opportunities successfully. In this scenario, gov-
ernments can play significant roles in creating a
munificent business environment, educating for
entrepreneurial capabilities and nurturing nascent
entrepreneurs.
Start-up businesses are “new,” “active,” and
“independent” (Luger & Koo, 2005). Both in
research and in practice it is shown that entrepre-
neurial firms, that is new start-ups and SMEs that
consistently pursue opportunities for growth and
development, are the engine of regional/national
economic development.
Stages of Firm Growth
This chapter classifies firms broadly into the
following three stages of development; nascent,
survival and growth. The subsequent sections
discuss the entrepreneurial characteristics that
are positively influencing the transition through
these stages of firm development.
Nascent
Creation of a successful venture is a process. A
nascent entrepreneur is someone who commits
time and resources to start a new firm. When this
gestation process is completed, either a venture
could start as an operating business or if the na-
scent entrepreneur abandons the effort, a stillborn
occurs. A nascent entrepreneur is defined as a
person who is now trying to start a new business
as the owner or part owner of the new firm, who
has been active in trying to start the new firm in
the past 12 months carrying out some gestation
activity (Lepoutre et al., 2011). Scholars also refer
to this phase as the inception stage or pre-start
stage (Chrisman & McMullan, 2004; Capelleras
at el, 2008).
Survival
A multitude of terminologies have been used to de-
fine this stage by various scholars including start-
up phase and live or die stage (Steinmetz, 1969,
Chrisman & McMullan, 2004, Reynolds & Miller,
1992). These firms have in most cases started the
operation ideally with a business registration and
have started operating with a cash flow either by
means of income and/or expenses. The survival of
these firms often depends upon securing enough
cash to maintain working capital and fund capital
purchases, both of which are necessary to support
the business’ ongoing sustainability.
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Supporting Entrepreneurship in High Cost Economies

Growth
Growth is a multi-faceted phenomenon. Growth
can be different from vertical integration. How-
ever it is commonly measured by the scaling-up
of sales by a firm that has been in operation for
at least 3-5 years.
Entrepreneurial Environment
Contingency theory suggests that the study of
entrepreneurship cannot be isolated from the
external environment for entrepreneurship (Gilad
& Levine, 1986). The external environment is
crucial to entrepreneurial activities since it poses
threats and offers opportunities in varying degrees
to entrepreneurs and entrepreneurial firms. The
external environment of entrepreneurship includes
the economic environment (e.g. labour and mar-
ket conditions, materials availability, access to
financial assistance), social environment (culture,
honesty, justification, religion, social marginality)
and political environment (stability).
The interaction between entrepreneurship and
the environment is dynamic and complicated, thus
it is difficult to generate a universal environment
to promote entrepreneurship. Littunen et al (1998)
have found that the local environment can influ-
ence entrepreneurial firm success and survival by
impacting the entrepreneurs and firms within it.
Based on data from 10,000 persons in ten Ger-
man planning regions, the empirical research of
Wagner & Sternberg (2004) supports the theory
that regions with a more dense population, faster
growth and lower land prices enjoy higher entre-
preneurship (measured by new start-ups). Their
theoretical framework of the interplay between
environment and external environment is shown
in Figure 5. The environment for entrepreneur-
ship can also be expanded to the concept of the
ecosystem that takes into account local, regional
and global influences.
Entrepreneurial Ecosystem
Many researchers have used the institutional ap-
proach in the field of entrepreneurship where the
institution (conceptualized as the firm or venture)
is the primary unit where the entrepreneur oper-
ates. However, the institutional ecosystem is also
an integral mediator for entrepreneurial success
(Alvarez et al. 2011). An ecosystem is the environ-
ment that will have an impact on entrepreneurship.
This can broadly be classified into three levels
as local, regional and global. An entrepreneurial
ecosystem comprises hundreds of elements that
build the environment in which entrepreneurship
takes place. Based on the literature review carried
out by Alvarez and his team (2011), financial sup-
port, government policies and programs, research
and development (R&D) transfer, access to infra-
structure, cultural and social norms and education
and training have been identified as environmental
factors explored by scholars that have an influ-
ence on entrepreneurial activity. The following
diagram is an example of the elements within an
entrepreneurial ecosystem which, for simplicity
and convenience, has classified the ecosystem into
six main categories: a conducive culture; enabling
policies and leadership; availability of appropriate
finance; quality human capital; venture friendly
markets for products and services; and a range
of institutional and infrastructure support. These
principles and processes at large drive the entre-
preneurial ecosystem which in turn accelerates
entrepreneurial success (Isenberg, 2010).
An ecosystem has a mediating effect on the
entrepreneurial success and the ecosystem changes
from place to place and time to time. While a
supportive ecosystem enables more opportunity
discovery for entrepreneurial success by creat-
ing a positive perception among entrepreneurs, a
dynamic ecosystem enables successful entrepre-
neurial activity where entrepreneurial opportunity
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308
Supporting Entrepreneurship in High Cost Economies

creation is concerned (Webb et al. 2012). As a
result, characteristics of the entrepreneur and
impact of the ecosystem to entrepreneurial activity
have a tightly knit interrelationship.
REGIONAL LEVEL
CHARACTERISTICS
The main objective of this section is to review the
principal best practices from around the world con-
nected to the data collection specifically focused
on the regional entrepreneurial characteristics for
economic development. The concept of economic
development refers to those actions that the govern-
ment or the community can undertake in order to
improve not only the standard of living but also
the health of a region (Acs, Z 2006; Acs, ZJ et al.
2012; Carree & Thurik, 2003). The actions can
include the development of any indicators associ-
ated with the standard of living such as health,
social inclusion, literacy, etc.
It is recognised within many entrepreneurial
research frameworks that the social and economic
development of countries can lead to differences
in entrepreneurship activities. The ecosystem
within which companies operate can become a
competitive advantage or a barrier for a firm’s
development. As such, there are some differ-
ences between the treatment of entrepreneurs
in developing and developed countries which is
connected to the analysis of the socioeconomic
Figure 5. The impact of external environment (Adopted from Wagner & Sternberg 2004)
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309
Supporting Entrepreneurship in High Cost Economies

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Supporting Entrepreneurship in High Cost Economies

environment surrounding entrepreneurs, or more
specifically, the regulatory framework, culture,
access to finance, market conditions and so on.
Entrepreneurship can assist in meeting eco-
nomic growth objectives (Nadim & Anders, 2008;
Wennekers & Thurik, 1999) such as productivity,
innovation and employment which are becoming
key factors of economic dynamism (OECD, 2008).
This section outlines the primary models used
by national or regional economists to monitor
and assess the level of entrepreneurial activity
within a given geographic boundary and provides
an analysis of the most common measurements
used in the field. Many of these measurements
present different issues and the relevance of them
depends on the governments’ agendas and objec-
tives (Yusuf, 2010).
There are any number of lesser known entre-
preneurial activity frameworks such as Gallup’s
framework for entrepreneurship and job creation
(Badal, 2010). However, for the purpose of this
chapter we first present the better known surveys
and indices. We then target three high profile and
internationally recognized frameworks for detailed
discussion: the Global Entrepreneurship Monitor
(GEM), the Entrepreneurial Indicator Programme
(EIP) from the OECD, and the Entrepreneurship
Policy Framework and Implementation Guidance
(UNCTAD). Each of these has been created to
serve different purposes.
GEM started in the late 1990s as a project to
measure entrepreneurial activities across nations.
At the beginning it was only used to measure 10
countries. It was created with the idea of filling a
gap in the data available for measuring entrepre-
neurial activities. It has become one of the most
important entrepreneurship studies in the world
with respect to monitoring the rate of entrepre-
neurship within countries and providing cross
country comparisons. GEM allows comparison of
entrepreneurial activities between those countries
which participate in the study and the results help
us understand the drivers or characteristics of
entrepreneurship in order to develop appropriate
policies for each country.
The second framework that is presented for
detailed discussion is the EIP (OECD) which was
launched in 2006 with the purpose of building
comparable statistics about entrepreneurship and
its determinants. In 2005, the OECD found that
there was a gap in the entrepreneurship measures
as many of their members were not measuring
entrepreneurship activities.
Finally, this chapter will outline the UNCTAD
which aims to help policymakers of developing
countries and economies in transition to promote
entrepreneurship (United Nations Conference on
Trade and Development, 2012).
Regional Level Data on
Entrepreneurship
Surveys
In order to gather information about entrepreneur-
ship, different instruments have been created.
Surveys were developed to collect data about
entrepreneurial individuals and/or firms by in-
ternational institutions.
Table 4 presents a summary of the main
instruments created and entrepreneurship data
availability by international institutions in order
to measure regional entrepreneurial activities.
GEM developed two main instruments for
measuring entrepreneurial activities, as can be
seen from the previous table: The Adult Popula-
tion Survey (APS) and the National Expert Survey
(NES). The purpose of those surveys is different.
APS measures attitudes, activity and aspirations
of individuals and is administrated to 2000 adults
in each country measured. Further information
about the main variables measured in the APS
can be found in the 2010 Global Report (Kelley,
D, Bosma & Amorós, 2010). Also, the full instru-
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311
Supporting Entrepreneurship in High Cost Economies

ment can be downloaded from the GEM website
http://www.gemconsortium.org/docs/409/gem-
2010-aps-questionnaire.
The second instrument is the NES survey of
socio-economic factors which can influence the
entrepreneurial activities of the countries. This
instrument is administered to at least 36 experts
in each country in order to gather qualified opin-
ions. It measures finance, government policies
and programs, entrepreneurial education and
training, R&D transfer, commercial and profes-
sional infrastructure, internal market openness,
physical infrastructure and services, and cultural
and social norms (http://www.gemconsortium.
org/Data-Collection).
Eurobarometer Survey on Entrepreneurship
measures entrepreneurial mindset. This includes
the motivation, choices, experiences and obstacles
linked to self-employment. This survey was de-
veloped with the idea of understanding the situ-
ation in Europe in order to develop policies. This
instrument targets over 26,000 randomly selected
respondents aged 15 years and over from 36
countries, including 29 European Union member
and candidate countries, 3 European Free Trade
Agreement countries, the USA and three Asian
countries; China, Japan and South Korea. The com-
plete instrument can be obtained at http://www.
eubusiness.com/topics/sme/entrepreneurship.09.
EIP used data from different sources in order to
analyse the entrepreneurial activities. The database
contains information about business demography,
enterprise birth, death and survival, and other
information such as high-growth enterprises.
The World Bank Group Entrepreneurship
Snapshots (WBGES) works on entrepreneur-
ship. This group works in collaboration with the
International Finance Corporation (IFC), and
Table 4. Entrepreneurship regional surveys
Surveys
Institution Name Description
GEM
APS (Adult Population Survey) It is a questionnaire that is administered by GEM to collect
information about attitudes, aspirations and entrepreneurial activities
(GEM). This survey is used to collect data which are comparable
across countries and allows longitudinal studies (GEM 2010).
The National Experts’ Survey
(NES)
It is a survey instrument administered by GEM for measuring key
entrepreneurial framework conditions such as: finance, government
policies and programs, entrepreneurship education and training,
R&D, infrastructure, culture and social norms, market openness and
so on (GEM 2012).
European Commission
Eurobarometer Survey on
Entrepreneurship
It measures entrepreneurial mindset. It focuses on motivation,
choices, experiences and obstacles linked to self employment.
The results from this survey help policymakers to understand
entrepreneurship in their countries. This survey started in 2001 and
has expanded into Asian countries (European Commission 2009).
OECD
Eurostat Entrepreneurship
Indicators Programme (EIP)
In 2006, EIP work began with the development of standard
definitions and concepts as a basis for the collection of empirical
data.
World Bank
World Bank Group
Entrepreneurship Snapshots
The objective was to create a database to make comparisons on
entrepreneurship and its determinants across the OECD countries. It
started in 2004 and covers 112 countries (World Bank 2008).
Kauffman Firm Foundation
Kauffman firm survey It collects data on young businesses in the United States to
understand factors influencing entrepreneurship. It began operations
in 2004. The questions are about the founders’ background, access to
finance, firms’ performance, and so on.
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Supporting Entrepreneurship in High Cost Economies

the Kauffman Foundation on data collection on
business creation. They analysed the regulatory,
political and macroeconomic institutional environ-
ment on entrepreneurship and the entrepreneurs’
drivers. They do not include the informal sector
in their measures. They collect data through
phone interviews and email/fax with businesses
registered from over 150 countries http://econ.
worldbank.org/.
Finally, the Kauffman Firm Survey (KFS)
studies around 5,000 businesses in the US and
was created in 2004. The purpose is tracking
business development during the early years. The
data collected is connected with business forma-
tion, strategies, employment patterns, founders’
characteristics and financial arrangements (http://
www.kauffman.org/kfs/).
Entrepreneurship Index
Another means of monitoring entrepreneurial
activity is via the use of entrepreneurial indexes.
Table 5 details two such entrepreneurial indexes.
The Kauffman Index of Entrepreneurial Activ-
ity is based upon the population survey from the
US. It examines business creation. This index only
includes individuals who own their business and
work more than 15 hours per week and who are
adults between 20 and 64 years. Further informa-
tion about the Index of Entrepreneurial activity
can be found in www.kauffman.org/research-
and-policy/kauffman-index-of-entrepreneurial-
activity.aspx.
The Danish Entrepreneurship Index involves
diverse factors such as capital availability; quan-
tifying the focused expenditure in building up en-
trepreneurial skills though educational programs,
trust in bankruptcy laws, administrative burden
and research environment. All these factors create
a framework that can hinder or promote entrepre-
neurial activities. The analysis is based on the six
factors presented by OECD (Nadim & Anders,
2008): regulation, market conditions, access to
financing, creation and diffusion of knowledge,
skills and culture. These factors influence policy
areas. Much of the information collected from
different countries is not directly comparable
(percentages, ratios, etc). They use normalised
data setting values of 100 for the best country and
0 for the poorest (Hoffmann et al. 2010). Quality
assessment of the indicators has been presented
at www.foranet.dk.
Entrepreneurship Websites
More information about entrepreneurs and en-
trepreneurship programs are available on the
following websites:
Table 5. Entrepreneurship indexes
Indexes
Institution Name Description
Kauffman Foundation Index of Entrepreneurial
Activity
Uses leading indicators of new business creation in U.S. Data from the
Current Population Survey (CPS). The index compares percentages of
adults not business owners who start business. Additional information
about business creation by demographic groups is presented in this index.
www.kauffman.org
Danish Enterprise and
Construction Authority
Danish Entrepreneurship
Index (2009/2010)
First publication in 2009 (Astrup et al. 2009) to follow up on the Danish
Government’s goals. The entrepreneurship index shows that a total
of six factors affect a country’s entrepreneurial performance such as
regulation, market conditions, access to financing, creation and diffusion
of knowledge, entrepreneurial skills, and entrepreneurial culture.
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Supporting Entrepreneurship in High Cost Economies

• www.fasttrac.org (Kauffman Foundation)
• www.barbadosentrepreneurshipfounda-
tion.org (the Barbados Entrepreneurship
foundation)
• www.endeavor.co.za (Entrepreneurial
dialogues)
• www.entrepreneurindicator.com/ (Global
Entrepreneurship Indicator)
• www.efinlab.com (Harvard Entrepreneurial
finance lab)
• www.wbaa.biz (World Business Angels
Association)
• www.unleashingideas.org (Global
Entrepreneurship Week – Kauffman
Foundation)
• w w w. s u s t a i n – e n t r e p r e n e u r s h i p . o r g
(Sustainable Business and Entrepreneurship
Platform)
• www.ace.sg/Site/index.aspx (ACE –
Action Community for Entrepreneurship)
• www.eonetwork.org (Entrepreneur’s
Organization Network)
• www.entrepreneurship.org (Kauffman
Foundation)
• www.entrepreneur.com (Magazine and
website)
There are many other instruments which are
not presented in this chapter which focus on al-
lied concepts to support entrepreneurship such
as business incubators, science parks, and so on.
Internationally Recognised
Frameworks
It is recognised that it is necessary to measure
entrepreneurial activities. However, there is no
consensus about how to measure these activities
(Rachida & De Castro, 2008) as entrepreneur-
ship is a concept that includes many dimensions
(Bruyat & Julien, 2000; Rachida & De Castro,
2008; Verheul et al. 2002). Furthermore, the
entrepreneurial activities are also affected by the
environment in which they operate (Rachida &
De Castro, 2008).
Global Entrepreneurship
Monitor Project (GEM)
GEM started in 1997, at a time when there was
a lack of possible comparisons across the world
of entrepreneurship. Recognition of the impor-
tance of entrepreneurship around the world was
growing and governments started to realise that
it was an important factor influencing economic
development.
Among other things, the GEM sought to pro-
vide understanding of the role of entrepreneurs
in our economies and how external factors can
affect the development of new businesses. It was
assumed that a high relationship between the eco-
nomic development and entrepreneurial dynamic
sectors existed.
The GEM was established to achieve the fol-
lowing objectives:
• “To measure differences in entrepreneurial
attitudes, activity and aspirations of indi-
viduals among many economies across the
globe,
• To uncover factors determining the nature
and levels of entrepreneurial activity, and
• To identify policy implications for en-
hancing entrepreneurship in an economy.”
(Bosma et al. 2012, p. 8).
The GEM treats entrepreneurship as a complex
process which is influenced by many factors, tak-
ing a comprehensive socio-economic approach
with a focus on the individual (Bosma et al. 2012).
The first model of the GEM was explained
in detail by Levie & Autio (2008) who present
how entrepreneurship’s three main components
(attitudes, activity and aspirations) are influenced
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Supporting Entrepreneurship in High Cost Economies

by national conditions. Levie & Autio (2008, p
235) state “To date, the relationships between the
variables in the model have lacked explicit theo-
retical grounding. Because of this, the potential
value of the GEM model for academic research
remains unfulfilled, and it has been difficult to
assess the value of empirical contributions based
on GEM data”.
Further reviews were undertaken by GEM and
the revised model is presented in Figure 7. The
GEM model shows that entrepreneurship is not
independent of its environment and is affected by
national conditions. This model reflects how the
three components (attitudes, activity and aspira-
tions) interact with each other. Furthermore, it
takes into consideration how entrepreneurship can
influence economic development as an output.
Figure 7 shows that entrepreneurship is not
a standalone process and it has been recognised
by other authors to involve many dimensions
(Murphy, Trailer & Hill, 1996). It is not enough
to have an entrepreneurship profile – there are
other factors that influence entrepreneurs which
are also important. These factors are subdivided
into three basic requirements; efficiency enhanc-
ers, innovation and entrepreneurship.
In order to measure the variables presented in
the previous model, GEM developed two measure-
ment instruments in order to gather information
for analysing the model. The first instrument is the
Adult Population Survey (APS) and the second one
is Expert Survey (ES). The first randomly surveys
a minimum of 2000 adults between 18 and 64 and
the second surveys 36 experts in every economy.
Figure 7. The revised GEM model (Kelley et al. 2012; Bosma et al. 2012)
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Supporting Entrepreneurship in High Cost Economies

The aspiration is to have world coverage with 87
countries thus far participating in the surveys over
the years since the project’s inception.
GEM 2011 Report: Australia
In 2011, GEM measured 54 economies. GEM esti-
mated that 388 million entrepreneurs were starting
or running new businesses in 2011. Based on this
report Australia is recognised as an Innovation-
Driven Economy (IDE). This classification takes
into consideration GDP per capita and the share
of exports including primary goods. This type of
economy is characterised by a higher proportion
of business services compared to the other levels
(factor-driven and efficiency-driven) (Kelley, DJ,
Singer & Herrington, 2011).
Based on the GEM 2011 report, Australia
displays a medium range number with respect
to perceived opportunities, capabilities and fear
of failure, however it also shows that 12.3% of
individuals with entrepreneurial intentions were
expecting to start a business within the next three
years. This number was below Czech Republic,
France, Korea and Taiwan (countries which are
also innovation-driven economies) (Kelley, DJ,
Singer & Herrington, 2011).
There are also some measures which show so-
cietal attitudes to entrepreneurship. These attitudes
may positively or negatively influence entrepre-
neurial activities. Australia ranked high in the
‘awarding high status to successful entrepreneurs
and focusing media attention on entrepreneurship’
factor (Kelley, DJ, Singer & Herrington, 2011).
Australia has a nascent entrepreneurship rate
of 6% compared to the US with 8.3% (Kelley, DJ,
Singer & Herrington, 2011). Furthermore, Aus-
tralia and the US have high levels of early-stage
entrepreneurial activity, and these two countries
also show the higher involvement of women in
entrepreneurial activities in the innovation-driven
group.
EIP / OECD-Eurostat (Entrepreneurship
Indicators Programme)
The EIP (OECD) started in late 2006 (OECD,
2008). The OECD stated that until then, there
was no country from the OECD group which
collected data on entrepreneurship. The EIP
programme was developed to cover this gap
and propose a framework to measure entrepre-
neurship. The framework developed includes a
set of indicators and methodologies to produce
international comparable data which is used by
OECD countries.
This framework also treats entrepreneurship
as a complex concept which cannot be considered
with a single measure (Hindle, 2006; Murphy,
Trailer & Hill, 1996; Verheul et al. 2002). This
programme’s main objective is to help policy-
makers understand the situation and propose new
policies, based on the idea that policymakers can
improve the entrepreneurial activities by improv-
ing the entrepreneurial environment (Nadim &
Anders, 2008).
Furthermore, the OECD uses external data
and databases for analysing the entrepreneurial
environment. The proposition involves a collab-
orative process between OECD and other national
statistical organisations in order to develop an
international entrepreneurship measure which
provides policymakers with indicators needed
to tackle whichever entrepreneurship related
objective they determine (Schmiemann, 2009).
The OECD not only focuses on SMEs or start-up
companies, they mention that large companies can
also be entrepreneurial and they should be taken
into consideration (Nadim & Anders, 2008).
The framework identifies three separate but
interconnected flows, all of which are important
in the formulation, assessment and appraisal of
policy measures. The three components of the
framework are: determinants, entrepreneurial
performance and impact.
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316
Supporting Entrepreneurship in High Cost Economies

The first component is determinants which
reflect the key factors that affect entrepreneurial
performance. The second component is entre-
preneurial performance which reflects the target
indicators that policymakers believe have an im-
pact (third component) on some or many ultimate
objectives (Nadim & Anders, 2008).
Determinates of Entrepreneurship
Determinants involve many environmental and
sociological factors which, in conjunction with
the entrepreneur’s personal attributes, affect the
outcomes of the entrepreneurial process (Nadim
& Anders, 2008). Although the OECD report
does not present the literature underlying each
of these determinants, many of them may be ex-
plained within the following individual and firms
entrepreneurial characteristics sections.
Nadim & Anders (2008) mentioned three fac-
tors which influence entrepreneurship, such as
opportunities (market conditions), skilled people
(capabilities and infrastructure) and resources
(access to capital, R&D and technology). Addi-
tionally, they stated the importance of the envi-
ronment which includes, for example, regulatory
frameworks and culture. Together, they isolated
six subgroups of determinants for the conditions
that support entrepreneurial performance as shown
in Figure 9.
These six determinants can be affected or
influenced by government policy (see Table 6),
for example, policies affecting access to capital
and connected with Business Angels, access to
capital and stock markets. Policies influencing
access to R&D and technology are connected
with R&D investment, university/ industry col-
laboration, collaboration between firms, diffusion
of new technology, patent system and broadband
access. Furthermore, government can also influ-
ence market conditions using anti-trust laws or
competition laws, and other regulations influenc-
ing access to external markets and procurement.
The regulatory framework can include policies
such as administrative burden, bankruptcy, legal
environment, taxes, and so on. Culture can be
influenced by entrepreneurial education policies
and motivation to change certain societal attitudes
(Nadim & Anders, 2008).
Furthermore, policies influencing entrepre-
neurial capabilities, which are the subject of this
chapter, are: training and experience of entrepre-
neurs, business and entrepreneurship education,
entrepreneurship infrastructure and immigration
Figure 8. Three-stage entrepreneurship model (Nadim & Anders 2008, p. 10)
Figure 9. Determinants of entrepreneurship (Nadim & Anders 2008, p. 19)
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317
Supporting Entrepreneurship in High Cost Economies

(Nadim & Anders, 2008). Other authors previously
studied the influence of experience and education
(Cooper, AC, Gimeno-Gascon & Woo, 1994).
Please refer to later sections of this chapter for
detailed information about the entrepreneurial
capabilities literature.
Table 6 shows how each of these determinants
can also be subdivided further into specific policy
areas. However, for the purpose of this chapter,
entrepreneurial capabilities are the main focus.
The International Consortium for Entrepre-
neurship (ICE) collects and evaluates 57 indicators
connected with determinants (Hoffmann, Larsen
& Oxholm, 2006). Many factors which influence
entrepreneurship have been previously studied by
many authors. Some of them have been presented
in the individual characteristics such as gender,
age, marital status, family background, wealth,
income, current working status, education, work
experience, risk attitude, over-optimism, prefer-
ence for independence, etc. External influences
include per capita income, financial system and
availability of credit, and business cycles.
Indicators for Entrepreneurial
Performance
Entrepreneurial performance depends on ac-
tions from the entrepreneurs that will impact the
economy (Nadim & Anders, 2008). The indica-
tors that OECD has chosen in this case are based
on a pragmatic approach, where it is recognised
that more indicators can be added as statistical
capacity of the institutions improves (Nadim &
Anders, 2008).
Figure 10 shows the main subgroups of entre-
preneurial performance.
Each of these subgroups also contains many
components as shown in Table 7.
Each of the indicators can be further broken
down to varying degrees into sub-sectors such
as industrial sector, gender, business size, etc.
Many of these can be produced using currently
existing data sources, particularly sectoral and
size breakdowns (Nadim & Anders, 2008). Yusuf
(2010) mentioned that growth, profitability and
survival are the most popular measurements of
Table 6. Determinants for entrepreneurship (Source: OECD 2009b)
Regulatory
Framework
R & D and
Technology
Entrepreneurial
Capabilities
Culture Access to
Finance
Market
Conditions
D
et
er
m
in
an
ts
• Adm. burdens for
entrepreneurs and
for growth.
• Bankruptcy
regulations.
• Safety, health
and environmental
regulations.
• Product
regulation.
• Labour market
regulation.
• Court and legal
framework.
• Social and health
security.
• Income taxes,
wealth/bequest
taxes.
• Business and
capital taxes.
• R&D
investment.
• University and
Industry interface.
• Technological
cooperation
between firms.
• Technology
diffusion.
• Broadband
access.
• Patent System.
• Patent system,
standards.
• Training and
experience of
entrepreneurs.
• Business and
entrepreneurship
education (skills).
• Entrepreneurship
infrastructure.
• Immigration.
• Risk attitude in
society.
• Attitudes towards
entrepreneurs.
• Desire for business
ownership.
• Entrepreneurship
education (mindset).
• Access
to debt
financing.
• Business
angels.
• Access
to Venture
Capital.
• Access to
other types of
Equity.
• Stock
markets.
• Antitrust laws.
• Competition.
• Access to
domestic market.
• Access to
foreign markets.
• Degree
of public
involvement.
• Public
procurement.
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318
Supporting Entrepreneurship in High Cost Economies

outcomes. Brush & Vanderwerf (1992) analysed
outcome measurements and they selected the most
popular ones as: survival, sales and employee
changes, profitability, return on investment and
net profit. Schutjens & Wever (2000) recognised
the most frequently used three measurements to
be: profits, return on profit and income generation.
Others mentioned measurements such as revenue,
profit, number of ventures, and employee growth
(Luke, Verreynne & Kearins, 2007).
Impact
According to Nadim & Anders (2008) impacts
reflect the “value” created by entrepreneurs and
entrepreneurship on the economy. However, some
measures of social and economic impact are pre-
sented in the framework. Nadim & Anders (2008)
recognised this part of the model can be seen as
additional as they focused on determinants and
performance and not on impact measurements.
They introduce the impact measures with the
purpose of showing that policies created to influ-
ence determinants influence the performance of
those firms and in turn they will have social and
economic impact on the region.
Figure 11 shows the EIP subcategories of the
entrepreneurial impact: job creation, economic
growth, poverty reduction and formalising the
informal sector. In this instance there are no
subdivisions for entrepreneurial impact. As was
previously mentioned, the OECD framework
report does not mention the reasons behind the
selection of these measurements: they only pro-
pose them as obvious measures. However, there
are many authors who highlight the relationship
between entrepreneurship and economic growth
(Van Stel, Carree & Thurik, 2005; Wong, Ho &
Autio, 2005). There are no indicators currently
identified within these subcategories, however
there are clearly obvious candidates, for example
GDP growth, employment indicators, average
Figure 10. Indicators of entrepreneurial performance (Nadim & Anders 2008, p. 14)
Table 7. Entrepreneurial performance (OECD 2009b)
Firm-Based Indicators Employment-Based Indicators Wealth-Based Indicators
E
nt
re
pr
en
eu
ri
al

Pe
rf
or
m
an
ce
• Employer enterprise birth rates.
• Employer enterprise death rates.
• Business churn.
• Net business population growth.
• Survival rates at 3 and 5 years.
• Proportion of 3 and 5 years.
• High growth firm rates by
employment.
• Gazelle rates by employment (the
number of high-growth firms and the
number of young, high-growth firms).
• Business ownership rates.
• Employment in 3 and 5 year old
firms.
• Average firm size after 3 and 5 years.
• High growth firm rates by turnover.
• Gazelle rates by turnover.
• Value-added by young or small firms.
• Productivity contribution, young or
small firms.
• Innovation performance, young or
small firms.
• Export performance, young or small
firms.
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319
Supporting Entrepreneurship in High Cost Economies

wages and salaries, and relative poverty. Yusuf
(2010) explained that entrepreneurship can be
seen as a path out of welfare and poverty for the
underprivileged.
OECD Data Availability: Australia
The OECD presents a report with a list of tables
with all the indicators showing comparisons
between the members (OECD, 2012). There are
data available for structural indicators on the
enterprise population; enterprise birth, death and
survival; employment creation and destruction;
enterprise growth; women entrepreneurship and
selected determinants of entrepreneurship (OECD,
2012). In the case of Australia not all the previous
indicators are available.
UNCTAD Entrepreneurship
Policy Framework and
Implementation Guidance
The policy framework developed by UNCTAD is
intended to support developing-countries’ policy-
makers to promote entrepreneurship. It is claimed
that policies connected with entrepreneurship
cannot be treated completely separately from the
economic development policies (United Nations
Figure 12. Key components of the UNCTAD entrepreneurship framework (UNCTAD (United Nations
Conference on Trade and Development 2012, p. 7))
Figure 11. Categories of entrepreneurial impact (Nadim & Anders 2008, p. 14)
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320
Supporting Entrepreneurship in High Cost Economies

Conference on Trade and Development, 2012).
It is stated that “the Entrepreneurship policy
framework is narrower in scope and focuses
specifically on policies aimed at promoting the
emergence of new entrepreneurs and facilitating
new business start-ups in developing countries
and transition economies” (United Nations Con-
ference on Trade and Development, 2012, p. 5).
UNCTAD (2012) reviewed best entrepreneurship
practices in developing countries and created the
best entrepreneurship practices inventory.
The UNCTAD (2012) report states that this
framework has been developed based on experi-
ence and international expertise in research and
policy analysis (p.1); however they do not present
reasons for choosing the policy areas selected.
This framework recognises that one policy
cannot be designed for all cases; however they
propose an approach which identifies the key
priority areas to take into consideration, in order
to formulate a national entrepreneurship strategy,
such as (also see Figure 12):
• Optimising the regulatory environment.
• Enhancing entrepreneurship education.
• Facilitating technology exchange and
innovation.
• Improving access to finance.
• Promoting awareness and networking.
Furthermore, they provide guidance on specific
issues for thoroughly assessing each area. They
formulated a toolkit that can help governments
prepare entrepreneurship policy and assess the
effectiveness after the implementation. The UNC-
TAD proposes a step by step process.
The Formulation of the National
Entrepreneurship Policy
The UNCTAD proposes identifying the policy
objectives and recommending actions for each
of the key components of the entrepreneurship
framework. UNCTAD recommends that govern-
ments undertake a proactive systematic approach
in supporting entrepreneurship (Radosevic, 2010).
Table 8 shows policy objectives and recom-
mended actions for the formulation of the national
entrepreneurship policy as follows:
The UNCTAD report explains that there is no
right mix of policy and actions. They deliver a set
of explanations for each of the points involved in
the formulation of the entrepreneurship national
policy. However, the report does not present any
explanations about the selection of these steps.
The first step is connected with the identifica-
tion of a country’s conditions. It recognises the
importance of entrepreneurship strategies being
tailored to each country-specific condition. The
report mentioned a great list of conditions which
can be assessed by governments. Before starting
to develop entrepreneurial policies governments
should access the particular conditions of their
countries. Some of them are presented below.
Governments should assess the rate of start-ups
relative to the size of the workforce and levels
of innovation, other authors have mentioned the
rate of start-ups as a measure of entrepreneurial
outcome (Armington & Acs, 2002; Chrisman, J.
J., Gatewood & Donlevy, 2002). Furthermore,
it is important to analyse and take into account
whether entrepreneurs are being pushed into this
area as a consequence of necessity as developing
countries tend to have a high level of own-account
workers. Also, the analysis of the importance of
the informal sector and the segmentation of the
private sector could help policymakers to under-
stand their country situation. Entrepreneurs and
informal sectors tend to be lower in developed
countries.
The second step is connected with setting up
goals and priorities. Barriers and opportunities
faced by entrepreneurs may be connected with
gaps in the education system, specific skills, and
so on. Furthermore, access to finance is not always
equal for all sectors in developing countries. The
productivity spectrum may also be affected by the
product quality and managerial skills for growth.
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Supporting Entrepreneurship in High Cost Economies

Other specific country conditions can help
policymakers such as characteristics of the
private sector. For example, capital intensive
and/or export oriented firms require different
characteristic linkages so specifically developed
programs can create new opportunities for new
firms. Other factors include if the country faces
discrimination issues (this type of information
can help government decide who requires extra
support, for example women in some countries);
and depending also on the workforce, whether
the characteristics of young entrepreneurship
programs can also be an option.
The third step mentioned in the formulation
of national policies is the coherence of entrepre-
neurship strategy and other national policies. It
is important that the entrepreneurship strategy is
aligned with the development strategies and with
other competitiveness policies in the country.
Furthermore, it is important to mention that the
entrepreneurial strategy should also have internal
coherence. This is also based on the multifaceted
characteristics of entrepreneurship (Yusuf, 2010).
The fourth step is described as strengthening
the institutional framework which is focused
on the importance of the right choice of instru-
ments. Designating a leading institution could
help to coordinate the implementation of the
entrepreneurial policies and facilitate the links
between the stakeholders (non-governmental ac-
tors, new enterprises and private sectors should
have a voice). Entrepreneurship development
should be addressed by more than one institu-
tion in order to face the multidimensionality
of the process.
And finally, measure the results and ensure
policy learning. It is important that policies re-
main relevant and that impact and achievement of
objectives can be successfully measured.
UNCTAD (2012) proposes analysing the spe-
cific country situation so that countries will be
able to tailor their policies to their environment.
Table 8. The formulation of the national entrepreneurship policy (UNCTAD (United Nations Conference
on Trade and Development 2012, p. 9)
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Supporting Entrepreneurship in High Cost Economies

As a starting point UNCTAD (2012) suggests the
following checklist (without, however, offering
explanations for the selection of these particular
questions) (United Nations Conference on Trade
and Development, 2012, p. 19):
• “Are there surveys for assessing the nation-
al entrepreneurial environment?
• Do mechanisms, such as multi-stakeholder
forums, exist to promote policy dialogue
on entrepreneurship?
• Does the country have a dedicated policy
framework to promote entrepreneurship? Is
there a national entrepreneurship strategy?
• Is there clarity about the priorities and type
of entrepreneurship that the country wants
to encourage?
• Are there specific policies in place to fa-
vour start-ups and SMEs?
• Are there specific policies in place to en-
courage the transition to the formal busi-
ness sector?
• Is the entrepreneurship policy closely co-
ordinated with other national policies? Is
entrepreneurship embedded into other na-
tional policies?
• Is there a ministry, agency or institution
championing entrepreneurship? Is there a
ministerial level entity in charge of coordi-
nation of the strategy?
• Is there a deliberate policy to promote for-
mal entrepreneurial activity among specif-
ic groups of the population?
• Are there specific targets or measurable
objectives to increase entrepreneurial
activity?
• Does the government assess the impact of
policy measures?
• Does the government support regular inde-
pendent policy evaluations?
• Does the government incorporate feedback
from lessons learnt?
• Is there an annual (periodic) report on the
state of entrepreneurship?”
Furthermore, the UNCTAD (2012) proposed a
series of indicators which can help to understand
how to measure the results after the implementa-
tion:
• Number of formal business start-ups cre-
ated annually (Armington & Acs, 2002;
Davidsson & Henrekson, 2002)
• Survival rates (Chrisman, J.J. & McMullan,
2000)
• Share of total start-ups in target areas
• Share of total start-ups in target groups
• Job growth (Birley, 1987; Cooper, A et al.
1990; Puhakka, 2007; Yusuf, 2010)
• Taxes paid by start-ups and revenue gener-
ated (United Nations Conference on Trade
and Development, 2012, p. 66).
UNCTAD (2012) does not explain how they
selected the indicators. Previous authors have also
presented similar indicators and these have been
added next to the indicators for the purposes of
this report.
Optimising the Regulatory Environment
The UNCTAD (2012) point out that it is not only
about entrepreneurs’ capability, but it is also
about the environment that enables enhancement
of those activities. UNCTAD (2012) proposed
policies and objectives, which are recognised
as crucial for enterprise development, based on
policies addressed by international reports. Those
reports include:
• Index of Economic Freedom, refer www.
heritage.org/index
• Doing Business, refer www.doingbusiness.
org
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Supporting Entrepreneurship in High Cost Economies

• Transformation Index, refer www.bertels-
mann-transformation-index.de/en/bti
• Global Entrepreneurship Monitor, refer
www.gemconsortium.org
• The Donor Committee for Enterprise
Development, refer www.enterprise-devel-
opment.org
Table 9 shows policy objectives and recom-
mended actions for the formulation of the regula-
tory environment as follows:
The ranking presented by Doing Business
shows that the most entrepreneurial economies and
competitive economies (such as Singapore, New
Zealand and Canada) recognised the importance
of the environment as, in general, they imposed
less administrative requirements on start-ups.
Administrative entry barriers have a greater influ-
ence on poor people (cost of business registrations,
licensing, etc). Furthermore, the lack of transpar-
ency or corruption can affect the development of
entrepreneurial activities.
The first step is analysing the regulatory
requirements for start-ups. At this point, it is
important to analyse the reasons connected
with the regulatory environment that affect
the development of entrepreneurial activities.
Although some international reports (doing
Table 9. Regulatory environment (UNCTAD (United Nations Conference on Trade and Development
2012, p. 20)
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324
Supporting Entrepreneurship in High Cost Economies

business) mention that less regulations help
entrepreneurs, the UNCTAD (2012) point out
the importance of arriving at the right balance
in regulation. It mentioned that entrepreneurs
require regulations to create a more predictable
business environment, fair competition and
security. The report stated the importance of
benchmarking.
The second point is connected with minimis-
ing regulatory hurdles for start-ups. This involves
working in the reduction of bureaucratic process,
facilitating accurate information, and reducing
time-consuming procedures. Reducing this can
facilitate the formal entrepreneurship sector.
The next step is connected to building entrepre-
neurs’ confidence in the regulatory environment.
UNCTAD (2012) stated that the confidence in the
regulatory environment is related to the regulator’s
power to enforce rules, entrepreneurs’ awareness,
government operations (how timely and efficient),
contractual enforcement in the countries, legal
dispute mechanisms, property rights, and access
to credit after bankruptcy.
The third step is the guidance and help available
to assist entrepreneurs through the administrative
process for start-ups. Help to new entrepreneurs
in the administrative procedures can be offered
via assistance with websites or help desks.
In order to help countries to work on the regu-
latory environment in 2007 UNCTAD developed
an e-regulations tool (please refer to www.e-
regulations.org). This tool helps governments to
work on business facilitation.
Again, as a starting point, a checklist is offered
by the UNCTAD (United Nations Conference on
Trade and Development, 2012, p. 29):
• “Has the government carried out an as-
sessment of the process of starting a busi-
ness? Does it benchmark the time and cost
of starting a business? Does it have a good
overview of sector- and region-specific
regulations?
• Is a public-private dialogue on regulatory
costs and benefits in place?
• Has the government considered initiat-
ing a process of weeding out unnecessary
regulations?
• Are there special provisions for social
entrepreneurship?
• Does the country have fast-track mecha-
nisms and one-stop-shops to bundle pro-
cedures? Does it make use of ICT-based
administrative procedures?
• Does the government offer mechanisms
to make contract enforcement easier and
faster?
• Has it considered the introduction of alter-
native dispute resolution mechanisms?
• Do bankruptcy laws allow for business
re-starts?
• Does the government offer services to
assist start-ups in meeting regulatory
requirements?
• Is information about business establish-
ment procedures transparent? Are business
regulations available online? Are there
tutorials available for start-ups? Is infor-
mation on business regulations also made
available to disadvantaged groups?”
Possible indicators for measuring the effi-
ciency of the regulatory environment which can
allow international comparison are (refer United
Nations Conference on Trade and Development,
2012, p. 66):
• Number of procedures to open a business
• Number of days and cost to start or close
a business
• Timeliness of dispute resolution mechanism.
Enhancing Entrepreneurship
Education and Skills Development
UNCTAD recognises two types of skills: soft
and hard. Soft skills are connected with attitudes
and hard skills with knowledge. The framework
highlights the importance of both formal educa-
tion and informal processes which can alter the
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Supporting Entrepreneurship in High Cost Economies

culture. The formal education is associated with
formal entrepreneurship programs. However,
government should ensure that the entrepreneurial
education is implanted across the whole formal
and informal education system.
Table 10 shows policy objectives and recom-
mended actions for enhancing entrepreneurship
education and skills development as follows:
This part requires the involvement of many
different government departments – not just the
education departments but also the economic
development departments. It is not enough to
introduce an effective entrepreneurial curriculum
only at the university level.
The first step is embedding entrepreneurship
in formal and informal education systems. Entre-
preneurial education can start from a young age
with the introduction of soft skills such as risk
taking, etc. Later, more formal entrepreneurship
education can be introduced through university
or Vocational Education and Training (VET)
programs.
The UNCTAD (2012) report does not mention
the reason for choosing skills. However, many
authors have previously studied the soft skills
connected with entrepreneurship (Arenius &
Minniti, 2005; Van Gelderen, Thurik & Bosma,
2005) and hard skills (Delmar & Davidson, 2000).
Table 10. Enhancing entrepreneurship education and skills development (UNCTAD (United Nations
Conference on Trade and Development 2012, p. 30)
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Supporting Entrepreneurship in High Cost Economies

A higher level of education has been shown to
be positively related to entrepreneurial activities
(Delmar & Davidson, 2000).
The second step is developing effective en-
trepreneurship curricula which includes a more
holistic approach (basic financial skills, opportu-
nity recognition, business planning, commercial
law and so on). There are three main points that
entrepreneurship education should address: per-
sonal competencies, core operative skills, and
business and management skills.
UNCTAD developed with this purpose the
“Empretec Entrepreneurship Training Pro-
gramme” (refer for further information to www.
empretec.net).
The third step is training teachers who can be-
come key elements of the entrepreneurial process.
Finally, partnering with the private sector is
a key factor of entrepreneurial education. Entre-
preneurs can become an important part of the
teaching and mentoring process. Some examples
of firms involved in this process can be found in
UNCTAD’s Business Linkages Programme.
UNCTAD also developed a checklist as a
starting point for analysing educational policies
and actions (United Nations Conference on Trade
and Development, 2012, p. 38):
• “Do national curricula recognize entre-
preneurship as a subject? Is it integrated
across other disciplines?
• Do policies promote key entrepreneurial
skills training in schools including both at-
titudes and enabling skills?
• Do policies recognize the specific needs of
youth, women and other target groups?
• Are entrepreneurship training programmes
offered outside the formal education sys-
tem? Do these programmes address low-
literacy groups and those in rural areas?
• Are there policies for introducing more
interactive and experience-based teaching
approaches in the educational system?
• Are schools engaged with business practi-
tioners and local entrepreneurs?
• Has entrepreneurship been explicitly rec-
ognized as an objective of the national cur-
ricula for vocational, technical and com-
mercial school at secondary level?
• Have provisions of specific training and in-
centives for teachers been introduced?
• Do curriculum designers develop local
case studies and entrepreneurship course
materials to be used in the classroom?
• Are academic institutions encouraged and
supported in providing training, counsel-
ling, diagnostic and advisory services to
early-stage entrepreneurs?
• Is extracurricular entrepreneurial activity
promoted (e.g. student activities, business
plan competitions, business development
programs, etc.)?
• Have national entrepreneurship educators’
networks been established to facilitate the
application of programs?
• Is private sector funding leveraged for en-
trepreneurship education?
• Are there mentoring and coaching avail-
able to develop entrepreneur’ skills?”
Possible indicators for measuring performanc-
es in this area are (United Nations Conference on
Trade and Development, 2012, p. 19):
• Share of secondary or technical/vocational
schools offering entrepreneurship pro-
grams/extra-curricular activities.
• Number of annual spin-offs from universi-
ties/research programs.
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Supporting Entrepreneurship in High Cost Economies

The Framework Continues
with Facilitation of Technology
Exchange and Innovation
The UNCTAD (2012) approach recognises the
supported environment between entrepreneurship,
technology and innovation and proposes a series
of policy objectives and options, as indicated in
Table 11.
The first point UNCTAD (2012) emphasizes
is supporting greater diffusion of Information
and Communication Technologies (ICT) and le-
veraging the advantages of these modern systems
to the private sector; however low technology
firms are not included in the report. The report
is focused on developing countries and mentions
mobile phone uses and technologies to facilitate
enterprise growth.
The second point is promoting inter-firm
networks spreading technology and innovation.
Proximity can help to create opportunities. Knowl-
edge becomes one of the main characteristics of
a dynamic environment which fosters innovation
(Audretsch, Hülsbeck & Lehmann, 2012; Santoro
& Chakrabarti, 2002; Sorenson & Audia, 2000;
Varga, 2000). Clusters of firms appear and use the
Table 11. Facilitation of technology exchange and innovation (UNCTAD (United Nations Conference
on Trade and Development 2012, p. 39)
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Supporting Entrepreneurship in High Cost Economies

synergy of working together in order to be more
competitive. Maskell & Malmberg (1999) main-
tained that Regional Innovation Systems (RIS)
can guide competitive advantages through the
localisation of certain capabilities. These capabili-
ties could be specific resources, specialised skills,
and all the social dimensions that are implicit in
cultures. A definition of RIS is “a set of interact-
ing private and public interests, formal institutions
and other organisations that function according
to organisational and institutional arrangements
and relationships conducive to the generation,
use and dissemination of knowledge” (Doloreux
& Parto, 2005, p. 3).
Fostering innovation and technology transfer,
creating relationships between the actors, and de-
veloping National Innovation Systems (NIS) also
help to promote technology based entrepreneurial
activities. NIS and RIS have been supported by
many authors (Cooke, 1998; Edquist, 1997, 2005;
Lundvall, Bengt-Åke, 1992; Lundvall, Bengt-Åke,
2007; Nelson, 1993; Patel & Pavitt, 1999). The
global economy raises the necessity of having
more competitive advantages in certain areas of
the world in order to face increasing competition
(Doloreux & Parto, 2005). As a result, the clusters
of firms appear and use the synergy of working
together in order to be more competitive and
transfer knowledge that increases entrepreneurial
activities.
The third point is to build bridges between
public bodies, research institutions, universities
and the private sector. Previouys studies show that
the innovation process relies on the interaction of
academia, government and private sectors. Etz-
kowitz (2003) wrote about the Triple Helix Model
(THM). He explained that innovation is the base
of the THM, where knowledge plays a relevant
role. The THM frames studies of the interaction
between university, industry and government but
focuses mainly on the university in their support
of technology based firms. Etzkowitz (2003)
explained that universities should be involved in
training and sharing knowledge processes and the
government should go further than the traditional
role of setting up the rules of the game and be a
public entrepreneur and venture capitalist.
UNCTAD (2012) mentions the importance
of universities becoming more actively involved
in the innovation and entrepreneurship process.
Furthermore, the private sector may become more
interested in sharing knowledge with universi-
ties. The government should also have an active
entrepreneurial role in facilitating different sector
interactions.
The fourth and final policy point is for sup-
port of high-tech start-ups and notably there is no
mention in the report (United Nations Conference
on Trade and Development, 2012) about low-tech
start-ups. Some of the possible policy actions
recommended are establishing: technology hubs,
incubators, small science parks, innovation awards,
preferential access to finance or intellectual prop-
erty, and so on.
Audretsch et al (2012) found that research in-
tensive universities influence young and high tech
firms. In this way, universities become important
competitive advantages of the regions. They also
argue that government can facilitate the process
providing infrastructure and incentives for entre-
preneurs and researchers (p.599). They also point
out that public funded research should spill over
into entrepreneurial firms.
A checklist of questions is presented as a
starting point for developing policies and actions
that facilitate technology exchange and innova-
tion (United Nations Conference on Trade and
Development, 2012, p. 45):
• “Are there awareness and capacity-build-
ing campaigns on ICT use?
• Is there a policy to promote diffusion of
technologies to SMEs?
• Does the Government facilitate or provide
training and support for technology up-
grading in small firms?
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329
Supporting Entrepreneurship in High Cost Economies

• Are there initiatives to facilitate and en-
courage exports, business linkages and in-
dustrial clusters?
• Are there supplier development programs
to engage SMEs in the value chain of larger
companies?
• Does the Government provide assistance
for standardization and quality certification
for local enterprises to meet required stan-
dards, including social and environmental
standards?
• Does the government encourage and
support linkages for university industry
partnerships?
• Does it provide support for applied re-
search and commercialization of science
and technology?
• Does the government provide support
infrastructure or engage in public-pri-
vate partnerships to establish business
incubators, clusters, networks and sci-
ence parks for science and technology
commercialization?”
Lists of possible indicators for measuring
performances in this area are (United Nations Con-
ference on Trade and Development, 2012, p. 19):
• Share of graduates with science/engineer-
ing degrees.
• Share of technology-intensive start-ups in
total start-ups.
• Share of technology-intensive start-ups
with venture capital funding.
• Number of science parks, technology hubs
and incubators.
Improving Access to Finance
Inadequate access to finance has been recognised
as the main impediment for entrepreneurs in de-
veloping countries (McKinsey, 2010).
UNCTAD addresses the finance issues pre-
sented below based on a series of international
reports (International Finance Corporation, 2010;
OECD 2009a).
Table 12 shows policy objectives and rec-
ommended actions for improving the access to
finance.
The first point prescribed by UNCTAD is
improving access to relevant financial services
on appropriate terms. In developing countries
entrepreneurs do not have access to finance,
sometimes interest rates are very high, and/or
requirements for finance are very complicated.
Furthermore, sometimes the access to finance
also differs between groups. One solution could
be the implementation of public credits guaran-
tees for entrepreneurs. Moreover, by improving
Foreign Direct Investment (FDI) it is also possible
to improve credit for local entrepreneurs and so
on (United Nations Conference on Trade and
Development, 2012).
The second point is to promote funding for
innovation which includes encouragement of
business angels, assistance funds, loans, grants,
tax incentives, etc. (United Nations Conference
on Trade and Development, 2012).
Third, policymakers should build the capacity
of the financial sector to serve start-ups. There
are four basic categories where governments can
work to build that capacity: commercial banks,
micro-finance institutions, community banks/
credit cooperatives, and private equity and ven-
ture capital funds (United Nations Conference
on Trade and Development, 2012). Furthermore,
policymakers could play an important role in the
promotion of new banking technologies.
Finally, it is important to provide literacy train-
ing to entrepreneurs and encourage responsible
borrowing and lending. Easy availability to credit
information is required.
There is also a checklist presented as a starting
point for analysing accessibility to finance, how-
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Supporting Entrepreneurship in High Cost Economies

ever as previously explained there is no explana-
tion about the reasons for selecting the following
questions (United Nations Conference on Trade
and Development, 2012, p. 55):
• “Are there measures to encourage financial
institutions to lend to start-ups and SMEs?
• Does the government require banks and
other financial institutions to report their
lending by size of firm?
• Are there public-private funds for
entrepreneurs?
• Is FDI promoted to broaden access to fi-
nance to local entrepreneurs?
• Are factoring and leasing schemes
encouraged?
• Are there incentives for venture capital and
the development of networks of business
mentors or supporters, including business
angel networks?
• Are development-oriented funds encour-
aged to invest in seed capital and small
firms?
• Has the government taken steps to improve
access to finance for target groups (minori-
ties, youth, women, immigrants, expatri-
ates, those in rural areas, etc.)?
• Is the adoption of financial service provi-
sion through post offices and other “prox-
Table 12. Improving access to finance (UNCTAD (United Nations Conference on Trade and Develop-
ment 2012, p. 46)
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331
Supporting Entrepreneurship in High Cost Economies

imity lenders”; and new banking tech-
nologies (e.g., mobile phone banking)
encouraged?
• Are effective intellectual property rights
(IPR) accepted as collateral?
• Is there a financial charter?
• Does the government provide appropriate
supervision and regulation to prevent un-
sustainable lending?
• Are there formal courses on financial lit-
eracy designed and available for SMEs and
micro-enterprises?
• Is training available to lenders to design
ways to expand lending activities to SMEs
and entrepreneurs?
• Are there credit bureaux?”.
Possible indicators for measuring performanc-
es in this area are (United Nations Conference on
Trade and Development, 2012, p. 19):
• Share of microfinance/SME loans in total
business loans.
• Average value of collateral required for
SME loans (per cent of loan).
• Total venture capital invested in SMEs.
• Credit bureau coverage (per cent of adult
population).
Promoting Awareness and Networking
Fostering an entrepreneurial culture could be a
key determinant for successful entrepreneurship
policies (United Nations Conference on Trade and
Development, 2012).
Table 13 shows policy objectives and recom-
mended actions for promoting awareness and
networking in order to support entrepreneurship.
There were no explanations about the reason un-
derlying the selection of these areas as presented
in the UNCTAD (2012) report.
Networking can foster entrepreneurial culture
in a positive way through showcasing models,
champions and references to successful entrepre-
neurs. In developing countries, entrepreneurial
networking is important in facilitating operations
through trust, support, counselling, communica-
tion, etc. (United Nations Conference on Trade
and Development, 2012, p. 56).
The first step is highlighting the value of en-
trepreneurship to society and challenging negative
cultural biases. Some countries have negative
perceptions towards entrepreneurship which can
be connected to societal values such as tolerance
to risk, fear of failure, rewards to success, and so
on. The governments can address this issue by
showing entrepreneurship importance in solving
problems like unemployment, social inequality and
poverty (Audretsch, Grilo & Thurik, 2007; Gilbert,
Audretsch & McDougall, 2004; Yusuf, 2010).
Furthermore, the UNCTAD (2012) mentioned
the importance of eliminating cultural bias based
on age, race, disability, etc. Many organisations
can play an important role in this process such as
chambers of commerce, professional associations,
trade unions and so on.
The second step mentioned in this report is
raising awareness about entrepreneurial opportu-
nities which can be achieved though government
participation in reducing information asymme-
tries. Forums and fairs can be ways of showing
entrepreneurial opportunities.
Finally, stimulating private sector led-initia-
tives and strengthening networks among entrepre-
neurs can be done by diverse measures such as:
free office space, finance, mentoring support, etc.
By improving horizontal links (between different
small businesses) and vertical links (with potential
suppliers to create a value chain) governments can
improve the distribution of information (United
Nations Conference on Trade and Development,
2012).
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Supporting Entrepreneurship in High Cost Economies

A checklist as starting point was also developed
by UNCTAD for this area. Like the other checklists
no explanations were presented in regard to the
selection of the questions (United Nations Con-
ference on Trade and Development, 2012, p. 63):
• “Does the government carry out campaigns
to promote entrepreneurship?
• Do policymakers communicate their sup-
port for entrepreneurship in speeches, and
communicate the link between entrepre-
neurship and economic development?
• Are measures taken within the public sec-
tor to raise awareness of entrepreneurship
issues with officials?
• Does the government take part in global
entrepreneurship awareness initiatives
such as Global Entrepreneurship Week?
• Does the government engage in public-pri-
vate partnerships to organise entrepreneur-
ship awareness activities such as entrepre-
neurship fairs or entrepreneurship forums?
• Does the government support competi-
tions, awards or similar events to publicly
recognize entrepreneurs?
• Are there initiatives to encourage and rec-
ognize corporate social responsibility?
• Do information platforms on entrepreneur-
ship and trade opportunities exist?
• Does the government support networks of
entrepreneurs and business leaders?
• Are there measures in place to engage in-
ternational Diaspora networks?”
Lists of possible indicators for measuring
performances in this area are (United Nations Con-
ference on Trade and Development, 2012, p. 19):
Table 13. Promoting awareness and networking (UNCTAD (United Nations Conference on Trade and
Development 2012, p. 56))
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Supporting Entrepreneurship in High Cost Economies

• Results of opinion/attitudinal surveys
and evaluations following awareness
campaigns.
• Number of business associations ‘ for […]
entrepreneurs’.
Summary and Recommendations
This section of the report summarises the variables
included in the most recognised global interna-
tional entrepreneurship frameworks (see Table 14);
the GEM, OECD and UNCTAD. Furthermore, it
presents instruments to measure entrepreneurial
activities developed around the world. The GEM is
used for a global perspective where 87 countries are
measured. The Entrepreneurship Program is used
in the OECD member countries. Furthermore, the
World Bank measures entrepreneurial activities in
112 countries. And finally the Eurobarometer en-
trepreneurship measures entrepreneurial activities
in European countries, EFTA countries, Croatia,
Turkey, the US, Japan, South Korea and China.
Many of these surveys for collecting data started
in the last decade with the intention of providing
information about entrepreneurial activities and
supporting policymakers in developing the right
strategies that can promote the economic develop-
ment of the regions.
Information about entrepreneurship around
the world can be found in regional reports. Aus-
tralia’s entrepreneurial situation can be compared
to the rest of the world by analysing information
presented by GEM and OECD reports.
Entrepreneurial activities can drive economic
development. The efforts of regional govern-
ment should be to improve the entrepreneurial
environment. The entrepreneurial environment
is multidimensional and as such requires the co-
ordination of many government departments in
order to improve it. Table 15 highlights the focus
of macro-level monitoring of entrepreneurship
that considers leading, operational, lagging and
government pro-activeness measures.
The challenge for regional governments lies in
assessing the region’s entrepreneurial situation,
benchmarking with similar jurisdictions around
the world, and identifying the main factors to
work on in coordination with different entities
to achieve the final objectives. A key obstacle to
meeting this challenge is accessing relevant and
pertinent data and intelligence on not only on a
region-wide basis but also on a sub-region level.
INDIVIDUAL LEVEL
CHARACTERISTICS
The purpose of this section of the study was to
determine the various entrepreneurial character-
istics that are associated with different stages of
firm development. Governments are challenged by
the need to create programs to support the growth
and development of firms, provide a framework
of conditions that will encourage firms toward
success and monitor the overall state of a region
with respect to its readiness to start, nurture and
grow firms to prosperity. Lichtenstein (2008)
argued that the stage of development of a firm is
independent of the characteristics of entrepreneurs
although transitioning through stages depends
upon entrepreneurs with more suited individual
characteristics. Therefore, understanding the as-
sociation between a firm’s stage of development
and the entrepreneurial characteristics needed
to transition the firm to the next stage will aid
government policy-makers to provide direct train-
ing and education programs that better match the
dominant need within a region.
What are the characteristics of nascent entre-
preneurs, those who have not started the business,
are determinants for successful venture formation?
What entrepreneurial characteristics of entrepre-
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Supporting Entrepreneurship in High Cost Economies

Table 14. GEM OECD and UNCTAD summary of variables
GEM OECD UNCTAD
Attitudes – Perceived opportunities and capabilities x
Attitudes – Fear of failure x
Attitudes – Status of entrepreneurship x
Activity – opportunity/necessity driven x
Activity – Early stage x
Activity – Inclusiveness x
Activity – Industry x
Activity – Exits x
Aspirations – growth x
Aspirations – innovation x
Aspirations – International orientation x
Aspirations – social value creation x
Regulatory Framework / Commercial, legal infrastructure for entrepreneurship x x x
Market conditions / internal market openness x x
Access to finance / Entrepreneurial finance x x x
R&D transfer and Technology x x x
Entrepreneurial capabilities / education / skills x x x
Culture / and social norms x x
FIRMS entrepreneurial performance x
Employment entrepreneurial performance x
Wealth entrepreneurial performance x
Job creation – impact x
Economic growth – impact x
Poverty reduction – impact x
Formalising the informal sector – impact x
Government Policy x
Government Entrepreneurship programs x
Physical infrastructure for entrepreneurship x
Promoting awareness and networking x
Table 15. Macro indicators of entrepreneurship
Leading Operational Lagging Government Pro-Activeness
Entrepreneurial Population
Attitudes & Aspirations
Framework conditions: Social,
political, regulatory, technology
and economic
Firm Performance and Impact Policy, Programs and
Infrastructure
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Supporting Entrepreneurship in High Cost Economies

neurs will ensure firm survival during the start-up
phase? What entrepreneurial characteristics of
entrepreneurs will accelerate firm growth?
The Driver of Entrepreneurial
Process: Causation or Effectuation?
In recent years the concepts of causation and
effectuation have emerged as two alternative ap-
proaches used by entrepreneurs in the new venture
development process (Sarasvathy, 2001). Together
with other influencing factors, entrepreneurial
opportunities, entrepreneurial personality and
experience are the drivers of the entrepreneurial
process that result in either “develop a full-blown
business or marketing plan” (causation) or “just
get started” (effectuation) (Chandler, G. N. et al.
2011). According to Sarasvathy (2001 p. 245),
“Causation processes take a particular effect as
given and focus on selecting between means to
create that effect. Effectuation processes take a set
of means as given and focus on selecting between
possible effects that can be created with that set
of means”. Chandler et al. (2011 p377) differen-
tiates entrepreneurial causation and effectuation
processes through the following four aspects:
• A focus on short-term experiments to iden-
tify business opportunities in an unpredict-
able future (effectuation) versus prediction
of an uncertain future by defining the final
objective up front (causation).
• A focus on projects where the loss in a
worst-case scenario is affordable (effectua-
tion) versus maximization of expected re-
turns (causation).
• An emphasis on pre-commitments and
strategic alliances to control an unpredict-
able future (effectuation) versus business
planning and competitive analyses to pre-
dict an uncertain future (causation).
• Exploitation of environmental contingen-
cies by remaining flexible (effectuation)
versus exploitation of pre-existing capa-
bilities and resources (causation).
During new venture creation, research has
shown that experienced entrepreneurs tend to
apply effectuation rather than causation (Harms
& Schiele, 2012). Family owned firms are some-
what more likely to follow effectuation processes
and significantly less likely to follow causation
processes than non-family owned firms (Hayton,
Chandler & DeTienne, 2011). In the process of
new venture creation, causation oriented entre-
preneurs systematically search information to
find opportunities to accomplish their clearly
defined objectives. Thus, the venture is envisioned
from the beginning by entrepreneurs following
a causation process and all the following efforts
are directed at achieving the pre-envisioned state
(Chandler, G. N. et al. 2011). In contrast, in the
process of new venture creation, effectuation
oriented entrepreneurs do not have a clear defined
future of new venture creation, they might begin
their venture process through general aspiration
(Chandler, G. N. et al. 2011) and they have flex-
ible approaches and change their venture course
based on new information.
The new venture creation process is influenced
by multi-dimensional factors that in turn affect
entrepreneurial outcomes. Thus, it is important
to know the nature of an entrepreneurial process.
Chandler et al. (2011) suggest that the causa-
tion process is a reflective construct while the
effectuation process is a formative constructive.
To measure whether an entrepreneurial process
is a causation or effectuation process, they ran a
two-stage study and statistical analysis of these
two studies.
The Approach to the Study
of Individual Entrepreneurial
Characteristics
Systematic review, meta-analysis and narrative re-
view methods were taken into account as method-
ologies for this stage of the research. A systematic
review comprehensively identifies, appraises and
synthesizes all relevant studies on a given topic
whereas a meta analysis uses a specific statisti-
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336
Supporting Entrepreneurship in High Cost Economies

cal technique for synthesising results of several
studies into a single quantitative estimate such as
the summary effect size (Patticrew, 2009). As this
is the first attempt to understand the state of the
literature, this research followed a narrative study
in order to explore the heterogeneity descriptively.
Based on the methodology followed by Meglio
& Risberg (2011), as a first step, three main data-
bases were identified. Business Source Complete,
Academic OneFile and Scopus were the main
three databases where the searches were carried
out on a set of keywords. These databases do not
cover the same journals. The main keywords were:
entrepreneur*, competenc*, attribute*, trait*,
characteristic*, capability*, nascent, survival,
start-up, growth, established, firm*, organiza*,
company*. The asterisk stands for finding all
combination of a word or word fragment.
After filtering the initial pool or more than
350 articles, 184 were extracted based on the
publication date which was from the year 2000 to
current date of the study. The citations of the older
articles were also analysed in order to determine
any articles that were significant yet not included
in the pool of shortlisted articles. Google scholar
was mainly used to search these articles using the
title (which was obtained from the citation list of
the articles that were older than publication year
2000) as the search criteria and included in the
pool. Subsequently their area of study was closely
analysed to determine whether the study was focus-
ing on individual level attributes and not firm level
or environmental attributes. This resulted in 98
papers. A final filtering criterion was the type of
the study. Conceptual articles, theoretical articles
and studies on the literature reviews including but
not limited to meta analysis reviews, systematic
reviews and narrative reviews were excluded. This
resulted in the 42 articles that present the main
themes of study. Table 16 shows the breakdown of
the article filtration process while Table 17 shows
the main journal sources of articles.
In addition to the above, during the filtering
process a backward and forward referencing
mechanism were also put into practice whilst
analysing each article, in order to increase the
pool of the articles. The objective was to gain
insights into themes as well as contradictive views
on entrepreneurial capabilities and their influence
towards various firm stages.
Measuring Entrepreneurial
Competency
Entrepreneurial competency can be measured
through multiple aspects. There are two broad units
of classifications in measuring entrepreneurial
competencies: at a composite level combining
the competencies of the entrepreneur, or at an
atomic level measuring specific entrepreneurial
Table 16. Filtering summary
Filter Criteria Articles
Total papers reviewed 357
Filter one – publication date 184
Filter two – focus of study (excluded firm specific
articles, environmental specific articles)
98
Filter three – type of study (excluded meta
analysis studies, theoretical studies)
42
Table 17. Main source of selected articles
Name of the Journal Number %
Journal of Business Venturing (JBV) 9 21%
Entrepreneurship Theory and Practice
(ETP)
6 14%
Entrepreneurship and Regional
Development (ERD)
4 9%
Journal of Small Business Economics
(SBE)
5 11%
Journal of Applied Psychology (JAP) 3 7%
Economics Letters (EL) 3 7%
Other 12 27%
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Supporting Entrepreneurship in High Cost Economies

competencies. For instance risk propensity, self-
efficacy and opportunity alertness are examples
of specific competencies that can be measured at
an atomic level. Scholars have developed compos-
ite level instruments to measure entrepreneurial
competencies as illustrated in Table 18.
Empirical evidence of these is discussed below.
Most of the research is confined to measuring
entrepreneurial competencies based on self as-
sessment. Self assessment is primarily defining
competencies based on literature and allowing
entrepreneurs to self assess their own competen-
cies or level of agreement with competence related
statements (Markman et al., 2002).
Another subjective measurement device has
been performance based assessment that identifies
key tasks (Lerner & Almor, 2002; Reuber & Fische,
1994). For example Escan is a self-assessment
test that poses 114 questions and statements to
measure entrepreneurial competencies (Driessen
& Zwart, 1999). This has been developed based
on determinants of successful entrepreneurship
from psychological and business studies. Escan
looks at need for achievement, need for autonomy,
need for power, social orientation, self-efficacy,
endurance and risk taking propensity from a traits
standpoint. In addition it measures three skills:
market awareness, creativity and flexibility.
Table 18. Composite level instruments to measure entrepreneurial competencies (Mitchelmore & Rowley
2010)
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Supporting Entrepreneurship in High Cost Economies

Delmar & Shane (2004) have suggested a
method to determine the entrepreneurial ability
based on reaching milestones which are beyond
the traditional measures such as achieving first
sale or getting into positive cash flow. These are
milestones of entrepreneurial ability and are such
things as product completion and product pilot.
Davidsson & Honig (2003) proposed the mea-
surement of accumulation of gestation activities
between two points in time as a performance indi-
cator where nascent entrepreneurship is concerned.
Entrepreneurial competencies measurement needs
further research which has been called for by many
researchers (Davidsson, 2007; Hisrich et al., 2007;
Sarasvathy, 2004).
Even though scholars have argued that there is
a void where entrepreneurial competency measure-
ment is concerned, tested models are available to
measure some entrepreneurial competencies. For
instance, general education as a competency can
be measured by the number of years of school-
ing (Van der Sluis et al., 2006; Van der Sluis &
Van Praag, 2007). Entrepreneurial self-efficacy
(ESE) can be used to determine an individual’s
choice, level of effort and perseverance (Chen et
al., 1998) and researchers have devised methods
to measure ESE as a multi-dimensional construct
(Wilson, Kickul, & Marlino, 2007; Zhao et al.,
2005, McGee et al., 2009). McGee et al. (2009)
developed an instrument based on 50 questions
and it was tested in the field successfully. They
found that the multi-dimensional and sequential
nature of entrepreneurship should be taken into
account when developing entrepreneurship-related
education programs and the effectiveness of these
programs can be measured through pre- and
post- ESE measurement. An alternative argu-
ment to using ESE measure is to use a General
Self-Efficacy (GSE) measure. Some researchers
advocate using GSE as they believe entrepreneurs
require a diverse range of skills (Markman, Balkin,
& Baron, 2005).
MacKo & Tyszka (2009) used the Kogan-
Wallach instrument to measure risk propensity of
individuals where they concluded entrepreneurs in
naturalistic risky situations opted for risky choices.
Interestingly they found under laboratory condi-
tions entrepreneurs and non entrepreneurs were
similar in their choices unlike the circumstances
found in natural situations.
Entrepreneurial activity is primarily in and
around opportunity identification and exploita-
tion. As a result, opportunity alertness is another
facet of measuring entrepreneurial competency.
Tang et al. (2012) proposed a process to measure
alertness for opportunity comprising of three
stages: (1) systematically or non-systematically
scan the environment and search information;
(2) associate or piece together previously uncon-
nected information; and (3) make evaluations and
judgments about the possibility to commercialise
the idea. This model was tested with three studies
and reported to be reliable.
Measuring entrepreneurial characteristics sup-
ports the predictability of entrepreneurial success.
Using a combination of the findings of recent
empirical studies, policy makers will be able to
determine the competencies at an individual level.
Entrepreneurial Characteristics
and Stages of a Firm
We have analysed capabilities associated with
entrepreneurs that positively contribute towards
various stages of the firm to argue that different
capabilities are crucial for different stages. Given
the different sample sizes and diversity of studies,
we recognize the need for caution in interpreting
the results. However, we believe our study brings
further insight to the individual level capabilities
that are positively contributing towards a firm
transitioning across stages of growth.
In order to carry out the analysis, the entrepre-
neurial capabilities discussed above were mapped
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339
Supporting Entrepreneurship in High Cost Economies

against the studies that fulfilled the criteria of
firm stages as outlined in the definitions section.
Table 19 is the summary of the classification of
studies and the significant observations of the
study are discussed in detail in the subsequent
sub sections below.
Entrepreneurial Capabilities
during the Nascent Stage
Creation of a successful venture is a process. A
nascent entrepreneur is someone who commits
time and resources to start a new firm and the
Table 19. Summary of individual level studies
Firm Stage Entrepreneurial
Capability
Author Journal Sample
Nascent Risk propensity,
Opportunity propensity,
Self-efficacy
Westhead, Ucbasaran & Wright
(2005)
SBE Based on a GEM, 80,117 across 28
countries
Risk propensity van Gelderen & Jansen (2006) SBE Based on SOEP, 22,000 in Germany
Van Gelderen, Thurik & Bosma
(2006)
SBE 517 in the USA
Education, Experience,
Role models, Age, Marital
status
Delmar & Davidsson (2000) ERD 30,427 in Sweden
Role models Lichtenstein, B. B., Dooley &
Lumpkin (2006)
JBV 297 in Netherlands
Seeking assistance Brixy, Sternberg & Stüber
(2013)
EL Based on GEPANGE, shortlisted 209
in Germany
Education, Experience Cassar (2006) JBV 490 in the USA
Business planning Chwolka & Raith (2012) JBV
Human capital Dimov (2010) JMS Based on PSED, 64,222 in the USA
Business planning Honig & Samuelsson (2012) SBM 623 in Sweden
Complexity dynamics Lichtenstein, B.B. et al. (2007) JBV Based on PSED 15,118 in the USA
Support network Zhao, Hills & Seibert (2005) SBM Based on PSED I, shortlisted 830 in
the USA
Balanced skills Stuetzer, Goethner & Cantner
(2012)
EL Based on Thuringian Founder
Study 98 in Germany
Self-efficacy,
Entrepreneurial intension
Wilson, Kickul & Marlino
(2007)
ETP 4,292 in the USA
Self-efficacy Zhao, Hills & Seibert (2005) JAP 265 in the USA
De Clercq et al. (2009) SBE Based on PSED, 81 in the US
Entrepreneurial passion Zhu, Li & Chen (2011) ERD
Experience Chrisman & McMullan (2004) ERD Filtered 197 from a 9,533 sample In
Norway
Opportunity propensity Edelman & Yli‐Renko (2010) ETP Based on PSED, 114 in the US
Nascent,
Survival
Entrepreneurial aspirations Brush, Edelman & Manolova
(2008)
SBM Based on PSED 280 from the US
Nascent,
Survival,
Growth
Entrepreneurial intension,
Opportunity propensity
Delmar & Davidsson (2000) ERD Based on GEM, 25,384 in 38 countries
continued on following page
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340
Supporting Entrepreneurship in High Cost Economies

required capabilities for nascent entrepreneurs
is discussed below. When this gestation process
is completed, either a venture will start as an
operating business or if the nascent entrepreneur
abandons the effort, a stillborn venture occurs,
i.e. the venture remains a conceptual idea that
has not found traction with either or all of the
entrepreneur, the market it seeks to serve or the
backers and supporters needed to operationalise
the venture.
Identifying market opportunities is more of
an art than a science. In broad terms, an op-
portunity may be the chance to meet a market
need (Schumpeter, 1934). Being alert for new
opportunities, recognizing them, developing the
same and evaluating the possibility of fulfilling
the demands through existing and/or available
resources are elements of opportunity perception.
Nascent entrepreneurs who demonstrate these
traits are more successful in their endeavour than
Firm Stage Entrepreneurial
Capability
Author Journal Sample
Survival Entrepreneurial passion Newbert (2005) QRE&F Based on BHPS, shortlisted 1436 in
the UK
Rotefoss & Kolvereid (2005) JM Filtered 204 out of 1,866 initial sample
Entrepreneurial passion,
Entrepreneurial intension
Reynolds et al. (2004) FER 201 in the US
Human capital, Social
capital, Entrepreneurial
passion
Van Gelderen, Thurik & Bosma
(2005)
SME 517 in Netherlands
Experience Stel, Carree & Thurik (2005) II 2,497 in Denmark
Cardon et al. (2005) JBV 630 in the UK
Human capital Delmar & Davidsson (2000) E&SB 97 in the UK
Shrader & Siegel (2007) ETP 198 in the US
Shared experience Zheng (2012) JBV 98 in China
Self-efficacy Tumasjan & Braun (2012) JBV 254 in Germany
Opportunity alertness Tang, Kacmar & Busenitz
(2012)
JBV 291 in the USA
Cognition and ideation Gemmell, Boland & Kolb
(2012)
ETP 32 in the USA
Survival,
Growth
Human capital, Social
capital
Carter et al. (2003) AMJ 275 in the US
Assisted planning Frese et al. (2007) JBV 159 in the USA
Related experience French, Kelly & Harrison
(2004)
ETP 349 in China
Growth Business planning Frese et al. (2007) JAP 117 in South Africa
French, Kelly & Harrison
(2004)
JMD 126 in Australia
Sarason & Tegarden (2003) JBM 314 in the USA
Related experience Shepherd (2011) JAP 59 in Finland
Barringer, Jones & Neubaum
(2005)
JBV 100 in the USA
Table 19. Continued
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341
Supporting Entrepreneurship in High Cost Economies

others (Arenius & Minniti, 2005). Dimov (2010)
found that opportunity confidence is a strong me-
diator of nascent entrepreneurial success which
is defined as venture formation and both prior
experience and planning are positive influencers
to determine opportunity confidence.
Attitude towards risk is an important determi-
nant for nascent entrepreneurial success. Scholars
have defined various models to determine the at-
titude towards risks although it is also argued that
risk management capabilities are strongly affect-
ing nascent entrepreneurial success over merely
looking at the attitude towards risks (Caliendo at
el 2009; Gelderen at el 2006).
Growth intentions of the entrepreneur are also
an important determinant for nascent entrepreneur-
ial success (Cassar, 2007; Chwolka & Raith, 2012;
Honig & Samuelsson, 2012; Manolova, T.S. et al.
2012). While career independence was identified
as the key motivation for an entrepreneurial career
by Cassar (2007), he also identified it as a barrier
for employment growth.
Based on the studies carried out by schol-
ars including Delmar & Davidsson (2000) and
Muller (2006), education can build knowledge
with respect to opportunities, resources and their
efficient application, specifically with respect to
the general administration of a business. In addi-
tion to knowledge, it is expected that such general
education would also support the development of
general skills such as communication, teamwork,
critical analysis, and problem solving. Finally, it
has been suggested that the extent to which an
entrepreneur obtains formal educational qualifica-
tions is also an indicator of his or her determination
and drive, energy, motivation and commitment to
the business enterprise.
In addition to knowledge and skills obtained
from education, it was empirically argued that
it is important to consider the influence of prior
experience. Prior experience in similar contexts
represents a form of specific human capital. This
provides nascent entrepreneurs with knowledge of
the industry, understanding of markets, customers
and the specific technologies. Experience supports
opportunity identification and exploitation, as
well as resource acquisitions (Kim et al. 2006).
Thus, it is recommended to consider education
and experience as highly positive determinants to
identify nascent entrepreneurs with a higher de-
gree of potential for successful venture formation.
With a different viewpoint on industry experience,
Brixy, Sternberg & Stüber (2013) suggested poli-
cies should target highly educated inexperienced
entrepreneurs for assistance schemes based on
their study findings as opposed to experienced
entrepreneurs. This suggests that government
policy makers and education providers need to
decide on the nature of support and the outcome
sought depending upon the objective requirements.
Self-efficacy is a useful concept for explaining
human behaviour as research reveals that it plays
an influential role in determining an individual’s
choice, level of effort, and perseverance (Chen
et al., 1998). Simply stated, individuals with
high self-efficacy for a certain task are more
likely to pursue and then persist in that task than
those individuals who possess low self-efficacy.
Entrepreneurial self-efficacy when coupled with
entrepreneurial risk propensity, education and
experience is a highly positive determinant for
nascent entrepreneurial success (Zhao & Siebert,
2005). Gender differences have an impact on en-
trepreneurial self-efficacy where entrepreneurship
is found to be a “male” field. However, entrepre-
neurial education acting as an equalizer reduces
this effect of low self-efficacy among female
entrepreneurs and ultimately increases the chances
for successful gestation activity by women.
A social network facilitates establishing
linkages with the market in order to understand
market demand. In addition, it also provides bet-
ter access to those who can assist in fulfilling
resource requirements to cater for the demands of
the markets. It is also evident that the impact of
role models with required knowledge are of high
significance to nascent entrepreneurial success
(Newbert & Tornikoski, 2012; Bosma et al 2012).
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Supporting Entrepreneurship in High Cost Economies

The gestation process is complex by nature
as it involves understanding many facets but yet
being focused enough to successfully accomplish
the gestation activities. As a result, examining the
capabilities of potential successful entrepreneurs
should place a critical emphasis on ensuring na-
scent entrepreneurs have the ability to compound
various skills in an appropriate manner while tak-
ing the complexity of the business landscape into
account. This will be a key criterion for effectively
filtering nascent entrepreneurs with a high prob-
ability of entrepreneurial success (Davidsson &
Gordon, 2012; Stuetzer et al 2012; Lichtenstein
et al 2006).
Entrepreneurial Capabilities
during the Survival Stage
Survival rates of firms are strikingly low after
firm formation. Accordingly Bartlesman et al
(2005), found that around 20-40% of firms fail
within the first two years of life. The founder’s
role is paramount to manage this stage success-
fully and this section consolidates the literature
that discusse the capabilities of the entrepreneur
that are critical to this survival stage.
Entrepreneurial passion is a positive intense
feeling experienced by engagement and is enduring
as opposed to being momentary. Entrepreneurial
passion positively influences entrepreneurial
actions that accelerate firm growth and survival
during survival phase (Murnieks et al, 2012). The
passion of the entrepreneur is significant during
the survival stage although, in subsequent growth
phases of the firm, it has less of an impact. During
the survival stage of the firm, firms cannot escape
facing unforeseen challenges. In order to be pas-
sionate on the mission of the firm, it is paramount
the entrepreneur demonstrates coping skills which
will in turn lead towards positive well-being (Uy
et al, 2010). This becomes a positive influencer
towards the firm survival and growth during the
survival phase. Georgellis et al (2011) suggested
that being satisfied about one’s work as an entre-
preneur has a positive influence on the survival
of the firm as opposed to being negative about
the work. However, even when entrepreneurs lack
self-efficacy, Tumasjan & Braun (2012) found that
the capability to remain focused on promotion
of the venture can substitute for a lack of self-
efficacy, and an entrepreneur will successfully
face the challenges by identifying opportunities to
overcome the obstacles during the survival stage.
Educated entrepreneurs with relevant experi-
ence had better access to relevant information and
are expected to exhibit better firm survival rates
and firm performance (Dhal & Reichstein 2007;
Baptista et. al. 2011; Rotefoss et al 2005; Ebbers
2011). Furthermore, Ucbasaran et al (2010) found
that experienced entrepreneurs identified and
exploited more opportunities than inexperienced
entrepreneurs. It is also empirically proven that
business failure will temper the likelihood of
comparative optimism and grief resulting from
business failure, which negatively influences the
ability to learn from said failure (Ucbasaran et al
2010; Shepherd 2003). Shrader & Siegel (2007)
through their study found prior experience with
corporate environments influenced entrepreneurs
to be more conservative or risk averse while start-
up experience tends to influence the entrepreneur
to contribute in a positive manner during the
survival stage of the firm. The founding team is
also a mediator during the survival phase primarily
due to relief of the limited human and financial
capital of an individual and the benefit of shared
experiences among the founders that induce an
effective and efficient environment (Zheng, 2012).
An entrepreneur’s network also has a positive
influence during the survival stage in identifying
demand to penetrate the market as well as sourcing
the right skill sets for the firm, to supplying the
required input to fulfil the demands of the market
(Florin et al, 2003). Depending on the size of the
firm, the impact of the network varies. For instance,
for a small firm the founder’s network will play a
crucial role, more than for a firm with a sizable
resource pool (Gurău et al, 2010). Macpherson &
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343
Supporting Entrepreneurship in High Cost Economies

Holt (2007) through their study revealed that social
capital obtained through the founder’s network,
should be evaluated in a context specific manner.
Gemmell, Boland & Kolb (2012) through their
study on technology entrepreneurs identified
that ideation which is a cyclic complex process
is a social process where ideas are being refined
through a form of shared cognition.
A founder’s desire to improvise has a very
positive influence on firm survival during the
survival stage and firms founded to seize an op-
portunity are more likely to survive with such
founders as opposed to firms that were founded
out of necessity (Hmieleski & Corbett 2006).
Further Tang, Kacmar & Busenitz (2012) found
a positive mediating effect between prior experi-
ence and opportunity alertness and they argued
that opportunity alertness strongly influences the
innovative performance of the firm.
In summary, the specific capabilities that will
facilitate venture survival include entrepreneurial
passion, prior work experience, an entrepreneur’s
education and social network. These aspects are
indicated as those that will help to predict the po-
tential for firms to survive and persevere through
the critical early stages of venture establishment.
Entrepreneurial Capabilities
during the Growth Stage
Based on the literature, a different set of entre-
preneurial capabilities are significant during the
growth phase of a firm and are different compared
to the entrepreneurial capabilities of nascent or
survival stage firms.
In the growth stage the literature suggests
that founders with higher education, with a more
compelling entrepreneurial story or entrepreneur-
ial intentions and higher incidence of industry
experience will grow their firms faster than others.
However, in addition to the contributions by the
founder, firm attributes, business practices and
human resource management practices also have
a substantial impact on firm growth (Barringer,
Jones & Neubaum, 2005). These aspects will be
discussed in the subsequent firm section of this
chapter. While entrepreneurial experience has a
significant impact during previously discussed
nascent and survival phases of the firm mainly
to identify opportunities, management experience
becomes significant during the growth phase of
the firm (Gruber, MacMillan & Thompson, 2012).
Sadler-Smith et al. (2003) argue that management
competencies and entrepreneurial competencies
are dynamic rather than static in their interaction
with contextual and temporal factors. This is best
discussed under firm level analysis.
Firm growth cannot be measured by studying
a single point in time and is generally measured
by the differential outcome between two points
in time (Shepherd & Wiklund, 2003; Delmar et
al., 2003; Penrose, 1995). In research based on a
survey carried out among close to 500 US South
West firms, it was found by Watson et al. (2003)
that the founding partner with higher education
and more work experience had better firm growth.
Delmar & Wiklund (2008) carried out a study and
found that the willingness to grow or the entrepre-
neurial intentions have a positive co-relationship
to firm growth. On the other hand, McKelvie &
Davidsson (2009) through a 3-year time-lagged
study found that initial measures based on the
founders for growth have less explanatory power
than first thought as the management team tends
to change over time.
Unlike nascent and survival stages of the firm,
the most critical capability during the growth
stage of the firm is planning skills (Chrisman
& McMullan, 2004; French, Kelly & Harrison,
2004). Many scholars from different regions have
found this association. Related experience (Bar-
ringer, Jones & Neubaum, 2005; French, Kelly &
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344
Supporting Entrepreneurship in High Cost Economies

Harrison, 2004; Shepherd, 2011) supports better
planning and planning during growth phase ac-
celerate the success of the firm.
Summary and Discussion of
Individual Characteristics
The authors identified the findings from hetro-
geneous studies on entrepreneurial capabilities
across firm stages. The authors beleive these
findings will contribute to the development of
entrepreneurial capabilities that are empirically
grounded and significant during different firm
stages. Table 20 summarises the main findings
for this section of the chapter.
Some entrepreneurial capabilities, such as
higher education, are found to be positively in-
fluencing the firm in a stage independant manner.
Specific capabilities were more significant to
certain firm stages according to the literature.
However, the authors emphasise that the above
associations of capabilities do imply skill that is
associated with firm stages that positively influ-
ence firm growth and success.
An entrepreneur’s competence play an integral
role on the performance and progression of the
firm. Depending on the stage of the firm, the
significance of the competencies varies. This
paper classified firm stages into three: nascent
stage, survival stage and growth stage. However,
it may be that these factors can be linked to a more
sophisticated heuristic beyond entrepreneurial
competence. In this regard, a contextually sensitive
understanding that influences firm growth may
be useful. This could provide policy makers and
practitioners with a higher level of predictability
for facilitating entrepreneurial growth.
This study makes several contributions: Firstly
it combines recent individual level entrepreneurial
studies in order to depict the heterogeneity of
entrepreneurial capabilities and their effect on
firm stages in an explorative way. On the surface
it appears that the capabilities of the entrepreneur
are not a significant mediator depending on the
stage of the firm. However, based on the literature,
this study highlights more significant and impact-
ful capabilities of the entrepreneur for different
firm stages.
Education and experience primarily falls under
the human capital influences across all three stages
in a positive manner. Based on the literature, related
experience supports the success of the growth
stage more than the nascent and survival stages.
Furthermore, is a strong influencer during the
growth stage but planning did not play a crucial
mediator role during nascent and survival stages.
Risk propensity and opportunity propensity are
apparent capabilities during the nascent stage to
influence successful firm formation. Self-efficacy
and entrepreneurial passion are more evident and
noteworthy capabilities for the survival stage based
on the articles reviewed for this study.
The study findings will support policy makers
and practitioners alike in taking the prominent ca-
pabilities into account during different firm stages
to accelerate firm success and growth. Higher
education, industry and/or market experience,
social capital and balanced skills and an ability
to analyse complex dynamics will each influence
more specifically the nature of the opportunity that
the entrepreneur seeks to follow. Furthermore,
the individual characteristics that will become
Table 20. Firm stages and significant entrepre-
neurial capabilities
Firm
Stages Significant Entrepreneurial Capabilities
Nascent
Risk propensity, Opportunity propensity,
Entrepreneurial intentions, Higher education,
Industry and/or market experience, Social
capital, Balanced skills and an ability to analyse
complex dynamics.
Survival
Self-efficacy and coping skills, Promotion
capabilities, Entrepreneurial passion and
intentions, Higher education, Related start-up
experience, Social capital.
Growth
Business planning, Growth intentions, Higher
education, Related business management
experience.
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345
Supporting Entrepreneurship in High Cost Economies

telling as the venture progresses through survival
and growth will be the capabilities of the entre-
preneur to cope with the stresses and strains of
early-venture establishment, business and strategic
planning skills and the intention to pursue growth
beyond catering for a life-style venture.
A further observation from this work is that the
broader policy dimensions that are non-specific
to new venture start-up but that influence nascent
entrepreneurs, have a role to play in preparing
would-be entrepreneurs. In particular, identifica-
tion and development of nascent stage entrepre-
neurial intentions and self-efficacy, an exposure
to risk and opportunity dynamics that identifies
these predispositions and the development of
balanced skills that facilitate analysis and com-
prehension of complex dynamics should be more
broadly embedded in the primary and secondary
school education. These attributes of an educa-
tion system would help to foster and stimulate the
entrepreneurial ecosystem.
FIRM LEVEL CHARACTERISTICS
This section focuses on exploring the characteris-
tics of entrepreneurial firms and firm performance
as it is relevant to economic development. First,
we analyse the linkage between entrepreneurial
opportunity and the entrepreneurial firm concept,
particularly as these concepts overlap at the nascent
stage of a business venture. Next, we review the
entrepreneurship literature to establish the range
of measures of success for firm level entrepreneur-
ship. We then discuss the relationship between the
entrepreneurial firm and firm performance based
on the empirical studies in this field. Further, some
factors that could affect the entrepreneurship and
performance relationship are discussed along with
the implications for researchers and practitioners.
In the final section, we draw conclusions and
implications.
Linking Entrepreneurial
Opportunity to the Entrepreneurial
Firm (Nascent Stage)
The recognition and development of opportunities
is at the heart of the new entrepreneurial firm. Prior
experience, gaining insights to new information,
changes in the ecosystem and being frustrated are
the main triggers for an entrepreneurial opportu-
nity to emerge with an entrepreneur (McMullen &
Shepherd, 2006; Shane, 2000; Tripsas, 2008). The
emergence of the entrepreneurial opportunity is a
cognitive process in the mind of the entrepreneur
(Baron, 2006). Self-efficacy and self regulation
play an integral role during the entrepreneurial
opportunity emergence process (Baron, Hmieleski
& Henry, 2012; Tumasjan & Braun, 2012). Self-
efficacy is the measure of one’s own perception
of competency to complete tasks and achieve a
goal. Self regulation is the psychological processes
by which individuals exercise control over their
cognitive, emotional, and behavioural processes.
Based on a study carried out on 1000 ventures
in the United States, Hmeileski et. al. (2007)
found that self regulatory behaviours by the
entrepreneur have a greater impact in dynamic
ecosystems than in stable ecosystems with respect
to exploiting opportunities. Self-efficacy is a
positive determinant for opportunity exploitation
independent of the ecosystem. In accordance with
effect-as-is information theory, fear decreases
entrepreneurial opportunity exploitation, whereas
joy and anger increases the exploitation tendencies
of the entrepreneurial opportunity (Welpe et al.
2012). Entrepreneurial opportunity is a creative
process, and a multidimensional representation of
the phenomenon explains the process best than
any one-dimensional representation. Based on a
study that was carried out on 1500 organisations
with revenues between US$5-100 millions, it
was found a five factor process for opportunity
recognition is better than a two factor process or
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346
Supporting Entrepreneurship in High Cost Economies

a single factor process. The five factors of the
process were preparation, incubation, insight,
evaluation and elaboration (Hansen, Lumpkin &
Hills, 2011). Based on a meta analysis carried out
(De Carolis & Saparito, 2006), it was found that
social capital is a mediator for cognition biases
where opportunity exploitation is concerned.
A default position in entrepreneurship research
is that entrepreneurial opportunities are not evi-
dent, but need entrepreneurial alertness (Gaglio
& Katz, 2001; Kirzner, 1973) or entrepreneurial
vision (Sadler–Smith et al. 2003) to identify en-
trepreneurial opportunities. To exploit entrepre-
neurial opportunities, entrepreneurs need to have
or have access to necessary resources. Entrepre-
neurial opportunities can only be pursued through
the formation of new means, ends or means-ends
relationships (Shane, S & Eckhardt, 2003). As
such, the entrepreneurial ability to recombine
resources is necessary which characterises the
entrepreneur as innovative and creative. Entre-
preneurial opportunities are often embedded in
uncertain environments and link with uncertain
outcomes, thus, entrepreneurs bear risk and have
long-term vision. Shane & Venkataraman (2001,
p. 16) state:
…..opportunity cost, financial cost, social ties,
career experience, willingness to bear risk, op-
timism, self-efficacy, internal locus of control,
tolerance of ambiguity, and need for achievement-
—-influence the decision to exploit opportunity.
Shane & Venkataraman’s (2001) statement has
been supported by empirical research. Westhead
& Wright (2001) examined 161 independent firms
over the period 1990/91 to 1997 and found that
firms that have principal founders with denser
information and contact networks, and consider-
able management know-how are more inclined to
enter international markets. Specialised know-
how such as prior work experience has been
found significantly and positively to influence
small firm profitability but not growth (Coleman,
2007). Cooper, Gimeno-Gascon & Woo (1994)
also found that human capital of the principal
founder such as education and prior work expe-
rience has a significant and positive influence
on the survival of new start-ups. Prior research
has also evidenced that an entrepreneurs’ gender
and educational level have an impact on whether
they opt for start-up assistance (Brixy, Sternberg
& Stüber, 2013)
Schutjens & Wever (2000) operationalised 20
factors: a mix of entrepreneur, firm and external
characteristics. Their empirical examination
highlights that work experience, business partner
and thorough preparation are mostly important
to the conversion of an opportunity to success as
a new start-up. Their research outcomes can be
informative to government policy-makers.
From these perspectives outlined above it be-
comes clear that distinguishing the nascent new
venture from the nascent entrepreneur at the very
early stages is a difficult task. The opportunity
is primarily a conceptual design in the mind of
the entrepreneur: sales have not necessarily com-
menced, resources may not yet have been acquired,
a support team may not have been assembled and
a business is not yet registered. The proxy for
the firm though is the articulation of a feasible
business model that is designed to capitalise on
a perceived market, based on identified unmet
demand or potentially created demand. The next
order of success of this conceptualisation depends
upon the environmental conditions and access to
tangible and intangible resources including ac-
cess to capital. Providing these conditions can be
observed at the nascent stage, the entrepreneur is
likely to move to commence business operations
and create a start-up business.
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347
Supporting Entrepreneurship in High Cost Economies

Success Criteria of Start-Ups: Not
a ‘One Size Fits All’ Proposition
The meaning of success differs considerably
between firms and entrepreneurs (Schutjens
& Wever, 2000). New venture success is often
defined from the starter’s perspective as the
achievement of something desired, planned or
attempted (MacMillan, Siegel & Narasimha,
1986). However, this definition has subjective
bias and the measurement of new venture/start-up
success should not be decoupled from the market
economy, especially if the measurement of success
is intended to promote and contribute to growth of
the regional/national economy. As Reid & Smith
(2000) argue, performance evaluation can never
be divorced from the market nexus and should be
objective, parsimonious, and plausible.
Because of the various definitions of start-up
success, measurements of success can be very
different, which is one of the major challenges
of entrepreneurship research (Murphy, Trailer &
Hill, 1996). “Frequently used operationalisations
of new firm success are profit, return on invest-
ment or a substantial income generation for the
entrepreneurs and their families” (Schutjens &
Wever, 2000). Much of the existing research also
employs survival or continued functioning (Lit-
tunen, Storhammar & Nenonen, 1998) to measure
success, which can also be subject to bias since
closed businesses can also be successful busi-
nesses (Headd, 2003) in terms of creating wealth
for owners or successfully merging with other
firms. Performance aspects of new start-ups are
also differentiated in terms of life cycle stage; for
instance whether they are in emergence or early
stage (Pirolo & Presutti, 2010).
As an indicator of the diversity of metrics
associated with success and performance, Ka-
kati (2003), using Factor Analysis and following
MacMillan et al.(1986), identified nine factors out
of 38 items that influence high-tech new venture
performance. Multiple-regression analysis was
used and nine items were found that had signifi-
cant betas for the performance measures in the
research, as shown in Table 21.
A general problem of all objective measures
for start-up success is that they depend on the
founders’ intentions and aspirations (Witt, 2004)
while subjective measurement are also problem-
atic since “different people may not be equally
satisfied with the same level of performance”
(Chandler, G.N. & Hanks, 1993). Chandler
& Hanks (1993) list three widely adopted ap-
proaches to obtain self reported data, requesting
performance in broad categories; using satisfac-
tion with performance index and using a com-
petition relative to competitors’ index. Kakati
(2003) used a five-point scale (1, significantly
worse than expectation; 2, marginally worse
than expectation; 3, achieved expectation; 4,
marginally better than expectation; 5, much better
than expectation) to assess seven performance
variables of new ventures.
An overview of the literature on articles that
report research on new start-up success criteria is
shown in Table 22. These articles are generated
initially from the Scopus database by the keywords
“performance,” “success,” new venture,” “start
–up (s) and “survive (survival)”. Only primary
English language studies from the A* or A ranked
journals calculated by Thomson ISI are considered.
We then chose articles in highly regarded journals
relating to entrepreneurship and economics such
as Small Business Economics, Entrepreneurship
and Regional Development, Journal of Business
Venturing, Journal of Small Business Manage-
ment, Management Science and the Journal of
Urban Economics. To maintain reliability and
representativeness only articles in the last 3 years
were extracted as, among the few research articles
in this area, many are similar.
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348
Supporting Entrepreneurship in High Cost Economies

The Resources and Capabilities
of the New Entrepreneurial
Firm for Survival
Pre-entry firm level resources and capabilities
will largely determine the entry type, timing and
entry success. Firm associated resources such as
human capital and financial capital are critical
components for new start-up success and survival.
These resources include tangible and intangible
firm assets and capabilities (Wu et al. 2008). The
strategic valuable resources of a firm should be
tacit, complex (Schoemaker, 1990), valuable, rare,
and inimitable (Barney, 1991). Helfat & Lieber-
man (2002, p. 725) state:
The greater the similarity between pre-entry
firm resources and the required resources in an
industry, the greater the likelihood that a firm will
enter that particular industry, and the greater the
likelihood that the firm will survive and prosper.
In short, following Teece (1980, 1982, 1986),
Helfat & Lieberman (2002) develop taxonomies
(see Table 23) distinguishing pre-entry firm level
core versus complementary and specialised versus
generalised resources and capabilities.
Furthermore a new firm’s business model,
defined as the content, structure, and gover-
nance of transactions designed so as to create
value through the exploitation of business op-
portunities (Amit & Zott, 2001), has been found
crucial to the survival of new start-ups (Zott &
Amit, 2007). Zott & Amit (2007) argue that be-
ing novel in business model design can enhance
new entrepreneurial firm performance. Through
a test of 195 new, technology based firms in the
UK, Yli-Renko, Sapienza & Hay (2001) propose
Table 21. Items that have a significant beta in multiple regression model (Adopted from Kakati 2003)
Items with Significant
Beta
Performance Variables
Sales Market
Share
Market
Cost
Production
Cost
General
Administration
Cost
Return on
Investment
(ROI)
Profit
Size of venture team -0.21
Capability of sustained
intense effort
-0.302
Ability to evaluate and
react to risk well
0.34
Attention to detail 0.487
Technical capability 0.516
Input sourcing
capability
0.759
Customization strategy 0.525 0.57 0.37 0.15 0.53
Protection of the
product
0.32
Product was in early
stage of development
0.35
Venture stimulated
existing market
0.45 0.44 0.381
R2 0.54 0.52 0.326 0.801 0.53 0.87 0.606
Significant F 0.00 0.0035 0.0029 0.000 0.002 0.000 0.0001
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349
Supporting Entrepreneurship in High Cost Economies

that greater contractual governance flexibility
is associated with higher new entrepreneurial
firm performance in new product development
and sales cost advantages in a situation of a high
level of exchange dependence. This viewpoint is
consistent with the research finding of Wynarczyk
& Watson (2005) who examined the performance
of a sample of 211 UK subcontractors and found
that inter-firm partnerships contribute to firm
growth in sales and employment.
Taken together, the preceding literature sug-
gests that firm level pre-entry resources and capa-
Table 22. Success criteria in start-ups
Author (Year) Sample Measurement of Start-
Up Success
Subjective Objective Notes
Tocher et
al.(2012)
163 entrepreneurs within
8 years of inception
throughout the USA
Entrepreneurial
performance;
Sales growth rate;
Accounting return
✓ Entrepreneurial
performance measured
as average of the
entrepreneur’s answers to
the 7 item entrepreneurial
performance scale
Rotger, Gørtz &
Storey (2012)
Participants of the North
Jutland Entrepreneurial
Network (NiN) programme
between 2002 and 2006 (a
yearly intake of about 1200
participants).
Survival
Employment
Sales
Growth firm”
✓ A growth firm is a venture
that experiences a growth
of at least 20% in turnover
or in employment a.
Pirolo &
Presutti (2010)
105 firms younger than
10 years old in high-tech
cluster in Rome
Sales Level
Change in Sales
Earnings
Profitability
Interest and Taxes
Return on Sales
Return on Assets
Return on Equity
✓ Innovation performance
measure is based on the
number of new products,
services, or technologies
that has been developed
Hvide & Møen
(2010)
A large panel of start-ups
from Norway
Profitability ✓ Operating return on assets
(OROA)
Arora &
Nandkumar
(2011)
286 information security
market (ISM) start-ups,
followed from the time of
entry until 2004 or their
exit.
Favourable acquisitions
IPOs (initial public
offering)
✓ Total start-ups are divided
into success, failure and
surviving.
Kuckertz,
Kohtamäki &
Körber (2010)
201 German
technology-oriented
new start-ups that had
successfully obtained
venture capital funding
Return on sales
Sales growth
Market share
Net profit
Cash flow
Return on investment
Shareholders’ return on
assets
✓ Innovation performance is
measured separately and is
found positively influence
venture performance
Chen, H et al.
(2010)
Sample consists of
28,434 venture capital
investments in 14,006
portfolio companies for
2,039 venture capital firms
between 1975 and 2005.
Whether each venture-
backed company went
public through an IPO
or has registered for an
IPO.
✓ The finding supports that
geographical proximity
has significant positive
relationship with new
start-up success
asame standard as OECD’s
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350
Supporting Entrepreneurship in High Cost Economies

bilities, business model of new firm and business
flexibility etc. can be significant factors leading
to a new firm’s success and survival.
New Start-Up Summary
Entrepreneurial start-ups have been considered
as the major engine for employment and most
important for innovation. Policymakers and re-
searchers have paid much attention to promote
entrepreneurial start-ups regionally and nationally.
However, the success of entrepreneurial start-ups
is determined by various factors which interact.
As stated in the above sections, the success of
entrepreneurial start-ups is determined mainly
by the entrepreneurial opportunity, the capabil-
ity of the entrepreneur to identify and pursue
the opportunity, the entrepreneurial process to
start a new firm and finally the external environ-
ment. In this chapter, we follow the definition of
entrepreneurial opportunities given by Casson
(1982) and Shane (2000) that entrepreneurial
opportunities are situations in which new goods,
services, raw materials, markets and organising
methods can be introduced through the formation
of new means, ends or means-ends relationship.
The entrepreneurial capabilities are defined as
capabilities to identify entrepreneurial/business
opportunities and to develop the resource base
needed to pursue the opportunity. Firm associated
factors such as human capital and financial capital
are critical components for new start-up success
and survival. These resources include tangible
and intangible firm assets and capabilities (Wu
et al. 2008). The resources of a firm can be tacit
and complex (Schoemaker, 1990). Strategically
valuable resources for firm competitive advantage
are valuable, rare and inimitable (Barney, 1991).
Entrepreneurial opportunities and entrepre-
neurial personality and experience together with
other influencing factors influence which entrepre-
neurial process is more appropriate for particular
Table 23. Pre-entry resources and capabilities (Adopted from Helfat & Lieberman 2002)
Core Versus Complementary Resources and Capabilities
Core resources and Capabilities Complementary Resources and Capabilities
Knowledge required to create a product or service
Examples: Technological knowledge
          Knowledge of customer needs
Resources and capabilities needed to profit from core resources
and capabilities
Examples: Finance
          Marketing and sales
          Distribution and logistics
          Customer service
Specialised vs. Generalised Resources and Capabilities
Specialised resources and capabilities:
Resources and capabilities that are more specialised to particular
settings
Generalised resources and capabilities:
Resources and capabilities that can be applied in a broad range of
settings
Functional area resources
Examples: Marketing
          Research and development
          Distribution
Functional area resources
Examples: Financial capital
Intangible resources
Examples: Relationship with buyers, suppliers
          Brand name
          Patents and trademarks
General organisational capabilities
Examples: Transfer of knowledge
          Management of multiple businesses (single location or
geographically dispersed)
Market-specific knowledge
Examples: Industry conditions
          Country or regional conditions
Mode of entry capability
Examples: Acquisition
          Joint venture
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351
Supporting Entrepreneurship in High Cost Economies

would-be entrepreneurs to take. Causation and
effectuation are two alternative approaches used
by entrepreneurs in the new venture development
process (Sarasvathy, 2001). According to Saras-
vathy (2001 p245), “Causation processes take a
particular effect as given and focus on selecting
between means to create that effect. Effectuation
processes take a set of means as given and focus
on selecting between possible effects that can be
created with that set of means”. External envi-
ronment is crucial to entrepreneurial activities
as well since it poses threats and offers oppor-
tunities in varying degrees to entrepreneurs and
entrepreneurial firms. The external environment
for entrepreneurship includes economic environ-
ment (e.g. labour and market conditions, materials,
financial assistance), social environment (culture,
honesty, justification, religion, social marginality)
and political environment.
These factors can influence the success and
survival of entrepreneurial start-ups indepen-
dently. However, more often than not, the success
of entrepreneurial start-ups is determined by the
dynamic interactions between factors as shown
in Figure 13. This figure shows that to promote
entrepreneurial activities policymakers should
consider interactions across the whole landscape
that influence entrepreneurial firm success.
Growth in Established
Entrepreneurial Firms
The roots of the concept of the entrepreneurial
firm can be traced back to earlier works about
strategic decision making in strategic manage-
ment literature. Mintzberg (1973) describes the
entrepreneurial decision making model as domi-
nated by the active search for new opportunities
Figure 13. The dynamic interactions influencing firm survival
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352
Supporting Entrepreneurship in High Cost Economies

as well as dramatic leaps forward in the face of
uncertainty. In some similar pioneering work
exploring entrepreneurially managed firm styles,
entrepreneurial firms are often characterised as
risky, proactive, aggressive decision-makers and
innovative (Khandwalla, 1976; Miller, 1983a).
This description is consistent with the follow up re-
search on entrepreneurship at the firm level. Morris
& Paul (1987, p. 249) conceive an entrepreneurial
firm as a firm with decision-making norms that
emphasizes proactive, innovative strategies that
contain an element of risk. These decision-making
norms are reflected in the management styles of
firms, as Covin & Slevin (1988, p. 218) state that
entrepreneurial firms are those in which the top
managers have entrepreneurial management styles,
as evidenced by the firm’s strategic decisions and
operating management philosophies.
Entrepreneurial firms exist in order to generate
and appropriate the economic rents associated with
market opportunities (Alvarez & Barney, 2004,
p. 631). Entrepreneurial firms represent a radical
departure from predominant and historic strategic
or structural patterns (Sharma & Chrisman, 1999,
p. 17). On the opposite side, traditional general
management is to utilise the resources controlled
by the firm. Managers will consider their resources
before exploiting any opportunities, only opportu-
nities requiring relevant resources under the firms
control are exploited by the firm. These firms are
mostly highly centralised and formal with clearly
defined hierarchy, authority, responsibility and
systems to ensure efficiency. Covin & Slevin
(2002) compare traditional general management
and entrepreneurial strategic leadership in beliefs
and philosophy as shown in Table 24.
Some useful work has been done to conceptu-
alise and operationalise the entrepreneurial firm.
Based on Miller’s (1983b) original work on firm
level entrepreneurship, Covin & Slevin (1989)
developed a nine-item scale to measure entrepre-
neurial posture of firms highlighting innovation,
proactiveness and risk-taking. Drawing from
strategic management literature, Lumpkin & Dess
(1996) proposed a five dimensional framework of
entrepreneurial orientation (EO) for investigating
firm level entrepreneurship: autonomy, innovative-
ness, risk taking, proactiveness and competitive
aggressiveness. Lumpkin & Dess’s research on
EO is analogous to Stevenson & Jarillo’s (1990b)
concept of entrepreneurial management (EM)
since both reflect in the entrepreneurial process,
Table 24. Traditional general management vs. entrepreneurial strategic leadership a comparison of
beliefs and philosophies
Attitude Toward Traditional General Management Entrepreneurial Strategic Leadership
Organisational resources and
capabilities.
Resources and capabilities should be
protected.
Resources and capabilities should be valued but
challenged.
The firm’s “business” and
“purpose”.
Definitions of “business” and “purpose”
are relatively enduring.
Definitions of “business” and “purpose” should be
periodically re-examined.
Business strategy. Play the game better than competitors. Play the game better than competitors or play your own
game.
Organisational architectural. Designed to optimize implementation of
the strategy.
Designed to allow for strategic flexibility.
Meeting customer needs. Stay “close to the customer”. Stay “close to the customer,” but also invest in promising
innovations that don’t currently meet expresses needs.
Entrepreneurial activity within
the organisation.
Entrepreneurial activity should follow
from strategy.
Entrepreneurial activity should lead to as well as follow
from strategy.
Organisational learning. Institutionalise knowledge to avoid
having to relearn business lessons.
Institutionalise a questioning attitude such that learning
and unlearning can coexist.
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353
Supporting Entrepreneurship in High Cost Economies

the entrepreneurial capabilities to identify op-
portunities and recombine requisited resources
to seize opportunities.
Sharma & Chrisman (1999, p. 18) define cor-
porate entrepreneurship as the process whereby an
individual or a group of individuals, in associa-
tion with an existing organisation, create a new
organisation or instigate renewal or innovation
within that organisation. They classify corporate
entrepreneurship into corporate venturing, innova-
tion and strategic renewal. Their conceptualisation
of corporate entrepreneurship is domain-focused,
i.e. it specifies where to look for entrepreneurship
at the firm level. Comparatively speaking, the
most currently adopted definition of EO is more
phenomenon-focused. Lumpkin & Dess (1996)
identified the five dimensions of an entrepreneurial
orientation as discussed above. In the past 30 years
or more, research on EO has become a central focus
of the entrepreneurship literature (Covin & Wales,
2011). Stevenson (1983) conceives entrepreneur-
ship as an approach to management, the pursuit of
opportunity without regard to resources currently
controlled. Stevenson’s entrepreneurial manage-
ment perspective to investigate entrepreneurship
at firm level has received wide recognition in the
literature of entrepreneurship (Brown, Davidsson
& Wiklund, 2001).
Drawing on the above discussion and the
existing research of the entrepreneurial firm,
the entrepreneurial firm should be innovatively
oriented, opportunity oriented, risk-taking, and
non-administrative. Theories of strategic manage-
ment and entrepreneurship, and resource based
theory have placed much effort into understand-
ing entrepreneurial behaviours in established
firms. In the following two sections, we will
discuss entrepreneurial orientation (EO) and
entrepreneurial management (EM) which are the
two most developed instruments to understand
entrepreneurial firms.
Entrepreneurial Orientation (EO)
Entrepreneurial orientation is regarded in the
field of entrepreneurship research as the most
established instrument for measuring firm level
entrepreneurship. Lumpkin & Dess (1996) de-
fine entrepreneurial orientation as the methods,
practices, and decision-making styles managers
use to act entrepreneurially. Lumpkin & Dess
(1996) proposed a five dimensional framework
referred to as entrepreneurial orientation (EO)
for investigating firm level entrepreneurship that
includes autonomy, innovativeness, risk taking,
proactiveness and competitive aggressiveness.
The following table (see Table 25) demonstrates
the definitions and implications of entrepreneurial
orientation.
Entrepreneurial Management (EM)
The opportunity-based entrepreneurial manage-
ment (EM), which reflects the pursuit of oppor-
tunity without regard to the resources currently
controlled, is differentiated by Stevenson & Jarillo
(1990b; 1986) from traditional management.
The entrepreneurial management practices are
reflected by the strategic orientation, resource
orientation, management structure, reward phi-
losophy, growth orientation and entrepreneurial
culture of a firm (Brown, Davidsson & Wiklund,
2001; Stevenson & Gumpert, 1985; Stevenson &
Jarillo, 1990b, 1990a; Stevenson & Jarrillo-Mossi,
1986). The conceptualisation of opportunity-based
entrepreneurial management (EM) is consistent
with the contemporary opportunity-based entre-
preneurship definition (Eckhardt & Shane, 2003;
Shane, S & Venkataraman, 2000; Venkataraman,
1997) and reflects classical entrepreneurship
domains such as Kirzner’s (1973) “opportunity
alertness”. After three decades of theoretical and
empirical inquiry, EM is widely recognised as
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354
Supporting Entrepreneurship in High Cost Economies

an efficient tool to evaluate or measure entrepre-
neurship in existing organisations and further our
understanding of the entrepreneurial behaviours
pursued by existing organisations.
There are six factors in entrepreneurial manage-
ment: strategic orientation, resource orientation,
management structure, reward philosophy, growth
orientation and entrepreneurial culture. The en-
trepreneurial strategic orientation is driven by
perceived opportunities in the environment not by
resources required to pursue these opportunities.
An entrepreneurial firm’s resource orientation is
toward maximising value creation generated by
exploiting opportunities while minimizing the
firm’s resources commitment. The dimensions
of ‘commitment of resources’ and ‘control of
resources’ in resource orientation has been firstly
described by Stevenson, and then developed by
Brown et al (2001). To maintain this type of en-
trepreneurial commitment of resourcing may be
difficult because of the organisational pressures
such as the increasing needs for capital allocation
systems, formal planning systems and certain
incentive systems, created by the accumulation
of resources within the firm (Brown, Davidsson
& Wiklund, 2001). In short, a firm’s growth to-
gether with the accumulation of resources leads
to increasing difficulty in maintaining an entre-
preneurial management practice.
Management structure and the idea of organic
versus mechanistic organisational structures is
introduced by Burns & Stalker (1961). To achieve
growth from the addition of new products/services
or new markets, firms must be flexible and open to
change (Stevenson & Gumpert, 1985), the organic
organisational structure allows employees to cre-
atively seek opportunities and resources external
to their firms to adapt to the environment. The re-
Table 25. Dimensions of entrepreneurial orientation
Dimensions Definition and Implication
Risk-taking Risk-taking is typically characterized by resources commitment in uncertain or risky environments, which may
cause costly failure. Besides resource commitment, strategic risk is also indentified by scholars, that of “venture
into unknown”. A risk-taking firm emphasizes exploring and exploiting opportunities in products, services, and
process even under the situation that these opportunities are unclear. Risk-taking favours speed decision-making
and enable firms to react to change quickly. The dimension of risk-taking is very critical in the economic situation
nowadays since the opportunity needed could disappear after a systematic investigation. Risk-taking firms can
often harvest the first-mover advantage; however, the risk-taking characteristic should match with insight strategic
judgment.
Innovativeness New, change, creativity, differentiation, advance and improvement etc. Innovativeness represents a bias
toward embracing and supporting creativity, experimentation, R&D in product-market or technology. As such,
innovativeness is a chief means to create differentiation and develop solutions that undermine those of competitors
(Hughes & Morgan 2007). Profit opportunities usually require recombination of resources, during which process
either Kirznaian or Schumpeterian innovation is included. Accordingly, innovativeness is the precondition for firms
to get competitive advantage. A firm, in contrast, is lulled into inertia, inaction, and adherence to tradition has the
higher possibility to fail in fierce competition and changing environment.
Proactiveness A firm with the characteristic of proactiveness has a forward-looking perspective, seeks opportunities actively,
and instigates forecasting changes in current strategies and tactics. Proactiveness increases the firm’s receptiveness
to market signals and awareness of customers’ needs (Kollmann & Stockmann 2010). Former experiences and
learning ability assure it can better understand market signals and anticipate market trends than its competitors.
Autonomy Autonomy refers to the independent action of an individual or a team in bringing forth an idea or a vision and
carrying it through to completion (Dess & Lumpkin 2005; Lumpkin, GT & Dess 1996, p. 140). As suggested by
the previous research, the degree of autonomy varies according to the firm size, structure and industry type etc.
Competitive
Aggressiveness
Competitive aggressiveness refers to an intensity efforts of a firm to outperform and undermine its industry rivals
(Lumpkin, G & Dess 2001). It is characterised by a combative posture and aggressive response (Dess & Lumpkin
2005). It can take the form of deliberate action as well as reactive action (Hughes & Morgan 2007). A competitive
aggressiveness firm establishes advantage through continuous offensive tactics (Davidson, 1987) and leverages
entrepreneurial capabilities to get more market share from competitors.
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355
Supporting Entrepreneurship in High Cost Economies

ward philosophy of an entrepreneurially managed
firm reflects interest in creating and harvesting
wealth (value) and thus is toward compensations
based on how individuals contribute to value
creation in pursuing opportunities. Managers in
entrepreneurial firms prefer rapid growth as op-
posed to steady growth which is often the choice
of managers in a more traditional administrative
firm. Entrepreneurial culture describes a firm’s
culture that encourages a broad range of ideas,
experimentation and creativity. Table 26 compares
the practices of entrepreneurial management and
administrative management.
A Review of Firm Entrepreneurial
Capabilities: The Link to Growth
We have talked about the factors that impact the
success of start-ups and performance of well
established firms. However, these factors may
not directly bring competitive advantage to entre-
preneurs/firms in fierce competition. One reason
is that most of these factors are static, common
and imitable; the other reason is that many of
these factors are the outcomes of other elements,
among them is the entrepreneurial capability at
the firm level.
To further our understanding of entrepreneurial
capability, we conducted a broad literature review
in highly regarded journals relating to entrepre-
neurship. These journals are generated initially
by keywords search of the Scopus database to
identify the most cited articles and journals. We
searched for the words “capability or capacity”
in the article title, abstract and keywords, and
searched for the words “entrepreneurial,” “en-
trepreneurship” or “entrepreneur” in the whole
article. The search revealed 154 articles at this
first stage from only primary English language
studies from the A* or A journals calculated by
Thomson ISI drawn from 12 years prior to our
study. We then conducted a manual review of all
the articles to check that the article focused on
firm level entrepreneurial capability. As such,
86 articles were excluded and 68 articles were
left in the final review group. Table 27 shows the
distribution of entrepreneurial capability research
in various Journals, from which we can see the
distribution is quite fragmented. This indicates
that the entrepreneurial capability research is at its
very earliy stage and needs more future research
attention. All these 68 articles are reviewed and
categorised based on their focus on entrepreneurial
capability and presented in Table 28.
Linking Firm Entrepreneurial Capability
to Performance and Growth
Entrepreneurial capability is defined as the capa-
bility to identify, evaluate, exploit and/or explore
entrepreneurial/business opportunities and has
been viewed as a crucial factor in influencing firm
performance. Chaston & Mangles (1997) conclude
that firm key capability factors may influence a
small firm’s strategic positioning; new product
development; financial management; business
planning; innovative workforce; productivity;
human resource management; quality and infor-
mation management. Chaston & Sadler-Smith
(2012) propose that under intense market condi-
tions firms that have well-developed capabilities
are more likely to succeed than firms that do not
have such capabilities. They argue that entrepre-
neurial orientation (EO) and firm capability are
two important positive factors in enhancing firm
performance and growth, as shown in Figure 14.
Fully-fledged explanations that identify the
factors that affect different organisational arrange-
ments under which opportunities are identified,
evaluated, and exploited have not been developed
(Alvarez & Parker, 2009; Davidsson, 2005;
Shane, S 2012). Gürbüz & Aykol (2009) argue
that a firm’s entrepreneurial orientation needs
the support of entrepreneurial management to
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Supporting Entrepreneurship in High Cost Economies

Table 26. Comparison between entrepreneurial management and administrative management
Entrepreneurial Management Administrative Management
Strategic Orientation The strategy creation is driven by perceived
opportunities in the environment not by resources
required to purse these opportunities in entrepreneurial
management practises. As opportunities driven
strategy, opportunities are the first consideration of
managers, once opportunities are indentified as real,
then, required resources will be marshalled to exploit
these opportunities. All most any opportunity is
relevant to the firm (Brown, Davidsson & Wiklund
2001) because managers are inclined to create a new
business (organisation), instigate renewal or innovation
(Sharma & Chrisman 1999).
The administrative management’s strategy is to utilise
the recourses controlled by the firm and to make these
resources use efficiently. Managers will consider their
resources before exploiting any opportunities, only
opportunities required relevant resources under the
firms control are exploited by the firm.
Resource
Orientation
Under the situation of resource orientation, the
commitment of resources is in a multi-step manner
(McGrath 1999), which allows the entrepreneurial
firm to adopt new or improved strategies according to
opportunities status. An entrepreneurial firm reduces
the resources it uses or owns as much as possible and
favours resources (e.g. financial capital, intellectual
capital, skills, and competencies) that are borrowed or
rented from others. Such an entrepreneurial resources
orientation provides flexibility, which allows SMEs to
manage uncertainty by pursuing multi opportunities
(Bradley, Wiklund & Shepherd 2011).
The firms that considered less entrepreneurial if its
commitment of resources is characterised by favouring
ownership control of resources, thorough analysis in
advance before mostly irreversible investments.
Management
structure
Organic firms are decentralised, informal, emphasising
on lateral interactions and an equal distribution
of knowledge and information throughout the
organisation (Lumpkin, GT & Dess 1996). The organic
organisational structure enable an entrepreneurial firm
to manage its rented or borrowed resources flexibly
when pursuing opportunities under environment
contingency.
Mechanistic firms are highly centralised, formal with
a clearly defined hierarchy, authority, responsibility
and systems to ensure efficiency. A traditional
administrative firm, in contrast, tends to adopt the
mechanistic organisational structure to allocate owned
resources efficiently.
Reward Philosophy The reward philosophy of an entrepreneurially
managed firm reflects interest in creating and
harvesting wealth (value) and thus, is toward
compensations based on how individuals contribute
to value creation in pursuing opportunities. The
entrepreneurial management structure makes is
possible to reward or evaluate employees based on their
own individual performance and accountability. Under
a entrepreneurial reward philosophy, employees are
encouraged to explore potential opportunities, which
develops higher levels of commitment and trust within
the firm (Bradley, Wiklund & Shepherd 2011).
Under a less entrepreneurial reward philosophy,
rewards are based on the amount of resources under
the individual’s control, hierarchy, and on seniority.
Such a reward philosophy will undermine the pursuit
of opportunities since the individuals who control
resources tend to limit the usage of these resources to
pursuit any opportunities under uncertainty.
Growth Orientation Managers in entrepreneurial firms prefer rapid growth
to steady growth that is often the premier choice
of managers in a traditional administrative firm. A
entrepreneurial firm is characterised as proactive and
competitive aggressive (Covin & Slevin 1991), utilise
all kinds of opportunities and resources to achieve high
growth. High growth often indicate high value creation,
thus in entrepreneurially managed firms, managers are
inclined to seek high growth rate.
A traditional administrative firm, in contrast, focusing
on resources under its control, tend to avoid rapid
growth that required more and new resources. The
reward philosophy in less entrepreneurial firms decides
that it seeks a growth rate which does not jeopardise
accumulated resources or create fluctuations in the
management track record (Stevenson & Gumpert
1985).
continued on following page
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Supporting Entrepreneurship in High Cost Economies

enhance firm performance. The organisational
characteristics are often viewed as important
mediating factors in the relationship between
entrepreneurial orientation and firm performance.
Wolcott & Lippitz (2007) classify four models of
the entrepreneurship models in established firms:
the enabler, the producer, the opportunist and the
advocate according to the resource authority and
organisational ownership. In Figure 15, we show
how entrepreneurial opportunities interact with
other important factors of firms to impact jointly
on firm performance.
Summary and Discussion of
Firm Level Characteristics
Entrepreneurship is not solely concerned with
individuals. Equally, significant research focus is
placed on entrepreneurial firms. Adopting a firm
level unit of analysis by definition suggests a limi-
tation of this discussion to research that examines
the factors that contribute to the progression from
the stage of survival to growth; in the nascent stage
a firm by definition is not established. However,
any firm is commenced on the perception of some
sort of opportunity regardless of the motivations
of the nascent entrepreneur. Therefore, in this
sense, the proxy for the firm at the nascent stage
is the particular opportunity that the entrepreneur
is actively pursuing and the business model that
is designed to respond to that opportunity.
The survival and growth of the firm is unques-
tionably linked to the capabilities and attributes of
the entrepreneur and the start-up team. Further the
ongoing firm evolution is subject to entrepreneur-
ial management capabilities and maintaining an
entrepreneurial orientation within the firm toward
the market and opportunities. However, there are
Entrepreneurial Management Administrative Management
Entrepreneurial
Culture
An entrepreneurially managed firm regards opportunity
is the starting point to conduct business; on the other
hand, a traditional administrative firm takes resources
under its control as the starting point. Therefore, it is
full of ideas, experimentation, and creativity within
an entrepreneurial firm. Entrepreneurial culture
is beneficial to firm growth since growth can be
generated from a broad range of opportunities.
It is lack of ideas or ideas just match the owned
resources within traditional a more administratively
focused firm. firms that are lack of entrepreneurial
culture typically generate sales from a more proven
and narrow set of opportunities that is associated with
slower growth rates than entrepreneurial firms (Covin,
Green & Slevin 2006).
Table 26. Continued
Table 27. The distribution entrepreneurial capability research
Journal No. of
Journals
No. of
Articles
(Each)
Academy of Management Journal, Academy of Management Review, International Journal of Research
in Marketing, International Small Business Journal, Journal of business research, Journal of International
Business Studies.
6 1
Journal of Engineering and Technology Management, Management Science, Technovation. 3 2
Organisation Science, Organisation Studies, Small Business Economics. 3 3
Research Policy, Entrepreneurship and Regional Development, Entrepreneurship: Theory and Practice. 3 4
Journal of Management Studies, Industrial and Corporate Change, Journal of Business Venturing. 3 5
Journal of Small Business Management, Journal of World Business. 2 6
Strategic Management Journal. 1 8
Total 21 68
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358
Supporting Entrepreneurship in High Cost Economies

Table 28. A review of entrepreneurial capability research in last 12 years
Author (Year) Focal Entrepreneurial Capability Casually Adjacent Outcomes of
Entrepreneurial Capability
Sapienza, Autio et al.(2006); Moreno & Casillas
(2007)
Generating new routines, new project or
initiatives.
Firm survival and growth.
Lechner & Dowling (2003); Eraydin & Armatli-
Köroǧlu (2005); George, Wood D.R et al. (2001);
Jong (2006); Chen, Zou & Wang (2009); Walter,
Auer & Ritter (2006); (Zhou, Barnes & Lu
2010); Lowik et al.(2012); Chung (2006)
Networking capability. Competitiveness & Firm performance;
Innovation; Firm survival; New venture
performance.
Agarwal, Echambadi et al. (2004); Zahra, Van de
Velde & Larrañeta (2007)
Integrating, acquire or converting
knowledge.
Firm survival; Firm Productivity.
Autio, George et al.(2011) Organisational organising process and
cognitive map.
New venture performance.
Ireland, Covin et al. (2009); Patel & Fiet (2011);
Jacobides (2006); (Corner & Wu 2012); Arthurs
& Busenitz (2006); Hsieh, Nickerson & Zenger
(2007); Kor, Mahoney & Michael (2007);
Liao, Kickul & Ma (2009); Withers, Drnevich
& Marino (2011); Newbert, Gopalakrishnan
& Kirchhoff (2008); Ucbasaran, Westhead &
Wright (2008)a; Clarysse, Tartari & Salter (2011)
a
Capacity to recognise and exploit
opportunity.
Corporate entrepreneurship strategy;
Competitive advantage; Creation of new
capability and/or business model; New
venture performance; Innovation.
Mathews (2003); Wu (2007); (Vohora, Wright &
Lockett 2004); Arora & Nandkumar (2012); Yiu
& Lau (2008); Pitelis & Teece (2010)
The capability to accumulate, combine
and coordinate intern and external
resources.
Start-up performance; Venture
performance; Firm performance; Value
creation.
Zahra, Filatotchev & Wright (2009);(Zahra &
Hayton 2008); (Deeds 2001)
Absorptive capacity. Entrepreneurial activates; Firm
Performance; Wealth creation.
Zheng, Liu & George (2010); (Robeson &
O’Connor (2007)
Innovative capability. Firm valuation.
Balasubramanian (2011) Learning capability. Venture performance.
Laamanen & Wallin (2009); (Zahra, Sapienza
& Davidsson 2006);Liao, Kickul & Ma (2009);
Newbert (2005)a; (Weerawardena et al. 2007);
Augier & Teece (2009); Augier & Teece (2008);
Mathews (2010); Hoang & Rothaermel (2010);
Rothaermel, Hitt & Jobe (2006); Bingham &
Eisenhardt (2011); Teece (2007)
Dynamic capability. Innovation ; New firm formation;
Internalisation; Firm performance
; Strategy evolution ; Competitive
capability; R&D project performance.
Lerner & Almor (2002); Lau & Bruton (2011);
Bock et al. (2012)
Strategy building. Venture performance; Business model
innovation.
Wang & Ang (2004); Liang, Lu & Wang (2012);
Loane, Bell & McNaughton (2007); Ripollés &
Blesa (2012); Klepper & Sleeper (2005); Argyres
(2011); (Lockett & Wright 2005); (Narayanan,
Yang & Zahra 2009); Hewitt-Dundas (2006);
Gruber et al.(2010); Verwaal et al. (2010); Zahra
& Nielsen (2002); Kakati (2003)Lee, C., Lee, K.
& Pennings, J. M. (2001)b
Resources based capability. Venture performance;
Internationalisation risk-taking tendency;
Spin-off; Innovation; Firm performance;
Technology commercialization.
Filatotchev et al.(2003); Boeker & Wiltbank
(2005);
Managerial capability. Organisation restructure; Firm growth.
bincluding entrepreneurial orientation; financial resources and technological capability
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359
Supporting Entrepreneurship in High Cost Economies

Figure 14. Interaction effect of firm capability, market conditions (i.e. intensity of competition) and
entrepreneurial orientation on firm growth (Adopted from Chaston & Sadler-Smith 2012)
Figure 15. The entrepreneurial capability of established firms
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360
Supporting Entrepreneurship in High Cost Economies

also many factors that are outside the control of
the entrepreneur that need to be considered. Some
of these factors relate specifically to the nature of
the opportunity being followed and the demand,
acceptance and uptake of the product/service by a
sufficiently large group of customers and the level
of innovation and uniqueness and differentiation.
Extending this point further, the particular
location and context of the venture may equally
be responsible for the venture’s success or other-
wise. The extent to which the context is supportive
or hostile in terms of the market, industry and
general social, political, economic, regulatory or
technological environment can play a major role
in determining whether a firm progresses through
stages and emerges as a successful venture or not.
Related to this is the access to the particular tan-
gible and intangible resources that are important
for the venture, whether that be human resources in
terms of labour, knowledge and skills or financial
capital, technology or particular infrastructure.
Ultimately success is attained through manage-
ment of the opportunity and the ability of the team
to identify or create feasible ongoing opportuni-
ties that can be transformed or incorporated into
feasible and sustainable business models.
Tables 29 and 30 summarise the findings
of the chapter with respect to the development
and application of characteristics and capabili-
ties at the firm level through the three stages of
development targeted by the authors taking into
account the proxy of the opportunity at the nascent
entrepreneur stage.
ENTREPRENEURSHIP POLICY
Entrepreneurship policy and small business
policy are two different definitions. That is to
say, public policy encouraging entrepreneurship
is not always policy encouraging small business
(Dennis Jr, 2011). Public policy is currently tend-
ing to shift emphasis away from SME policy and
towards entrepreneurship policy in many countries
(Henrekson & Stenkula, 2010) with the objective
to stimulate a dynamic entrepreneurial economy.
Entrepreneurship can be encouraged by public
policy ranging from specific supports such as tax
breaks, government-directed credit (Kawai &
Urata, 2002), technology assistance and entre-
preneurial training to generalised supports such
Table 29. Firm level capabilities summary
Firm Stages Significant Entrepreneurial Firm Level
Capabilities
Nascent
(Opportunity
Stage)
Capability to develop a feasible business
model designed to capitalise on a perceived
market, based on identified unmet demand
or potentially created demand. Abilities to
access or acquire the tangible and intangible
resources including access to capital and
abilities to secure and draw upon a supportive
network of associates.
Survival Capabilities are intrinsically linked to human
capital and financial capital for new start-up
success and survival. These capabilities can be
either tangible or intangible but specific to the
firm and the opportunity. Strategic capabilities
to build a firm competitive advantage
establishes the foundation for growth.
Growth Entrepreneurial orientation and
entrepreneurial management team factors that
leverage capabilities and opportunities.
Table 30. Firm level indicators of success and
stage relationships
Opportunity
(Nascent)
Stage
Start-Up
(Survival) Stage
Established
(Growth) Stage
Fi
rm
s
Founder(s) characteristics (see Individual level above)
Supportive economic, social and political environment
Access to tangible (physical
resources) and intangible (human/
social capital) resources
Extent of
innovation
Access to financial capital Entrepreneurial
orientation
Customer
demand
Entrepreneurial management
Opportunity
(market)
feasibility
Business model feasibility and
competitive advantage
Market dynamics
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361
Supporting Entrepreneurship in High Cost Economies

as tax incentives, knowledge transformation and
entrepreneurial culture creation to maintain a
stable economic environment.
According to Baumol, Litan & Schramm
(2007), an entrepreneurial economy has four main
characteristics: ease of starting and growing a
business; generous rewards for productive entre-
preneurial activity; disincentives for unproductive
activity and incentives to keep the winners on their
toes. Entrepreneurship can also be encouraged by
public policy from supply side (entrepreneurial
capabilities from the labour market perspective)
and demand side (business/entrepreneurial op-
portunities from the product market perspective).
Besides these two areas, Henrekson & Stenkula
(2010) propose that public policy can influence
entrepreneurship in three other areas: the availabil-
ity of resources, skills and knowledge; preferences
for entrepreneurship; and, the decision-making
process of potential entrepreneurs.
The policy milieu favouring entrepreneurship
is created by the composition of entrepreneurship
promoting policy portfolios including government
honesty and efficiency, public service quality and
attentiveness, positive social attitudes toward en-
trepreneurship and general sympathy to entrepre-
neurial firms in taxes, funds and regulations. Any
single tax policiy has not been found to have sig-
nificant influence on entrepreneurship (Bruce &
Deskins, 2010). In supporting high-tech start-ups,
research has shown that R&D subsidies through
selective/competitive basis leads to a positive
effect while R&D subsidies through automatic
procedures lead to inefficiencies (Colombo, Grilli
& Murtinu, 2011).
Government guided preparation for new ven-
tures has been found to contribute to the survival
of new ventures (Rotger, Gørtz & Storey, 2012).
Although importantly, portfolio entrepreneurs are
more likely to show dimensions of entrepreneurial
behaviours than novice and serial entrepreneurs
(Westhead, Ucbasaran & Wright, 2005). The pro-
vision of appropriate information about resources
to enable portfolio entrepreneurs to exploit op-
portunities is critical; support should be provided
for serial entrepreneurs to aid the identification of
opportunities. Relevant training schemes should
be launched to address the obstacles met by nov-
ice entrepreneurs and learning adaptation skills
contributes to dependent business unit survival
(Andries & Debackere, 2007).
Policies that encourage entrepreneurial educa-
tion are another key government area of influence.
Entrepreneurial education has been defined as “a
process of providing individuals with the ability
to recognize commercial opportunities and the
insight, self-esteem, knowledge and skills to act
on them” (Jones & English, 2004). Entrepreneurial
education combines different disciplines such as
management, marketing, finance, economics and
engineering. It enhances students’ willingness to
become entrepreneurs (von Graevenitz, Harhoff
& Weber, 2010) and studies of college experi-
ences have been found to influence significantly
students’ attitudes toward entrepreneurship and en-
trepreneurial self-efficacy (Kamau-Maina, 2009).
In essence government policies can have a
range of effects on the entrepreneurial ecosystem.
The broader social policy settings, particularly in
the education sector, can identify, support and de-
velop the key attributes of entrepreneurial minded
young individuals. A range of programs and sup-
port mechanisms such as incubators, science parks
and co-creation spaces can provide crucial low
cost start-up support services and accommoda-
tion. Awareness of industry and sectoral activity
and needs is important for governments to be able
to target development of key infrastructures that
facilitate the emergence of new enterprise and
particularly so if these facilities are important for
the collective industry base or cost is prohibitive
without government assistance. In this regard
industry cluster policies and programs can assist
to stimulate innovation, university collaboration
and technology transfer to accelerate expansion
and growth of particular industry sectors. Creat-
ing the right conditions for financial capital to
flow to early-stage start-ups and firms positioned
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362
Supporting Entrepreneurship in High Cost Economies

for growth is a key role of policy. Lastly, policy
can nurture the emergence of new opportunities
through procurement platforms and incentives and
rewards for risk-taking by ventures exhibiting high
promise, strong capabilities and growth ambition.
The objective for this research was to conduct
a comprehensive literature review that addressed
three areas:
• To review internationally recognised and
accepted methodologies of entrepreneurial
human and firm characteristics data collec-
tion and analysis to recommend strategies
viable for DMITRE.
• To formulate the contemporary view and
latest research on entrepreneurial charac-
teristics and how these characteristics con-
tribute to a model of entrepreneurial firm
behaviour.
• To examine developments in the literature
that explain to what extent human charac-
teristics influence and predict the perfor-
mance of firms.
The rationale for this work was to inform
government policy on:
• Particular criteria to assist with grantee se-
lection of early-stage ventures.
• Designing the parameters for a gap analy-
sis on entrepreneurship programs.
• Providing Key Performance Indicators
(KPIs) for Policy and Program Monitoring.
Each of these will now be discussed before
the conclusion of the chapter.
Criteria for Grantee and Program
Participant Selection
While much effort has been placed into under-
standing the characteristics of entrepreneurial
individuals and firms, another line of research
has focused on the investment decision making
of venture capital firms and informal (angel) in-
vestors. The roots of this research stem from the
1970s and the screening of ventures emphasises
two lines of thinking with respect to what con-
stitutes a successful venture. The first involves a
focus on the entrepreneur and the management
team. The underlying logic to this view is that a
good management team will persevere and make
a success of new venture concepts by adapting
and evolving the business model in response to
the drivers of the market place and customer.
The second line of evaluation emphasises the
market and industry dynamics and identifies with
the customer need, the market potential and the
competitive landscape. This view acknowledges
that the basis of a good venture starts with a viable
product/service that can penetrate or establish a
market beachhead with a competitive advantage
that will serve to fuel growth. Using these two
dimensions serves as a means to comprehend the
venture’s likelihood of success and probability of
an acceptable positive return on the investment.
As research has developed the dynamism of
new venture development has also been taken into
account. Ventures progress through stages and
attract different types of investment at different
times throughout a venture’s life cycle develop-
ment. Research suggests that venture screening at
the earlier stages of a new venture’s life is biased
toward identifying good market/industry potential.
For more mature ventures the emphasis shifts to
a focus on the abilities of the management team
and/or entrepreneur to exploit the market oppor-
tunity with management capabilities grounded in
industry and prior new venture experience. Hence,
there is no dichotomy in the decision-making
processes of Venture Capital firms. Rather, as-
sessment of both market and team takes place
but the relevance and significance of the market
and team criteria shift depending upon the stage
of development of the venture and the investor’s
strategy of investment.
Research also highlights a third dimension
that drives investment decision-making being the
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363
Supporting Entrepreneurship in High Cost Economies

investment parameters of the particular investment
firm (including expected investment returns). This
aspect will be ignored for our purposes although it
is relevant in consideration of the development of
a screening tool whereby the objective of the tool
should be clearly stated and appropriate criteria
included. A key point to consider is that individual
investment firms may have a pre-disposition to
particular investment strategies, types of invest-
ment preferences or preferred firm investment
stages. Therefore, in adapting a screening tool for
government screening purposes, any bias toward
types of investment strategies will need to be
addressed and the tool should be appropriately
aligned to the stage of support.
There are a range of screening tools that may
be of assistance in screening new ventures. These
include but are not limited to:
• The New Venture Opportunity Screening
Guide (Timmons 1994)
• The Bell-Mason Diagnostic (Bell & Mason
1991)
• ProGrid Venture (Bowman 1997)
• The New Venture Template (Mitchell
1995)
• Klofsten Business Platform (Klofsten 1998)
• The Idea Venture Assessment Tool (Hindle
2010)
The underlying principle in choosing a screen-
ing tool is to identify those that use known and
tested viable venture attributes supported by ac-
tuarial modelling. These offer the most potential
of assisting in identifying new ventures that are
mostly likely to succeed. Table 31 is a summary
of relevant indicative factors that are critical in-
dicators of venture success.
To explore the application and use of screening
methodologies has been beyond the scope of this
chapter. However, there are three options available
with respect to incorporating these approaches into
an assessment methodology with some predictive
power of the likely success of nascent entrepre-
neurs and their ventures. These are:
• Develop a methodology in-house leverag-
ing this Entrepreneurial Characteristics
chapter as the basis for the work and in-
clude a broad ranging review of market/
industry factors to identify specific and rel-
evant inclusions.
Table 31. New venture screening tools abridged critical indicators of firm success
Principle Areas of Screening Typical Critical Indicators
New Venture Screening Tool Market/Industry Opportunity Target market is experiencing growth.
Evidence of market acceptance for the product/service.
Large potential market.
Industry sector is attractive and not hostile to value retention.
Product is proprietary or can be protected (has competitive
advantage).
Competitive rivalry is restricted, limited or manageable.
Product has a working prototype.
Entrepreneur / Management
Team Capability
Industry/market experience.
Previous new venture experience.
Demonstrated leadership ability.
Capable of sustained effort.
Able to evaluate and react to risk well.
Articulate and comfortable in communication.
Trustful in relationships.
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364
Supporting Entrepreneurship in High Cost Economies

• Leverage the knowledge and experi-
ence of the University sector to incorpo-
rate the findings of the Entrepreneurial
Characteristics to develop a robust and
purpose built methodology.
• Examine the potential of adopting one of
the aforementioned methodologies for ad-
aptation to the specific needs required by
the a regional government.
Parameters for a Gap Analysis
on Entrepreneurship Programs
Entrepreneurship research is still in relatively early
stages with respect to uncovering the causal rela-
tionships between individuals, firms and the socio-
economic performances of any specific economic
boundary. However, in the context of this work,
there is a specific purpose for entrepreneurship
which is aligned with an economic development
agenda rather than either a productivity or socio-
economic (social) focus. From this perspective
and if the conceptualization of entrepreneurship
economic purposes are accepted, policy should be
concerned with proactive stimulation, facilitation
and growth of ventures that are grounded on new
and advancing technologies and the harnessing of
new knowledge. This differentiates entrepreneur-
ship policy from either small business or industry
policy, that are both anchored in the productivity
agenda, except where new knowledge and/or new
technology serves to revitalise and re-focus busi-
ness and industry toward new activity to provide
a platform basis and a new source of wealth for
the economy.
The review of the macro level analysis of
frameworks suggests that there are four main
concerns highlighted by international measures of
entrepreneurship. These are the leading indicators
that highlight the prevalence of human attitude and
aspirations for entrepreneurship; the operational
indicators that consider the framework conditions
(social, political, regulatory, technology and eco-
nomic), levels of activity, the barriers and ease
of doing entrepreneurship within an economic
region; the lagging measures that isolate perfor-
mance and impact; and lastly the government
pro-activeness indicators that reveal the extent to
which a government supports entrepreneurship
through policy, programs and infrastructure.
By drawing together the literature discussed in
this chapter it is now feasible to present specific
measures that are relevant to different questions
that policy-makers may wish to explore to gain
a more complete appreciation of entrepreneur-
ship within an economy. Table 32 lists the items
from the three most internationally accepted
methodologies to provide a focus on the leading,
operational, lagging and pro-activeness indicators.
Furthermore drawing upon the conceptualisation
of the development, productivity and social sectors
of the economy also directs the sites for informa-
tion gathering and eliminates some questions that
would be irrelevant to a specific socioeconomic
policy agenda. For instance Table 32 lists the
questions that are most relevant to economic de-
velopment and omits questions relating to social
value created and poverty reduction which may
more appropriately be directed toward the social
sector and the issues of utility of entrepreneurship.
In order to pursue a gap analysis of entrepre-
neurial capability there are four considerations
that must first be explicitly decided:
1. What is the basis of entrepreneurship that
is of most concern; one or more of the eco-
nomic development, productivity or social
issues? This determines where to look and
who to ask regarding specific policies and
programs to meet specific agendas.
2. Is one or more indicators, be it leading,
operational, lagging or pro-activeness, of
most importance for analysis? This may
be based on perceptions of need and stage
of development of policies or urgency of
implementation needed and would dif-
ferentiate between the needs to know the
latency of entrepreneurship in an economy,
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365
Supporting Entrepreneurship in High Cost Economies

the transformative power of the operational
platforms for entrepreneurship, the stock or
impact that policies and programs have had
or the relative performance of the govern-
ment on issues of entrepreneurship.
3. What are the acknowledged best practices
and policy and program philosophies in
areas of specific concern? This provides a
benchmark from which the gap in policies
and programs can be assessed and further
invites the question for later analysis whether
the best practices can actually be bettered.
4. Does the specific region differ in any substan-
tive way or have unique characteristics that
are not encountered by best practices in other
jurisdictions? This consideration focuses on
Table 33. Individual indicators of success and stage relationships
Nascent Stage Survival Stage Growth Stage
In
di
vi
du
al
s
Higher education
Related industry experience
Entrepreneurial intentions and self-efficacy. Business planning/management skills.
Social network Growth intentions
Risk/opportunity propensity Coping skills
Complexity dynamic/balanced skills
Fi
rm
s
Supportive economic, social and political environment.
Founder(s) characteristics (see Individual level above).
Access to tangible (physical resources) and intangible (human/social capital)
resources.
Extent of innovation
Access to financial capital Entrepreneurial Orientation
Customer demand Market dynamics
Opportunity feasibility Business model feasibility
Entrepreneurial management
Table 32. Macro indicators of entrepreneurship for economic development
Leading Operational Lagging Government Pro-Activeness
Entrepreneurial Population
Attitudes & Aspirations
Framework conditions: Social,
political, regulatory, technology
and economic
Firm Performance and Impact Policy, Programs and
Infrastructure.
• Perceived opportunities and
capabilities.
• Fear of failure.
• Status of entrepreneurship.
• Aspirations for growth.
• Aspirations – innovation.
• Aspirations – International
orientation.
• Regulatory Framework
/ Commercial, legal
infrastructure for
entrepreneurship.
• Market conditions / internal
market openness.
• Access to finance /
Entrepreneurial finance.
• Entrepreneurial capabilities /
education / skills.
• Culture / and social norms.
• Opportunity/necessity driven.
• Industry.
• Early stage entries.
• Business exits.
• R&D transfer and
Technology.
• FIRMS entrepreneurial
performance.
• Employment entrepreneurial
performance.
• Wealth entrepreneurial
performance.
• Job creation.
• Economic growth.
• Promoting awareness and
networking.
• Formalising the informal
sector.
• Government entrepreneurship
policy.
• Government entrepreneurship
programs.
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Supporting Entrepreneurship in High Cost Economies

adaptation, extension or irrelevance of policy
and programs observed across dissimilar
geographies or socio-political contexts.
Key Performance Indicators
for Program Monitoring
Although there are varied conceptualizations
about the stages of development of a firm, the
researchers for this chapter adopted an approach
that considered three phases that were represen-
tative and relevant to the research objectives. In
particular firms will only be started if there are
individuals actively engaged in exploring ideas
and opportunities that form the foundations of
new firms. This stage of activity is undertaken
by nascent entrepreneurs, those who are involved
in activities of becoming an entrepreneur. Mea-
suring activity in this area suggests indicators of
entrepreneurship latency.
Table 34. Entrepreneurship KPI synthesis
Key Indicators
for Economic
Performance
Leading
Entrepreneurial
Population Attitudes &
Aspirations
Operational Framework
Conditions: Social,
Political, Regulatory,
Technology and
Economic
Lagging
Firm Performance and
Impact
Government
Pro-Activeness
Policy, Programs and
Infrastructure
Latency • Higher education of
nascent entrepreneurs.
• Related industry
experience of nascent
entrepreneurs.
• Entrepreneurial
intentions and self-
efficacy.
• Cultural fear of failure.
• Status and perceptions
of entrepreneurship.
• Perceived opportunities
and capabilities.
• Entrepreneurial
capabilities / education
/ skills.
• IP Regulatory
Framework / Commercial,
legal infrastructure for
entrepreneurship.
• Culture / and social
norms.
• Business entry / exits.
• Firms entrepreneurial
performance.
• Employment
entrepreneurial
performance.
• Entrepreneurial wealth
created.
• Promoting awareness
and networking.
Economic
Development
• Aspirations –
innovation.
• IP filing of the
knowledge sector.
• Economic status (i.e.
decline).
• Presence of clusters.
• Access to
entrepreneurial finance,
informal and formal
investment.
• Innovation opportunity
motivated entrepreneurs.
• R&D and technology
transfer to new starts and
spin-outs.
• R&D sector
employment.
• Growth of existing
clusters.
• Formalising the
informal finance sector.
• Government
entrepreneurship policy
and programs.
Productivity • IP filing of the industry
sector.
• Relative productivity
performance per sector.
• Market conditions /
internal market openness.
• Access to
entrepreneurial finance,
mezzanine and expansion
capital.
• Market opportunity
motivated entrepreneurs.
• R&D transfer and
Technology to spin-ins
and established firms.
• Firm R&D spend.
• Government innovation
policies and programs.
Social Utility • Necessity motivated
entrepreneurs.
• Government social
entrepreneurship policies
and programs.
Economic Growth • Aspirations for growth.
• International
aspirations.
• Entrepreneurial
orientation and
management.
• Exports.
• Business expansion.
• Job creation.
• GDP (GSP) growth.
• (State)Trade surplus.
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367
Supporting Entrepreneurship in High Cost Economies

Assuming nascent entrepreneurs identify
with an opportunity and judge sufficient benefit
in pursing it through to business formation the
priority of the subsequent stage is survival of
the business. Those individuals who manage to
sustain the business through this stage may either
choose to plateau or leverage the firm into fur-
ther growth following product, service or market
development opportunities. Alternatively, some
entrepreneurs may choose either voluntarily or,
through unfavourable circumstances, to withdraw
from the business. Hence, performance indicators
measured at this stage of activity would indicate
levels of entrepreneurship dynamism revolving
around economic development, productivity and/
or utility. However, the ultimate contribution
toward economic growth will only transpire as
firms move to the third stage and achieve sig-
nificant growth.
The third stage in the new venture life cycle,
growth, sees the new venture established as a busi-
ness entity. At this point, the economic contribution
of the firm shifts from development, productivity
or utility to the more specific measures of eco-
nomic growth as new jobs and wealth are created.
Measures of established firm growth become key
lead indicators of economic growth.
Table 33 summarises the findings of the lit-
erature review with respect to the changing char-
acteristics observed across the transition through
the three stages of entrepreneurial activity. The
contribution of the work for this chapter is to
identify the specific entrepreneurial characteristic
measures that may be taken to suggest indicators
of corresponding economic performance at the
levels of entrepreneurship latency, economic de-
velopment, productivity and utility and ultimately
economic growth.
Synthesizing the characteristics identified
in this work with the four categories of macro
indicators of entrepreneurship and the economic
purposes produces Table 34 which clusters key
performance indicators under leading, operational,
lagging, and policy performance with the specific
indicators of entrepreneurship in the categories
of latency, economic development, social util-
Figure 16. The conceptual relationships between the entrepreneurial effort and government and private
sector support
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368
Supporting Entrepreneurship in High Cost Economies

ity, productivity and economic growth. In other
cases indicators may contribute to more than one
category and therefore this suggests that further
refinement of this table is still required.
From the synthesis provided in Tables 33 and
34, Key Performance Indicators can be selected
and formulated for any particular policy direc-
tion and for various stages of entrepreneurship
development. In some cases the measures may be
specific but in others the precise metric might need
further refinement by drawing upon this chapter
and other research. Each cell of the table can also
be added to by reference to the earlier sections of
this chapter. For instance economic growth will
have many more indicators than suggested here
although the metrics suggested area guide.
CONCLUSION
A review of research literature strongly suggests
that there is a role for government in stimulating
entrepreneurial and new venture activity. The
nature, type and number of policies all have an
effect on entrepreneurial activity. The key chal-
lenge for government is to walk a fine line between
managing the evolution of new industries while
looking after the interests of current industries
and dependent communities. As a consequence,
governments can play a significant role in the
development of the entrepreneur and their early
stage new ventures but then must allow the private
sector to pick-up the most promising and emerging
new players. Figure 16 conceptually illustrates
the intertwined dynamics between the private
and public sectors highlighting the area of the
individual’s domain of entrepreneurial endeavour
that is applied to extend the support provided by
government and the private sector to bring new
ventures to life.
Research also highlights that government
programs of entrepreneurial support must take
into consideration the business and private sec-
tor conditions and make allowance for business
objectives to be met. Supporting new ideas or
technologies without factoring in these critical
areas that facilitate transition from concepts to
operating and flourishing businesses reduces the
public sector investment efficiency and effective-
ness. Aside from the direct support and focus on
the emergence and development of entrepreneurial
ideas, governments also must seek to provide the
conditions that stimulate and encourage private
sector engagement.
ACKNOWLEDGMENT
This research was made possible by funding from
the Department for Manufacturing, Innovation,
Trade, Resources and Energy, Government of
South Australia.
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KEY TERMS AND DEFINITIONS
Entrepreneurial Behaviours: Those behav-
iours that lead to a venture start-up which is the
outcome of an entrepreneurial process. The en-
trepreneurial process is the process that includes
identifying, evaluating, exploring, and exploiting
entrepreneurial opportunities.
Entrepreneurial Capability: The capability
to identify an entrepreneurial/business oppor-
tunity and to develop the resource base needed
to pursue the opportunity. In this article, we
distinguish between the individual and the firm
level entrepreneurial capabilities and discuss each
independently.
Entrepreneurial Characteristics: Include
competency, skills, knowledge, expertise, acu-
men, behaviours, attitudes and personality traits
of successful entrepreneurs. This paper will refer
to competency and characteristics as interchange-
able words.
Entrepreneurial Competence: A specific
group of competencies relevant to exercise suc-
cessful entrepreneurship that is mainly associated
with development of small and new businesses.
This paper will refer to competency and charac-
teristics as interchangeable words.
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Entrepreneurial Ecosystem: Comprises of
hundreds of elements that build the environment
in which entrepreneurship takes place among
them are financial support, government policies
and programs, research and development (R&D)
transfer, access to infrastructure, cultural and social
norms and education and training.
Entrepreneurial Environment: Includes the
economic environment (e.g. labour and market
conditions, materials availability, access to fi-
nancial assistance), social environment (culture,
honesty, justification, religion, social marginality)
and political environment (stability).
Entrepreneurial Firm: A firm in the earlier
stage of new venturing or start-up which has the
potential of attaining significant size and prof-
itability whether from a spin-off, a merger or
independent entrepreneurial activity.
Entrepreneurial Opportunity: Situations in
which new goods, services, raw materials, markets
and organising methods can be introduced through
the formation of new means, ends, or means-ends
relationships.
Growth Firm: Commonly measured by the
scaling-up of sales by a firm that has been in
operation for at least 3-5 years.
Nascent Entrepreneur: A person who is now
trying to start a new business as the owner or part
owner of the new firm, who has been active in
trying to start the new firm in the past 12 months
carrying out some gestation activity.
Nascent Firm: The conceptual stage of a firm
in the process of becoming an established business
led (most likely) by a nascent entrepreneur who
commits time and resources to start a new firm.
Stages of Firm Growth: Describes the devel-
opment of firms following three stages; nascent,
survival and growth.
Survival Firm: Firms that have in most cases
started operations ideally with a business registra-
tion and have started operating with a cash flow
either by means of income and/or expenses. A
survival firm often depends upon securing enough
cash to maintain working capital and fund capital
purchases, both necessary to support the ongoing
sustainability of the business venture.
The Entrepreneur: The central figure in en-
trepreneurship, acting on opportunities either in
well-defined markets or by defining new markets
and market segments.
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Chapter 13
DOI: 10.4018/978-1-4666-5828-8.ch013
Manufacturing in a High
Cost Environment:
Basis for Success on the Firm Level
ABSTRACT
This chapter draws on an overview of contemporary literature to distil the best ways for manufacturing
firms to adapt to and succeed in high cost environments. Parts of global value chains will move back to
sophisticated, economically complex, high operating cost environments like the US and the European
Manufacturing Belt. However, the firms that participate in these value chains will look different. The
forces that impact the structure and location of manufacturing activities will also impact the individual
firm, and this chapter discusses how this will result in successful firms becoming so called “Hidden
Champions.” A successful transformation into tomorrow’s Hidden Champion will result in fewer employees
with higher capability, producing a higher level of output of which a very high share will be produced
and delivered digitally. These firms will participate in smaller, more concentrated value chains serving
a global market but operating both competitively and collaboratively in agglomerations like clusters.
These agglomerations will be located in jurisdictions with high economic complexity and with a deep
and broad industrial commons and with a supportive policy regime.
LOW COST OPERATING
ENVIRONMENT
In a low cost operating environment, the basis for
success is normally to successfully compete on
price i.e. to have the lowest total cost. This leads to
a focus on efficiency (which is interpreted as doing
what you do as well as possible) and consequently
on imitation (normally called benchmarking, best
practice, etc.) which reduces the risk, and thereby
cost, associated with introducing new things into
the firm. It also leads to a focus on productivity
improvements which are interpreted as cost reduc-
tion and work efficiency.
Low cost operating environments are charac-
terised by most production factors being available
at lower or similar cost to other locations. With
globalisation, an increasing number of produc-
Göran Roos
Swinburne University, Australia
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Manufacturing in a High Cost Environment

tion factors become available at similar cost in
different locations, which makes the remaining
production factors that are still available at lower
cost increasingly valuable as a basis for the firm’s
competitiveness.
HIGH COST OPERATING
ENVIRONMENT
In a high cost operating environment, the basis for
success is normally to compete on superior value
for money. This means an emphasis on effective-
ness balanced with an emphasis on efficiency.
Effectiveness (which is interpreted as doing the
right thing) is about delivering what the customer
values; efficiency (which is interpreted as doing
what you do as well as possible) is about delivering
this value at the lowest possible cost.
This emphasis on effectiveness leads to a focus
on innovation and on productivity defined as do-
ing smarter things in smarter ways, whereas the
secondary emphasis on efficiency means ensuring
as short a lead-time as possible from idea to prod-
uct and as rapid a cost reduction as possible for
the new innovation once it is put into production.
Given the continuously increasing speed of
knowledge dissemination (including the codi-
fication of tacit information) in an increasingly
globalised world, firms in a high cost operating
environment must do one or both of (Roos, 2013a):
• Creating and accumulating knowledge
faster than firms in low cost operating en-
vironments, at the same time as converting
this new knowledge to a temporary com-
petitive advantage1 faster than firms in low
cost operating environments.
• Shielding some critical part of their knowl-
edge base (usually partly tacit) from be-
coming globally accessible in order to
extend the duration of their temporary
competitive advantage.
The ability to achieve one or both of these
outcomes is frequently based on close interaction
and cooperation with customers. Building up and
maintaining strong interactive relationships with
external partners, and primarily with lead custom-
ers, is critical to firm success (Kleinaltenkamp
& Jacob, 2002; Jacob, 2006; Arnold et al. 2010).
The benefits include dramatic reduction in rework
cost (Bürgel & Zeller, 1997) and enhanced idea
generation (Arnold et al. 2010). Maintaining close
relationships and engagement with suppliers is
similarly critical as they frequently are drivers
of process innovation and technology transfer
(Chronéer, 2005; Aylen, 2010; Lee et al. 2010;
Sjödin & Eriksson, 2010), especially in process
industries (Rönnberg Sjödin et al., 2011; Sjö-
din, 2012; Rönnberg-Sjödin, 2013). Likewise,
relationships with competitors (the concept of
coopetition2) is critical here (Johansson, 2011;
Peng et al. 2012; Ritala & Hurmelinna‐Lauk-
kanen, 2013; Yami & Nemeh, 2013) and can
lead to positive outcomes (Bengtsson & Kock,
2000) like shorter time to market and increased
technological diversity (Lou, 2007; Faems et
al., 2010) and stimulus for new product innova-
tion (Belderbos et al., 2004; Quintana-Garciá &
Benavides-Velasco, 2004; Ritala, 2012). These
benefits also result from engaged working rela-
tionships with research providers (Roos & Pike,
2011; Estep & Daim, 2013). Crespi et al. (2008)
found that vertical linkages and cooperation
within the business group account for 50 percent
of total factor productivity growth and Harris et
al. (2012) found that cooperation with universities
account for 16.3 percent of total factor productiv-
ity growth, hence it can be stated that firms that
have a higher level of cooperation are more likely
to innovate successfully with positive impact on
total factor productivity growth.
Knowledge creation is normally strongly in-
fluenced by particular location-specific factors in
the regional innovation system, combined with
social and cultural institutions and behaviours
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Manufacturing in a High Cost Environment

(Porter, 1998; Cantwell & Piscitello, 2002; Mal-
ecki, 2004; Thierstein et al. 2011; Theyel, 2012;
Lüthi et al., 2013).
EXOGENOUS DRIVERS OF
INNOVATION DYNAMICS
In periods of economic expansion, an innovation
based strategy is pursued primarily by well estab-
lished firms that can exploit strong appropriability
conditions and that have formal internal and con-
tracted R&D activities executed in collaboration
with both customers and suppliers (Archibugi et
al., 2013).This fits with the concept of creative
accumulation taking place in an environment
characterised by a technological regime with high
cumulativeness and low technological opportuni-
ties, with the resulting stability enabling the bulk
of innovation to be incremental in nature and to
be carried out by large and established firms,
resulting in a market with high entry barriers and
oligopolistic competition (Schumpeter, 1942).
A large share of the explanation for this rests
with the concept of path dependency (i.e. that the
present state is a function of the preceding state
and so on backwards in time). Path dependency
is driven by (Hannan & Freeman, 1984; David,
1985; David, 1988; Cohen & Levinthal, 1990;
Hodgson, 1993; Arthur, 1994; David, 1994; Car-
roll & Hannan, 1995; Crow & Bozeman, 1998;
Essletzbichler & Winther, 1999: Ronde, 2001;
Araujo & Harrison, 2002; Niosi, 2002; Booth,
2003; Fuchs & Shapira, 2005; Gertler, 2005;
Hassink, 2005; Meyer & Schubert, 2007; Martin
& Sunley, 2010; Golomzina, 2013):
• Barriers to changing the existing compe-
tence base due to behavioural inertia, ex-
isting language, etc.
• Contract based barriers to change due to
high cost, as well as performance uncer-
tainties of the “new offering” combined
with risk avoidance behaviour from the
buyer.
• Increasing returns to scale due to the first
entrant imposing their technology and
hence forcing later entrants to suffer from
the negative effect of economies of scale
and economies of learning.
• Network externalities due to the first en-
trant imposing their standard resulting in
exclusion of “better offerings” that are non
compliant with this standard.
• Success lock-in, meaning that what is a
successful strategy, business model and
resource system at one point in time may
well not be successful at a different point
in time, but past success has generated both
behavioural inertia as well as an inability
to see the reducing performance of the ex-
isting strategy, business model, resource
system combination.
• Sunk cost resulting from past investments
in equipment that generates technological
lock-in.
In periods of economic contraction, an in-
novation based strategy is pursued primarily by
smaller firms in cooperation with other firms
using methods aimed at exploring and exploiting
new technologies to capture new markets and op-
portunities (Archibugi et al., 2013). This fits with
the concept of creative destruction taking place in
an environment characterised by fierce competi-
tion, low cumulativeness and high technological
opportunities, leading to a situation with greater
dynamism in terms of technological ease of entry
and exit, providing a major role for entrepreneurs
(Schumpeter, 1911).
These same arguments for periods of economic
expansion and contraction can be made for periods
of technological stability with linear technologi-
cal development versus periods characterised by
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discontinuous non-linear technological develop-
ment (Wersching, 2010; Karvonen, 2011; Bonnyai,
2013; Golomzina, 2013).
PRODUCTIVITY DRIVERS IN HIGH
COST OPERATING ENVIRONMENTS
Total Factor Productivity (TFP) or Multifactor
Productivity (MFP) measures the changes in
output per unit of combined inputs. A change in
TFP (MFP) reflects the change in output that can-
not be accounted for by the change in combined
inputs and as a result, multifactor productivity
measures reflect the joint effects of numerous
factors e.g. new technologies, economies of scale,
managerial skill, changes in the organisation of
production, changes in capital services, changes in
labour services, changes in energy use, changes in
materials, changes in purchased services, etc. TFP
(MFP) is often seen as the real driver of growth
within an economy:
• The biggest factor in increasing economic
growth and raising living standards over
time is the economy’s ability to produce
more out of less, also known as productiv-
ity (Fox, 2002).
• Productivity isn’t everything, but in the
long run it is almost everything. A coun-
try’s ability to improve its standard of liv-
ing over time depends almost entirely on
its ability to raise its output per worker
(Krugman, 1990)
So what drives productivity on the firm level?
In an excellent article Syverson (2011) has identi-
fied the following drivers:
• Managerial competence and capability to-
gether with managerial practices (Walker,
1887; Mundlak, 1961; Shashua et al. 1976;
Mefford, 1986; Bertrand & Schoar, 2003;
Alvarez et al. 2004; Cosh et al., 2005;
Yukl, 2008; Bushnell & Wolfram, 2009;
Baranchuk et al., 2011; Lazear et al., 2012;
Balsmeier & Czarnitzki, 2013; Lin et al.,
2013; Yonker, 2013). The seminal stud-
ies by Bloom et al. (Bloom & van Reenen,
2007; Bloom et al., 2010; Bloom & van
Reenen, 2010; Bloom & van Reenen,
2011; Bloom et al., 2012a; Bloom et al.,
2012c; Bloom et al., 2012b; Bloom et al.,
2013a; Bloom et al., 2013b) find a statis-
tically strong correlation between a firm’s
management practice score (see Figure 1)
and the firm’s TFP (MFP) with an eco-
nomic impact that expressed in numbers
means if you move between quartiles of
management practice score, the produc-
tivity impact varies between 3.3 percent
and 7.5 percent which equals to between
a third and a quarter of the corresponding
TFP (MFP). Bloom et al. (2013b) estimate
that management could account for on av-
erage 29 percent of a country’s TFP (MFP)
deficit.
The research by Bloom et al. also shows that
there are two primary factors that are strongly
correlated with management practice: The first
is competitive intensity where higher intensity
is positively correlated with high management
practice score; the second is when family firms
(which in themselves as an ownership structure are
positively correlated with management practice)
have installed the first son as a manager – which is
negatively correlated with management practice.
• An interesting subset of the managerial
practices discussion relates to high-per-
formance work systems. These systems
are not clearly defined (some critique
around one-sided reporting favouring posi-
tive outcomes (Godard, 2004) as well as
validity of claimed causalities has been
voiced (Gerhart, 2012; Tregaskis et al.,
2013)) but different studies have identified
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397
Manufacturing in a High Cost Environment

the key components of such systems and
they have been summarised by Gibbons &
Henderson (2012) and shown in Table 1.
The findings from the studies seem to indicate
that it is the complete bundle of practices that
increases performance rather than the individual
practices (Gritti & Leoni, 2012). It also should
be noted that while some high-performance
work systems in some contexts do contribute to
enhanced performance; not all high-performance
work systems in all contexts contribute to the de-
sired outcomes (Boxall, 2012; Jiang, et al., 2012).
The identified productivity difference between
using the complete bundle and using none of the
identified practices seems to be in the range of 6
-7 percent. Another interesting finding is that the
productivity benefits and the improvement of these
benefits only accrue slowly – less than 10 percent
improvement annually. Gibbons & Henderson
(2012) point out that significant management
practices require both managers and employees to
act in ways that cannot be fully specified ex ante
or verified ex post, so organisations must rely on
relational contracts to implement these practices,
which can explain the slow diffusion speed since
three barriers may be encountered: firstly, the
relational contracts operated by high performing
firms may be unfeasible or prohibitively costly
for underperformers to implement (Gibbons &
Henderson, 2012, p. 61); secondly, the sequence of
events during a relationship can produce measured
performance differences among ex ante identical
enterprises: achieving perfunctory cooperation can
make it harder to achieve consummate coopera-
tion; cooperation, once built, can be fragile; and
cooperation may be difficult to build in the first
place (Gibbons & Henderson, 2012, p. 61-62);
thirdly, difficulty in communicating the extensive
task and relational information that underlies
Figure 1. Management practice scores by country (Averages taken across all firms within each country)
(Bloom et al., 2013b, p. 73.)
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398
Manufacturing in a High Cost Environment

many relational contracts may also play a role in
making it difficult to build unfamiliar relational
contracts (Gibbons & Henderson, 2012, p. 62).
This explanation is probably more important than
other explanations put forward in the literature
(Gibbons & Henderson, 2012):
• Incumbent managers may not know that
they are operating with a sub-standard
performance (Henderson & Clark, 1990;
Christensen, 1997; Tripsas & Gavetti, 2000;
Ambrosini & Bowman, 2010; Kaplan, 2011).
• Incumbent managers may know that they
operate at a sub-standard performance but
do not know what to do about it (Nelson,
1982; Winter, 1988; Winter, 1998; Almeida
& Kogut, 1999; Anand & Khanna, 2000;
Gant et al., 2002; Zollo & Winter, 2002;
Lacetera et al., 2004; Winter, 2006; Breschi
& Lissoni, 2009).
• Incumbent managers may know that they
operate at a sub-standard performance and
do know what to do about it but have no
(or negative) incentive to take action and
adopt new practices (Reinganum, 1989;
Bloom & van Reenen, 2007; Bresnahan et
al., 2011).
• Incumbent managers may know that they
operate at a sub-standard performance
but do not know what to do about it and
they are striving to take actions to improve
performance but cannot get the surround-
ing organisation to implement the neces-
sary and identified actions to achieve the
higher performance (Milgrom & Roberts,
1990; Milgrom & Roberts, 1995; Pil &
MacDuffie, 1996; Rivkin, 2000; Bresnahan
et al., 2002; Rivkin & Siggelkow, 2003;
Siggelkow & Rivkin, 2005)
• Higher-Quality General Labour and
Capital Inputs. On the labour side, qual-
ity of labour is impacted by e.g. educa-
tion, training, overall experience, ten-
ure, etc. (Amabile et al, 1996; Maliranta,
2003; Ilmakunnas et al., 2004; Shalley et
al., 2004; Schneider et al., 2007; Jones et
al., 2010; Chen et al., 2011; Naoki, 2011;
Spiegelaere et al., 2013; Parrotta et al.,
2014). On the capital input side, Sakellaris
& Wilson (2004) estimate that the annual
capital efficiency growth due to capital-em-
bodied technological progress is between 8
percent and 17 percent whilst Cummins &
Violante (2002) arrive at 5 percent. This
exemplifies how important continued in-
vestment in the latest capital equipment is
for increasing productivity.
• The importance of Key Enabling Technolo-
gies3 for productivity has been identified since
the beginning of this century, starting with the
productivity impact of ICT (Brynjolfsson et
al., 2008; Bartelsman et al., 2010; Faggio et
al., 2010). See chapter 1 table 2 for a more de-
tailed discussion of the KETs.
• R&D capital formation, primarily driven
by the pace not the intensity of R&D in-
vestment, is an important contributor to
productivity growth in manufacturing
firms (see table 2) by facilitating techno-
logical progress as well as catch up with
industry leaders (Lee & Kim, 2006).
This impact on productivity is further strength-
ened by the spill-over effects in the form of inter-
firm and inter-industry innovations (Mansfield
et al., 1977; Hall & Mairesse, 1995; Verspagen,
1995; Yanbing, 2006; Griliches, 2007; Sveikaus-
kas, 2007; Heshmati & Kim, 2011; Higón et al.,
2011; Ortega-Argilés et al., 2011; Doraszelski &
Jaumandreu, 2013).
Innovation is a core driver of both firm (Cuc-
culelli, 2013) and industry productivity and this is
well recognised also among managers (Crossan &
Apaydin, 2010). On the industry scale, aggregate
productivity comes from the market reallocating
inputs to successfully innovating firms from non-
innovating or unsuccessfully innovating firms that
hence fall behind the performance frontier, or from
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Manufacturing in a High Cost Environment

failing firms. Lentz & Mortensen (2008) found
that this reallocation made up 75percent of the
aggregate productivity growth in Denmark. Ber-
nard et al. (2006) found that productivity growth
accompanies expansion of the variety of products
a firm offers. Cucculelli & Ermini (2012) found
that the release of a new product enhances growth
opportunity among multiproduct firms (which
fits with the empirical finding from Kawakami
& Miyagawa, 2013), that multiple-product firms
perform better than single-product firms and that
their labour productivity growth rates are higher.
It also fits with the findings of Lelarge & Nefussi
(2008) who found that increasing competition from
low cost operating countries drives innovation in
forms aimed at broadening or renewing the prod-
uct portfolio and that more productive firms are
more successful in doing this and hence achieve
higher survival rates. Further, they found that
product development promotes the growth of firms
belonging to sectors with stronger commitment
to research and development, by allowing them
to better exploit the benefits from their “learning
by innovating,” and also that new product devel-
opment enhances firm growth substantially in
those sectors which absorb externally-originated
patents4. Buckley & Chatterjee (2012) found in
their study of 1600 businesses that strong busi-
ness practices and effective management were
as important as the more traditional drivers of
product innovation in Australian SME’s, whereas
financial performance was found to have no posi-
tive influence on innovation.
Learning by Doing, Using and Interacting.
Improvements can be achieved by learning what
works without needing to know why it works.
These improvements can be made due to the skill
and knowledge acquired by employees on the
job as they face and solve unforeseen problems.
Depending on the type of problem faced and
solved, the acquired skill and knowledge may be
specific or generic, and if generic it may be pos-
sible to codify it and turn it into an organisational
resource that is available organisation wide. If
the problem is complex, it may involve teams
rather than individuals and may also involve
inter-personal interactions between individuals
both within and between teams. This is a mode
of learning that requires hands-on acquisition of
know-what frequently combined with know-who.
Organisations can purposefully foster this type of
learning through building conducive practices,
structures, processes and relationships (both inside
and outside the organisation) like e.g. apprentice-
ship structures, project teams, problem-solving
groups, job and task rotation, etc. (Lundvall &
Nielsen, 1999; Laursen & Foss, 2003; Lorenz et
al., 2004; Lorenz & Valeyre, 2005; Jensen et al.,
2007 ; Schienstock et al., 2009; Pankhurst, 2010;
Rasmussen & Nielsen, 2011; Høyrup, 2012;
Spiegelaere et al., 2012; Egelman et al., 2013).
There are two processes going on simultaneously,
the first is the accumulation of learning in the or-
ganisation, where Thornton & Thompson (2001)
identified that past experience with the specific
product design was the largest source of learn-
ing, followed by in declining order (in percent of
the learning from the specific product design):
past experience with other product designs at 60
percent and lastly cross-firm spillover learning
at 5-10 percent. The second is loss of learning
in the organisation (driven by e.g. lack of use
of accumulated knowledge, employee turnover,
change in the production process, the production
system, the production equipment, change in
the product produced, change in organisational
structures, etc.), and Benkard (1999) estimated
the annual loss of the cumulated learning to 40
percent in the aircraft industry (see also de Holan
& Phillips, 2004; Rao & Argote, 2006; Fernandez
& Sune, 2009; Besanko et al., 2010; Brachet &
David, 2011; Kleiner et al., 2012; Argote, 2013;
López & Sune, 2013). The net effect of these
two processes is normally observed and named
Experience Curve, Learning Curve or Progress
Function (Adler & Clark, 1991) which states
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in simplified form that the unit cost declines
proportionate to the logarithm of the cumulative
volume as long as there is no change in any of the
variables mentioned above.
Firm Structure in combination with the indus-
try structure and ecosystem in which it operates
as well as the firm’s absolute and relative size
will impact the firm’s productivity. Hortaçsu &
Syverson (2009) and Atalay et al. (2012) in their
study of establishments in the US found that verti-
cally integrated plants have higher productivity
levels, but that most of this difference is due to
high-productivity plants being part of vertical
structures rather than being a function of causal
impact of integration on productivity. Further, the
empirical evidence suggests that rather than mod-
erating goods transfers along production chains,
integration instead allows more efficient transfers
of intangible inputs (e.g., managerial oversight)
within the firm and this latter point fits with the
findings of Ramondo et al. (2011) that the com-
parative advantage of multinational corporations
is their ability to transfer intangible—rather than
physical—inputs along vertically linked produc-
tion units. One of the explanations of firm diver-
sification can be found in the results of a study
by Zhou (2011) which found that a firm is more
likely to diversify into a new business when its
existing business lines can potentially share more
inputs with the new business; however, the firm is
less likely to diversify into any new business when
its existing business lines are complex. The study
also found that the likelihood of diversifying into a
new business decreases more with the complexity
in the firm’s existing business lines if they share
more inputs with the new business, which suggests
that increasing coordination costs counterbalance
the potential synergistic benefits associated with
related diversification. Schoar (2002) shows that
conglomerates have, if anything, higher produc-
tivity and claims that the financial diversification
discount arises out of the temporary adjustment
costs resulting from the very act of diversifying
into new businesses; and that the acquired busi-
ness will initially experience productivity growth
whereas existing plants experience productivity
loss; generating an initial net productivity loss for
the conglomerate as a whole This would explain
results like those which showed that the degree of
vertical integration consistently has a negative and
statistically significant impact on firm productiv-
ity. Ševčík (2010) found in his study of Canadian
firms that small plants in conglomerates are less
productive than plants in single-segment firms
of similar size, but large plants in conglomerates
are more productive than those of similar size in
single-segment firms. Zaninotto & Pieri,(2011)
in their study of the Italian machine tool industry
found that more efficient firms exploit their ef-
ficiency advantage to control a greater part of the
production chain, possibly benefiting from greater
coordination among different phases and tailored
intermediate inputs, whereas poor performers
outsource instead and this fits with the theoretical
findings of Fossati (2011).
Productivity Spillovers exist in both the
technological domain and the business practice
domain and are impacted by location, product,
process, technology and position in eco system
relatedness, meaning the closer in terms of both
distance and technological relatedness, the larger
the spillover effect. These spillover effects oper-
ate through various mechanisms, all of which
experience some level of friction to diffusion and
replication. The benefits of being parts of clus-
ters, as one operationalisation of agglomeration
economics, has been estimated by Roos (2013b)
based on data from Sölvell & Williams (2013)
to be 14 percentage points higher value added
growth, seven percentage points higher profit-
ability growth and two percentage points higher
wages per employee (a proxy for productivity).
The success of clusters depend on many different
factors including but not limited to industry, tech-
nology level, openness to exchange between par-
ticipants, international linkages, labour exchange,
etc. Successful clusters enable local firms that are
part of the cluster to be embedded simultaneously
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401
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in knowledge exchanges at different geographic
scales. It is interesting to note that manufacturing
firms represent the largest users of knowledge from
most sources and that advanced manufacturers are
around twice as likely to cooperate internation-
ally with all types of partners relative to average
manufactures (Bascavusoglu-Moreau & Li, 2013).
Competition drives productivity through Dar-
winian selection among producers with heteroge-
neous productivity levels by rewarding the more
efficient producers and penalising the less efficient
producers, sometimes to the point of forcing their
exit. A secondary outcome of this also raises the
productivity bar for potential entrants. Competi-
tion also drives productivity through encouraging
firms to take costly productivity-increasing actions
that otherwise may not have been taken, unless
the market size is limited when the effect may be
the opposite (Vives, 2008).
Deregulation or Smarter Regulation can
drive productivity improvements. Deregulation
through the mechanisms identified above. Smarter
regulations by imposing productivity reducing
regulations on the firm that force it to innovate
in order to re-establish its previous productivity
level, a level required to remain competitive with
jurisdictions that do not have these productiv-
ity reducing regulations. This, when the firm
is successful, establishes a basis for a superior
competitive position that can be realised once the
productivity reducing regulations are imposed
in jurisdictions from which competitors operate.
This fits with the findings of Blind et al. (2004)
that e.g. environmental regulations have a short
term negative but a long term positive impact on
innovation. Regulation can be a powerful tool to
drive innovation within specific sectors (e.g. con-
struction) and technologies (e.g. green technolo-
gies) (Roos, 2011a) as can be seen in studies like
Averch & Johnson (1962); Zajac (1970); Cotton &
Clairman (1995); Blind et al. (2004); Walz et al.
(2008); González (2009); Walz et al. (2011); Blind
(2012). Blind (2012) finds a positive impact of
product and service legislation deterring business
activities in general, and environmental laws and
compliance hindering competitiveness in particu-
lar, which again fits with the statement above but
requires a clear distinction between short-term and
long-term impact of regulation that deters business
activities like e.g. environmental regulation. The
above discussion is closely interlinked with the
discussion around lead markets i.e. the jurisdiction
in which a globally successful innovation takes
off (Beise, 2004).This is because lead markets
provide the opportunity for first mover advantage,
which if successful, provides these countries and
their firms with a good opportunity to dominate
international competition due to their early pres-
ence in this field (Porter & Van der Linde, 2005).
A country’s potential to become a lead market is
determined by (Walz et al., 2011):
• The characteristics of the technology for
which a lead market is sought. This tech-
nology should have the following charac-
teristics in order to form a barrier to inter-
national relocation:
◦ Provide opportunities for niche mar-
kets where value for money is more
important than cost.
◦ High innovation dynamics.
◦ High potential learning effects of the
technology.
• The demand conditions in the country
should have the following characteristics:
◦ Presence of lead users, which are in-
terested in novel approaches and will-
ing to accept higher prices.
◦ Openness to new innovations and
new technologies.
◦ Supportive of user-producer
interactions.
◦ High levels of competition, along
with the presence of competitors of-
fering alternative solutions grounded
in different technologies.
◦ Strong domestic players in the field of
the technology and strong domestic
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Manufacturing in a High Cost Environment

suppliers or in summary a strong do-
mestic industrial commons and high
economic complexity.
◦ A high technological reputation.
◦ Preferences similar to that of the world
market but with a time advantage.
◦ Open to the world.
• Innovation-friendly regulation in the
country should have the following
characteristics:
◦ National regulation should set the
standard for the regulatory regime,
which other countries are likely to
adopt.
◦ Regulation should lead to a correc-
tion of market failures which origi-
nate in environmental externalities
and monopolistic bottlenecks.
◦ National regulation should not lead to
an idiosyncratic innovation.
◦ Regulation should be open to di-
verse technical solutions, which in-
crease the chance that the solution
fits into the preferences of importing
countries.
• The technological capability of the country
should have the following characteristics:
◦ The ability of a country to utilise a
lead market for a first-mover advan-
tage also depends on its comparative
technological capability. Path depen-
dency means that if a country has a
comparatively high knowledge base,
it also has an additional advantage
in developing and marketing future
technologies.
◦ High R&D spending as share of GDP
and a high share of this being R&D
spending by business.
◦ High patenting rate per capita.
• The competitiveness of related industry
clusters in the country should have the fol-
lowing characteristics:
◦ Innovation and economic success
depend on how a specific technol-
ogy is embedded into other relevant
industry clusters. Learning effects,
expectations of the users of the tech-
nology and knowledge spillovers
are more easily realised if the flow
of (tacit) knowledge is facilitated by
proximity and a common knowledge
of language and institutions. The in-
ternational competitiveness of sectors
and technologies is greatly influenced
by the competitiveness of interlinked
sectors. This boils down to a require-
ment for a broad and deep industrial
commons or in other words a very
high economic complexity.
Flexible Input Markets are facilitated if insti-
tutions improve match efficiency, solve asym-
metric information problems, or otherwise serve
efficiency-enhancing roles. If they on the other
hand facilitate rent-seeking behaviour, they reduce
flexibility. Petrin & Sivadasan (2013) found that
regulatory change that increased the cost of em-
ployee termination was associated with reduced
allocative efficiency.
Demand plays a role for productivity since it
can generate e.g. innovations in situations where
a customer demands solutions and performance
that does not presently exist in the market. This
has been illustrated by e.g. Eliasson (2010) in
a study where he illustrated that if the spillover
value is divided by the development investment,
a spillover multiplier of at least 2.6 was arrived
at in the Swedish Griffin Fighter project where
the government created a market by demanding
something that could not be delivered using the
knowledge then available, but required substantial
research and development efforts. This identi-
fied spillover effects related to core technolo-
gies, related technologies, general engineering
technologies, general industrial technologies
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403
Manufacturing in a High Cost Environment

contributing to the industrial commons and
the economic complexity, and development of
localised industrial competence blocs with ag-
glomeration economic benefits. Eliasson (2010)
concludes that public procurement of sophisti-
cated public goods and services is an effective
form of innovation policy.
Thomas et al. (2012) has identified nine de-
velopmental areas for UK manufacturing which
could be improved by identifying and continuously
implementing the latest best practice approaches
as summarised in Table 3.
To summarise the findings from this discussion
as it relates to actions that firms and government
can take, see the Table 4 (all such tables are per
definition incomplete):
FIRM RESPONSE IN HIGH COST
OPERATING ENVIRONMENTS
The above findings fit well with the insights from
both the general findings by Ridgway et al. (2013)
(summarised in Figure 2) and from successful medium
sized firms in Northern and Germanic Europe (i.e.
Germany, Switzerland, Austria, Netherlands, Sweden,
Denmark, Finland and Norway) which are outlined
in Table 5 and some of the key aspects in this table
will be discussed in more detail below.
Absorptive Capacity
As outlined in the table below, these firms must
have high absorptive capacity to pursue this
Figure 2. Characteristics of the factory of the future (Ridgway et al. 2013, Figure 10, p. 33)
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Manufacturing in a High Cost Environment

strategy/business model combination. A firm’s
absorptive capacity is made up of a set of rou-
tines and processes, by which the firm acquires,
assimilates, transforms and exploits knowledge
to produce a dynamic capability that underpins
a competitive advantage (Mowery et al., 1996;
Dyer & Singh, 1998; Koza & Lewin, 1998; Zahra
& George, 2002; Lane et al., 2006; Flatten et al.,
2011; Kamal, 2013). These routines and processes
are of course complemented with capable and
competent individuals (Massini, 2010) and a
wide spectrum of high quality relationships i.e.
an effective resource system well deployed (Roos
et al., 2012).The definitions of the components
are (Zahra & George, 2002):
• Acquisition: Is about identifying and ac-
quiring externally generated knowledge
that is critical to the firm’s operation. This
means the ability to identify what is rel-
evant in all the information that surrounds
the firm and then finding ways to bring
this information into the firm. The suc-
cess in this domain is achieved by the di-
versity and relevance of the firm’s existing
knowledge base (Rocha, 1999) enabling it
to know where to look for external infor-
mation as well as enabling it to understand
and evaluate the information and in that
process, assimilate it (Cohen & Levinthal,
1990; March, 1991; Levinthal & March,
1993; Szulanski, 1996; Kamien & Zang;
2000; Lane et al., 2006; Leahy & Near,
2007; Camisón & Forés, 2010).
• Assimilation: Is about the processes that
enable the analysing of information, in-
terpretation of information, adaptation of
information, as well as adding to or sub-
tracting from the acquired information
(Szulanski, 1996; Kim, 1997; Lane et al.,
2006; Todorova & Durisin, 2007; Ben-
Menahem et al., 2012; Perez-Arostegui et
al., 2013). These processes are influenced
by a firm’s tacit, firm-specific knowledge
regarding its established systems for pro-
cessing information (Cohen & Levinthal,
1990; Van Den Bosch, 1999; Lane et al.,
2006; Sedoglavich, 2008) and are facilitat-
ed by close similarity between the informa-
tion provider and the information receiver
in terms of knowledge base, culture, lan-
guage and cognitive structures, skills and
on the organisational level similar strategy
and business model (Cyert & March, 1963;
Bierly & Chakrabarti, 1996; Barkema
& Vermeulen, 1998; Lane & Lubatkin,
1998; Simonin, 1999; Ahuja & Katila,
2001; Rosenkopf & Nerkar, 2001 Bhagat
et al., 2002; Lane et al., 2006; Yeoh, 2009;
Jensen, 2010; Baumann & Rundahl, 2013).
These processes are made more difficult
the higher the tacitness and complexity of
the information (Reed & DeFillippi, 1990;
Kogut & Zander, 1992; Garud & Nayyar,
1994; Nonaka, 1994; Szulanski, 1996;
Lam, 1997; Saviotti, 1998; Simonin, 1999).
• Transformation: Is the ability to take
what has been assimilated and make it
usable (i.e. possible to assimilate) to the
relevant parts of the organisation (Zahra
& George, 2002; van Wijk et al., 2008).
Transformation and assimilation are not
distinct concepts and depending on defi-
nition, one can replace other (see e.g. de
Man, 2008)
• Exploitation: Is about the conversation
from information via knowledge to a com-
petitive advantage for the firm (Koestler,
1964; Cohen & Levinthal, 1990; Ireland
et al., 2003; Daghfous, 2004; Bogner &
Bansal, 2007; Lumpkin & Katz, 2007;
Alegre & Chiva, 2008; Straßburger, 2008;
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405
Manufacturing in a High Cost Environment

Pollard & Svarcova, 2009; Liu et al., 2011;
Arts, 2012; Gong et al., 2013; Marcone,
2013).
Firms in high cost operating environments
must have a high absorptive capacity underpinning
their innovation activities and hence building and
maintaining this capacity is a critical managerial
responsibility. Li (2010) found that absorptive
capacity accrues not passively but rather auto-
matically from day-to-day interaction, and must
be continuously and purposefully developed. Li
(2010) also found that if leakage risks increased,
so did the focus on enhancing the absorptive ca-
pacity and further, that if there is close operational
integration with a partner (customer, cooperating
firm, etc.), the exploitation component becomes
more effective and also that in a partner relation-
ship, both parties need to learn at the same pace
to ensure development of the absorptive capacity.
These findings are outlined in Figure 3:
Bascavusoglu-Moreau & Li (2013) found that
manufacturing firms appear to have the highest
absorptive capacity for general external knowledge
(the principal type of absorptive capacity) and also
a noticeable advantage in its absorptive capacity for
national and international cooperation, and busi-
ness strategy and practice. The second sector that
stood out in the study was Knowledge-Intensive
Services (KIS) which dominates in its absorptive
capacity for business strategy and practice, na-
tional and international cooperation and is second
only to manufacturing in its principal capacity for
general external knowledge.
Firms normally ensure assistance from Public
Research Organisations (sometimes known as
Research and Technology Organisations) and
universities in developing and enhancing their
Figure 3. Summary of drivers of absorptive capacity and effective exploitation (i.e. solution innovative-
ness) (Average value of responses from customer and focal firms) (Li, 2010, p. 98)
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406
Manufacturing in a High Cost Environment

absorptive capacity. Spithoven et al. (2011) identi-
fied the following roles as provided by the PROs/
RTOs (in descending order of frequency of use):
• R&D laboratory for use of company.
• Technology advisory services.
• Technology innovation stimulation.
• Information on Public R&D programmes.
• Access to technical library.
• Provision of qualified personnel.
• Sales of equipment.
• Right to use inventions (licences).
• Provision of advice to external parties ac-
tive within the sector.
• Provision of advice to external parties,
firms active outside the sector.
• Provision of advice to external parties, oth-
er organisations (universities, PROs).
This is part of having a large number of high
quality sets of relationships which, together with
a high internal R&D capability, is one of the pre-
requisites for building a high absorptive capacity.
Lim (2009) identified the following three types of
absorptive capacity with key enablers (Table 6).
Experienced, Educated, and
Entrepreneurial Leadership
with Ambitious Goals
Management capacity matters as shown in the
different studies by Bloom et al. (2007) and Green
et al. (2009). The studies show that a 17 percent
improvement in management practice score is
associated with the same increase in output as
a 25 percent increase in the labour force or a 65
percent increase in working capital. The literature,
as reported in Jarzabkowski et al. (2013) finds that
management education has a general impact on the
development of managers’ skills and competencies
(Ishida, 1997; Kretovics, 1999; Baruch & Peiperl,
2000; Cheng, 2000; Priem & Rosenstein, 2000;
Sturges et al., 2003; Simpson et al., 2005; Wren
et al., 2007; Hay & Hodgkinson, 2008; Hall et
al, 2013b). Jarzabkowski et al. (2013) finds that
formal management education does provide a
basis for improving the use of management tools
and techniques but that the effect depends on
individual characteristics, so that formal business
education, exposure to and frequency of manage-
ment training, higher specificity of the training,
seniority of corporate position, the relevance of
the tools and techniques to the area of responsi-
bility has a positive correlation, whereas age has
a negative correlation. Lin et al. (2013) find that
firms whose owners received higher education had
5.2–5.8 percentage points higher return on equity,
115–126 percentage points higher profits, and
102–111 percentage points higher sales revenue,
respectively, than firms that did not have higher
educated entrepreneurs.
Croce et al. (2013) find that highly educated
employers have a greater propensity to invest in
workplace training and also that close proximity
between competing firms can lead to either a
lower propensity to train workers due to the risk
of poaching or a greater propensity to engage in
training due to a positive knowledge spillover
effect. Which of these two effects will dominate
is a function of cultural traits where the second
dominate in northern and Germanic Europe and
the first in latin Europe. Sung & Choi (2013)
found that internal staff training is a precursor for
improved innovative performance which aligns
with the findings of Kim & Ployhart (2013) that
staff training drives firm productivity and growth
and the findings of Aragon & Valle (2013) that
shows that firms that train their managers with
high frequency achieve better efficiency and
performance than those that train their managers
with lower frequency or not at all.
The above findings validate the importance
of life-long training of both managerial staff and
the workforce in general. This need is going to
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407
Manufacturing in a High Cost Environment

increase as technology developments continue to
accelerate and as product life cycles continue to
shorten into the future.
Knowledgeable, Loyal Low-
Turnover Employees
In addition to the discussion above, Kwon &
Rupp (2013) find that the negative impact of
high-performer turnover on firm performance
will be strongest for reputable firms and for firms
who invest less in human capital (e.g. selection,
training, and incentive-based pay) which aligns
with the more general findings of Osterman
(1987), Alexander et al. (1994), Huselid (1995),
Batt(2002) and Yanadori (2007) that there exists
a negative relationship between turnover and
firm performance; and the findings of Dess &
Show (2001), Cross & Cummings (2004), Shaw
et al. (2005) and Burt (2009) that high-performer
turnover negatively influences firm performance
because it results in more social capital loss
compared with overall turnover since high per-
forming employees hold more ties and have more
network centrality. This complements the view of
performance and that high performers’ turnover
is dysfunctional for firm performance but low
performers’ turnover in fact can be functional
for firm performance (Dalton et al., 1982) since
it allows firms to upgrade their human capital
pool by replacing lower performers with more
qualified people from the outside.
The conclusion is that firms should develop
high performers and then maintain them in the
firm with continuous capability development,
whilst speedily letting go low performers whose
skills cannot be developed. This is going to be-
come even more important given the increasing
requirements posed by accelerating knowledge
development in the domains underpinning the
firm’s activities, combined with shorter and shorter
product life cycles.
High Performing Product-Service-
System Offerings Anchored in
Customer and Consumer Insight
These firms have an offering portfolio made up
of interconnected products and services that pro-
vide the highest possible value for money. This
means that they have a superior insight into the
customers and the customers’ customers’ value
perspective.
This requires an understanding of the three
components of value (Pike & Roos, 2004):
• Instrumental: The value derived from the
deployment and use of the offering. This
is the value component that is most com-
monly focussed on to the exclusion of the
other two. In its simplest form this compo-
nent can be expressed easily in direct mon-
etary terms.
• Intrinsic: The value derived from the pos-
session of the offering. This is the value
that a coin collector assigns to his coins or
the value we assign to things for what they
are in themselves, like aesthetics or knowl-
edge. This is the reason why you might be
willing to pay for features in a product that
you will never use – it feels good to have
them.
• Extrinsic: The value derived from the ap-
preciation of the offering by others. This is
most easily visible in goods that are sold as
“show-off” goods (see e.g. Veblen, 1899)
e.g. the brand suit with the brand label still
kept visible on the sleeve when worn.
In order to maximise the value for money
from the customers’ perspective, all these value
dimensions need to be taken into account (for
some case examples see e.g. Fletcher et al., 2003;
Pike & Roos, 2006; Rødseth et al., 2007; Garnett
et al., 2008; Millar et al., 2010; Roos et al., 2012).
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Manufacturing in a High Cost Environment

These products then need to incorporate the
outcomes of four domains: The Science and
Technology Domain; The Design Domain; The
Art Domain; The Domain of Understanding
Emotional States. When innovation is done using
all of these with the intent to contribute both to
value creation and value appropriation we call
it integrated innovation and it will be discussed
further below.
There are two primary forces that drive manu-
facturing firms to include services in their offer-
ings. The first is discussed above and relates to
increasing the value for money from the customer’s
perspective when a product-service combination is
offered instead of a stand-alone product offering.
The second relates to the migration of the manu-
facturing value adding potential from production
activities to pre- and post-production activities as
shown in Figure 4:
As can be seen from the above curve and the
fact that the trend identified in the curve will
continue to strengthen, firms must extend their
activities into the pre- and post-production phase
of manufacturing as well as increasing these ac-
tivities in order to stabilise or increase the total
value creating potential.
This above development is further strength-
ened by the increasing move to digital space of
activities presently executed in physical space
as outlined in Figure 5, and increases the pres-
sure on manufacturing firms to servitize5 (some
examples of this move to digital space are given
in e.g. Ludwig & Spiegel, 2014)
From this follows that in addition to servitiz-
ing to compensate for the reduction in the value
adding potential of production activities, firms
will have to create service monopolies generated
by product attributes that lock competing service
Figure 4. The shift in value-adding over time across the key value chain steps (Veugelers, 2013, p.27
after original concept by Shih, 1992)
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409
Manufacturing in a High Cost Environment

providers out as well as by continuously innovating
also in the domain of services which will enable
temporary competitive advantages resulting in
higher economic rent. This means that the firm
will compete on value for money in a market
where it ideally is the only service provider able
to provide services associated with a given product
that it manufactures, hence becoming the highest
value for money provider of the complete product-
service-system offering in competition with other
providers of competing product-service-system
offerings or several cooperating or independent
providers of products and services (Roos, 2014b).
Roos (2014b) summarises the work by Lewis,
1942; Levitt, 1983; Coyne, 1989; Reichheld &
Sasser, 1990; Knecht et al., 1993; Anderson&
Narus, 1995; Kalwani & Narayandas, 1995; Reich-
held, 1996; Frambach et al., 1997; Desmet etal.,
1998; van Looy, et al., 1998; Goffin, 1999; Wise
& Baumgartner, 1999; Reichheld, 2001; Goffin
& New, 2001; Mathieu, 2001; Nambisan, 2001;
Munos, 2002; Davies, 2003; Homburg et al., 2003;
Krishnamurthy et al., 2003; Oliva & Kallenberg,
2003; Henkel et al., 2004; Kalliokoski et al.,
2004; Mont, 2004; Sawhney et al., 2004; Vargo
& Lusch, 2004; Windahl et al., 2004; Brax, 2005;
Gebauer et al., 2005; Gebauer & Friedli, 2005;
Slack, 2005a; Slack, 2005b; Ward & Graves, 2005;
Malleret, 2006; Breunig et al., 2007; Gebauer &
Fleisch, 2007; Kim et al., 2007; Matthyssens &
Vandenbempt, 2008; Neely, 2008; Reinartz &
Ulaga, 2008; Baines et al., 2009a; Bains et al.,
2009b; Brax & Jonsson, 2009; Brege et al., 2009;
Schmenner, 2009; Kindström & Kowalkowski,
2009; Aurich et al., 2010; Slepniov et al., 2010a;
Slepniov et al., 2010b; Isaksson et al., 2011, and
Neely, 2013, into the most common tactical reasons
and desired outcomes as relates to servitization
as shown in Table 7.
A push towards servitization cannot be of lim-
ited scope since Fang et al. (2008) have found that
servitization strategies typically require building
Figure 5. The increased digitalisation in the manufacturing activities (Roos, 2014a)
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410
Manufacturing in a High Cost Environment

a critical mass in sales, estimated to be 20 – 30
percent, before they can expect positive effects
on firm value and that smaller outcomes than that
may in fact have a negative impact both on firm
value and firm performance. Fang et al. (2008)
also concludes that managers should focus their
service initiatives on closely related businesses as
much as possible to enhance synergistic spillover
benefits and this fits with the above statement
around achieving a monopolistic position as a
provider of services linked to products manufac-
tured by the firm.
Implementing servitization is challenging and
in order to succeed servitization must be seen
as a business model innovation not an offering
innovation, and as such it requires interlinked
changes in many dimensions. The dimensions,
and the resulting business model, will be a com-
bination of the dimensions outlined by Salkari et
al. (2007) in their business-to-business service
business model and the dimensions outlined
by Roos (2013a) for a manufacturing business
model as seen in Table 8. This need to combine
the service and manufacturing business model is
aligned with the findings of Visnjic & Van Looy
(2013) in their study of a large durable industrial
equipment manufacturer that has been actively
pursuing a servitization strategy over the last
decade. They found that these manufacturers
enact complementarities between products and
services by relying on an “integrated service busi-
ness model‟, characterised by offering a variety
of services related to the product activities of the
firm. This ensures the effective deployment of a
service business, but service activities also act as
a driver of the product business. This reciprocal
relationship between service and product activities
is achieved in spite of the inherent substitution-
type relationship that characterises products and
related service offerings since successful service
provisioning frequently leads to an extension of
the in-use product life cycle (of existing products)
and limits the potential sales of replacement
products. Here, paradoxically, service-product
relatedness leads to product cannibalisation if it
was not for the managerial practices that ensure
service-to-product complementarity (Visnjic &
Van Looy, 2013).
The variety of service offerings that are
possible across the complete set of activities,
pre-production/production/post-production, are il-
lustrated by Ren (2009) in his synthesis (Figure 6).
The driving force to extend the manufacturing
firm’s offering to include services can be expressed
as a move from an incomplete offering in a product-
focused transaction-based customer relationship to
a complete offering (i.e. the bundling of products
and services to better meet defined customer needs)
in a relational-based customer relationship (Tellis
& Stremersch, 2002; Penttinen & Palmer, 2007,
Kowalkowski et al., 2009).
The conclusion from this section is that the firm
must develop an offering that combines products
and services, where the total bundle provides
the highest value for money from the customer’s
perspective and where the services that are part
of the bundle can only be supplied by the firm
due to their unique coupling with the product and
where the products can only be produced by the
firm due to unique features built into the product
or unique attributes of the production process.
A Focused Niche Strategy &
Deep In-House Knowledge in the
Underpinning Knowledge Domains
The relationship between characteristics of strat-
egy and firm performance has been studied for a
long time. When looking at high cost countries
the studies tend to agree that a focus on innova-
tion grounded in market insight and with a market
focus tend to outperform other strategies (Douglas
& Rhee, 1989; Wong & Saunders, 1993; Collis &
Montgomery, 1995; Avlonitis & Gounaris, 1997;
Spedale, 2003; Iansiti & Levien, 2004; Narver et
al., 2004; Atuahene‐Gimaet al., 2005; Bierly &
Daly, 2007; Paladino, 2007; Wong & Ellis, 2007;
Grinstein, 2008; Paladino, 2008; Schindehutte et
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411
Manufacturing in a High Cost Environment

Fi
gu
re
6
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n
in
te
gr
at
ed
v
ie
w
o
f s
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vi
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at
io
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(R
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00
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412
Manufacturing in a High Cost Environment

al., 2008; Paladin, 2009; Terziovski, 2010; Hakala,
2011; Blarr, 2012; Andersén, 2012; Reulink, 2012;
Blackmore & Nesbitt, 2013; Cheng & Chen,
2013; Flor & Oltra, 2013; González‐Benito et al.,
2013; Hollen etal., 2013; Hamidizadeh & Taheri,
2013; Hussain et al., 2013 ; Jarrar & Smith, 2013;
Jespersen & Bysted, 2013; Liao et al., 2013; Lo-
nial & Carter, 2013; Marín-Idárraga & Cuartas-
Marín, 2013; Martín-Rojas et al., 2013; Obel &
Gurkov, 2013; Rashidirad et al., 2013; Slater et
al., 2013; Tournois, 2013; Vermeulen & De Kok,
2013; Walter et al., 2013; Ynzunza Cortés & Izar
Landeta, 2013).
A given strategic orientation is organisation
specific and depends on the cultural context and
can generate complex capabilities that can form
the basis for competitive advantage (Zhou et al.,
2005) and as a consequence different strategic
orientations have different pros and cons. Pala-
dino (2009) compares firms across two composite
dimensions: the first is made up of the degree
of resource sharing within the company to fully
exploit the benefits combined with the degree
of integration and deployment of resources to
induce organisational learning combined with
the degree of difficulty for rivals to imitate the
resource base – this composite dimension is called
Resource Orientation (RO). The second dimension
is the degree to which the organisation’s culture
effectively and efficiently creates the necessary
behaviours for the creation of superior value for
buyers and is called Market Orientation (MO).
Paladino (2009) finds that four types of organisa-
tions emerge with differing performance and that
the highest performance is achieved when resource
and market orientation are balanced (Table 9).
In fact, organisations with a high RO in the
matrix (masters of innovation and financial
champions) achieved a higher impact on innova-
tion relative to the quadrants reflecting a lower
MO. Results also demonstrate that pursuing a low
degree of resource and market orientations leads
to inferior financial performance. Therefore, a
balance of resource and market orientations is
important (Atuahene-Gima, 2005; Menguc &
Auh, 2006; Raisch & Birkinshaw, 2008) albeit
in times of increasing technological turbulence,
such as in the coming decade, the emphasis
should be rebalanced towards a higher resource
orientation (Paladino, 2008). Likewise when
market turbulence is increasing, as in the coming
decade, the emphasis should also be rebalanced
towards higher resource orientation (Calantone
etal., 2003; Jansen et al., 2006; Droge et al. 2008).
As competitive intensity increases the emphasis
on market orientation should increase so that
customer needs can be well understood to guide
the innovations towards highly valuable offerings
from the customer’s perspective (Porter, 2008).
In a resource rich environment the focus should
be on effectiveness whereas in a resource poor
environment it should be on efficiency.
These findings are borne out by the empiri-
cal results from Reulink (2012) in his study of
Dutch SME’s showing that SME’s that aim for
high performance in terms of radical innovation
capability as a basis for competitive advantage
have to both develop and deploy unique and
costly-to-imitate, highly valuable immobile and
heterogeneous resources both for offensive pur-
poses (the exploitation of opportunities) and for
defensive purposes (the neutralisation of threats.)
Such a resource base provides a high potential
for synergy through a high degree of intra-firm
resource sharing to maximally exploit the potential
benefits. It also provides a basis for a high degree
of resource deployment and integration to gener-
ate organisational learning. Finally, it is obviously
very difficult for competitors to imitate or replicate
this resource base. Adding to this an inside-out
focus (i.e. a high resource orientation) enables
radical innovations that can create new markets
by successfully satisfying latent customer needs,
whereas an outside-in focus (i.e. a high market
orientation only) would only enable incremental
innovations in response to articulated customer
needs. Once the new offerings grounded in a radical
innovation approach are realised, the market orien-
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413
Manufacturing in a High Cost Environment

tation needs to be ramped up to ensure successful
capitalisation of these. Reulink (2012) finding
also indicates the need for high and continuous
learning which fits the previously discussed need
for education of both management and workforce
and the establishment of a high performance work
place organisation.
The above findings align with those of An-
dersén (2012) who developed a resource based
taxonomy of manufacturing Micro, Small, and
Medium-Sized Enterprises (MSMEs) through a
cluster analysis of 186 Swedish manufacturing
MSMEs. He identified six clusters:
• Technocrats (27 Percent): These com-
panies have technological production ca-
pabilities and utilise them to a great ex-
tent. This also enables them to produce
both complex and innovative products.
However, the companies are inward-look-
ing and do not market their products to a
great extent. This distinguishes technocrats
from, for example, prospector firms.
• Conservatives (22 Percent): These com-
panies can be regarded as non-entrepre-
neurial, and in entrepreneurship research
they are generally referred to as conser-
vatives. Members of this group produce
simple products and are below average in
marketing as well as in innovation. This is
generally the result of an unwillingness to
adapt to a changing environment.
• Marketeers (19 Percent): This group of
companies is extremely market-oriented
and compete by producing complex prod-
ucts that require advanced technological
facilities. However, their average level of
innovation distinguishes them from tradi-
tional entrepreneurs. Thus, they are highly
outward-looking in their efforts to maxi-
mise returns from their existing products.
• Craftsmen (16 Percent): A group of com-
panies that are below average regarding
several resources and capabilities. Their
extremely low level of technological re-
sources is the most apparent weakness.
Their marketing capabilities are also well
below average. They do, however, produce
complex products. Thus, they are highly
skilled but not in areas that require com-
plex technological facilities; they produce
more craftsman-like products.
• Ikeas (10 Percent): These companies
compete by producing low-cost products
and are highly innovative in their product
development. They are also skilled in mar-
keting and have strong relations with their
customers. Companies such as IKEA and
Wal-Mart are typical examples of larger
companies in this group. The products are
not very complex to produce. The low-cost
production ability does not have to imply
that they adopt a low-cost strategy in the
product market. However, this is likely
to be the case for the majority of these
companies.
• Nomads (6 Percent): These firms are
below average on all fronts regarding re-
sources and capabilities. Their lack of re-
lational resources stands out most. These
firms wander the markets from customer
to customer (lack of relational resources)
without much direction (lack of market-
ing capabilities). They do not have any ap-
parent competitive advantages and can be
classified as primitive and non-innovative.
The three categories of firms that were found
to have high survivability potential and that, with
further improvements, could reach very high levels
of success were Technocrats, Marketeers and Ikeas
(totalling 56 percent of the study’s firms), whereas
the rest are under threat of downsizing and clo-
sure. As can be seen there is a close resemblance
between these categories and the characteristics
of success in Reulink (2012) study.
The conclusion is that firms in a high cost
operating environment must have a focused
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Manufacturing in a High Cost Environment

global niche strategy underpinned by continuous
innovation grounded in deep domain knowledge
and deep customer knowledge. The develop-
ment of new knowledge within the firm must
be faster than in competitor firms and the firm
must be faster in converting this new knowledge
to product-service-system offerings than any of
the competing firms. This will mean cannibalis-
ing existing own offerings in order to bring new
higher value-for-money offering to the market and
these offerings will frequently be aimed at latent
customer needs grounded in the firm’s superior
customer knowledge and customer relationships.
Global Outlook and Global
Business but Local Operations
The key characteristics of successful firms in
high cost operating environments is that they
fulfil the characteristics of what is called Hidden
Champions by Simon (1990), i.e. they achieve
dominating regional or top three global market
position in their selected niche, they are highly
focused, highly proactive and have a turnover
of less than $4bn. They are generally unknown
outside their core market and purposefully keep
a low profile. The work by Simon (1990) allowed
for the identification of the success factors of these
hidden champions viz:
• As firms they are tight on strategy and
loose on control so characterised by en-
lightened despotism on strategic issues,
but a bottom-up participative leadership
style on operational issues. The identity of
the leader is embedded into the firm and
the leaders identify themselves with the
firm. The leaders are product focused and
normally have a deep technical expertise
in both the products and the knowledge
domains that underpin the products. The
leadership tenure is substantially longer
than in listed companies. In these firms ex-
ceptional management means doing small
things better than the competitors every
time all the time. A core guiding principle
is to have more work than you have re-
sources to execute it and another is to rely
on your own strengths (an example of this
latter is the willingness of becoming your
own supplier if you are unhappy with ex-
ternal suppliers).
• The corporate culture of hidden champi-
ons is distinctive and they value hard work,
strict merit based selection and are intoler-
ant of underperformance which results in
low absenteeism and high employee loy-
alty. There is a strong bond between com-
pany and employees – due to the strong
mutual interdependency between them. A
large and increasing share of their employ-
ees has university education or the equiva-
lent through the apprenticeship process.
The knowledge level and creativity of em-
ployees is a key success factor for Hidden
Champions.
• They also view themselves as an integral
part of the community (mostly smaller
towns) where they are located and their
perceived obligations to this community
go well beyond what would be taught at an
average American business school and is
more in line with what is articulated also
by Strand & Freeman (2013).
• They accept the risk inherent in being a
single product manufacturer but this also
leads, for better or worse, to a high level
of mutual dependency between the Hidden
Champion and their customers.
• They are early exporters driven by econo-
mies of scale to export early in their firm
life cycle and have a very high export share.
• They are mostly family owned and keep a
very low public profile especially around
their success.
• They have long term strategic objectives
that are pursued with diligence and do not
maximise short term profits.
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• They are characterised by above average
growth, both in revenue and employees.
• They avoid gaining sales through discount-
ing or aggressive pricing
• They normally have a decentralised organi-
sational structure with organisational units
that encompass the entire value chain. This
delegation of responsibility at the customer
interface fosters closer and more in-depth
customer contact which underpins their
focus of being very close to their custom-
ers and and understanding their customer’s
needs very well which forms an important
input into their innovation activities as
well as building their excellent reputation
among their customers which in turn con-
tributes to their success. This decentralised
organisational structure is combined with
strong cross-functional cooperation within
the company which minimises waste of
time and resources.
• They operate in oligopolies with intense
competition.
• They are very robust and have high survival
rates even under very adverse conditions.
• They produce highly specialised and
unique products, that are not normally
clearly distinguishable within the final
product and are hence invisible to the user,
and which they are frequently the original
inventor of, and they are ranked top in the
world for instrumental value of these prod-
ucts within the global target (niche) market
but the products are unknown outside this
market. They aim for market leadership in
these terms not in terms of market share,
which is perceived to come if the first is
achieved and both employees and manag-
ers have a passion to become and remain
number one in these terms. They offer high
value for money through high instrumental
performance and low total cost of owner-
ship over the life of the product not through
low product cost. As a consequence they
play an active role in defining the rules of
the game for their market.
• They have sustained outstanding innova-
tion performance regarding technologi-
cal, service, process, design, marketing,
or business model innovations (what we
call integrated innovation and will discuss
further below). Technological leadership
often goes hand in hand with non-techno-
logical innovations and they tend to pursue
joint innovation together with customers,
suppliers and external partners whilst re-
taining the barriers to imitation discussed.
They are good in pursuing a coopetitive
strategy with competitors in close geo-
graphical proximity benefiting all parties.
• They have a very high Real Net Output
Ratio
This High Real Net Output Ratio is maintained
by design and is grounded in proprietary product
elements and production processes as well as tacit
knowledge combined with codified but complex
knowledge underpinning also their service of-
ferings. Their ability to provide customers with
excellent service (including system integration
and system solutions) linked to their products,
makes it hard to imitate their offering and the
barriers to imitation are also kept high by not
outsourcing any of these core processes whilst
non-core administrative processes are frequently
outsourced e.g. finance, regulatory, logistics etc.
Equation 1. Real net output ratio definition
Real Net Output Ratio =
Internal Production
TotalProductio
nnValue

=
Internal
Production
Internal
Production
+
Externaally
Produced
Goods
+
Externally
Produced
Services
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Manufacturing in a High Cost Environment

This also leads to a solitary way of doing business
i.e. to control the total chain from production to
final installation in-house rather than working
with other firms. This means that international
operations are managed from the parent company
using employees of the parent company, which
of course contributes to protecting the unique
knowledge of the firm as well as facilitating the
attraction of a highly qualified workforce, which
for smaller firms otherwise can be a problem.
The foregoing list of characteristics accords
strongly with the success factors identified in
the literature previously discussed. As a curios-
ity it is worth mentioning that the overwhelming
majority of these types of Hidden Champions are
found in the Germanic part of Europe6 (i.e. Austria
(13.8/million inhabitants), Denmark (3.4/million
inhabitants), Finland (2.7/million inhabitants),
Germany (16/million inhabitants), Netherlands
(1.7/million inhabitants), Norway (2.8/million
inhabitants), Slovenia (3.5/million inhabitants),
Sweden (5.4/million inhabitants, Switzerland
(13.9/million inhabitants) – to be compared with
e.g. Australia (0.5/million inhabitants), Canada
(0.5/million inhabitants) and the US (1.2/million
inhabitants)) and given the relative size of these
economies they are mostly found in Germany
(examples of German hidden champions are:
Getrag – transmissions; Gildemeister – machine
tools; Karl Mayer Textilmaschinenfabrik – knitting
technology; Schmitz Cargobull – Truck Trailers;
Kärcher – High Pressure Cleaners; Wild – Ingredi-
ents for beverages; KHS – Bottling systems; Sta-
bilus – Gas-pressurised springs; Suspa – vibration
control; RUD – Industrial chains; Wanzl – Shop-
ping carts; Zahoransky – Brush-making machines;
Fischerwerke – Fastening products; Tracto-Technik
– Ground-rockets; Herion – Pneumatic proportional
valves; RUD-Kettenfabrik – Tire and snow chains;
Sachtler – Camera tripods; Heidenhain – Linear
measuring systems; Kiekert – Locking systems
for cars; Prominent – Metering pumps; Krones –
Labeling machines; Böllhof – Screws and nuts;
EJOT – Screws for plastic; Loos – Steam systems;
Probat Werke – Coffee roasters.
There has been considerable research based on
these criteria aimed at further refining the under-
standing of high performing firms (see e.g. Kum-
metsteiner, 1992; Simon, 1992a; Simon, 1992b;
Simon, 1996a; Simon, 1996b; Voudouris et al.,
2000; Blackburn et al., 2001; Haussmann, 2003;
Ewing, 2004; Henle, 2004; Rickes & von Hassell,
2007; Simon & Zatta, 2008; Volk, 2008; Lee, 2009;
Simon, 2009; Yu & Chen, 2009; Lechner, 2010;
Roth, 2010; Pittrof, 2011; Zastempowski, 2011;
Boga, 2012; Çetindamar & Kozanoglu, 2012;
Malshe, 2012; Shi, 2012; Classen et al., 2013;
Coltorti et al, 2013; Din et al., 2013; Dolles et al.,
2013; Haric et al., 2013; Hilz, 2013; Ivarsson &
Alvstam, 2013; Kammerlander, 2013; Klarner et
al., 2013; McKiernan & Purg, 2013; Witt & Carr,
2013; Zink, 2013)
The conclusion from this section is that firms
in high cost operating environments should try
to adhere to the principles of hidden champions
which means no outsourcing of core activities,
most of the value chain in-house, manufacture in
the high cost operating country, co-locate innova-
tion and manufacturing, be good at coopetition,
cover the world from your location and aim to be
best at what you do.
Masters at Incremental
Integrated Innovation
One of the key issues that has come through in
most of the discussions above is the need for an
integrated approach to innovation. An integrated
approach to innovation has the following compo-
nents (Roos, 2011b; Roos, 2011c; Roos, 2011d;
Roos, 2012; Roos et al., 2013; Roos, 2013a; Roos,
2014c):
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417
Manufacturing in a High Cost Environment

• All innovation enablers present in suffi-
cient quantity with sufficient quality, and
deployed in a way that maximises the ef-
fectiveness and efficiency of innovation
production.
• A clearly articulated innovation strategy
that sets the direction and scope of the in-
novation activities
• A well functioning innovation manage-
ment system that provides the processes
and interfaces for repeatable innovation
activities in a closed, semi-open or open
innovation environment
• Simultaneous, integrated and continuous
pursuit of value generating innovations
• Simultaneous, integrated and continuous
pursuit of value appropriating innovations
Each of these will be discussed below.
Innovation Enablers
Identify the resources deployed by the firm
to create value and the effectiveness of their
deployment structure. Resources fall in the fol-
lowing five categories and can be both tangible
and intangible as outlined in Table 10.
The resource transformation system7 is the firm
specific transformation of resources into each other
with the use of other resources in a journey from
lower to higher value in the eyes of the paying
customer. Examples of such transformation are
illustrated in Table 11.
Sufficient volume of resources with suffi-
cient quality, deployed in an effective resource
transformation system is the foundation for well
functioning innovation activity.
Innovation Strategy
An innovation strategy in its simplest form is an
articulation of the problems, that if solved, would
dramatically improve the firm’s performance. In
practice it can become as large as you want it to
be. Anderberg & Roos (2004) and Anderberg &
Roos (2005) have outlined the typical structure and
content of a comprehensive innovation strategy
as shown in Box 1.
Innovation Management System
The innovation management system is the embodi-
ment of the processes, systems and structures that
the organisation deploys to ensure that innovation
becomes a business process and is managed as
such rather than a random happening. The prin-
ciple characteristics of an innovation management
system are outlined below (Anderberg & Roos,
2004; Anderberg & Roos, 2005; Roos, 2007):
Organisationally they have:
• A managerial top down element that de-
cides and approves the innovation strategy
for the next product-service-system life
cycle, as drafted by the innovation man-
agement group. The top down element also
decides and approves the document out-
lining the different innovation projects as
provided by the innovation prioritisation
meeting and documented by the innovation
management group. The top down element
is responsible for decisions on strategic in-
vestments and is in the end accountable for
all investments made. The top down ele-
ment is also responsible for initiating and
responding to stakeholder relationships
that follow as a consequence of the innova-
tion strategy in alignment with corporate
strategy, e.g. Initiating cooperation agree-
ments, negotiating joint efforts with stake-
holders that require peer-to-peer interac-
tion and articulating corporate interests in
involving key stakeholders in projects. The
top down element will further initiate key
projects to ensure that the decided innova-
tion strategy is delivered upon.
• An Innovation Management Group that is
the permanent staff function that oversees
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418
Manufacturing in a High Cost Environment

and runs the innovation management sys-
tem. This group is responsible for organis-
ing and leading the work preparing the in-
novation strategy and the plans as well as
preparing and documenting the innovation
prioritisation meeting. It will comprise se-
nior people with relevant background. The
innovation management group is also the
keeper of the key documents pertaining
to the innovation management system. It
is important to note that the responsibility
of the innovation management group is to
oversee and coordinate; it does not have
authority to make any project or strategy
relating decisions.
• A Bottom Up Element which is responsible
for generating and facilitating the genera-
tion of ideas, evaluating ideas against the
strategy and for overseeing the execution of
the innovation projects and evaluating the
results. The bottom up element includes
representatives from entities (normally in-
side the firm but can also be from outside)
that can convert the ideas into reality and
from entities inside the organisation that
can convert the realised idea into business
benefit (e.g. revenue, market share, cost re-
duction, etc), and is frequently linked into
semi-open (can also be open or, in today’s
world, more seldom closed) innovation
networks.
Process wise there are:
• Innovation Prioritisation Meetings:
Together with the innovation strategy,
these meetings are the key component of
the innovation management system ensur-
ing transparency and adherence to the in-
novation strategy. The innovation prioriti-
sation meeting is an event, the frequency of
which depends on the industry the firm op-
Table 1. Management practices underlying high-performance work systems (Gibbons & Henderson,
2012, p. 18)
Non Mutually
Exclusive Practices
Huselid,
(1995)
Macduffie,
(1995)
Ichniowski, Shaw
& Prennushi,
(1997)
Pfeffer,
(1998)
Appelbaum,
(2000)
Black &
Lynch,
2001
Bloom &
van
Reenen,
(2007)
Incentive pay X X X X X X X
Skills training X X X X X X X
Selective recruiting X X X X X X X
Teamwork X X X X X X X
Employment security X X X X X
Information sharing X X X
Merit-based
promotions
X X X
Flexible job
assignment
X X X
Reduced status
distinctions
X X X
TQM/Process Control X X X
Communication X X X
Performance review X X
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419
Manufacturing in a High Cost Environment

Box 1. Example of structure and content of a comprehensive innovation strategy (Anderberg & Roos,
2004; Anderberg & Roos, 2005)
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420
Manufacturing in a High Cost Environment

erates in and the strategy that the firm pur-
sues. One of these meetings is dedicated
to developing next year’s budget and plans
and the others address re-prioritisation as
a consequence of emerging issues. At this
meeting the bottom up and top down ele-
ments are both represented together with
the innovation management group. The in-
novation prioritisation meeting members
discuss priorities against the background of
the innovation strategy. Based on this dis-
cussion the chairman of the innovation pri-
oritisation meeting decides which projects
and programs should be launched within
the existing budget. The innovation priori-
tisation meeting delivers its output to the
creating management group for conversion
into plans. The innovation management
group then forwards this to the top down
element for formal decision and sign-off.
• Operation of the Innovation Management
System: The principle flow of the system
is that a suggestion for an innovation enters
the innovation management system from
inside or outside the firm. This idea enters
the bottom-up element, which is usually
made up of more than one entity with simi-
lar structure but different areas of expertise
and responsibility structured by e.g. tech-
nology domains, customer type, problem
domain mentioned in the innovation strat-
egy etc. Inside the Bottom Up Element the
idea has to pass three sequential hurdles:
Is it aligned with the articulated strategy?
Can it be realised by the firm? Can the firm
benefit from the realised idea? Only when
all three hurdles are passed will the idea be
turned into a project plan outlining the nec-
essary resources (including time) for both
the realisation of the idea through value
generating innovation and the realisation of
the benefit inherent in the idea through val-
ue appropriating innovation. This project
plan is then put forward to the Innovation
Management Group. With some frequen-
cy Innovation Prioritisation Meetings
will be called and during these meetings
the project plans put forward through the
Innovation Management Group by the dif-
ferent Bottom Up Elements will be priori-
tised. The result is three categories: the first
are those projects that will be commenced
and that fit within the existing budget; the
second are those projects that are desir-
able to commence but for which there is no
budget – these are put back for review in
the next Innovation Prioritisation Meeting;
the third are those projects that are rejected
and that will not be commenced. The op-
erations so far are outlined in Figure 7.
The Bottom Up Element is also responsible
for overseeing ongoing innovation projects and
this is done with regular reviews. The moment
the innovation project starts to deviate from the
project plan a specific evaluation is done to see
if the innovation project can be brought back on
plan or not. If the judgement is that it can, the
innovation project is allowed to continue under
intense supervision until it is clear that it is either
back on plan or cannot get back on plan. If the
innovation project is judged not possible to get
back on plan it is immediately terminated and
a new project plan for the innovation project is
worked out and treated as a completely new project
in that it enters into the process as such and may
or may not be given a go in the next Innovation
Prioritisation Meeting.
The Bottom Up Element is also responsible
for: evaluating the performance of the project
estimates done by the Bottom Up Element (this is
done in such a way that one Bottom Up Element
is evaluating another Bottom Up Element); the
performance of the innovation project managers;
suggestions for changes in the Innovation Strategy
due to insights from Innovation Suggestions; the
benefits accrued to the firm from the realised
innovations; and the benefits accrued to others
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421
Manufacturing in a High Cost Environment

outside the firm from realised innovations. This
then forms the basis for the annual evaluation of
the innovation management system, including
suggestions for improvements.
The purpose of the Innovation Management
System is to ensure that all major strategic in-
novation thrusts are executed using an integrated
approach i.e. have both a value creating and a
value appropriation element, when appropriate.
Smaller innovations and improvements rest within
the normal day-to-day responsibility of manage-
ment on all levels.
Value Generating Innovations
The purpose of Value Generating Innovations is to
maximise the value for money that the customer
perceives from the innovation whilst ensuring a
maximum benefit to the firm. This means that
there are five principal domains that are pursued
in an integrated way:
The first is efficiency improvements i.e. doing
what you do even better. These are done using all
the normal productivity improving tools8 and tech-
niques9 available. Due to continuously increasing
pressures on productivity combined with an ever
increasing speed of technological development in
the domain of production processes and production
equipment rather than in the domain of products
offered, productivity improvements are achieved
at a very high speed in manufacturing. The auto-
motive industry can serve as an example here, as
shown in Figure 8. It is one of the industries under
the highest pressure to continuously increase its
productivity with some remarkable results, and is
also the industry that has originated most of the
tools and techniques used throughout industry (in-
cluding in service and public sector organisations)
to achieve productivity improvements. According
to Suzaki (1985), 70 percent of the productivity
improvements in the Japanese automotive industry
can be attributed to improvements in operations
and management systems.
As a consequence, companies linked to the
global automotive industry have adopted produc-
tivity improving tools and techniques to a higher
extent than general manufacturing10, 11 (Deloitte
Touche Tohmatsu, 2004). Trimble et al. (2013)
studied the use of productivity improvement tools
and techniques among 162 automotive suppli-
ers and found the results shown in Table 12 and
Table 13.
Figure 7. The first area of operations for the innovation management system (Roos, 2007; Roos, 2013)
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As a consequence of this, the annual produc-
tivity improvement for the automotive industry is
in the range of 2.5 – 8 percent depending on the
study, the specific definition of productivity, and
the time period studied (see e.g. Kim, 2010; Chen,
2011; García-Castro et al., 2013). In a high cost
operating environment, firms should strive for an
annual productivity improvement of 5 percent.
Achieving this objective can be facilitated through
applying two lenses: The first is the principle of
“lean” which can be expressed as “do more of
what you get paid for and less of what you do not
get paid for”. The latter is normally called waste
which is generated in many ways, and is to be
avoided (as outlined in Figure 9).
The second is the ability to do smarter things
in smarter ways – the way productivity improve-
ments are defined in most firms working in high
cost operating environments, which leads us back
to innovation.
Beyond mere efficiency, we enter into the pure
value creating innovation domains, of which the
first is the use of science and technology as a
basis for innovation. This is a domain where most
firms are active and it has been and continues to be
thoroughly studied in the literature. The conclusion
so far is that mastery of this domain is becoming
even more critical and that the speed by which
new technological knowledge can be absorbed and
exploited is critical. This is especially true when
it comes to Key Enabling Technologies12 since
most advance products in a product-service-system
offering include combinations of several key
enabling technologies as illustrated in Figure 10.
Figure 8. Sources of productivity improvements in the US Automotive industry in the period 1987-2002
(Baily et al., 2005, p. 11)
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Given the familiarity of the science and tech-
nology domain for value creating innovations, it
is important to concentrate on some less familiar
domains instead.
The next such domain is the use of design as
a basis for innovation. In summary, design based
innovation is the ability to create an artefact that
when being used makes the user change behaviour.
Figure 9. The principles of Lean (Moura & Botter 2012, complemented by the author with “intellectual
Waste”)
Figure 10. Examples of advanced products encompassing several key enabling technologies (HLGKETs,
2011, p. 10-11)
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This behavioural change leads to the user feel-
ing better off and as a consequence of this new
behaviour, the creator of the object is better off:
in other words, a win-win situation. A familiar
example would be the Apple iPhone.
Acklin (2010), outlines the main roles of design
throughout the innovation process (Figure 11).
This above description is to be contrasted
with the two daily uses of the word design in
manufacturing that have different meanings. The
first is an engineering take on design as in e.g.
design-for-manufacturability see e.g. Petroski
(1996) and the other is the art take on design as
e.g. designing for attractiveness see e.g. Sunley et
al. (2010). These two domains have received a lot
of research interest whereas design in the meaning
that we have adopted above has been substantially
less studied. A somewhat broader view has been
taken by e.g. Roy et al., 1986; Waksh, 1988;
Walsh, 1996; and finally an excellent review by
D’Ippolito, 2012 in which she conceptualises the
principal characteristics of the term design as used
in literature and shown in Table 14.
Design, in all of the above uses of the word,
impacts most dimensions of a product like cost,
performance, usability, durability etc., and hence
is a basis for market differentiation and impacts
both revenue and cost as well as being critical in
all aspects of innovation.
This is illustrated by the findings from Design
Council (2012) that:
• For every $1 invested in design, businesses
can expect over $20 in increased revenues.
• For every $1 invested in design businesses
can expect a return of over $4 increase in
net operating profit.
• For every $1 invested in design, businesses
can expect a return of over $5 in increased
exports.
The use of design for behavioural change has
been proposed by e.g. Rodriguez & Boks (2005),
Lilley (2007), Bhamra et al. (2008), Consolvo et al.
(2009),Clune (2010), Lockton et al. (2010), Selve-
fors et al. (2011), Shirey (2011), Hermanssdottir
Figure 11. Design and design management capabilities and outcomes in the innovation process (Acklin,
2010; Acklin, 2013, p. 86)
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et al. (2012), Laitala (2012); Lockton (2012a),
Lockton (2012b), Lockton (2012c), Montazeri et
al. (2012), Richter (2012), Lockton et al. (2013),
Wendel (2013).
An example can be used to illustrate how design
for behavioural change can work:
A large department store has a situation where
the haute couture department on the second floor
experiences very few sales. When the security
camera footage is reviewed, it is found that the
typical customer group is made up of a couple
where she wants to stop and look (and potentially
try on and buy some of the offerings) and he on
average allows her 8 minutes before he manages
to drag her on to the next department in the store.
The problem is obviously that the couple is made
up of one potential customer and one saboteur
from the department store’s point of view. The
desired outcome of any intervention is to have a
changed behaviour that leads to a sale and both
members of the couple being happy. In the end the
resulting solution, (using the design methodology
of observation, interpretation, innovation and
implementation in a trial and error way) turns out
to be: Firstly, the installation of a sports and beer
bar in the back of the haute couture department
with 8 screens showing different sports channels
and 160 different brands of beer for sale. This
enables and encourages the couple to self sepa-
rate (the divide in divide and conquer achieved
from the department store’s point of view) to their
mutual satisfaction providing sufficient time for
the potential buyer to evaluate and pick potential
purchases. Secondly, the introduction of a process
that states that if you procure something from the
haute couture department exceeding a total value
of $800 the beer consumed at the bar is free (the
conquer in divide and conquer achieved from the
department store’s point of view) and this means
that when the previous saboteur is presented with
a potential purchase by the potential buyer he
has two choices: 1. To reject and then to have the
partner see that he has to pay on average $100
for the beer consumed during the waiting time i.e.
he has got something beneficial and enjoyable
to him for a price and she has got nothing with
the associated negative consequences for their
relationship the rest of that day. 2. To accept and
then have no expense for the consumed beer i.e.
she has got something beneficial and enjoyable
to her for a price and he has got nothing(since
the free beer value will not be easily observed
post consumption) with the associated positive
consequences for their relationship the rest of
that day. The result for the department store is
increased sale and profit and the result for the
couple that purchase something is beneficial to
both the partners. Hence a behavioural change
has been achieved where the parties that have
changed their behaviour are better off and as a
consequence of their behaviour they make the
instigator of the change better off (in this case the
department store) and all this due to design (in
this case a redesign of the department with the
design and location of the sports and beer bar
plus the design of the discount process).
The same way as science and technology based
innovation needs to be managed so does design
based innovation. Acklin, (2009) has synthesised
and visualised a model for design management
taking into account the coordination, alignment,
communication, education and even mediation
between conflicting forces in the company that
is necessary if design is to fully unfold its power
as a value creator (Figure 12).
The third is the use of art as a basis for in-
novation. Art has numerous opportunities to add
value to business. In consumer goods art can
add to the perceived authenticity of the good and
thereby increase its value in the eye of the con-
sumer (Gilmore & Pine, 2007). This is critical in
the luxury goods end of the spectrum.
Gilmore & Pine (2009) provide an example:
The Aria Hotel in Prague, organises itself around
music, so much a part of the heritage of the capi-
tal of the Czech Republic. Each floor represents
a different type of music: classical, opera, jazz,
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Manufacturing in a High Cost Environment

Figure 12. Design management model (Acklin, 2009; Acklin, 2013, p. 49)
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427
Manufacturing in a High Cost Environment

and contemporary. Suites on each floor highlight
a particular musical artist representing that type
of music, including the Dvořák, Mozart, Gershwin
and even Elvis Presley suites. The Aria came up
with a number of innovations to extend the basic
design, including room keys that come with iPods
pre-loaded with music to play on a speaker system
in every room (which also has the Art Channel on
every TV). And in the public area, right next to the
Coda restaurant and Music Salon, lies the Music
CD/DVD Library with its own Music Concierge.
The art of music infuses the entire place.
On the theatre side there have been some stud-
ies around leadership and choreographical studies
of work processes (Denhardt & Denhardt, 2006).
Roos & Roos (2006) state that for many people the
word drama is connected with theatre, but there
is a difference. Drama is a personal experience
(the word comes from the Greek drao: ‘I do’ or
‘struggle’) and theatre is communicating the expe-
rience to others (the word comes from the Greek
theatron: ‘a place for seeing/showing’). Drama
therapy and psychodrama both employ drama as
therapeutic methods but in slightly different ways:
for example spontaneity and imagination are even
more emphasized in psychodrama. They are not,
as in theatre, specialised skills that people can
or cannot do. Anyone can role-play. Techniques
such as sociodrama and psychodrama can have a
profound impact on innovation and value creation.
The performing art of ballet has formed the
basis for what is now called Movement Pattern
Analysis based on the pioneering work by Rudolf
Laban who developed a subtle and refined method
of notating and describing movement around
ballet (Kaylo, 2006; Kaylo 2009; Rothe, 2012;
McColl, 2013). Movement Pattern Analysis has
been put to use in labour intensive manufacturing
environments to improve overall performance and
minimise injuries.
Retailers have long understood the importance
of store environment in enhancing the shopping or
service experience, and past research has examined
the main effects of many pleasant ambient stimuli
such as music and scent (Bartholmé & Melewar,
2009; Rajagopal, 2009; Bartholmé & Melewar,
2011; Ford, 2013; Mari & Poggesi, 2013). When
ambient scent and music are congruent with each
other in terms of their arousing qualities, consum-
ers rate the environment significantly more posi-
tive, exhibit higher levels of approach and impulse
buying behaviours and experience enhanced sat-
isfaction (Mattila & Wirtz, 2001; Spangenberg et
al., 2006; Wirtz et al., 2007; Kearney, 2012). The
impact of scent on social interaction (Zemke &
Shoemaker, 2008; Hulshof, 2013) and hence as a
facilitator for innovation has also been identified.
The evidence from both research and practice
(Garlin & Owen, 2006; Turner, 2012) clearly
suggests that customers’ affective and cognitive
responses to experiences in-store influence the
likelihood of behaviours which directly impact
an organisation’s financial returns (Hinskton,
2000; Oakes & North, 2008; Price, 2010; Ke-
arney. 2012; Srivastava, 2012). The literature
reports on studies which highlight managers’
implicit beliefs in the ability of background
music to facilitate top- and bottom-line returns
to business. Other researchers have secured sig-
nificant results using more objective measures.
Taken collectively, past research demonstrates
the capacity for appropriate background music
to illicit positive effects on affective, attitudinal/
perceptual, temporal and behavioural variables.
A considerable body of work presents evidence
for these effects to provide returns to business
in the form of sales value and volume, repeat
purchase, rate of spend, quantity purchased and
gross margin. Many indirect returns to business
are apparent, such as positive perceptions of
quality and venue/store brand image. In addition,
clear impact of music on creativity has been seen
(Callaghan & Growney, 2013).
Scent is generally regarded as the most affec-
tively laden atmospheric cue because the direct link
between the sense of smell and the limbic system
enables scent to elicit strong emotional reactions
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Manufacturing in a High Cost Environment

and mood changes (Glatzel, 2010). The nature of
these reactions depends on the individual associa-
tive network that will be triggered by a particular
scent. Nevertheless, due to mixed research find-
ings, there are still divergent opinions about the
validity of this assertion. With regard to cognitive
effects, scent can act as a central and peripheral cue
in order to shape attitudes and decision-making.
Pleasant odours can for instance enhance atten-
tion, memory, information search and processing
as well as elicit more favourable brand or product
evaluations. Emotional and cognitive responses
to ambient scent are often inextricably linked.
However, it is still contended in which order
they occur. There are two approaches, the C-E
approach and the E-C approach. Both approaches
converge in the belief that cognition and affect are
often inextricably linked and are both somehow
affected by scent. Finally, pleasant scent positively
influences approach behaviour. Previous research,
for instance, found positive effects on consumer
spending and store lingering time.
There has been much attention paid to the emo-
tional effects which impress and impact customers
during e.g. the marketing process. It has been
shown (Yagi et al., 2009) that the customer who
feels emotionally satisfied is positively committed
to the marketing process, contributes to knowledge
accumulation, and is involved in associated social
networks. As a consequence, insightful firms use
the arts in creating and marketing products for
emotional effect.
In spite of the fact that aspects of what might
be deemed art have been well studied, the rela-
tionship between art and business is still under-
researched, although some results are starting to
appear in the literature (Eriksson, 2007; Antal,
2009; Antal, 2014). The benefits seem to be un-
der four headings: providing new perspectives;
combining emotional intelligence and rational
thinking; recovering imagination, and using all
senses. Hence artistic interventions can change
perceptions through a heightened aesthetic sen-
sibility (Buswick et al., 2004)
An example of how art as an approach can
contribute to innovation is given by Barry and
Meisiek (2005), Roos et al. (2004) and Roos &
Statler (2004) and replicated in Box 2.
An increasing share of businesses employ
aesthetic strategies based on the premise that the
boundaries between art and everyday life are dis-
appearing. New opportunities have been opened
up for marketers in terms of not only adding more
value to their products but also how they add this
value beyond the functionality of the object (Dou
& Ekiz, 2011). Research shows that consumers
judge these applications non-cognitively and
mostly based on their senses. This approach has
Box 2. Examples of contributions from art towards innovation (Meisiek, 2005; Roos et al., 2004; Roos
& Statler, 2004)
The painter Karsten Auerbach worked with Quilts (a company which makes duvets). He began by placing his easel in the centre of
the factory floor and painting the people and their operations. Every now and then an employee would walk past and ask questions
about what he was painting. Around the same time, he went to a number of department stores to look at how the company’s quilts were
displayed. Coming back to the factory he confronted the managers: ‘You’re extremely white,’ he said. ‘There’s no colour in your product,
your displays, or your work.’ Managers later stated that they had never thought about their company in terms of colour until that day. His
next move was a workshop where employees mixed paints to form numerous colour swatches. He asked ‘Which one of these is Quilts?’, a
question which triggered intense and prolonged debate around just who and what the company was. This was followed by a photo collage
workshop, where the employees used magazine cut-outs to represent the world of quilts. Their montage ranged from bluish photos which
depicted technical advances, to warm coloured photos which connected quilts to comfort, happiness, and sex. As the implications of
these experiments sank in, the company executives decided to change the business focus from technical superiority to more lifestyle
considerations.
With the help of Lego blocks and sponsorship by the Lego Company, the Imagination Lab in Lausanne conducted ‘serious play’ sessions
with numerous organizations. Top managers would sit together and model their strategic landscape and organization using Lego bricks,
coming up with representations that would promote more inventive strategic thinking.
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429
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Table 2. Overview of studies estimating the rate of return of in-house R&D activities in UK firms (ex-
tracted from Bascavusoglu-Moreau & Li, 2013, Table A1 p. 90)
R&D Rate of Return Sample Period Study
38% and 20% respectively, using different approaches 239 firms 1988-1996 Bond et al. 2003
11%* and 14%* respectively, using different approaches 188 mfg firms 1990-2000 Griffith et al. 2006
40% – 58% (mfg) 53% – 108% (non-mfg)** 719 firms 1989-2000 Rogers 2009
*Computed assuming means of medians of the variables.
**Capital and labour corrected for double counting
Table 3. Potential best practice application areas for UK manufacturers (Thomas et al. 2012)
Manufacturing Development Area Objective Potential Best Practice Domain
Rapid and consistent delivery of new
products to the marketplace.
• Fast response to produce timely and affordable
niche products to meet specific customer
requirements.
• Innovation management
• Agility in supply chains
• Change management
• Leadership practices
Develop people competencies to create
a move away from “manufacturing”
only.
• Develop capabilities to manufacture “high
value” products and services to a global market.
• Improving productivity in product-
service systems
Responsive and precise knowledge
management systems.
• Faster and more accurate decision making within
companies.
• Management education
• Knowledge management
• Security of information
• Advanced analytics
Minimise environmental damage and
achieve energy neutral operation.
• Development of energy efficient local supply
systems.
• Technology adoption
• Energy management systems
• Sustainable manufacturing
Rapid enterprise configuration. • Ability to reconfigure supply chain and
manufacturing capability.
• Agility in supply chains
• Change management
• Leadership practices
Develop innovative products, processes
and services.
• Drive down product lifecycle times and develop
more effective NPD and introduction systems.
• Innovation management
• Change management
• Leadership practices
Closer collaboration between industry,
universities and colleges.
• Collaborative design, research and
manufacturing environments.
• University/college/industry
collaboration
• Change management
• Leadership practices
Develop new manufacturing paradigms. • Create a flexible, responsive and competitive
manufacturing organisations that can continuously
evolve and adapt to change.
• Change management
• Leadership practices
• Supply clustering
• Engagement with universities
• Application of new technologies
Develop digital networks to enhance
the digital economy.
• Digitally connected supply chains.
• Novel manufacturing management methods.
• Enhanced learning systems.
• Application of new technologies
• Change management
• Leadership practices
• Engagement with universities
• Security of IT systems
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Table 4. Summary of productivity drivers and firm and government action
Productivity Driver Concluding Actions for Firms Concluding Actions for Government
Managerial competence
and capability together with
managerial practices.
• Increase the managerial capability in firms
through education and job rotation. Hire managers
from outside the firm with experience from leading
firms in the industry.
• Implement high performance management
practices.
• Introduce policies conducive to life-long
learning, international experience building and
international recruitment.
• Facilitate access to information on high
performance managerial practices.
High-performance work
systems.
• Introduce all aspects of high performance work
systems:
       o Incentive pay
       o Skills training
       o Selective recruiting
       o Teamwork
       o Employment security
       o Information sharing
       o Merit-based promotions
       o Flexible job assignment
       o Reduced status distinctions
       o TQM/process control and all other
productivity enhancing tools and techniques of
relevance
       o Communication
       o Performance review
• Facilitate for employees and managers to do the
“right thing” to drive productivity and to do it in
cooperation.
• Ensure that managers know what “good looks
like” when it comes to performance and how to get
from the present state to the desired future state
and that they are encouraged to take these actions
with appropriate implementation support.
• Introduce policies conducive to the introduction
of the components of a high performance work
systems.
Higher-Quality General
Labour and Capital Inputs.
• Ensure that the firm builds high quality labour
through education and experience building.
• Ensure continuous investment in modern
manufacturing processes, systems, and equipment.
• Introduce policies conducive to life-long
learning as well as to a better quality labour input
to the workforce.
• Introduce policies conducive to continued
investment in the latest processes, systems and
equipment.
Key enabling technologies. • Build capabilities in all the relevant key enabling
technologies and implement them in the product-
service-system offerings or in the production
processes, systems and equipment.
• Aim to participate in the most relevant key
enabling technology value chain.
• Introduce policies that ensure capability
building in the key enabling technologies and the
participation in the associated emerging value
chains.
• Introduce policies that encourage firms to build
capabilities in the key enabling technologies so
that the country’s industrial commons is enlarged
with capabilities in these technologies.
R&D capital formation • Ensure a substantial R&D effort both internal as
well as in cooperation with external agents.
• Introduce policies that are conducive to R&D
activities and also conducive to the activities
being done in cooperation.
Innovation • Develop leading edge capability in innovation. • Introduce policies that are conducive to
innovation, like openness to procure unproven
solutions and procurement that requires
development of offerings with performance not
presently possible to achieve.
• Introduce policies that focus on taking
R&D outcomes all the way through to
commercialisation.
continued on following page
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Manufacturing in a High Cost Environment

Productivity Driver Concluding Actions for Firms Concluding Actions for Government
Learning by Doing, Using
and Interacting
• Introduce doing, using interacting type
innovations as a complement to science and
technology based innovations.
• Introduce processes and systems conducive to
efficient doing, using, interacting learning.
• Introduce policies that recognise that other
forms of innovation besides science and
technology have equal value in innovation space.
Firm Structure in combination
with the industry structure
and ecosystem in which it
operate, as well as the firm’s
absolute and relative size
• Understand the opportunities presented by global
value chains and eco-systems.
• Introduce policies conducive to productivity
enhancement of local firms in global value chains
or eco-systems.
Productivity spillovers • Participate in clusters and other cooperation
activities that are outcome oriented.
• Introduce policies conducive to cluster and
other operationalisations of agglomeration
economic benefits.
Competition • Aim to provide the highest value for money
against global benchmarks even if the business is
local.
• Introduce all policies that increase the
competitive pressure on individual firms
whilst not risking the total capability in the
industrial commons or a decline in the economic
complexity.
Deregulating or Smarter
Regulation
• Accept all challenges that tougher regulations
provide and aim to innovate to a level of
performance that is better after the new regulation
than it was before.
• Aim to be a first/early mover in lead markets.
• Deregulate as much as possible, as long as the
outcome is primarily measurable in monetary
terms and as long as a decline in the industrial
commons or the economic complexity is not the
result.
• Use regulation to drive innovation in new
technology areas or in social regulation domains
e.g. environmental or healthcare or private
entrepreneurship around public goods etc.
• Aim to identify opportunities for lead market
roles.
Flexible input markets • Strive to benefit from increased flexibility in
input markets and strive to contribute to this
flexibility by e.g. linking salary increases to
productivity increases on the firm level.
• Introduce policies that are conducive to
increased input market flexibility.
Demand • Accept the challenge of delivering outcomes not
previously achieved.
• Put in place smart procurement that drives
towards a willingness to buy untested solutions
with performance not presently available and
also set outcome targets that require research and
development to be achieved and always ensure
domestic system integrator.
• Introduce SBIR type programs to encourage
demand for new solutions or the creation of new
markets.
Table 4. Continued
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432
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Table 5. Summary of characteristics, strategy aspects and business model aspects of successful manu-
facturing firms operating in high cost operating environments
Key Characteristics Key Strategy Elements Key Business Model Elements
• Experienced, Educated &
Entrepreneurial Leadership with
Ambitious Goals.
• Only hire the right people and treat them as part of
the family.
• Leadership i.e. the MD must have deep
understanding of the knowledge domains that
underpin the business as well as a passion
for the business so that they can lead by
example.
• Knowledgeable, Loyal Low
Turn- Over Employees.
• Continuous life-long learning for all employees
both formal and informal.
• Highly flexible work arrangements based
on a mutual understanding that there exists a
mutual obligation expressed as:
   “My responsibility as an employer is to
make you the employee more employable
during your tenure with me” and “My
responsibility as an employee is to make you
the employer more successful during my
tenure with you”.
• Decentralised management
approach.
• Structure follows strategy and focus is on process
and the ability for everyone to be trusted to do “the
right thing” at any one time due to high competence
and mutual trust between management and employees
embodying elements of a high performance work
place system.
• High degree of mutual trust and loyalty
leading to an implicit life-long contract
contributing to a high performance work
place culture.
• Bottom-up management style and a high
degree of cross departmental cooperation.
• Deep expertise in the
knowledge domains that
underpin their business.
• To know more than anybody else about the offering
and its underpinning knowledge domains.
• Also focused on having a low resource
footprint e.g. products are built to use low
levels of input and have high levels of
recyclability or reusability with reusability
journeys outlined.
• Focussed Niche Strategy. • Extreme focus as opposed to all things for all men
which means saying NO when it is outside identified
focus area.
• Experts at operations and a tight focus
on cost using all available productivity
enhancing tools and techniques.
• Low levels of debt if any and high levels of
profitability.
• High Performance, High
Quality, Product-Service-
System Offering.
• Best in class product-service-system offering that is
sold on value for money not cost.
• Do not enter price driven volume markets
and when an existing market moves towards
this behaviour they exit and migrate to other
segments i.e. rigorously pursue a niche
strategy.
• The focus is superior value in absolute
terms and high value for money in relative
terms but at a high price.
• Highly servitized with well defined
product-service-system offerings where all
sub-components are charged for.
• Global outlook and global
business but local operations.
• The market is global and global customers are
served continuously and well but the operations and
the people are based in one place and there is very
little if any outsourcing.
• Have very strong long-term relationships
with partners and suppliers based on a win-
win approach but always control the channel
to market and to the customer.
• Partnerships are local and so are most
suppliers and very little outsourcing and no
outsourcing of anything that is core to the
business or the offering.
• Always co-locate research, development
and innovation with production and
operations.
continued on following page
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Manufacturing in a High Cost Environment

Key Characteristics Key Strategy Elements Key Business Model Elements
• Know more than the customer
about how the customer can
maximise the value they get out
of the procured product-service-
system offering.
• Deep customer and customer’s customer
knowledge.
• Global footprint combined with a high
level of specialisation results in market
leadership. Almost all existing and potential
customers are known and the characteristics
that a potential customer must fulfil to be
allowed to become a customer are well
known and adhered to.
• Profit is an inevitable consequence of
serving customers better than anyone else.
• Masters at incremental
integrated innovation.
• Continuous innovation is a core strategy. Must only
produce items that nobody else can produce [at that
performance level] and must cannibalise own offering
with new offering before anyone else.
• Obsessed with new knowledge and with
innovation in all forms i.e. integrated
innovation and innovates both to create and
to appropriate value.
• Have a very effective resource deployment
structure that is continuously reviewed given
innovation driven changes.
• Manages to combine economies of scale
with economies of scope in different parts of
the organisation.
• Risk reducing and innovation
driving partnerships with
research and expertise centres.
• Given the deep expertise in the underpinning
knowledge domain any business threatening
developments will originate in knowledge domains
outside the firm’s competence area so need partners
to identify these threats early in order to include
emerging knowledge domains into the firms existing
knowledge domains to maintain leadership in serving
the customer. This requires high absorptive capacity
(see below).
• These partnerships are pursued and
managed with respect based on earned trust
in a win-win way.
Table 6. Three types of Absorptive Capacity (Lim, 2009, p. 1252)
Disciplinary
Absorptive Capacity
Domain Specific
Absorptive Capacity
Encoded
Absorptive Capacity
Type of knowledge
acquired
• General scientific knowledge. • Solutions to specific technical
problems.
• Knowledge embedded in
tools and processes.
Stage of
technology
• Very early. • Early to intermediate. • Late.
Internal R&D • Exploratory (with a focus on
autonomy).
• Focused R&D. • Integration.
Linking internal to
external R&D
• Hire discipline-trained scientists,
develop ties with the academic
community, encourage scientific
publications.
• Hire people with domain-specific
skills, fund external R&D in specific
areas, influence the trajectory of external
R&D.
• Collaborate with suppliers
possessing the relevant
embedded knowledge.
Table 5. Continued
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Table 7. Tactical reasons and objectives driving servitization in manufacturing firms (Roos, 2014b, p.)
Tactical Observation Desired Outcome
Increased volatility in product sales (e.g. reduction of customer
capital equipment spend in the mining industry).
Lower volatility in cash flows due to a balance of product sales
revenues and after sales service revenues.
Missing out on the revenue potential in the large installed base. Increase the revenue stream from the installed base and contribute
to a reduction in cash flow volatility for the manufacturing firm.
Loyal customers are easier to serve and hence cost less to serve and
consequently are more profitable to serve.
Increase profitability by leveraging economies of loyalty.
Loyal customers have lower price sensitivity. Increase profitability by leveraging economies of loyalty.
Loyal customers use more complex services that frequently are
more profitable.
Increase profitability by leveraging economies of loyalty.
Loyal customers provide positive referrals and references to
potential new customers.
Reduce selling costs by leveraging economies of loyalty.
Services are more difficult for competitors to imitate. Increased profitability due to the creation of competitive
advantage, the duration of which can be extended through barriers
to entry inherent in the difficulty to imitate.
Services provision requires a closer relationship between producer
and customer and may result in customer lock-in.
This increases customer loyalty as well as providing a basis for
competitive advantage and hence increase profitability.
The product as a vehicle for service delivery, offers a potential for
monopoly in some co-created services.
Increased profitability through monopoly rent, economies of
loyalty and in-depth learning which reduces the cost and risk
around the development of both new products and new services.
Continuous customer interaction speeds up the acquisition, volume
and relevance of customer knowledge.
Volume of innovation ideas increases and their market acceptance
risk is reduced. Probability of co-developing new offerings with
a lead customer is increasing thereby reducing market acceptance
risk.
Decreased interest in the product matched by increased interest in
the outcome of the use of the product.
The ability to partake in business operations that do not involve
product sales but instead product use e.g. car sales replaced by car
rental or car sharing.
Service delivery with high customer satisfaction drives
replacement product sales.
Increased profitability due to repeat purchase.
Some outcomes demanded by customers requires service delivery. Retain market relevance, frequently combined with increased
customisation of the complete offering.
Some products require continuous service deliver over extended
periods of time.
Retain customer relationship.
Offshoring or outsourcing of production. Substitute lost cash flow and earnings.
Increasing regulatory requirements in the through-life and end-of
life product responsibility domain.
Services ensure regulatory compliance.
Services can contribute to reduced environmental and resource
footprint.
Respond to market trends and reduce operating costs.
Service provision adds another business. Increased turnover and (frequently) operating margin sometimes
through increased opportunities for cross-selling.
Services can differentiate the product offering. Increased competitive advantage resulting in increased profitability.
Services can extend product life. On the one hand this increases the net present value of the earnings
from a given product sale but on the other hand it reduces the net
present value of new product sales so this needs to be managed
very carefully.
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Table 8. The service business model (Salkari et al., 2007, p. 15) and derived business model dimensions
for manufacturing firms (Roos, 2013a)
A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses
Elements
classification
Element Description Positioning of THIS business within the company’s strategy.
Strategic
business
choices
Position in
company
strategy
Companies are value partners
supporting their customers’
(segments’) value creation in
order to provide solutions to
meet customer needs, including
subconscious needs.
Description of the Product-Service-System/Solutions offering.
Offerings Consist of bundled services and
products meeting customer needs
and supporting customers’ value
creation. Services are understood
as processes to support customer
value creation processes.
Identification of target customer segments, target consumer
segments and other definitive stakeholders.
Target
Customer
Segments
We select customers (customer
segments), where business may be
supported by way of our services
in order to be able to utilise our
core competencies to deliver
services.
Value Proposition for each of the target customer segments,
target consumer segments and other definitive stakeholders.
Customer
Relationships
Long-term relationships/
partnerships, close relations
with joint processes and dense
and continuous exchange of
information. Joint processes:
service providers move closer to
end customers in the value chain
Description of how the target customer segments, target
consumer segments and other definitive stakeholders capture
value from the offering.
Core
Competencies,
Capacity and
Tools
Competencies related to
understanding customer business,
processes and operations (at
least to some extent), and
information management within
service networks. Competent
personnel are required to deliver
the services. The capacity may
be limited in some geographical
areas.
What competitive advantage does the offering enable or
contribute to within the target customer segments, target
consumer segments and other definitive stakeholders.
Partner
Network
May be strategic service partners
and partners delivering services
at some sites/locations. Partner
networks often operate under the
brand of the company acting as an
integrator.
Value attribute, attribute preference and attribute performance
for each of the target customer segments, target consumer
segments and other definitive stakeholders.
Value
Proposition
Value comes from solutions
supporting customer value
creation. Such solutions consist of
services and products.
What requirements must be fulfilled by the target customer
segments, target consumer segments and other definitive
stakeholders in order to be able to benefit from the offering.
continued on following page
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A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses
Customer
Concerns:
Understanding
and
supporting
customer
value creation
Customer
Value Creation
Customer value creation and
related processes need to be
understood.
Description of how the Product-Service-System or Solutions
offering should be implemented at the target customer
segments, target consumer segments and other definitive
stakeholders to ensure the targeted benefits (value).
Value Capture Customer value comes from
solutions best supporting their
value creation – the services
supplied may even add to the
value of whatever the customer
outcome is.
Place, role and strategy of THIS business in the business
ecosystem of which it is part.
Customer
Advantages
Customers get solutions without
spending their resources beyond
their core competencies.
Technology base of the Product-Service-System/Solutions
offering.
General
Customer
Prerequisites
Customer key competencies and
businesses are well understood
by customers. Customers accept
the services and commit to
developing their own business
at different levels (strategic,
process, operations) in order to
fully benefit from the services.
Purchasing know-what and know-
how.
Design base of the Product-Service-System/Solutions offering.
Implementation
model
Joint service configuration and
implementation. Implementation
involves different levels provided
by service providers and
customers. Setting right Key
performance Indicators (KPI’s) is
elementary.
Art base of the Product-Service-System/Solutions offering.
Profitable
Service
Business
Earning Logic Earnings are accrued over time
and are based on value created.
Jointly defined KPI’s pinpoint
over- and under-performance
for both parties (provider –
customer). There are agreed
principles in place for dealing with
performance related risks.
Counselling (Hermeneutic) base of the Product-Service-
System/Solutions offering.
Pricing Value-based pricing: our service
should deliver certain value
exceeding service-related costs.
Therefore, a righteously dividable
“value” surplus will be generated.
Outgoing Logistics and Distribution Channel choice for each
of the target customer segments, target consumer segments and
other definitive stakeholders.
Delivery Delivery
Channel
Own delivery set-up or use of
service delivery networks, which
can be organised in various ways
to enable local offerings yet
still profitable business. Service
delivery networks may not own
customers.
Incoming Logistics and Supply Chain Choice.
Table 8. Continued
continued on following page
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A Generic Service Business Model for Product Centric Businesses A Generic Business Model for Manufacturing Businesses
Relationship width, depth and frequency for each of the target
customer segments and other definitive stakeholders.
Value Configuration (Value Chain, Value Shop, Value Network)
and associated transaction and coordination cost issues.
Resources, Competitive Advantage and Resource Deployment
Structure (IC Navigator).
Cost structure due to strategic choices and identification and
management objectives for associated economic value added
drivers as well as bankruptcy predicting indicators.
Revenue Models with focus on accessing multiple profit pools
and maximising the number of revenue streams/pricing logic
combinations aimed at achieving an economic value added for
the business exceeding the revenue stream from its primary
offering.
Table 9. Impact of resource orientation and market orientation on innovation and financial performance
of the firm (Paladino, 2009)
Low Resource Orientation High Resource Orientation
High Market
Orientation
Market-Driven Innovator
Second Highest Financial Performance
Lowest Innovation Performance
Financial Champion
Highest Financial Performance
Third Highest Innovation Performance
Low Market
Orientation
Unfocused Imitator or Follower
Lowest Financial Performance
Second Highest Innovation Performance
Masters of Innovation
Third Highest Financial Performance
Highest Innovation Performance
Table 10. Resource categories (Roos et al., 2012)
Resource Category
Monetary Physical Relational Organisational Competence
Definition Money or
monetary
equivalent
resources.
All physical
manifestations
including plant,
equipment, energy
and electricity.
All relationships
held by individuals
as representatives of
organisations.
All results of human endeavours
that remain in, and are owned
by, the organisation when
the employees have gone
home and that you cannot
find on the balance sheet e.g.
Brands, Processes, Software,
Information, etc.
Competence
residing in
individuals.
Tangible
Example
Cash Building, Energy Contractual
Relationships
Documented information Exam results
Intangible
Example
Unutilised
borrowing
Capacity
Location,
Exergy
Trust
Preferred status
Corporate culture Tacit knowledge
Table 8. Continued
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Manufacturing in a High Cost Environment

been used by brands that have become iconic such
as Apple turning computers into aesthetic designs,
Swatch turning watches into fashion and Cirque
du Soleil turning circus into art (Moon, 2010).
The fourth is the use of emotional state as
a basis for innovation. This is about the ability
to generate a predictable emotional state in an
individual (e.g. making you hungry by exposing
your olfactory sense to the smell of newly baked
bread). Some of this has been touched upon above
but here we take it one step further by applying a
reverse hermeneutic approach to innovation. The
methodology of hermeneutics was developed by
Frederich Schleiermacher (1768-1834). The term
is derived from the Greek word ‘hermeneutikos’,
which means ‘to interpret’, and this is exactly
what hermeneutics aims to do in order to reach
understanding (Palmer, 1969). In methodologi-
cal hermeneutics, the aim of interpretation is to
understand the creator of a text (or other object)
and his/her emotions, intentions and thoughts
behind it by means of the hermeneutic circle
that, according to Schleiermacher, enables us to
put ourselves in the place of the creator (Sheratt,
Table 11. Examples of resource transformations (Roos et al., 2012)
To
Monetary Physical Relational Organisational Competence
From Monetary Putting money in
the bank to gain
interest.
Procurement of
raw material or
equipment.
Investing in
relationship
building.
Investing in
software,
brand building,
information, etc.
Investing in
competence
development or in
people with higher
or more appropriate
competence.
Physical Selling products. Mixing chemical
A with chemical
B to get
chemical C.
Strengthening
relationships
through superior
aesthetic design or
through chemical
dependency e.g.
tobacco.
Developing new
products requiring
new production
processes.
Taking into use
new equipment
requiring new
competence to
operate.
Relational Monetising
relationships like
in e.g. shopping
TV where the
good seller pays
the TV channel
to get access to
the viewers.
The power
exerted by big
customers to
get free sample
products
developed
by tier one
suppliers.
Word of mouth. The quality system
that is implemented
for free by the large
customer into the
valuable small
supplier to assist
them reduce quality
variability.
Co-learning in
e.g. joint research
projects.
Organisational The additional
price you can
charge because
of brand or IP.
Process drive
production in
e.g. the process
industry (the
recipe that
if followed
generates the
product).
A customer
relationship
management
system that
increases
customer loyalty
when put to use.
Automated software
development.
Automated
training.
Competence Monetising
competence
(frequently
through
manhours as a
proxy).
The creation of
a prototype or a
work of art.
The conversion of
a non-relationship
into a relationship
by e.g. a
salesperson.
Documenting a
process so that it
can be repeated by
others.
Apprenticeship or
personal training.
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439
Manufacturing in a High Cost Environment

Table 12. The use of productivity improvement tools among 162 automotive suppliers [tool rating relat-
ing to the usefulness/ease of use of the tool using Likert Scale of 1 to 5, where 5 = very useful to 1 = of
no use.] (Trimble et al., 2013 p. 25)
Table 13. The use of productivity improvement techniques among 162 automotive suppliers (Trimble et
al., 2013 p. 26)
Product Group TQM Six
Sigma
Benchmarking Change
Management
Business Process Re-
Engineering
Policy
Deployment
Chassis suppliers 35% 20% 50% 16% 16% 23%
Electrical Suppliers 68% 32% 58% 45% 10% 48%
Trim suppliers 37% 33% 49% 20% 16% 35%
Total Percentage 42% 26% 50% 23% 14% 30%
51% Compared their performance against other factories in their own company group.
47% Compared their performance against competitors in their own field.
9% Compared their performance to other organisations outside of their own product
group or manufacturing areas in addition to comparing against other factories in their own
company group and/or against competitors in their own field.
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2005). According to Sheratt (2005) you, the in-
terpreter, imagine yourself to be the creator and
in doing so, will reach an understanding of the
author’s intentions and thoughts. Ricouer (1981)
recognises along with Habermas (1987) that the
hermeneutical process described can become a vi-
cious circle, in which the prejudices of the reader
dictate certain dogmatic readings, over and over
again. The explanation employed is pre-selected
to pre-determine the appropriation. Ricouer’s
(1981) solution is to interject the possibility of a
wilful distancing from one’s prejudices, a kind of
temporary suspension of judgment. He renames
the three stages as prejudgment, configuration,
and refiguration. The hermeneutic circle then
becomes a spiral as outlined in Figure 13.
Norman (2004) states that emotional responses
are the outcome of visceral, behavioural and reflec-
tive level processing in the brain. This is aligned
with Desmet’s (2002) statement that emotions are
not elicited by the tangible product but by a per-
sonal meaning derived from the tangible product.
Brunswicker et al. (2012) states that integration
of emotion is seen as a way to innovate beyond
products, services and processes.
Innovating in this space then becomes a reverse
hermeneutic process using insights from design,
behavioural and cognitive science together with
Figure 13. The hermeneutic spiral (Ricour, 1981)
Table 14. Characteristics of design in different domains (D’Ippolito, 2012, p. 20)
Engineering Meaning Management Meaning Aesthetics Meaning
Purpose Engineering Mean to shape a firm’s innovativeness, structure
and strategy
Artistic
Importance of the
Consumer
Medium Medium High
Skill Emphasis Team Team/Individual Individual
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441
Manufacturing in a High Cost Environment

psychology, with the aim as the creator of an ob-
ject, of generating in the mind of the interpreter
(consumer/customer) a specific set of predictable
emotions, intentions and thoughts.
Value Appropriating Innovations
These innovations come in two types: Effective-
ness Improving Innovations and Business Model
Innovations.
Effectiveness Improving Innovations fall into
one of three types (Roos, 2011d):
• Innovations that ensure a better fit between
the organisation’s offering and an explicit
or tacit demand from key stakeholders,
e.g. reducing the resource footprint of the
offering.
• Innovations that increase the effectiveness
of the resource-deployment structure, e.g.
switching from a physical resource to a re-
lational resource through outsourcing, In
this category fall also innovations that lock
in key stakeholders through platform strat-
egies – common in product-service sys-
tems where the only potential provider of
the service is the provider of the product,
or uses of e.g. switching costs or market
barriers.
• Innovations aimed at reducing coordina-
tion cost. Coordination cost includes cost
due to imperfect information and the op-
portunistic behaviour of organisational ac-
tors contributing to uncertainty in the firm.
The impact of coordination cost-based
decisions on business models is either an
increase in the precision or a broadening
of the coverage in the business model, or a
termination of the existing business model.
Business Model Innovations can act both as
an improvement in the appropriation of any value
created (their primary application), as well as
an additional increase in the value created (their
secondary application). Arend (2013) defines
a business model on a high level of abstraction
as how an organisation creates value by trans-
forming and transferring information, physical
resources, private, public or other categories of
goods through deploying resources, capabili-
ties, relationships, structures and other factors,
driven by an identifiable monetary or opera-
tional aid sourced from customers, partners,
volunteers, governments or other stakeholders.
This clarifies why the specific dimensions of
a business model will vary by sector, firm and
activity-system and hence there is no specific
set of dimensions that will be relevant across
all firms (see the right hand side of Table 8
above for the most common dimensions of
a manufacturing business model). Business
model innovation involves an innovation in at
least one of the constituent dimensions of the
specific business model.
The business model concept is useful in the
way it breaks down high level strategies into spe-
cific managerial tasks for businesses grounded in
new technologies or new approaches, especially if
the business has challenges as relates to making
money (Demil & Lecocq, 2010), and in addition
the business model concept enable effective com-
munications around how technology is translated
into value and then into profit (Chesbrough &
Rosenbloom, 2002). This conclusion is supported
by the conceptual ease with which successful new
business approaches like those brought to market
by e.g. Apple, Cirque du Soleil, Ryan Air, Google,
Twitter, Facebook, etc., can be explained using
the business model concept.
An integrative framework for business model
innovation is outlined in Figure 14 and can be
complemented with practical guidelines from
Bisgaard et al. (2012), Henriksen et al. (2012)
and Beltramello et al. (2013) that are useful al-
though they are mostly focussed on green business
models, as well as the insights from Roos & Pike
(2009), Burton et al. (2013), Roos (2013a) for
manufacturing firms.
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The importance of business model innova-
tion has been pointed out e.g. by Chaharbaghi
et al. (2003), Mitchell & Coles (2003), Mitchell
& Coles (2004), Santos et al. (2009), Taran
et al. (2009), Wang et al. (2009), Elbers et al.
(2010), Korsaa & Røge Jensen (2010), Leavy
(2010), Moingeon & Lehmann-Ortega (2010),
Zhang (2010), Breiby & Wanberg (2011), Ho
(2011), Habtay & Holmén (2012), Immonen
(2012). Jonkers et al. (2012), Kaplan (2012),
Na (2012), Shao et al. (2012), Sinfield et al.
(2012), Storbacka et al. (2012), Bocken etal.
(2013), Burton et al. (2013), Chesbrough et
al. (2013), Geterud & Tegern (2013), Konter
(2013), Schneider et al. (2013), Yannopoulos
(2013), Gassmann et al. (2014). Kindström &
Kowalkowski (2014).
One of the key strategies that a firm can use
to achieve a high level of value appropriation is
to widen the coverage of its business model and
participate in value chains where the firm was
not previously active and hence reach profit pools
previously inaccessible. Spring (2013) identify
the following themes for future manufacturing
business models:
• The decoupling of ownership from product
use and the increasing presence of circular
economy13 thinking will require the devel-
opment of products, institutions and sys-
tems appropriate to recycling, re-manufac-
ture, re-use and to more fluid attachments
of products to owners and users.
• Increasing importance of intrinsic and ex-
trinsic value attributes, including sustain-
ability, personalisation, guarantees of prov-
enance, and the information about these
facets that become ‘attached’ to products.
• ICT will increasingly enable radical de-
constructing and re-constructing of the
Figure 14. Phases of the business model innovation process and their key challenges (Frankenberger
et al., 2013)
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activities involved in product manufacture
(broadly defined), and in product use.
• There will be an increasing number of ways
in which value can be captured in addition
to a combination of strategic control of as-
sets, and mechanisms for making transac-
tions. This will include new ways to track,
measure and remunerate.
• Value will increasingly be created through
interactions between many small organisa-
tions, rather than through actions within
fewer, larger organisations.
CONCLUSION AND
RECOMMENDATIONS
In order to succeed in a high cost operating environ-
ment firms should ensure that they have access to:
• High managerial competence.
• Managers with experience from interna-
tional high performing firms.
• Modern managerial practices.
• A high performance work system operat-
ing in their business.
• A well educated and well trained workforce.
• Up to date capital equipment embodying
the latest proven productivity improving
technology.
• Competence in relevant key enabling tech-
nology domains.
• Well functioning and continuous R&D.
• Well functioning integrated innova-
tion management system with all its
components.
• A strategy that requires 5 percent produc-
tivity improvement annually.
• Skills in coopetition.
• A high performing cluster that it can be
part of.
• A high absorptive capacity.
• A combined and integrated product-ser-
vice-systems offering portfolio.
• A focused niche strategy with a balanced
resource and market orientation.
• Local lead customers.
• A strategy that requires global leadership
in the selected niche.
and that they in all other aspects adhere to the
principles of “Hidden Champions”.
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ENDNOTES
1 In a highly dynamic market it is not pos-
sible to have a long lasting competitive
advantage i.e. there is no such thing as a
sustainable competitive advantage but rather
a sequence of temporary competitive advan-
tages (Thomas, 1996; Eisenhardt & Martin,
2000; Useem & Brown, 2000; Fiol, 2001;
Roberts & Eisenhardt, 2003; Teece, 2007;
O’Shannassy, 2008; Chen, 2009; Thomas
& D’Aveni, 2009; Ahokangas et al., 2010;
D’Aveni et al. 2010; Sirmon et al., 2010;
Schimmer, 2012; Sigalas & Economou,
2013; El Shafeey, 2014)
2 The strategy by which companies cooperate
and compete simultaneously
3 Key Enabling Technologies are technology
domains that are knowledge intensive and
associated with high R&D intensity, rapid
innovation cycles, high capital expenditure,
highly-skilled employment, and that not only
underpin most industrial activities across
sectors but that also form industrial sectors in
their own right. They include in the author’s
definition: Information and Communication
Technologies, Nanotechnology, Micro- and
Nano-electronics, Industrial biotechnology,
Photonics, Advanced materials, Advanced
manufacturing Technologies, and Produc-
tion Systems for High Cost Operating En-
vironments.
4 It should be noted that Hall et al. (2013a)
found that firms with patents grow on av-
erage 10 percent faster than firms without
patents and that firms with design rights or
trademarks perform 16 -17 percent better
than firms without (Greenhalgh & Rogers,
2007; Bascavusoglu-Moreau & Tether,
2011).
5 The first use of the term servitization in a
context of manufacturing operations was by
Vandemerwe & Rada (1988, p. 314). They
defined servitization as “the increased offer-
ing of fuller market packages or “bundles” of
customer focussed combinations of goods,
services, support, self-service and knowl-
edge in order to add value to core product
offerings”. Baines et al. (2009a) later defined
servitization as “the innovation of an organi-
sation’s capabilities and processes to shift
from selling products to selling integrated
products and services that deliver value in
use”.
6 The numerical values are sourced from
Simon-Kucher & Partners’ 2013 study of
hidden champions in the 21st century.
7 The concept of resource transformations was
first introduced by Roos & Roos (1997)
8 Productivity improvement tools can be
defined as tools that are ‘stand-alone’ and
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Manufacturing in a High Cost Environment

which can be used to resolve particular
problems or make improvements in certain
focused areas. In addition, they have a clear
role and are narrow in focus. Productivity
improvement tools examples include Failure
Mode Effect Analysis (FMEA), 5S and Value
Stream Mapping. Individual productivity
improvement tools do not need any other
tools or methodologies to be able to function
and come in many forms ranging from very
simplistic to complex. As they tend to be only
used in certain areas of the company, they
do not normally require significant resources
or investment other than initial training and
implementation (Trimble et al., 2013).
9 A tool is a simple standalone application,
whereas a technique tends to be a more
comprehensively integrated approach to
problem solving that might rely on a num-
ber of supporting tools (Dale & McQuater,
1998). Examples of techniques are Total
Quality Management (TQM), Business Pro-
cess Reengineering (BPR), Six Sigma (6σ)
and Objective Policy Deployment (OPD)
(Trimble et al., 2013).
10 In general categories of erroneous applica-
tion of tools and techniques can be observed:
the use of wrong tool to solve problems; the
use of a single tool to solve all problems
and the use of the same set of tools on all
problems (Pavnaskar et al., 2003), lack of
understanding of the tool (Herron & Braiden,
2004) and in addition the error of using no
tools or techniques at all.
11 Productivity improvement is not easy and
use of tools and techniques does not guar-
antee success. A survey of 138 organisations
showed that nothing had changed in 26
percent of companies following productivity
improvement efforts, 49 percent of compa-
nies reported disillusionment over the lack
of improvement, 72 percent of improvement
initiatives had suffered due to time and re-
source limitations, 68 percent stated the cost
of the improvement was more than expected,
and 67 percent believed they needed more
guidance about exactly how to implement
successful improvement programs (Golden-
son & Herbsleb, 1995).
12 Generally considered to include: Nanotech-
nology; Micro and nanoelectronics; Indus-
trial biotechnology; Photonics; Advanced
Materials and Advanced Manufacturing
systems. The author also includes Pro-
duction Systems for High Cost operating
Environments with their different enabling
technologies.
13 The concept was first introduced by Bould-
ing (1966) and is used as a generic term for
an industrial economy that is, by design or
intention, restorative and in which material
flows are of two types, biological nutrients,
designed to re-enter the biosphere safely,
and technical nutrients, which are designed
to circulate at high quality without entering
the biosphere.
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481
Conclusion

SUCCEEDING IN A HIGH COST ENVIRONMENT
Akeytestofsuccessforhighcosteconomiesistheirappetiteandabilitytomanagechange,particularly
transformativeordisruptivechange.
Inordertocompetesuccessfullyfromahighercostbaseagainstlowercostbutsophisticatedcom-
petitors,theneedforchangeisinevitable.Itisaquestionofwhetherhighcostfirmsandnationsactto
anticipatetheforcesofchangeandcreateviableoptionsfortheirownfuture,oroperateontheassump-
tionthattheseforcesarebeyondtheircontrolandsobecomethecasualtiesofchange.
Muchofthetopicalcommentaryonoperatinginhighcosteconomies,likeAustralia,issimplistic.
Forexample,thereisapopularbeliefthatproductivitydeclinecanbeattributedtolowlabourproduc-
tivityandhighwagelevels,andthesimpleremedyistocutwages.Butthisprescriptionisatoddswith
authoritativeevidencepresentedinthisbookabouttheactualdriversofproductivityindifferentindus-
tries,andaboutthedecreasingimportanceofthecostsoflabourinproduction,locationandinvestment
decisionsformoderndaymanufacturing.
Similarly, policy setting in Australia’s high cost economy are invariably cautious, minimalist and
basedonalogicdesignedarguablyforanindustrialeraofthe19thand20thCenturies,nottheglobalised
knowledge-basedeconomyofthe21stCentury.
Governmentstendtofavouratriedandtruecourseandarewaryofrent-seekingandmarket-distorting
behaviourthatisdetrimentaltothewelfareofthecommunityeconomy-wide.Butcontributorstothisbook
argueontheinternationalevidencethatthisessentiallylaissez-faireapproachisaperformancefailure
bygovernment,onethatcreatesmorelosersthanwinners.Itisineffectiveinaddressingthechallenges
ofcompetingsuccessfullyasahighcosteconomy,andofturninganation’scomparativeadvantageinto
anenduringcompetitiveadvantage.
The task of succeeding in a high cost-operating environment is not one for policy makers alone:
actionbyenterprisesandworkplacesisalsokey.Itisvital,however,thatdecisionsaremadewitheyes
wide open to the realities of how to compete by creating and capturing value, not simply by cutting
costs.Contributionsinthisbookpointtothefollowingattributesofenterprisesthatcompetethrough
innovationandaddingvalue:
• Open,outward-lookingorganisationsembeddedinawidespectrumofqualityrelationshipsand
networks,andwithanexceptionalabilitytolearn,includinglearningbydoing;learningbytheuse
of next generation technologies and equipment which provide new productive capabilities; and
learningbyinteractingwithothers.
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482
• Closenesstocustomersthatprovidesathoroughunderstandingofneedsanddemand,asanav-
enueforprovidingsuperiorvalueformoneyintheeyesofthecustomer,includingwithbusiness
offeringsthatmeetlatent,unexpressedneedsandpreferences,orengagingcustomersdirectlyin
theproductionofthegoodsandservicestheybuy.
• Deep,uptodatesubjectmatterknowledgeintheirindustryandadjacentindustries,marketintel-
ligenceandknowledgeabouttrends,potentialdisruptionsandforcesforchange,understandingof
technologydevelopmentsandforesightingofnewtechnologiesandconvergence.
• Collaboration for problem-solving and for knowledge sharing and application, especially with
universities and research organisations, in clusters and regions, or in virtual cross-sectoral or
multi-disciplinarycommunitiesofpractice.
• Strong and deliberate building of new competitive capabilities within the business enterprise,
which increases its ‘absorptive capacity’. This refers to the set of processes, routines and skills
bywhichenterprisesacquire,assimilate,transformandexploitknowledgetoproducedistinctive
anddynamiccapabilitiesthatgivethemacompetitiveadvantagethatothersfindhardtoimitate
orsubstitute.
• Agileandcapablemanagersandskilledandempoweredemployeesengagedintheconstantsearch
fornewandemergingmarketopportunitiesandneeds,andhowthesecanbematchedwiththe
enterprise’sowndesign,operations,financial,engineeringandorganisationalcapabilities.
Thecollectionofexpertpapersinthisbookoffersakaleidoscopeofwell-referencedinsightsand
internationalcaseexamplesforfirms,regionsandpolicymakerstoassess,experimentwith,andadapt
tosuittheirownpriorities,businessmodelsandlocalcircumstances.
Thisbookmarshalstheevidenceforactiontocombatthepushforeverlowercostsandworse,ever
loweraspirationsbycompanies,communitiesandcountries.Anantidote,ratherthanablueprint,thisis
abookforthetoughtimesbeingconfrontedbyhighcosteconomies.
Göran Roos
Swinburne University, Australia
Narelle Kennedy
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About the Contributors
Göran Roos is Professor in Strategic Design in the Faculty of Design, Swinburne University of
Technology, Melbourne; Adjunct Professor at Mawson Institute, University of South Australia, Adelaide;
Adjunct Professor at the Entrepreneurship, Commercialisation and Innovation Centre, University of
Adelaide, South Australia; Adjunct Professor at University of Technology Sydney Business School,
Sydney; Adjunct Associate Professor in the College of Business, Nanyang Business School, Nanyang
Technological University, Singapore. He is a Stretton Fellow appointed by the City of Playford at Uni-
versity of Adelaide and chairing the Advanced Manufacturing Council in Adelaide; is a member of the
Economic Development Board; a member of the Council for Flinders University, Adelaide; a member
of CSIRO’s Manufacturing Sector Advisory Council; Senior Advisor to Aalto Executive Education
Academy in Helsinki; and holds the title of Professor at VTT Technical Research Centre of Finland. He
is a member of the editorial boards for Journal of Intellectual Capital, International Journal of Learn-
ing and Intellectual Capital, International Journal of Strategic Change Management, and Journal of
Human Resource Costing and Accounting.
Narelle Kennedy, AM, is Managing Director of the Kennedy Company Pty Ltd. providing business
leaders and public policy makers with research, advisory and consulting services to enable them to com-
pete in fast-moving, volatile global business environments. She is Adjunct Professor with the School of
Business at the University of Technology Sydney. She founded and led the pioneering, business-backed
collaborative research think tank, the Australian Business Foundation, and is responsible for its catalogue
of published research studies with leading academics and practitioners on innovation, future scenarios,
globalisation, productivity, sustainability, and industry case studies. She was awarded a Member of the
Order of Australia (AM) in 2014 for significant service to business in Australia.
* * *
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About the Contributors
Renu Agarwal is Senior Lecturer in Innovation and Service Operations Management at UTS Busi-
ness. In her current faculty position, she provides leadership and conducts research in the disciplinary
fields of service science, service value networks, supply chain management, dynamic capability building,
management practices, management education, and innovation and productivity. As a Research Director,
Renu has been instrumental in managing several federal government projects on management practices
in manufacturing firms for both Australia and New Zealand and at state government level in Australian
hospitals, participating in a global study of management practice and productivity, working in collabora-
tion with London School of Economics, McKinsey, and Stanford University. She has published in top tier
international journals including Decision Sciences, International Journal of Operations Management,
and International Journal of Production Economics. She is currently editing The Handbook of Service
Innovation to be published by Springer-Verlag London in 2014.
Toni Ahlqvist is Principal Scientist in the foresight team at VTT Technical Research Centre of
Finland. He has some 17 years of research experience in the fields of foresight, economic geography,
and innovation studies. He has been a project manager and a foresight expert in several foresight and
technology roadmapping projects at VTT. His present research focuses on socio-spatial transformations
induced by science, technology and innovation policies, and on political economy of national and regional
innovation systems. He has published widely on the field of foresight, on topics such as roadmapping,
emerging technologies and infrastructures, and socio-technical change. He is an Adjunct Professor of
economic geography and technological transformations at the University of Turku, Finland.
Christopher Bajada is Associate Professor of Economics and Associate Dean (Teaching and
Learning) at University of Technology Sydney. He started his teaching career at the University of New
South Wales, from where he holds a PhD. He has taught economics on a variety of undergraduate and
postgraduate courses, with his most recent teaching experience being in applied microeconomics. In
recognition of his teaching, Chris was awarded the University of Technology Teaching Excellence Award
and Team Teaching Award as well as the Carrick Institute (now the Office of Learning and Teaching)
Teaching Award for Outstanding Contributions to Student Learning in Higher Education. His research
is primarily in applied macroeconomics, with a special interest in tax compliance. He has worked with
the Australian Taxation Office as a member of the Cash Economy Task Force, as a member of the Eco-
nomics Society of Australia and more recently on the expert advisory panel on the development of the
Economics Learning Standards for Australian Higher Education.
Paul J. Brown is a Lecturer at UTS Business School in the Accounting Discipline Group. His PhD
was in the area of corporate governance and contracting theory, and since completing it in 2009, he has
embarked on a cross-disciplinary research program. As part of cross-disciplinary teams, he has been
funded for two large projects: Leadership and Change for Energy Efficiency in Accounting and Man-
agement, funded by the NSW Office of Environment and Heritage; and Accounting for Value Chain
Sustainability and Competitive Advantage, funded by the Australian Government Cotton Research and
Development Corporation. He has also worked on a number of Australian and New Zealand federal gov-
ernment funded projects focussing on evaluating the links between management practice and productiv-
ity. He is a core member of the UTS Centre for Corporate Governance and the Centre for Management
and Organisation Studies.
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About the Contributors
Sam Bucolo is Professor of Design and Innovation at University of Technology Sydney and a leading
academic and practitioner in the emerging field of design led innovation. He has led several projects that
has contributed to transforming businesses facing structural change through embedding design capability
within the organisation. He has published widely on the topic of the value of design to industry and has
undertaken several significant projects with a wide variety of firms. He is recognised as a leader in this
field. He leads a team investigating the value of Design Led Innovation to the Australian Economy. He
is also the convenor of the recently established Australian Design Integration network and is an executive
board member of the Cumulus global network.
Graciela Corral de Zubielqui is the Associate Head (Research) and lecturer in the postgraduate
Project Management area in the Entrepreneurship, Commercialisation, and Innovation Centre at the
University of Adelaide. She completed her PhD in the area of innovation and globalization. She also
holds a Bachelor of Economics (Honours) and a Master in Economics and Business Administration.
She has held appointments as a Research Associate in the School of Management, University of South
Australia, the Entrepreneurship, Commercialisation and Innovation Centre, and the Adelaide Business
School at the University of Adelaide. She worked in projects which linked government departments,
industry and university. She is interested in innovation and collaboration activities between government,
industry and university, and performance and economic regional development.
Manjula Dissanayake is a PhD candidate at the Entrepreneurship Commercialisation and Innovation
Centre (ECIC) at the University of Adelaide, studying entrepreneurial team learning and strategy develop-
ment. Prior to starting his PhD candidature, he was a founding member of highly successful technology
start up companies, one of which was acquired by Symbol Technologies (now a Motorola Company) in
2002. He has worked on innovative projects for leadings clients in retail, banking and government sectors
including for Fortune 500 companies. He has co-authored granted US patents in the technology space
mainly for the retail industry. He has served on numerous boards of universities and industry chambers
including the American Chamber of Commerce. He has presented and chaired sessions at international
conferences on Entrepreneurship. He obtained his Bachelors in Information Systems from Manchester
Metropolitan University, UK with a First Class Honours and Masters in Advanced Computing from
School of Computing – University of Colombo, Sri Lanka. He has also obtained his executive manage-
ment training from Stanford University, USA.
Bradley Farrell is a Partner at Earnst & Young and the firm’s Oil and Gas Advisory Leader for
Oceania. For more than 10 years, Bradley has delivered commercially pragmatic advisory solutions to a
wide range of local and international clients. He specialises in providing Advisory services to Exploration
and Production companies, especially those with interest in LNG (liquefied natural gas). His oil and gas
advisory experience includes assignments related to business transformations, enterprise performance
management, business management systems, process analysis and improvement, organisation design and
development, and change management. He coordinates the firm’s market strategy and thought leader-
ship. He also monitors current and emerging issues, represents Ernst & Young at industry forums and
participates in national and global consultations on energy specific issues.
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About the Contributors
Jerad A. Ford has over 10 years of experience with the world’s largest independent research and
development firm, Battelle, as a Senior Research Scientist responsible for project management and busi-
ness development. He has worked extensively with major US government agencies on innovation, and
has recently set strategy for renewable energy, and oil and gas exploration and production, for a major
national oil and gas firm in SE Asia. He is currently undertaking a PhD at The University of Queensland
Business School in Strategy with a focus on innovation in Australia’s oil and gas industry.
Rodin Genoff is founder and Managing Director of Rodin Genoff & Associates, Pty Ltd. Sydney
Australia, established in 1998. Rodin is an internationally recognised cluster development expert. His
work with the City of Playford in South Australia won the DOTARS award for the most innovative
economic development program in Australia. He has designed and led cluster projects in Europe, Asia
and Australia focussing on integrating cross cluster dynamics between sectors such as food processing,
steel, engineering, electronics, IT, cleantech, industrial design, and the creative industries to create col-
laborations between companies. These have led to new business and investment opportunities and the
formation of born global companies. His work has been widely reported in the Australian and Danish
financial press. He has worked at executive level of government, local and regional development and
between 1994 and 1999 lectured at undergraduate and postgraduate level in Economics and Public Policy
at the University of South Australia and undertook ARC research at the Centre of Labour Studies at
Adelaide University. He has written several books on manufacturing, innovation and industry cluster
development, was the Australian representative to the OECD LEED program between 2001 and 2006,
and has served on Ministerial Advisory Boards. He is also co-founder and Global Head of Strategy for
Integrative Design, a Singapore based sustainability and engineering design company. In 2013, Rodin
was named by ABC Carbon (Singapore) as one of the top 100 sustainability leaders in the world for his
innovative work in the cleantech and environment industries.
Roy Green is Dean of UTS Business School at the University of Technology Sydney. He gained his
doctorate from the University of Cambridge and has worked on innovation policy with governments and
business around the world, including projects for the OECD’s National Innovation Systems programme
and the European Union’s Seventh Framework Programme for Research and Technological Develop-
ment (FP7). Most recently, he led Australian participation in a global study of management practice and
productivity, conducted a major industry review for the Department of Innovation, Industry, Science and
Research and was invited to join the Prime Minister’s Manufacturing Taskforce. He has also chaired the
Australian Government’s Innovative Regions Centre, CSIRO Manufacturing Sector Advisory Council
and NSW Manufacturing Council, and was a member of the Enterprise Connect Advisory Council and
Australian Research Council (ARC) Centre of Excellence for Creative Industries and Innovation.
John Kettle earned his PhD at the University of Plymouth and is presently Manager of International
Operations at VTT Technical Research Centre of Finland. He has over 30 years of industrial research
and development experience in the Minerals R&D (Imerys) and Pulp and Paper R&D (SCA, KCL, and
VTT). His present focus is on the development of VTT’s business internationally and with particular
focus on Australia. He has published in the fields of porous materials, coating and printing technologies.
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About the Contributors
Mushui Huanmei Li graduated with a Bachelor of International Economics and Trade from Tianjin
Agriculture University, China in 2007. From 2007 to 2010, she completed a Master of Regional Eco-
nomics at North West Agriculture and Forestry University, China. She commenced her doctoral studies
at the University of Adelaide in November 2010. Her research interests are entrepreneurship, industrial
clusters, and wine industry policy in Australia.
Gerald Marion has over 17 years of professional experience as a Private Equity Investor and Manage-
ment Consultant. He is a Director within EY’s Advisory and the Strategic Direction & Customer Lead
in Queensland. His focus areas include delivering growth and business transformation projects across
Government, Financial Services and the Energy Sector. He has worked on a variety of strategy and opera-
tional projects including Growth and Innovation, Organisational Productivity, Customer Transformation,
Target Operating Models Redesign, and Lean/Six Sigma programs. He is a UQ Business School Industry
Fellow and has closely collaborated with UQ on a number of key initiatives, namely: The Productivity
and Innovation Study of the Australian Oil and Gas Industry; The Digital Transformation Audit of 500
businesses and 25 digital champions; The Brisbane Innovation Scorecard and The University of the
Future. He presented on behalf of EY-UQ the preliminary findings of “The Productivity and Innovation
Study of the Australian Oil and Gas Industry” at the APPEA conference in October 2012 in Brisbane.
Ian Marsh is Visiting Professor at the Crawford School, Australian National University and at the
Australian Innovation Research Centre, University of Tasmania. His most recent study Democratic De-
cline and Democratic Renewal: Political Change in Britain, Australia and New Zealand (with Raymond
Miller) was published in 2012 by Cambridge University Press. He has a strong background as a teacher,
researcher, author, and policy adviser, specialising in innovation and governance. He received a BA from
the University of Newcastle and is a graduate of the Kennedy School of Government and the Graduate
School of Arts and Sciences at Harvard University (AM. PhD).
Seelan Naicker (BSc Geology [Hon], MBA) is Managing Director of the 4Sight Group Pty Ltd that
is focused on assisting asset intensive organisations design and execute distinctive game plans to domi-
nate in today’s turbulent world. He specializes in the areas of innovation led productivity enhancement,
capital project innovation, value driven transformation and eco innovation. Prior to founding 4Sight
Group, he held senior leadership positions at Deloitte and Ernst & Young in Australia, South East Asia
and South Africa, where he was responsible for leading the Energy and Resources Practices, with a focus
on strategy, innovation, and supply chain transformation consulting. He is recognised as a thought leader,
and has published and presented papers on innovation, productivity and business excellence at signature
global conferences such as Asia Mining, Coaltrans, Deep Water Asia Pacific and APPEA in Australia.
He is a member of the Society of Petroleum Engineers, Energy Institute and Council for Supply Chain
Management Professionals.
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About the Contributors
Allan O’Connor is the Academic Director for Innovation and Entrepreneurship Post-Graduate
programs at the Entrepreneurship Commercialisation and Innovation Centre (ECIC), The University of
Adelaide, Australia. Commencing his professional career in 1979 in mechanical engineering, He has
worked primarily in the small and medium enterprise sector developing and introducing new products,
entering new markets, and expanding sales and business opportunities in both established and new
business environments. His qualifications in entrepreneurship include a Master in Enterprise Innovation
and a PhD in the field of public policy for entrepreneurship education and economic development. His
research involves enquiry at the intersections between entrepreneurship, innovation and socioeconomic
development.
Don Scott-Kemmis is a consultant specialising in innovation management and policy. He is Adjunct
Professor at UTS and teaches innovation management and entrepreneurship to postgraduates. Previously,
he was an Associate Professor at the ANU, and held research appointments at the University of Sussex
and University of Wollongong. He has been a consultant to many national and international organiza-
tions, and is currently advising on a major EU project in Indonesia. He has also been a manager and
adviser in research and innovation policy in the public sector in Australia. He holds degrees from the
University of Sydney and University of Sussex.
Graeme Sheather is Visiting Professor at the University of Technology Sydney Business School.
He has a Bachelor Degree in Architecture, a Master of Science in Urban and Regional Planning, and a
Master of Ekistics, and spent 30 years teaching, researching and consulting in urban and regional plan-
ning in Australia, Israel, Greece, and the USA. At UTS, he was the Director of the highly acclaimed
Bachelor of Manufacturing Management Coop degree. He has been a visiting lecturer in manufacturing
at Rhodes University, South Africa, and lecturer in manufacturing logistics at the Institute of Transport
and Logistics at University of Sydney Business School. He has some 50 publications across academic
and professional journals, papers in referred conference proceedings, and technical inquiries and reports.
He is joint author of three books and has chapters in a number of others, and has been a regular keynote
speaker and workshop leader at professional conferences. He was a joint recipient of ARC Large Re-
search grants incorporating work on integrated supply chain management, and awarded an international
grant as part of the EU’s ESPRIT 2000-TBP ENAPS Program for 1997 and 1998. He has completed
consulting contracts for industry and government agencies in regional industry analysis, transport and
economic planning and supply chain management. Currently he is a Principal in the consulting firm
Rodin Genoff & Associates, responsible for developing the cluster audit methodology used by the firm,
in creating economic development and job creation projects undertaken for regional Governments in
South Australia, Denmark and Sweden.
John Spoehr is the Executive Director of the Australian Workplace Innovation and Social Research
Centre at The University of Adelaide where he is an Associate Professor. He has published widely in the
areas of socio-economic impact of change including as Editor of State of South Australia now in its third
edition and The Engaging State, both published by Wakefield Press. He is currently playing a leading
role in the establishment of the Stretton Centre, which is seeking to foster and support more integrated
approaches to industry, workforce, and urban development in Australia.
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About the Contributors
John Steen is Associate Professor in Strategy at The University of Queensland Business School in
Brisbane. He holds PhDs in Strategy (The University of Queensland) and Biochemistry (University of
Tasmania). He is currently leading major international projects on the subject of innovation and produc-
tivity, with colleagues at UQ, Imperial College London and University College London. This includes
the transition to new digital business models and performance in megacapital ($1billion +) projects,
particularly in the oil and gas sector. Current partners in these projects include Imperial College London,
Cambridge University, Brisbane City Council, Queensland Government, Norwegian School of Manage-
ment, UQ Sustainable Minerals Institute, APPEA, and Ernst & Young. He is a nationally recognised
teacher in the field of business strategy, receiving an award from the Australian Teaching and Learning
Council in 2008. He has been on both the advisory and technical committees for the Brisbane Innovation
Scorecard, since its inception in 2010. He is highly sought after as a guest speaker and commentator and
has given talks on strategy and innovation to business and governments in Australia, Asia and Europe.
His research has been published in a range of leading peer-reviewed publications and he has been the
recipient of several competitive grants. In 2011, he was appointed as a visiting research fellow at the
Centre for Business Research, Cambridge University.
Milé Terziovski is in his second term as Head of School, International Graduate School of Busi-
ness, and Professor in Strategy and Innovation, at the University of South Australia. He is the Dean
(designate), and Professor in Innovation at the Curtin Graduate School of Business, effective end of
March 2014. Professor Terziovski has strong links with industry and the professions, and an outstanding
academic record of scholarship ranging across innovation, entrepreneurship and quality management. He
has published in prestigious journals such as the Strategic Management Journal, Journal of Operations
Management, and Rand European Journal of Operations Research, and received two best paper awards
from the US Academy of Management. He was previously employed with the University of Melbourne
for 10 years, Monash University for four years and Rio Tinto Ltd for 16 years as an Engineering Manager
and Project Leader.
John Tomaney is Professor of Urban and Regional Planning in the Bartlett School of Planning at
University College London. He holds visiting professorial appointments at the University of New South
Wales, Monash University, and Newcastle University (UK). He is an Academician of the (UK) Academy
of Social Science and a Fellow of the Regional Australia Institute.
Ville Valovirta is Senior Scientist at VTT Technical Research Centre of Finland. His research fo-
cuses on innovation systems, technology foresight, innovation policy, and public-private collaboration
for innovation. He is pursuing research on diffusion of urban innovation in cities and public procure-
ment of innovation. He has carried out foresight projects in Finland, Australia, South Korea, and Chile.
He has conducted programme evaluations and impact assessment related to innovation policy, R&D
programmes and commercialization support schemes. He has worked in a private consultancy where
he held responsibility for management of research and evaluation services. He holds M.S. (Pol.) from
University of Helsinki.
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About the Contributors
Nafty Vanderhoek is a graduate of the University of Adelaide where he obtained his BSc (Hons) in
1970 and PhD in 1974. He has been supporting the pulp and paper and related industries for almost 40
years in a variety of technical and management roles; 28 years with APM/Amcor, nine years with CSIRO
and for the past three years with VTT for whom he acts as a Senior Advisor. Today, he maintains a strong
interest in R&D aspects of biomass utilisation from transitioning existing pulp and paper operations to
new stand-alone biorefinery opportunities.
Martie-Louise Verreynne is Associate Professor in Innovation at the University of Queensland Busi-
ness School in Brisbane, Australia. She holds a PhD in Strategic Management from Massey University
in New Zealand and has worked at universities in Australia, New Zealand, and South Africa. She has
published in all three major small business journals, and is currently an assistant editor for one of those
journals. Her current work is in the areas of small firm growth, strategy, and innovation.
Cara Wrigley is Senior Lecturer in the field of Design-Led Innovation (DLI). She currently directs
the Queensland University of Technology’s DLI Research Lab, placing postgraduate researchers within
Australian businesses. She has developed a unique understanding of “visceral hedonic rhetoric” and its
contribution to the field of product design research. Combined with her scholarly expertise in emotional
design, she is actively researching the value that design holds in business – specifically through the
creation of strategies to design business models which lead to emotive customer engagement.
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563
Index
A
Action Plans 127, 136, 151
Agglomeration 32, 115, 121, 124, 126, 400, 403
Allocative Efficiency 69, 402
ambidextrous organisation 253, 256, 259, 264
B
Bookend Business Model 238
Business Alliances 124-125, 151
Business Collaboration Processes 151
Business Model 209-210, 212-215, 217, 219, 221,
223-224, 227-229, 231-234, 238-239, 244, 246,
248, 297, 346, 348, 350, 357, 362, 404, 410,
440-442
Business Model Innovation 209-210, 212-214, 217,
224, 227-229, 231-234, 238, 244, 410, 441-442
Business Networks 123, 125-126, 136, 142-144,
146-147, 151
C
Cellulosic Fibre 172-173, 178, 199, 203
Cleantech Industries 151
Cluster Audits 151
Cluster Dynamics 239
Clusters 32, 55, 76-78, 109, 115-117, 122-126, 137,
139, 142, 147-149, 152, 274, 278, 327-328,
367, 393, 400, 413
Collaborative Networks 124, 134, 152
competitive advantage 36, 88, 109, 114, 144, 151,
160, 169, 209, 241-242, 264, 268-269, 276,
278, 286, 301, 308, 350, 355, 362, 404, 412
Connector Companies 123, 126, 136-138, 140, 146,
151-152
cost economy 52-54, 59, 69, 112, 148, 153, 221, 242
Creative Destruction 5, 28, 60, 77, 109, 172, 300,
395
cultural transformation 243-244
Customer-Centric 229, 233, 239
D
Decentralised Policy Designs 62, 65, 69
deep customer 243, 245, 251, 414
Deep Customer Insight 251
Design-Led Innovation 241-246, 248-249, 251
Design Thinking 82, 109, 243-244, 251
development strategies 116-117, 216, 321
E
Economic Capabilities 53, 59-60, 65, 69-70
Economic Complexity 1, 31-32, 35-39, 393, 403
Entrepreneurial Behaviours 304, 306, 353-354, 361,
391
Entrepreneurial Capability 302-303, 355, 359, 364,
391
Entrepreneurial Characteristics 290, 301-302, 306,
308, 316, 333, 335, 338, 392
Entrepreneurial Competence 303, 344, 392
Entrepreneurial Ecosystem 291, 307, 345, 361, 392
Entrepreneurial Environment 307, 315, 333, 392
Entrepreneurial Firm 290, 299, 304-307, 345, 348-
349, 351-354, 392
Entrepreneurial Opportunity 294, 302, 304-307,
345, 350, 392
G
Gas industry 153-159, 162, 169-170
Gorgon project 154
Growth Firm 392
Growth Oriented Regional Policy 121
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564
Index
H
High Cost Economy 52-54, 59, 69, 112, 148, 153,
221
human capital 114, 119, 233, 271, 301-302, 307,
341, 344, 346, 348, 350, 407
I
Industrial Diversification 94, 109
Industrial Rejuvenation 72-73, 75-77, 81, 85-89, 97,
109
Industry Clusters 77, 109, 116, 123, 126, 152
Innovation Theory 54-56, 58, 61, 69, 255
Integrated and Inclusive Problem-Solving 109
Integrated Solutions Business Model 239
K
Kanban 133, 152
Knowledge Economy 53, 60, 70, 79, 114
L
labour costs 2, 27, 38, 155, 158, 219, 268-269, 273,
286
Leading Edge Customers 239
Lean Manufacturing 239, 270, 281, 284
Limestone Coast 173, 178-179, 182-183, 200
Local and Regional Institutions 112-113, 120-121
M
management practices 268-271, 273-274, 277-278,
281, 284-286, 343, 353, 397
manufacturing firms 244, 268-271, 276, 278, 280,
284, 286, 393, 401, 405, 408, 441
Manufacturing Process Types 139, 152
market share 143, 229, 246
multi-level governance 114, 117, 119
N
Nascent Entrepreneur 292, 306, 339-340, 346, 357,
360, 392
Nascent Firm 392
Neo-Classical Economics 70
Niche Business Model 223, 239
O
operating cost 27, 31, 252-255, 257, 264, 270, 393
operating economies 39
P
Peripheral cities 112, 117, 120
Place-Based Development 121
policy design 59, 61-62, 65, 174-175, 177, 204
production activities 2, 37, 408
productivity challenge 153-155, 157-158, 166, 170
public policy 5, 52-54, 56, 59-62, 65, 69, 115-116,
125, 173, 177, 201, 203, 210, 360-361
R
Redistributive Regional Policy 121
Regional Development 112-114, 116-117, 121, 126,
148, 173, 178, 347
Regional Innovation Systems 76-77, 79, 109, 328
S
Six Sigma 246, 252-261, 263-264
Smart Specialisation 32, 79-81, 88-89, 109, 125
Social Network Analysis 124, 152
Stages of Firm Growth 295, 306, 392
strategic roadmapping 172-178, 202-204
structural change 1-2, 5
Supply Chain Types 131-132, 134, 139, 152
Survival Firm 392
T
Technical Research 173, 179, 187, 203
The Entrepreneur 291-293, 295, 297, 299-302, 305,
307-308, 316, 336, 340-342, 344-346, 350,
357, 360, 362, 368, 392
U
Urban and Regional Regeneration 76, 109
V
Value Chain 10, 27, 38, 78, 88, 124, 172-173,
177-181, 183, 195, 199, 203, 216-217, 221,
233, 238-239, 331, 408, 416
Value Proposition 217, 223, 238-239, 249, 258
W
wood products 172-174, 178, 180, 182-183,
185-188, 190, 192-193, 195, 197, 199-200
Z
Zones of Competitive Capability 128, 152
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Title Page
Copyright Page
Advances in Business Strategy and Competitive Advantage (ABSCA) Book Series
Table of Contents
Detailed Table of Contents
Foreword
Preface
Section 1: Responses for National Economies
Chapter 1: Manufacturing in a High Cost Environment
Chapter 2: Competing from a High Cost Economy
Chapter 3: Foundations for Industrial Rejuvenation
Section 2: Responses for Sectors, Clusters, and Regions
Chapter 4: The Role of Local and Regional Institutions
Chapter 5: Putting Clusters to Work
Chapter 6: Confronting the Productivity Challenge in the High Cost Economy
Chapter 7: Strategic Roadmapping as a Policy Tool for Meso-Level Industrial Transformation
Section 3: Responses for Enterprises and Workplaces
Chapter 8: Business Innovation
Chapter 9: Design-Led Innovation
Chapter 10: The Effects of Six Sigma Quality (SSQ) on Innovation and Organisational Ambidexterity in a High Operating Cost Environment
Chapter 11: Managerial Practices in a High Cost Manufacturing Environment
Chapter 12: Supporting Entrepreneurship in High Cost Economies
Chapter 13: Manufacturing in a High Cost Environment
Conclusion
Compilation of References
About the Contributors
Index

10/25/2020 Rubric Detail – BUS407030VA016-1208-001

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Name: w04a1

Description: w04a1 – Training and Development in Small Businesse
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Analyze key elements of training and development geared toward improving the performance
of the specific small business for which you are consulting.

—

Unacceptable 0 (0.00%) points
Needs Improvement 34.125 (16.25%) points
Satisfactory 39.375 (18.75%) points
Competent 44.625 (21.25%) points
Exemplary 52.5 (25.00%) points

Predict 3–5 potential challenges that the managers or owners of the business could face in
addressing organizational performance. —

Unacceptable 0 (0.00%) points
Needs Improvement 27.3 (13.00%) points
Satisfactory 31.5 (15.00%) points
Competent 35.7 (17.00%) points
Exemplary 42 (20.00%) points

Justify the effects of detecting organizational gaps in small business, providing examples to
explain the rationale. —

Unacceptable 0 (0.00%) points
Needs Improvement 27.3 (13.00%) points
Satisfactory 31.5 (15.00%) points
Competent 35.7 (17.00%) points
Exemplary 42 (20.00%) points

Propose a competitive training strategy that will improve the position of the business in the
market. The strategy should include, at a minimum, an agenda of training activities, rationale
for instructional strategies used, and the return on investment (ROI) that will be gained from
the strategy you have developed.

—
Unacceptable 0 (0.00%) points
Needs Improvement 27.3 (13.00%) points
Satisfactory 31.5 (15.00%) points
Competent 35.7 (17.00%) points
Exemplary 42 (20.00%) points

10/25/2020 Rubric Detail – BUS407030VA016-1208-001

https://blackboard.strayer.edu/webapps/rubric/do/course/gradeRubric?mode=grid&isPopup=true&rubricCount=1&prefix=_24601653_1&course_id=_28… 2/2

Use at least three quality academic resources in this assignment.
—

Unacceptable 0 (0.00%) points
Needs Improvement 6.825 (3.25%) points
Satisfactory 7.875 (3.75%) points
Competent 8.925 (4.25%) points
Exemplary 10.5 (5.00%) points

Clarity, writing mechanics, and formatting requirements.
—

Unacceptable 0 (0.00%) points
Needs Improvement 13.65 (6.50%) points
Satisfactory 15.75 (7.50%) points
Competent 17.85 (8.50%) points
Exemplary 21 (10.00%) points

Name:w04a1

Description:w04a1 – Training and Development in Small Businesse
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