Innovative Management Perspectives on Confronting Contemporary Challenges [1 ed.] 9781443884341, 9781443872454

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Innovative Management Perspectives on Confronting Contemporary Challenges

Innovative Management Perspectives on Confronting Contemporary Challenges Edited by

Demetris Vrontis Evangelos Tsoukatos and Amedeo Maizza

Innovative Management Perspectives on Confronting Contemporary Challenges Edited by Demetris Vrontis, Evangelos Tsoukatos and Amedeo Maizza This book first published 2015 Cambridge Scholars Publishing Lady Stephenson Library, Newcastle upon Tyne, NE6 2PA, UK British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Copyright © 2015 by Demetris Vrontis, Evangelos Tsoukatos, Amedeo Maizza and contributors All rights for this book reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. ISBN (10): 1-4438-7245-8 ISBN (13): 978-1-4438-7245-4

TABLE OF CONTENTS

Chapter One ................................................................................................. 1 Cost of Equity Capital in Private Companies Bernd Britzelmaier, Dennis Schlegel and Lilit Vardanyan Chapter Two .............................................................................................. 29 Understanding Being Valued: A Key Driver for Engagement Julia Claxton Chapter Three ............................................................................................ 56 Management Accounting Systems in SMEs: A Means to Adapt to the Financial Crisis? Sandra Cohen, Sotirios Karatzimas and Vasilios-Christos Naoum Chapter Four .............................................................................................. 82 Engineering an Innovative Management System: Accomplishments and Challenges Larisa Mihoreanu, Rodica Pamfilie, Andrei Angheluta and Carmen Costea, Chapter Five ............................................................................................ 101 Leader Programme in Apulia: Rural Development and Innovation Needs Stefano De Rubertis, Angelo Belliggiano and Marilena Labianca Chapter Six .............................................................................................. 129 Nurses-Managers’ Acts in Organizational Conflict Spectacles: The Challenges of Public Sector Management in the Era of Globalization Helena Desivilya Syna, Michal Shamir and Orit Shamir-Balderman Chapter Seven.......................................................................................... 149 Mobile Customer Relationship Management: Innovative Perspectives and Future Trends in Tourism George Mastorakis, Nikolaos Trihas, Emmanouil Perakakis, Ioannis Kopanakis and Constandinos X. Mavromoustakis

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Chapter Eight ........................................................................................... 172 Work-Based Learning as an Integrated Curriculum: Enhancing Graduate Employability in a Changing Higher Education Landscape? Niki Kyriakidou, Sallyann Halliday and Stefanos Nachmias Chapter Nine............................................................................................ 197 Re-thinking the Management of Team Performance: No Longer Disingenuous or Stupid Caroline Rowland Chapter Ten ............................................................................................. 221 Innovation and SME Growth in Low Tech Sectors: The Case of Palestine Suhail Sami Sultan Chapter Eleven ........................................................................................ 241 Digital Innovation and Business Management Savino Santovito and Antonio Iazzi Chapter Twelve ....................................................................................... 263 Diagnosing the Competitiveness of SMEs on International Markets: Conception and Testing of an Innovative Software Amedeo Maizza, Lea Iaia and Federica Cavallo

CHAPTER ONE COST OF EQUITY CAPITAL IN PRIVATE COMPANIES BERND BRITZELMAIER, DENNIS SCHLEGEL AND LILIT VARDANYAN PFORZHEIM UNIVERSITY, GERMANY

1 Introduction In company valuation as well as in value-based management (VBM) the cost of capital (COC) is one of the key elements (AIR, 2010) and in the meantime it is one of the central problems in the value-enhancement analysis (Herter, 1994). COC is the profit that investors have to give up instead of investing elsewhere. It has two elements in it: a) the timing of the expected returns and b) the risk of alternative investments (Young and O’Byrne, 2001). That is why it is used as the discount rate for projecting present values of the future cash flows in valuation theory, for calculations in value-based management metrics (e.g. Economic Value Added, Shareholder Value) as well as a hurdle rate for accepting new investments (Stewart, 1991). The effectiveness of VBM measures highly depends on the accuracy of the calculation of the capital costs (Männel, 2006). Studies show that the difficulty of calculating the COC is in determining the requirement of return of the equity holders – cost of equity capital (CEC) (Geginat et al., 2006). The estimation of the cost of equity is difficult because there are many uncertainties to consider (Britzelmaier, 2013b). This is true for all companies, but is highly emphasized for private companies. The reason is that the calculation of CEC for publicly listed companies is possible with established mathematical models such as Capital Asset Pricing Model (CAPM) or Arbitrage Pricing Theory (APT),

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which however base on the condition of stock market listing. This is a condition, which naturally is absent for private companies. Existing literature on cost of equity capital mainly focuses on calculation methods for large companies, which also still demand further research. There are some papers about cost for privately held firms (e.g. McConaughy, 1999; Cotler and Fletcher, 2000 or Harjoto and Paglia, 2012) but existing literature still lacks, to a certain extent, an overview of which calculation methods are valid and applicable for private companies. The objective of this paper is to summarize and present solutions and methods to calculate the cost of equity capital for private companies. In doing this, this paper will critically analyze the validity of the most common CEC calculation method, namely CAPM for private companies. As the CAPM-derived methods for private companies are highly questioned, other methods are analyzed and presented. Although this paper does not include specific cases and is based on literature review, it is the intention of the authors to provide a practical guide for financial analysts and controllers to have an overview and a guideline in order to be able to calculate the cost of equity capital for private companies.

2 Fundamental Principals of cost of capital Background and Weighted Average Cost of Capital There are basically two approaches to the estimation of the cost of capital – subjective and objective. According to the decision oriented valuation principles, the COC is derived from the subjective decision making of individual investors (Pape, 2010 and Pereiro, 2002). In finance theory, however, an attempt is made to objectify the COC, thereby the COC represents the opportunity cost of a particular investment under the consideration of risk aspects (Ballwieser, 1994, as cited in AIR, 2010 and Bühner and Sulzbach, 1999). The capital providers expect certain compensation – a minimum rate of return – for the opportunity cost of investing their capital in a particular company instead of others with an equivalent risk (Khadjavi, 2005; Pereiro, 2002; Pape, 2010 and Copeland et al., 2000). The capital costs are represented by the expectations of debt holders regarding interest payments and expectations of equity providers regarding dividend payments or stock price profits (Britzelmaier, 2013b). In the classical finance theory the COC represents the business risk. However

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besides the business risk in COC, the financial risk also plays a major role, mostly through the capital structure component in the most common cost of capital formula – the Weighted Average Cost of Capital (WACC) (Coenenberg and Salfeld, 2007). Studies show that most companies (83%) use WACC for the calculation of the cost of capital (Britzelmaier, 2013a; Geginat et al., 2006) as shown in Formula 1. CEquity and CDebt stand for the costs of Equity and Debt Capital, respectively. Formula 1: Weighted Average Cost of Capital

Whereas all components of WACC can be calculated relatively easily and do not present complications in practice, the cost of equity capital is the pain point of the formula. The determination of the capital structure follows either a) by calculating the actual capital structure with market or book values of debt and equity or b) by applying the target capital structure. In general the actual market values of debt and equity are recommended to be used and not the actual book values, as the market values show how much it would cost to raise the same capital today – opportunity approach of raising capital (Young and O’Byrne, 2001; Vishwanath and Krishnamurti, 2009). Applying the market value of equity is clearly better because of the increasing meaning of the intangible assets which are referred to as hidden reserves. Many intangible assets are not activated under the existing Generally Accepted Accounting Principles (GAAP), thus resulting in divergence of the market and book values of the equity. As the book value of the debt usually does not vary so much from its market value, it can be used instead of the market value (Tappe, 2009). Whereas the market value of equity for publicly listed companies can be calculated by multiplying the number of outstanding shares with the stock price on the date of calculation, the market value of equity for unlisted companies is quite difficult to calculate (Hostettler, 2002). Instead of using actual values of debt and equity (regardless book or market) to determine the weighting ratios, the target capital structure can also be deployed in the WACC calculation. This recommendation is made mainly for the valuations for long-term periods in order to avoid short-

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term changes in the market value of the securities or other short-term financing activities and mainly for private firms (Copeland et al., 2000; Britzelmaier 2013b). The implicit assumption under this approach is that even though the current capital structure differs from the target, future financing decisions will bring the capital structure closer to the target (Young and O’Byrne, 2001). The target capital structure method is also recommended because of its calculation easiness, especially for not listed companies. This also solves the so called circularity problem for private companies, which arises due to the need of cost of capital as a discount rate during the calculation the market value of equity (Tappe, 2009). In theory the circularity problem can be solved with iterations methods, where, mathematically, all possible scenes are played until the relevant capital structure is found (Pape, 2010). In practice it is not easily applicable, so that the target capital structure can be used instead (Pape, 2010). Furthermore, the determination of the cost of debt and the tax rate can follow relatively easily. The cost of debt can be derived either a) by dividing actual debt interest payments over the average debt (Dörschel et al., 2009); b) by using the contractually agreed interest rate or c) by implementing the actual market rate of return in the case of bonds (Töpfer and Duchmann, 2006). The tax rate is considered in the WACC formula because of the so called tax shield effect. The tax shield effect occurs because the interest payments for debt are tax-deductible, i.e. the more interest payments the company has, the less tax it pays on the income (Young and O’Byrne, 2001). Therefore, the more the company is leveraged (more debt), the more effect has the tax shield on the WACC. The tax shield in WACC formula is considered under the assumption of a fictive only with equity financed firm (Hostettler, 2002). Usually a normalized country specific company tax rate is used. The remaining component, the cost of equity capital is the main focus of this paper so it will be discussed separately in the next section.

Alternative Approaches of Cost of Equity Figure 1 illustrates the different models, which have established in the literature and practice for calculating cost of equity capital. In general from all presented methods, only CAPM (with further model enhancement) and the Risk Components Model can be considered for

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5

private companies. This is due to the lack of existence of stock prices as required for CAPM, APT, MCPM and DDM Models. Being the most widely used method for CEC calculation CAPM builds and therefore a separate section is devoted to this method. Figure 1: Possible Models for Estimating Cost of Equity Capital Models for estimating CEC

Capital Asset Arbitrage Market-driven Pricing Model Pricing Theory Capital Pricing (CAPM) (APT) Model (MCPM) Source: Based on Britzelmaier (2013b)

Dividends Discount Model

Risk Components Model

Capital Asset Pricing Model (CAPM) The most common used method (according to Geginat 2006 about 2/3 of the firms examined determine their CEC with CAPM) of estimating the CEC is the CAPM, a capital market and portfolio theory model developed by Sharpe, Lintner and Mossin based on Tobin’s and Markowitz’s models (Tappe, 2009; Pratt and Grabowski, 2010). This model has been developed especially to determine the CEC for publicly listed companies because there are normally numerous investors and it is complicated to calculate a single expected rate of return for unknown investors. The solution has found in observing the capital market behavior through this model (Young and O’Byrne, 2001). It considers the return from a risk-free investment and a market premium. With the help of the Beta factor the systematic risk of each security relative to the market portfolio is brought into calculation. Formula 2: CAPM Model Formula

where rm is the rate of return of the market portfolio and therefore (rm- rf) is the market risk premium of the equity; ß is called market Beta or Beta factor.

Chapter One

6

A number of assumptions are laid under the CAPM model, which brings some limitations (Pratt and Grabowski, 2010 and Perridon and Steiner, 2007). Normally the yields of long-term government bonds with “best credit rating” are considered for r(risk-free) (Bark, 2011). The 30-year and 10year government bonds are mostly recommended in the literature as they are relatively easily determinable in the practice. For the calculation of the market premium (rm- rf) the required return of the market portfolio can be calculated ex-ante or ex-post by trying to estimate the future or by extrapolating historical development to the future, respectively. Both approaches have their proponents and critics (Copeland et al., 2000). Usually a market index, such as EuroStoxx, DAX or S&P 500 is considered. The bottom line is that except for company-specific E factor, all other components of CAPM can be calculated regardless whether the company is publicly traded or not. The Beta factor is normally calculated using historical market data by regressing the stock’s return against the return of a stock index (e.g. DAX Index) (AEU, 2002). Mathematically, it can be also calculated by dividing the covariance of the stock in subject and the market portfolio to the variance of the market portfolio as shown in the formula below (Dörschel et al., 2009). Formula 3: Beta Factor

where Cov(re; rm) is the covariance between the return of the equity and the market and Var(rm) is the variance of the return of the market. For companies that are not publicly traded, the decisive factor ß becomes a problem as the relevant capital market figures cannot be derived (Günther, 1997). Hence CAPM is not valid for private of companies without further adjustments or by using other alternatives (Vélez-Pareja, 2005).

3 Cost of equity capital for private companies Overview of Alternative Approaches

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7

Being the most common method of calculating the CEC, CAPM is supposed to objectively estimate the CEC from the market. However, many scholars heavily criticize the model regarding its anticipated objectivity and claim that the discount rate is a completely subjective parameter and that no formula can yield to better results than a simple subjective judgment (Pereiro, 2002). This is especially true for privately held companies where the direct calculation of CAPM does not apply anyway due to lack of historical stock prices for the computation of the Beta factor and the not fulfillment of the CAPM assumptions. Especially the SMEs or even large family owned companies are often publicly not listed and the estimation of risk-adequate capital costs is the largest critic of VBM concepts in such companies (Tappe, 2009). Nevertheless, financial analysts and practitioners have developed methods which allow the estimation of the CEC for such cases which are summarized in the following figure (Geginat et al., 2006; Bufka et al., 1999 and Britzelmaier, 2013b): Figure 2: CEC Calculation Methods for Private Companies

Source: Own Illustration based on Geginat et al. (2006) and Michels (2008)

Chapter One

8

These methods are not only useful for privately held companies, but also for company divisions of publicly listed companies. Often the risk of divisions is not the same as the overall group risk and the individual cost of capitals need to be calculated.

Analogy Methods (Comparable Company Approach) The first, and in practice most commonly used, cluster of CAPM-derived CEC is referred to as the Analogy Methods, which was initially suggested by Van Harde and then tested by Fuller and Kerr to estimate the divisional CEC. The Analogy Methods or also referred to as comparable companies’ approach (CCA) are the most common methods of calculating Betas for private companies. Here the Beta for the company in subject is approximated from that of a single listed comparable firm (Pure-Play Beta), or alternatively from several comparable firms (Peer-Group Beta) or from the industrial average (Industry Beta) (Geginat et al., 2006 and AWFMU, 2004). The implicit assumption is that the risk of the unlisted company is the same as that of the comparable listed ones and therefore the risk can be derived from the market (Bühner and Sulzbach, 1999). The Betas calculated from Analogy Approaches are sometimes referred to as bottom-up Betas (Damodaran, 2002). Pure Play Beta The original model of Van Herde suggested to proxy the unlisted company to a single comparable listed company. However due to special statistical effects this method is not recommended (Bark, 2011). The estimation error for a single company is higher than for a portfolio of companies. This is why the method was expanded to include more than just a single company. By using Peer-Group or the Industry Beta the standard estimation error decreases (Bowman and Rush, 2004). Moreover, finding a very similar company can often be problematic (Erhardt and Bhagwat, 1991). Thus in practice the pure play method is not recommended. Peer-Group Beta So by using Peer-Group the standard estimation error decreases to the extent that the comparability among the proxy companies to the private company decreases (Bowman and Rush, 2004). As the Peer-Group approach is the most widely used the standard approach of the Peer-Group calculation is demonstrated in figure 3.

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One approach of determining the Peer-Group is to establish what is called a long list of the listed comparable companies through rough filtering criteria. The long list excludes entirely irrelevant companies (Geginat et al., 2006). Then through individual selection criteria the relevant short list is created. The possible criteria might include the country, BS Total, financing structure, asset intensity and structure, sales revenue, sales growth, EBITDA, number of employees, product portfolio, composition of the sales (Geginat et al., 2006 and Herter, 1994). Then the Peer-Group of the most comparable companies is established. Figure 3: Calculation Steps for Peer-Group Beta

Peer-Group Identification (Step 1) This step is the most crucial as it requires subjective judgment as to which companies should be included and which excluded from the Peer-Group and this will affect the outcome of the Cost of Equity. In the first step, it should be attempted to find comparable publicly listed firms having similar operating activities as the firm in subject. However, occasionally, private companies have very specific business models and the number of similar companies can be very limited so that finding such companies

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Chapter One

might be much harder as thought at first sight. In this case, financial analysts can rely on the experience and knowledge of the management. The management can be asked to name comparable publicly listed companies, which are influenced from the same market forces as the valuated private company. This approach is beneficial especially for those private companies, which are family owned and the founders have been highly active in the management since decades and so their knowledge and expertise is first-hand and should be profited from. In the selection of the Peer-Group the companies should be thoroughly chosen. Companies which had their IPO earlier than 1 year ago are generally not recommended to be included as including them will affect the Beta calculation by statistically distorting the results. Internet sources such as Yahoo Finance can be a very helpful practical tool to find comparable companies as they offer such information at hand. Additionally, short profiles for each company can be obtained from financial internet sources in order to examine their core competencies in comparison to the private company. Generally, the more companies are included the better are the statistical properties of the estimation (Bowman and Rush, 2006). When the private company has a very specific business and the number of comparable companies is limited anyway, further selection criteria cannot be implemented (e.g. company size, revenue, country etc.). Normally, the more the size of the private company approximates the size of the comparable companies, the less biased is the method. Therefore, it is recommended to consider the size effect in CCA method for Beta calculation (Bowman and Rush, 2006). Normally if the private company is smaller as the peers, this will result in underestimating the Betas. Gross revenue is usually used to compare the companies. The geographical area is also essential for determining the Peer-Group (Geginat et al., 2006). Even if the operating activities of the firms are the same, the presence in different geographical areas might result in different unsystematic risks (Erhardt and Bhagwat, 1991). A further limitation in Peer-Group composed from companies from different countries as that of the private company represent effects from foreign exchange rates, which are not considered in this model. Here, a further assumption must be made that foreign exchange rates don’t have an essential influence. This can in fact be true for those companies which are globally active and anyhow affected by the same currency effects.

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Peer-Group Betas (Step 2) After the relevant companies have been identified, the Betas of these companies are required. Beta factors can be obtained from different financial sources such as Bloomberg or Yahoo Finance. Otherwise the Beta factors for the selected companies are calculated with the standard formula. The problem of obtaining the data from financial sources is that the Betas of all the selected companies need to be found in one source; otherwise they will not be comparable. This is because the CAPM model does not give any calculation specification. Even though the Beta factor has been established to be a benchmark financial measure, Betas from different sources might alter, depending on the time period chosen for the calculation, the market index as well as the frequency of the returns in the regression model. Here it is to point out once more, that there is no right or wrong, it is just a matter of subjective input of the required data by the financial analyst carrying out the valuation. Unlevering Betas (Step 3) When using the Analogy Approaches, normally, the capital structure of the private company will be different from the comparable ones (Bark, 2011). As the financial risk significantly affects the Beta, i.e. the more leveraged the company is the higher will be the Beta, the leverage effect has to be eliminated for calculating the company Beta (Süchting, 1989, as cited in Herter 1994). Regardless of the Analogy Method chosen (Pure Play, Peer-Group or Industry) the Beta taken has to be unlevered and then re-levered using the debt to equity ratio and the tax rate for the company subject to calculation. The most common formula for unlevering is the following (Michels, 2008, and Herter, 1994): Formula 4: Unlevering Beta

In practice however, this relation is complemented with two further assumptions: 1) the ȕdebt is zero, i.e. the debt is risk-free and 2) the tax rate is not affected from the capital structure (Serfling and Marx, 1990, and

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Copeland, 1990, as cited in Herter, 1994). Under these assumptions the following equation for the equity Beta can be derived for a company, which is fully financed with equity1: Formula 5: Unlevering Betas of the Peer-Group2

After the unlevered Betas for the Peer-Group have been calculated it is necessary to calculate the average Beta of the Peer-Group. Generally geometrical, arithmetical or median averages can be used (Geginat et al., 2006), however mostly simple arithmetical average is calculated. This is done to obtain one single unlevered Beta in order to be able to in the relevering formula. Re-levering and Beta Calculation (Step 4) After determining one single unlevered Beta for the Peer-Group (Step 3), the final step is to calculate and re-lever the Beta for the valuated company considering its financial leverage using the following formula: Formula 6: Re-levering of the Beta for the Company

However, the consideration of the leverage effect can lead to over or under estimation of the CEC (Fuller and Kerr, 1981; Schlegel 2011 and Bowman and Rush, 2004). Thus, one should be cautious when using the Analogies Method and the plausibility of the CEC should be proven with other calculation methods. Another problem in CAPM-derived CCA calculation can arise when the company in subject is in a country, where market capitalization is 1

When a “no-debt” company is assumed, then the tax shield effect has to be considered as well. The logic is the same as with tax shield consideration in WACC. 2 There are several formulas for re-levering the Betas, mainly depending on the financing structure (fixed book value or market driven value of debt) (Fernandez, 2006). However, the most common approach is here presented (fixed book value).

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relatively low. This is the case for many European countries, which compared to Anglo-Saxon countries are mainly bank financed. This prepares the difficulty of finding Peer-Group companies in the same country. In this case data from e.g. USA can be employed (Herter, 1994). However this challenges the comparability of the companies in terms of exchange rates and business environment. Industry Beta Although the Industry Beta improves the statistical method, an additional assumption, implicitly made, is that the systematic risk within the same industry is the same (Herter, 1994). Moreover, in specific cases it might also be difficult to place the company in one particular industry. Thus the Peer-Group Method form the Analogy Approaches is considered more plausible and unless it is impossible to calculate, then it is recommended to use the Industry Beta (Pape, 2010). The Industry Betas can be obtained from various financial sources. Once the Beta is available, the methodology of transforming Industry Beta into the company’s Beta is the same as in the case of the Peer-Group Beta starting however with the 3rd step – unlevering of Industry Beta.

Analytical Approaches In these approaches it is attempted to find a relationship between accounting-based measures of systematic risk and the market-based systematic risk measures (Erhardt and Bhagwat, 1991 and Bufka, et al., 1999). It is, thereby, assumed that the accounting data are influenced from the same events and information as the market price data (AF, 1996). The underlying approaches are the Earnings Beta, the Accounting Beta and the Fundamental Beta. In Earnings Beta, the changes in quarterly earnings of the private firm are regressed against changes in quarterly earnings for an equity index (S&P 500, DAX etc.) to estimate the Beta factor (Damodaran, 2002). Formula 7: Earnings Beta

The slope of the regression – the parameter b – is the Beta for the firm. The limitation of this approach is that the private firm’s earnings are

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usually available only on yearly basis, which will result in limited statistical power. Moreover, the mismatches resulting from accounting principles among firms might lead to wrong Betas (Damodaran, 2002). In the case of the Accounting Beta approach more than one accounting measure is taken into consideration. The principle is however the same as that of the Earnings Beta. The Fundamental Beta approach tries to find specific characteristics of the firm, which have a relation with the systematic risk. Many researchers have tried to find a relation of various measures of publicly listed firms to that of private firms in the attempt to estimate Betas for private firms. Such measures can be earnings growth, debt ratio, company size, foreign income or dividend payout. The weakness of this approach is that it is assumed that the Beta factors of different companies would react the same way on the changes of these fundamental factors (Damodaran, 2002 and AF, 1996 and references there). The Analytical Approaches are generally plausible models, but the calculations are complex and not easily applicable in practice. However, the main issue in these models can occur when the company in subject has experienced a great external growth through acquisition in the prior years. Often the acquisitions are done gradually and the consolidation decisions have a legal or tax background. This can significantly distort the regression results of the analytical methods as these models require a large amount historical data, preferably quarterly financial measures, which can be statistically biased.

Validity of CAPM-derived Methods for Private Companies As discussed in the previous chapter, the most common way of estimating CEC for private companies is by using Analogy Approaches. This methods allow to calculate the Beta of a private company and thus also the CAPM. But can this CEC be applied to private firms without hesitation? In this part, the plausibility of market derived calculation of CEC is proven. As it was emphasized before, the Betas calculated with these methods can be under or over estimated. But here the overall model of CAPM for the purposes of private companies is questioned. In order to prove the plausibility of CAPM, in the first place the model’s underlying assumptions are proven and the question is raised whether or not CAPM can be applied when these assumptions diverge greatly for privately held companies. The deviation of the CAPM assumptions for private companies is summarized in Table 1 below:

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Table 1: Divergence of CAPM Assumptions for Private Companies

CAPM Assumption Risk-aversion of the investors Perfect diversification Investors are price takers (minority interest holders) Perfect marketability and divisibility Systematic and complete information Neither transaction and information costs nor taxes

Divergence from CAPM Entrepreneurs are generally considered more risk taking Entrepreneurs are underdiversified Entrepreneurs hold the controlling packet of their company Entrepreneurs cannot sell their equity at any given time to a certain price Information is symmetric compared to publicly listed firms For private firms the information costs are high

Effect on CEC -

+ -

+

0/-

+

Source: Based on Khadjavi (2005), Michels (2008), and Balz and Bordemann (2007)

Risk-aversion Usually the entrepreneurs behave all but rational and risk averse vis-à-vis their investment decisions regarding their choices of the tradeoffs between risk and return (Young and O’Byrne, 2001and Khadjavi, 2005). CAPM neglects the individual risk appetite of the entrepreneurs and thus a CAPM-derived CEC for private companies is to be critically seen (Behringer, 1999, as cited in Tappe 2009). Not the expected return of the market is of relevance but rather that of the entrepreneurs. It can be assumed that the entrepreneurs are less risk-averse (Tappe, 2009). This would mean that they are ready to take more risk without compensation of adequate return. Consequently the assumption of CAPM that for higher risk investors require higher return is not fulfilled. This results in having a lower expected rate of return from the side of the entrepreneurs as it would have been with same risk for normal market investors.

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Perfect diversification The major assumption under the CAPM model is that investors are diversified. For closely held companies such as family owned companies with limited shareholders, the owners are normally under-diversified, i.e. they don’t or cannot invest in any desired portfolio. As the diversification is not achievable, market-derived CAPM for unlisted companies is heavily criticized (Herter, 1994). Furthermore, especially the family owners have all their assets in the company and it is highly unlikely that they have invested in other not to the family business related projects (Balz and Bordemann, 2007; Damodaran, and Herter, 1994). This results in requiring higher risk due to the additional unsystematic risks, which the entrepreneurs are undergoing (Balz und Bordemann, 2007 and Khadjavi, 2005). The owners are exposed not only to the market risk, but to the whole risk in the firm. As a result it can be argued that the capital market driven CEC for underdiversified companies should be neglected as they are underestimated (Herter, 1994). If the investors are not diversified, it’s necessary to consider and evaluate a specific risk and the individual risk preference of the entrepreneurs. However, the definition and foremost the quantification of such specific risk and its differentiation from the systematic risk is neither clear nor easy to determine. Thus, in many cases the costs of trying to do such measurements will exceed its benefits. To avoid further complication, the determination of the expected CEC for a not diversified shareholder can ultimately follow by the entrepreneur or his financial analyst. In this case, the market-derived CAPM can serve as the starting information basis with the help of which the investor decided how strong he wants to adjust for specific risk he is undergoing (Herter, 1994). However, the diversification problem can be solved when the market Beta is adjusted. After this adjustment the Beta is called Total Beta. If used in the same concept the standard and not adjusted Beta is referred to as Raw Betas. The formula of the adjustments is as follows (Damodaran, 2002): Formula 8: Total Beta

where ßtotal is the Beta unadjusted for diversification and correlation of the asset to the market.

is the

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In the case of unlisted companies, the correlation coefficient of the comparable companies is taken into the calculation (Damodaran, 2002). However, one should consider this adjustment very carefully. In the first place, the higher risk resulting from under-diversification can be compensated by more active and committed management of the family owners3. However, it should be also mentioned that in the case of family owned businesses, the owners might be risk-averse in the sense of being afraid to lose the business. In such cases careful risk management, diversification through financial instruments (hedging) and avoidance of high risk projects can even result in lower risk for such families (Khadjavi, 2005). Thus, a clear conclusion regarding the diversification and risk averseness of family owned firms cannot be drawn and case-specific information is to be considered. Nevertheless, in most of the literature entrepreneurs are generally considered not to be fully diversified and being risk sympathetic compared to capital market investors (Kratz and Wangler, 2005). Price takers Entrepreneurs are not price takers in the sense of CAPM (Tappe, 2009). They hold the controlling packet in the company and therefore manage the company the way they wish. Therefore the assumption that the investors are price takers is also not fulfilled. It is assumed that this somewhat reduces the risk (Bucher and Schwendener, 2007). It is often argued that these reductions are balanced out with the absence of marketability of privately held shares (Khadjavi, 2005). Marketability and illiquidity Private companies lack marketability and illiquidity. Moreover, compared with public companies private companies have more difficulty to raise additional debt or equity capital from organized capital markets (Pratt and Grabowski, 2010). Therefore, it is assumed that the cost of equity would normally be higher for the private company and an adjustment to the CEC should be made. Due to the lack of fungibility, i.e. the impossibility of withdrawing the invested capital from the company again at any time, the 3

A correlation has been found between higher risk and higher return of such companies which can be attributed to 1) High dependency of the equity holders makes them work harder on the company success and 2) Owners require higher returns on the investment projects because of the higher risk (Khadjavi, 2005).

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CEC has to be increased. However, the relevance of the fungibility adjustment is only justified in the case of possible intention to sell the company. The illiquidity adjustments are also to be neglected when this is not expected. The underlying principle to this approach is that only the expected risks are to be taken into calculation (Dörschell et al.2009). Moreover, even if such a general adjustment were to be made, it is almost impossible to determine a justified amount of adjustment. Empirical studies have tried to find some approximation, nevertheless studies are partially very controversial and the fixed adjustment is to be rejected. Systematic and Complete Information In CAPM it is assumed that the investors will require additional returns due to the principal agent information asymmetry. In case of private and family owned companies the principal and the agent are one person, so that this reduces the capital costs (Khadjavi, 2005). Nevertheless, in case of integration of third-party managers, the information asymmetry can also occur in private companies (Tappe, 2009). Transaction costs and taxes This assumption is not realistic neither for publicly listed nor for unlisted companies. In the real world there are transactions costs as well as taxes which will bring to requiring higher capital costs. Especially for privately held companies the transaction costs are high (Michels, 2008).

Other Methods Besides the above discussed issues regarding lack of fulfillment of CAPM assumptions for private companies, there are further specific characteristics which encourage the other methods of CEC. First, the entrepreneurs of private companies are usually described to be following not only monetary goals. The so called meta or personal goals, e.g. the consciousness to family business tradition, reputation, prestige, social recognition and etc., also have an impact on the valuation. This is sometimes referred to as emotional or family value (Bucher and Schwendener, 2007). Whereas market derived models assume purely monetary oriented investors, entrepreneurs’ other preferences might result in sacrifice of short-term returns in order to secure long term business existence. This can even result in a negative cost for equity in the short-

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term, which under the market driven models would be nonsense (Khadjavi, 2005). The models (e.g. CAPM, APT) for calculating the cost of equity were introduced in order to calculate the cost of equity for publicly listed companies, where the number or the identities of the investors are normally vast. From capital market observations driven calculation cannot be completely left out from consideration. Sometimes even if the entrepreneurs are to be asked their expectations, their answers might be partially too vague (e.g. “we want as much return as possible”) (Young and O’Byrne, 2001). Therefore other methods should be applied when calculating the cost of equity for private companies. Three methods are here presented and discussed, which are not based on capital market estimations. This can be quite plausible in practice especially when the above addressed problems with the commonly used mathematical methods (esp. CAPM) are taken into consideration. Moreover, many authors claim that formula cannot deliver better results than just a simple subjective estimation of the CEC (Pereiro, 2002). Risk Components Model In this model the cost of equity is calculated by adding different company specific risk components to the risk-free rate of return. Thus, in contrast to CAPM, unsystematic risk is also considered by taking different factors into the calculation. Hereby the basic risk free rate is increased or decreased with subjective estimations. Gleißner has developed a model for determining the adjustment to the risk free rate, which is based on the subjective evaluations from the company and not the investors form the market. Various risks are determined and with the budgeted date of the company through simulation (e.g. Monte-Carlo-Simulation) the risks are aggregated and added (Gleißner, 2005a and b). This method is considered to be a quite plausible one especially for closely-held companies, for which due to the under diversification of the unsystematic risk is relatively high. Although this model is suitable for not listed companies sound planning data and high qualified analysts within the company will be required to be able to conduct a reasonable assessment of the CEC. The latter conditions are not always given and can be a further challenge for smaller companies.

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Qualitative Approaches In contrast to CAPM-derived models, these approaches are not based on estimating CEC based on objective comparable data, but rather attempt to subjectively estimate the relevant risk indicators (Bufka et al., 1999). There are various scoring models, the most famous of which are the BCG and the Fuquana Inst. Method. Figure 4: Cost of Equity Capital Estimation with BCG Matrix Criteria Controllability of the profits Market Competitors Products/Concepts Market entry barriers Cost Structure

Low Risk Low external influences

Characteristics 1 2 3 4 5 High Risk Strong external infleunces

Stale, without cycles Few, constant market shares Long lifecycle, not substitutable High Low fix costs

Dynamic, cyclical Many, variable market shares Short lifecycle, substitutable Low High fix costs Legends: 1=not so important 5=very important

Source: Own illustration based on Bufka et al. (1999)

In the BCG method the CEC for unlisted firms or divisions is derived by comparing and adjusting the CEC of the whole company, which is listed and the CEC can be calculated with CAPM. With the help of 6 criteria, the subjective judgment of the managers is required to estimate the divisional CEC (Lewis and Stelter, 1994 as cited in Bufka, et al. 1999). The Fuqua Ind. method is similar to the BCG Method and uses 14 instead of 6 criteria. The BCG method is considered as a better approach because the criteria used in BCG are more general. The study of Bufka et al. (1999) indicated that the estimation of the CEC with the BCG method has a better explanation relation with the Beta factor as the Fuqua Ind. method, especially for homogenous companies. If the BCG method is used of unlisted companies, a starting CEC can be applied, which can for example be the average CEC of the industry and then through scoring and normalization, company specific CEC can be calculated. Alternatively, the Beta can be estimated with the help of the scoring model, by assuming the mean value of the scoring the Beta=1 and then by adjusting it according to the respective risk (Herter, 1994). For the Qualitative Approaches the management of the company in subject can be questioned and their subjective judgments of the company’s risks

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are taken into consideration. The main problem of scoring models is the starting point of the adjustment. In scoring models the criteria are used to compare the risk, i.e. cost of equity with another company. These models are more adequate for determining the divisional/ or subsidiary cost of equity in case the overall cost of equity for the parent company is already determined. In this case with the help of scoring, one can determine whether the divisions have a higher or lower risk compared to the parent, and adjustments can be carried out. On the contrary, for estimation of the CEC for the private company a very similar company’s CEC has to be found. In practice this can be difficult, as it is the case with the Pure-Play method in terms of finding a company similar with the risk portfolio, having the same regional activities and being public. A further problem of the qualitative approaches is the weighting proportion of each risk criteria. It’s questionable that each of the risk categories would lead to the same change in the CEC. Existing literature recommends using the same weighting for each of the category. Here it is proposed to ask the managers also to evaluate the importance of each of the category and through scaling this can be normalized and the weighting proportions of each of the category can be adjusted. Figure 5: Determination of Weighting each Criteria of the BCG Matrix How important do you consider each of the categories for the development of your business? 1 2 3 4 5 Controllability of the profits Legends: 1=not so important Market 5=very important Competitors Products/Concepts Market entry barriers Cost Structure

A further challenge of scoring models is the determination of the deduction and the increase of the basis value and determination of the basis value itself. Therefore, often this is done in approximation and is therefore very subjective (AF, 1996). Direct Questioning Besides capital market derived approaches the cost of equity can be estimated with the help of the, so called, “Individual Approach” or “Direct Questioning” (Weber et al., 2004). Analogy Approaches can serve as an orientation tool. According to this model direct questioning of the

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entrepreneurs, independent from capital markets is applied in all the cases where it is possible. Important for this approach, is the consideration of the risk-aversion of the entrepreneurs and their under- diversification (Tappe, 2009). It can be generally assumed that the entrepreneurs are more riskfriendly, thus require fewer premiums for the higher risk. Here the opportunity cost of capital does not play any role (Tappe, 2009). If there is more than one owner, the expected return of each owner can be weighted according to their equity share to arrive at an overall cost of equity capital (Khadjavi, 2005). Table 2: Cost of Equity by Direct Questioning (Example) S hareholders

Part in Equity

Expected Return

Weighted

Shareholder 1

55%

7,5%

4,1%

Shareholder 2

24%

9,2%

2,2%

Shareholder 3

16%

5,0%

0,8%

Shareholder 4

5%

7,5%

0,4%

Total expected return on equity

7,51%

The company owners can be asked to give their expected return on the invested capital. In order to better explain the plausibility of their answer additional questions can be prepared to proof their risk appetite. In the classical finance theory the cost of equity is higher than the cost of debt, as the equity holders are liable in case of bankruptcy. This is not the case for family owners, as the equity is seen as a controllable capital. Therefore the equity cost can be even lower as the debt costs (Bühler, 2005). As risk is a very subjective measure, there is no universal understanding how the risk appetite could be precisely measured. Nevertheless, to compare the risk appetite of private company owners, the shareholders can be asked to choose one out of three investment alternatives. The investment alternatives with different probabilities of occurrence and returns can be suggested. An example of such questioning is presented below:

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Table 3: Investment Alternatives Investment alternatives Return Prob. Alternative 1 15% 10% Alternative 2 10% 60% Alternative 3 5% 90% Expected Return

Shareholder 1

Answers Shareholder 2 Shareholder 3 X

Shareholder 4

X X 1,5%

6,0%

X 4,5%

6,0%

4 Conclusions This paper contributes to the literature, which argues that capital market derived methods though rooted for calculation of cost of equity capital in listed companies, may not be the best approach for private companies. Subjective approaches of cost of equity capital can be applied in case of private companies saving further assumptions and complexity in already doubtful and assumption flooded finance formulas, the most common of which is the CAPM. Whereas the Beta factor can be adjusted in numerous ways in order to be applicable for private companies, the authors challenge such approaches. Whereas it can be argued that the suggested subjective methods will be biased and therefore are useless in finance calculations, we argue that CAPM either does not deliver unbiased and objective calculation methodology and far most not for private companies. If the financial analysts are able to make the notion of cost of equity understandable and transparent to the company owners and the management, together a reasonable cost of equity capital and thus cost of capital can be agreed upon. Most importantly, CEC should consider the business and finance risk of the company and represent the expected return on the invested equity by the entrepreneurs. Further related research topics can be empirical studies of private companies and their perception, acceptance and use of cost of equity capital. Furthermore, case studies of hands-on calculation of CEC for companies from broad business spectrum would help this research field.

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Bernd Britzelmaier is a professor at the Business School of Pforzheim University. His prime research interests are Finance, Accounting and Management Control, areas in which he has widely published and consulted. He is the associate editor of the World Review of Entrepreneurship, Management and Sustainable Development and serves a member of several editorial boards. Dennis Schlegel is a graduate from Pforzheim University and a PhD student at Leeds Beckett University. Lilit Vardanyan is a graduate from Pforzheim University.

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Bowman, R.G. and Rush S. R. (2006), “Using comparable companies to Estimate the Betas of Private Companies”, Journal of Applied Science, 16(2), pp. 71-81. Britzelmaier, B., (2013a), Controlling. 1st ed., Pearson, Munich. —. (2013b), Wertorientierte Unternehmensführung, 2nd ed., Friedrich Kiehl Verlag, Herne. Britzelmaier, B. and Schlegel, D, (2011), “An Analysis of Dysfunctions and Biases in Financial Measures”, Global Business and Economics Review, 13(3/4), 2011, pp. 269 – 280. Britzelmaier, B., et al., (2012), „Wertorientierte Unternehmensführung in den DAX 30-Unternehmen: Eine Untersuchung auf Basis der Geschäftsberichte 2010“, Controller Magazin, 37(4), pp. 26-28. Bucher, M. and Schwendener, P. (2007), „Die Bewertung von Familienunternehmen. Neben Bewertungsmethoden spielen weitere Faktoren eine massgebliche Rolle“, Der Schweizer Treuhänder, 81(5), pp. 340-347. Bufka, J.; Schierek, D. and Zinn, K., (1999), “Kapitalkostenbestimmung für diversifizierte Unternehmen“, Zeitschrift für Betriebswirtschaft, 69(1), pp. 115–131. Bühler, P., (2005), Finanzielles Risiko- und Investitionsverhalten von Familienunternehmen, Ernst & Young AG, Zürich. Bühner, R. and Sulzbach, K., (1999). Wertorientierte Steuerungs- und Führungssystem, Schäffer-Poeschel Verlag, Stuttgart. Coenenberg, A. G.; Salfeld, R., (2007), Wertorientierte Unternehmensführung. Vom Strategieentwurf zur Implementierung. 2. ed. Schäffer-Poeschel, Stuttgart. Copeland, T., Koller, T. and Murrin, J., (2000), Valuation: measuring and managing the value of companies. 3rd ed, Wiley, New York. Cotner, J. S. and Fletcher, H. D., (2000), “Computing the cost of capital for privately held firms“, American Business Review, 18 (2), p 27ff. Dörschell, A., Franken, L. and Schulte, J. (2009), Der Kapitalisierungszinssatz in der Unternehmensbewertung: Praxisgerechte Ableitung unter Verwendung von Kapitalmarktdaten, IDW, Düsseldorf. Dörschell, A., Franken, L. and Schulte, J., (2010), Kapitalkosten 2010 für die Unternehmensbewertung. Branchenanalysen für Betafaktoren, Fremdkapitalkosten und Verschuldungsgrade. IDW-Verlag, Düsseldorf. Damodaran, A., (2002), Investment Valuation, 2nd ed., John Wiley & Sons, New York. Drukarczyk, J. and Schüler, A., (2007), Unternehmensbewertung, 5th ed., Verlag Vahlen, München.

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Hostettler, S., (2002), Economic Value Added (EVA). Darstellung und Anwendung auf Schweizer Aktiengesellschaften, 5th ed., Haupt, Bern. IDW/FAUB, (2008), Ergänzende Hinweise des FAUB zur Bestimmung des Basiszinssatzes im Rahmen objektivierter Unternehmensbewertungen. IDW Fachnachrichten. Khadjavi, K., (2005), Wertmanagement im Mittelstand. Dissertation Thesis at the University Duisburg-Essen. Eschen: digiprint AG. [Online]: Available at: http://www1.unisg.ch/www/edis.nsf/SysLkpBy Identifier/3088/$FILE/dis3088.pdf [Accessed 24 August 2012] Kratz, N. and Wangler, C., (2005), Unternehmensbewertung bei nicht kapitalmarktorientierten Unternehmen: Das Problem der Ermittlung entscheidungsrelevanter Kapitalkosten, Finanzbetrieb, 7(3), pp. 169176. Krol, F., (2007), Value Based Management in Small and Medium Enterprises, Working Paper, [Online], Nr. 9-1 Available at: http://www.wiwi.uni-muenster.de/ctrl/md/content/publikationen/ Arbeitspapier_9_1.pdf [Accessed 17 December 2011] Männel, W., (2006), Wertorientiertes Management, Verlag der GAB Gesellschaft für angewandte Betriebswirtschaft mbh, Lauf an der Pegnitz: McConaughy, D. (1999), „Is the cost of capital different for family firms?“, Family Business Review, 12 (4), p 353-360. Michels, J., (2008), Alternativen zum CAPM: Modelle zur Unternehmensbewertung. VDM Verlag Dr. Müller, Saarbrücken. Pape, U., (2010), Wertorientierte Unternehmensführung, Techn. Univ., Diss. u.d.T.: Pape, Ulrich: Wertorientierte Unternehmensführung und Controlling--Berlin, (1996), 4th ed.,Verlag Wissenschaft & Praxis, Sternenfels. Pereiro, L. E., (2002), Valuation of Companies in Emerging Markets, John Willey & Sons, New York. Perridon, L. and Steiner, M. (2009), Finanzwirtschaft der Unternehmung, 15th ed., Vahlen, Munich. Pratt, S. P. and Grabowski, R. J., (2010), Cost of Capital: Applications and Examples, 4th ed., John Wiley & Sons, Hoboken. Schlegel, D., (2011), Subsidiary Controlling with Strategically Aligned Performance Measurement Systems, EULVERLAG, Lohmar. Schultze, W., (2003), Methoden der Unternehmensbewertung, 2nd ed. IDW, Düsseldorf. Stewart, G. B. III, (1991), The Quest for Value: The EVA™ Management Guide, HarperCollins, Publishers, Inc., New York

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—. (1999), The Quest for Value: A Guide for Senior Managers, HarperCollins, Publishers, Inc., New York. Tappe, R., (2009), Wertorientierte Unternehmensführung im Mittelstand. Eine Überprüfung der Anwendbarkeit, Peter Lang, Frankfurt am Main. Töpfer, A. and Duchmann, C., (2006). „Ganzheitliche Konzeption des wertorientierten Managements“, in: Schweickart, N. and Töpfer, A. (Eds.), Wertorientiertes Management, Springer, Berlin/Heidelberg. Vélez-Pareja, I. (2005), “Cost of Capital for Non-Traded Firms”, available at: http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=366981. [Accessed 14 February 2012] Weber, J. et al., (2004), Wertorientierte Unternehmenssteuerung: Konzepte-Implementierung-Praxisstatements, 1. Ed. Gabler, Wiesbaden. Werner, H.S., (2006), Eigenkapital-Finanzierung, Bank-Verlag Medien, Köln. Young, D. and O’Byrne, S., (2001), EVA and Value-based Management. McGraw-Hill, New York.

CHAPTER TWO UNDERSTANDING BEING VALUED: A KEY DRIVER FOR ENGAGEMENT JULIA CLAXTON LEEDS BUSINESS SCHOOL, UK

Introduction In order to build recovery from the recession it is important to rethink how we engage our people. According to the Winter 2012/13 Chartered Institute of Personnel and Development (CIPD) Employee Engagement Index, only 35% of employees across all sectors in the UK are engaged - a record low for the survey. The picture across Europe is slightly better with 57% workers being engaged in (Hewitt 2014). The recession has brought about redundancy, restructuring and higher workloads. We want to maximize performance and at the same time bring about well-being and provide sustainability through a recovery period. Engaging people can be seen as a key way to bringing about this (Shuck and Wollard 2010) and there is growing understanding that an engaged workforce can bring about organizational and personal benefits (Saks 2006). There is a growing interest in what drives this engagement. The purpose of this chapter is to look closely at one driver in particular, the key driver of ‘being valued’. This is an amorphous construct which is personally held and perceived and this may be why research in this area is quite sparse. It is difficult to research and yet the term and an understanding of the term is commonly used, commonly expressed and often used as part of engagement surveys on which organizational decisions are made. My curiosity into this construct coupled with my belief that organisations and people can gain immensely from understanding it has led me into this area of research.

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Engagement The construct of employee engagement is still being developed in the literature, in academic debate and amongst practitioners and consultants. Multiple definitions exist and continue to come forward which shows the strong interest in this construct though the academic and the practitioner often define it differently (Robinson et al., 2004). ‘Engage for Success’, the movement led by David MacLeod and Nita Clarke, deliberately does not define employee engagement for this reason. Bakker (2010) defined work engagement as the psychological state that accompanies the behavioural investment of personal energy. In the academic literature the construct can be seen to relate to the constructs of ‘work engagement’, ‘organisational commitment’, ‘job satisfaction’ and ‘organisational commitment behaviours’. Saks (2006) and Robinson et al. (2004), however, both argue that engagement is different to all of these other constructs. Commitment usually means an individual’s attachment and obligation to the organisation (Allen and Meyer, 1990) so the term commitment is usually meaning ‘organisational commitment’ which is specific to the organisation and not the work or the role, although of course, these should, in theory, at least be leading one to the other. Work engagement is narrower than employee engagement but then a definition of work would be required to show the extent of the difference. The term employee in employee engagement is highlighting the person and the act of being engaged rather than a relationship with the organisation or the job. The construct of employee engagement was first put forward by Kahn which he described as personal engagement; “the harnessing of organization members' selves to their work roles; in engagement, people employ and express themselves physically, cognitively, and emotionally during role performances.” (Kahn 1990, p. 694). Schaufeli et al. define engagement “as a positive, fulfilling, work-related state of mind that is characterized by vigor, dedication, and absorption.” The idea is that the individual is so absorbed in the work that time flies. (Schaufeli et al., 2002, p. 74). It also emphasises a positive state of mind and willing effort, “being positively present during the performance of work by willingly contributing intellectual effort, experiencing positive emotions and meaningful connections to others.” (Truss et al., 2006). Employee engagement is both a ‘state’ of being engaged and an ‘outcome’ of being engaged.

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31

Studies that have perhaps created the most interest in employee engagement are those that support the notion that engagement leads to higher productivity (Gruman and Saks, 2011) and leads to discretionary effort, innovation, customer loyalty, quality, profitability, earnings per share and productivity (Blessingwhite, 2008). It is agreed that organisations want their employees to be engaged.

The driver of ‘being valued’ So why is being valued so important? Being valued is a very common way of describing a key experience and is used in multiple questionnaires when organisations are trying to find out how their employees feel about their jobs and their employers. Just as engagement can be a driver and an outcome so too can being valued be a driver and an outcome. In this paper the construct of ‘being valued’ is being explored particularly as a key driver to ‘engagement’. Robinson et al (2004) in their research on the NHS found that “The strongest driver of all (drivers) for engagement is a sense of feeling valued and involved” (Robinson, et al., 2004, IES Report 408). This means feeling valued and feeling involved and is not seen here to include the notion of participation which has a literature of its own. The author has gathered anecdotal evidence and has seen conference presentations showing that participation can actually lead to disengagement as employees can become weary of being asked to participate. Robinson et al, discovered that feeling valued and involved was an overarching driver for engagement. It comprised ten other drivers which all fed into it. The ten drivers are: training, development and career; immediate management; performance and appraisal; communication; equal opportunities and fair treatment; pay and benefits; health and safety; co-operation; family friendliness; and job satisfaction (Robinson et al., 2004). The authors explain their findings by saying “our Phase 1 findings included the fact that the main driver of engagement in the NHS was found to be feeling valued and involved. The extent to which it was the main driver was so overwhelming that all other drivers, even if significant statistically, appeared relatively unimportant. (Robinson et al., 2004). I have mapped the drivers and outcomes and illustrated this in Figure 1 below: In Phase 2 of their work they found that the driver of feeling valued and involved was no longer seen as the overarching driver but one of eight

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drivers. These were established as: job satisfaction; equality of opportunity; health and safety; length of service; ethnicity; communication; and cooperation. “Our Phase 2 findings show that, although feeling valued and involved is very important in driving engagement, it is not the only key driver – in overall terms, it contributes approximately on a par with job satisfaction.” (Robinson et al., 2007). So we can see that being engaged is a driver and an outcome and also being valued is a driver and an outcome. In America, the Harris Interactive online survey organised by the American Psychological Association’s (APA) gave results for 1,714 adults questioned in January 2012. It showed that in answer to the question “my company makes me feel valued” only 52% in 2011 and 54% in 2012 of workers agreed or strongly agreed with this statement. (Employment Experience section of the APA Workplace Survey 2012). Just over half of all those surveyed worked for SMEs and three quarters of all of them were in the private sector. There is a specific feeling valued section of the report which shows that “employees who report feeling valued are significantly more likely than those who do not feel valued to report that they are satisfied with their job overall and are also more satisfied other key aspects like employee involvement, growth and development and recognition.” (Feeling Valued Section of the APA Workplace Survey 2012). For example; the question “I am motivated to do my very best for my employer” gained responses of agree or strongly agree by 93% of workers who felt valued and only 33% of those who did not feel valued. For the question “I am satisfied with my job” it was 70% of those who felt valued compared to 40% of those who felt undervalued and for the question “I am satisfied with the employee recognition practices of my employer” it was 76% compared to 6%. Those feeling valued are also significantly less likely to say that they intend to seek employment outside of their company within the next year, 50% compared to 21%. Also “employees who report that they do not feel valued are significantly more likely than those who feel valued to report that a variety of factors significantly affect their stress levels at work.” (Work Stress and Feeling Valued at Work section of the report). Low pay is a significant stress factor for 72% of those who feel undervalued but only 32% of those who feel valued. Lack of participation in decision making was a significant factor for only 16% of those who felt valued but 57% of those who felt undervalued. Feeling stressed from lack of opportunity and growth was significant for 75% of those who felt undervalued but only 26% of those who felt valued. So ‘feeling valued’ is a moderator to the perception of many other factors of work.

Understanding Being Valued: A Key Driver for Engagement

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Figure 1 illustrates the driver-outcome relationships provided by these studies.

Figure 1: Drivers and Outcomes: Being Valued

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So my curiosity leads to me to ask; if engagement brings about so many benefits and the key driver (or a key driver) to being engaged is being valued, which also brings about benefits of its own, then what is it, exactly, that makes people feel valued? That is, what drives being valued? When a person says that they feel valued, what do they mean? What are they bringing to mind when they say this? What evidence are they using? What has given them the impression, perception, feeling or experience that they are valued? Is it just a personally held and experienced construct or are there any commonalities when people, within the same context, are asked to explore this construct together? If there are indeed commonalities within certain contexts, eg particular sectors, professions, organisations, etc then this would help in providing positive levers to increase the experience of feeling valued. Of course, this can have wider implications for society. We usually look to employees first in engagement studies but we can widen this to consider what makes business students feel valued, and in the community, what makes patients feel valued and what makes other societal groupings such as young people or the elderly feel valued and a particularly challenging grouping; what makes convicts feel valued. My research will cover all of these areas, eventually, but for now, this chapter focusses on work done with employees and business students as these are considered to be key players in recovery out of the recession and from whom innovation must come. If research finds that there are no commonalities within contexts and that every individual identifies different reasons for feeling valued then this is not a problem. It simply means that everyone holds/experiences a different perspective as to what makes them feel valued. This helps organization to understand that their efforts should be placed on treating people as individuals and listening to their specific needs and aspirations rather than spending their efforts focusing on creating organisational interventions which are expected to reach all employees. There is little point of organisational interventions based on one perception of what supports being valued if it may inadvertently have the opposite effect on some employees. In fact, we see this all the time in reward systems. If we consider the reward for a job well done where employees are invited to a special reward dinner to receive an award in front of their peers, this could be a moment of pride and enjoyment. However, if you have dependent children or elderly parents to care for, live at a distance from your workplace, have dietary issues and do not like being in the limelight then this is not going to feel like a reward to you. You may feel obliged to go and resentful that the organization did not think to ask you how you would like to be rewarded for your hard work. This could give you a sense of not

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being valued. After all, if they had asked you, you may have asked for an extra day off to spend with your family or a resource that would help you in your work or the change to undertake a training programme that is not normally supported by the department. This, of course, would not provide the organization with the publicity it wants to use to show that it cares. If commonalities can be found, within contexts, then this makes it much easier for organisations and decision makers to build more generalized interventions and to measure their success. There is a lack of research studies on being valued as opposed to adding value which is a different concept. One paper provides a definition of being valued as “a positive affective response arising from confirmation, within a congruent set of criteria, of an individual’s possession of the qualities on which worth or desirability depends” (White and MackenzieDavey, 2003 p.228). The only study related to learning is a study on student nurses. This study found that students were valued for being a learner, valued as being a team leader and valued as a person (BradburyJones et al., 2011).

Employee participants In choosing a context for research SMEs were considered a useful place to start. SMEs are an important area to consider for improvement of the economy. They provided 59.1% of private sector employment in the UK in 2012, employing 14.1 million people and accounted for 99.9% of all private sector business (Dept for Business Innovation and Skills BIS Oct 2012). “In 2010, enterprises with less than 250 employees are estimated to have accounted for 99.8% of the total number of enterprises across Europe, 66.9% of employment, 57% of turnover and 58% of value-added.” (European Commission, 2012) SMEs have fantastic employment value in Europe (Hill and Stewart, 2000). Indeed they are seen as the “main source of new employment in Europe” and “If the EU is to achieve its goals of speeding up economic growth and creating more and better jobs, it will be SMEs which play the biggest role” (Eubusiness, 2013). One of the ways that success is more likely to happen is if SMEs can make the most of their workforce and ensure they are working to their highest potential. Understanding what makes them feel valued and therefore strengthens the driver for engagement is seen as a means to this. Another area of interest is the future business leaders and what makes them feel valued as students at the moment as this may continue into their business lives and into the organisations they work for.

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Business Student Participants Business students, and in particular those studying at Master’s level are those who will be the next employees and leaders. Some of them are already working to support their studies or have left a job in order to take a Master’s degree to improve their career prospects or specifically move into a leadership role. Recovery from the recession requires new models of working, fresh ideas and the ability to use those ideas for business innovation. Organisations wish to employ the best talent and retain that talent. It is therefore important to understand what makes business students feel valued in their current context as students. It is suggested that they will take these perceptions and expectations into their workplace which will affect choice of employer and retention with that employer.

Methodology In order to research a construct with complexity an inductive approach was selected where rich data could be collected and analysed within both the contexts. A grounded theory (GT) methodology (GTM) was chosen as this focusses on providing a conceptual account of how people perceive what is going on in the matters that concern them. Grounded theory appeared to be particularly good at answering the how question in which the author was interested eg how did employees perceive they were valued? How did they know they were valued? How did they learn they were valued? What was it that told them this? The term feeling valued is a common way to express a perception, an understanding and it does not necessarily relate to an emotion as such. The term feeling valued is used to mean a knowing, a believing that one is valued. One of the issues around choosing grounded theory as a methodology is the different forms it takes. The methodology was first developed by Glaser and Strauss in the 1967. Since then it has been developed and used in different ways. The three most well-known approaches are: Classical Grounded Theory by Glaser and Strauss; Evolved Grounded Theory by Strauss and Corbin and Social Constructivist Grounded Theory by Charmaz. All of these were considered with the classical approach being selected. The reasoning for this was because the Glaser approach emphasises discovery and emergence of concepts from the data (as opposed to creation of the concepts through social constructionism between participants and researcher). Glaser advocates no literature review prior to data gathering (which the other methods use) to allow the data to

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speak without confines. Data is collected in field notes, not taped, and there is no need to use verbatim data though quotes can be used as ‘in vivo’ codes. The emphasis is not on interpreting the experiences of people but recording what they say about their thoughts and behaviour, which is constructivist data, and finding the concepts in it. Although there was no specific literature review prior to data collection, to avoid confining the data, the researcher did have prior knowledge of employee engagement theory from which this interest evolved and clearly this may have some effect on the coding of the data. Glaser says “researchers are human beings and therefore must to some degree reify data in trying to symbolize it in collecting, reporting and coding the data. In doing so they may impart their personal bias and/or interpretations— ergo this is called constructivist data. But this data is rendered objective to a high degree by most research methods and GT in particular by looking at many cases of the same phenomenon, when jointly collecting and coding data, to correct for bias and to make the data objective. (Glaser, 2002).

Data collection Appreciative Inquiry (Cooperrider & Whitney, 2005) was used as the approach for data collection. Appreciative inquiry is when we consider the best of what is happening and look to increase that rather than consider things we wish were not happening. Choosing this approach was an important consideration. Another alternative would have been to take the problem solving approach. The former provides positive data and opens up opportunities whereas the latter focusses on aspects that need addressing. The data required was data that evidence what made people feel valued and not what made them feel unvalued or devalued. If I were to ask what had made them feel unvalued I would have gained very different data. Being valued and being unvalued, in my view, are not on the same continuum. They are rather like Herzberg’s two factor theory (Herzberg, 1987) where he determines that motivation is different from satisfaction – they are not on the same continuum. If the problem solving approach had been used and the questions related to “what makes you feel you are not valued?” and by implication ‘what can be done to address these issues’ then perhaps the satisfiers, rather than the motivators would have emerged. It is easy and natural to think of reasons we do not feel valued so there had to be a definite methodological approach that insisted on an appreciative inquiry approach.

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Data was collected from in-depth interviews with SME employees and indepth interviews and focus groups with master degree business students. All participants were voluntary. A few simple questions were posed in order to obtain as open a response as possible. An open response was important as the purpose was gain inductive data. The key question was ‘How do you know you are valued?’ with supporting questions around: What specific evidence tells you that you are valued? Which people, events, processes, systems, conversations etc. make you feel valued? For transparency and ethics the focus groups notes were displayed on flipcharts for all participants to see what data was gathered and they could assure themselves of what was being recorded. For the interviews notes were written on a pad in front of the participant and the researcher which they constructed together. Attempts were made to collect data through internet forums and email but all these attempts were fruitless as respondents were unable to grasp the question being asked. This at least closes the door on those methods of data collection and confirms that this is a complex construct that requires a personal approach. The benefit of interviewing is that the researcher can help the participant to reflect on times they have felt valued and extract the evidence from the story – in effect this was enabling reflective space. A slightly different benefit derived from the focus groups was that others can help the understanding of the construct and when one person provides evidence another can see ways of identifying their own evidence. In both cases if the respondent starts to mention something that the researcher identifies as potential evidence then the participant can be encouraged to explain further. The personal approach also ensured adherence to appreciative inquiry. As mentioned earlier, it is natural to think of reasons we do not feel valued. It is harder to think about reasons we are valued. For example, one focus group participant stated “I need someone to talk through my work with me and advise me but when I feel I have reached a point that I need this help it is difficult to find someone who has the time to do this – the planned-in times for this are not useful to me”. I asked the participant to consider how he could be valued in this context and he immediately replied “I would feel valued if I was given a mentor”. This appreciative inquiry approach reminds the researcher and the participants that it is positive evidence they are seeking and there is often a positive to a negative story. To respond to the negative comment would involve the problem solving approach and

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probably consider that more planned-in times were needed or a more flexible resource provided probably meaning more cost. The appreciate inquiry approach opens up ideas around mentoring and then who could act as mentor which could be a number of people.

Data analysis For the purpose of data analysis the data from the employees and the business students was analysed separately. This was in order to keep the contexts intact and separate. With a methodology of discovery and emergence it was unknown whether the data would have any commonalities across the two contexts so consideration of commonalities was a separate stage of the research. Within each context the analysis used the grounded theory process of Constant Comparative Method. This is where the data is coded as data is collected and then these codes are compared codes to one other and amalgamated, reduced and filtered so that they become broader substantive categories. These are sometimes termed themes. Throughout the process of coding and developing the categories, theoretical memos (reflective notes) were written. "Memos are the theorizing write-up of ideas about substantive codes and their theoretically coded relationships as they emerge during coding, collecting and analyzing data, and during memoing" (Glaser, 1998). These were used to reflect on theoretical connections, focus on particular statements that seemed to carry weight with the research question and record ideas linking different concepts together. Theoretical sampling was used so that for the employees the results from the first interviews informed the selection of further interviewees and with the business students in-depth interviews were used to provide rich data on emerging categories from the focus groups. The overall aim in Glaserian grounded theory is to find a core category that links all the others and this is the precipitative theory. Glaser and Horton advise that “the core variable can be any kind of theoretical code—a process, a condition, two dimensions, a consequence, a range and so forth…….The core variable reoccurs frequently in the data and comes to be seen as a stable pattern that is more and more related to other variables (Glaser and Holton 2004, section 3.9).

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Figure 2 illustrates some of the coding from the focus groups. Focus Group Discussion Data

Codes

Recognising my potential

Recognising individual potential

Social and esteem needs are being met – these are interconnecting

Meeting social and esteem needs

Seeing my peers recognised and their contributions valued in class

Seeing others supported

Giving me voice – listening to what I want

Contributions valued

Being asked to be involved – asking for my opinion – letting me be involved in decision-making in class

Listening to voice Involvement

communication that is prompt, open and meaningful

Valuing opinion

responsive communication – answering emails responding to my needs

Responsive communication

style of communication – supportive

Meaningful communication Open communication

following through on communication Supportive style of communication appreciating my concerns as legitimate Follow-through on communication giving me an individual response – not what is policy and reflect and check on whether it is really policy

Respecting concerns

transparent communication – not fogging

Individually based response

recognition of progress and improvement (valued added) rather than absolute achievement

Thoughtful response

Understanding Being Valued: A Key Driver for Engagement Focus Group Discussion Data

Codes

actively involving participation in the class

Transparent communication

social groupings – going out socially – bonding – facebooking – mutual appreciation

Recognition of progress

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Recognition of individuality “I miss people when I don’t see them” Involvement in class “Everybody is important to me” Participation in class “We check up on each other in a nice way” Social bonding We value each other and the things that are important to each one of us

Mutual appreciation Emotional closeness

relationship with tutors (versus interaction with bureaucracy)

Holding others as important Mutual support

get-togethers specifically for constructive learning Mutual affirming

Tutor relationship

Purposive support

Figure 2: Illustration of some of the Focus Group Data Coding

The interviews provided more in-depth data and in particular provided a deeper understanding of the importance of individually orientated support that was already emerging from the class data.

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An illustration of some of the coding of the interview data is shown in Figure 3 below. Interview Data

Codes

I feel valued when I am treated as an individual – when it is based on my needs – built on what is important to me and not on the whole group

Treated as individual

Needs orientated When the tutors understand your learning style, your home problems, mark work as you as an individual instead of stereotyping, treated equally with others.

Individual learning style Flexible assessment

I am valued because my course is all about diversity and social work and so the tutors uphold that everyone is valued because that is what the course is all about. ethos of course - diversity I am valued by the tutors – one example is when everyone in the class understands something except me. The tutor will explain something again even if I am the only one in the class who doesn’t understand it. That makes me feel valued.

High personal value expected

Valued by tutors I felt valued at interview, they ask you if you have any difficulties or need support like childcare and what they offered matched up because they even fill in all the childcare forms for you.

The tutors are very good at keeping us informed and keeping everyone like tutors and placements informed. When you get to placement they know your needs. For me, valued as a student would mean I feel that I am treated as a paying customer and that lecturers work for me, not the other way round. My tutors are really helpful – they will have a chat over a coffee and really help you work out what to do. Even if they have to say your work is poor you can have a good relationship with them.

Individual needs vs group needs

Supportive interview process Need identification

Helping hand for processes

Understanding Being Valued: A Key Driver for Engagement Interview Data

Codes

I see the tutor as a sort of colleague because they are on an equal footing (being similar age and experienced in business) and therefore journeying with me in my learning.

Keep us informed

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Keep important others informed

I feel valued when the tutor has time to see me, talk to me and tell me exactly where I need to improve my work.

Valued as paying customer Tutor as staff

Tutor-student relationship Approachability

Tutor as colleague. Tutor journey alongside.

Access to tutor Talking to tutor Purposive communication

Figure 3: Illustration of some of the Interview Data Coding

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Interview Data - employees

Codes

Leader: “I go to bed every night very conscious that I am supporting fifty families and fifty mortgages on my shoulders”

job security/responsibility staff welfare

We all care that we all have jobs Company purpose - to provide us all with jobs

mutual job security

Company purpose to provide for local community

shared organisational purpose

leaders expect high level of effort from employees

Benevolence

leaders say what they do and they do what they say

High work expectation

leaders highly innovative and highly value innovation from others

Authenticity & integrity Innovation valued

‘you know people know if you are doing a good job – no shirking’ The leaders are bosses but also friends

Mutual-accountability

Managers ask for ideas – there is a system – new ideas are respected Leader-employee relationship Leaders very good at listening Innovation encouraged Leaders take views before making decisions High valuing of individuals irrespective of skills Listening See individuals as equal in value Shared decision-making “pride is my main goal” Valuing the person Proud to be trusted to do a quality job mutual valuing Proud to have my ideas for new products to be listened to

pride as goal

Craftsmanship, quality of finish

pride in trustworthiness

Ideas are taken seriously and investigated

pride in innovation

Employees sacrifice part of pay to keep colleague’s job

Understanding Being Valued: A Key Driver for Engagement Interview Data - employees

Codes

Personal sacrifice of leader for sake of people’s jobs

craftpersonship

Leaders would not make anyone redundant unless last resort

seriousness of innovation mutual-sacrificing/altruism

Will support to utmost when ill or in difficulty leader sacrifice/altruism Awareness and supporting of employee family members ‘We are all one team’, ‘we are one family’

job protection/avoid hardship

‘we all want the company to do well’

Caring for person

Multiple chances of redemption if poor behaviour or long term sick

Caring of employee family

“your ideas are never ignored, they may not be accepted but you always know why” “I hate forms and don’t write well so they let me draw my idea”

Cohesiveness Oneness -one team, one family Shared purpose Grace

Innovation valued

System accessibility/valuing individual

Figure 3: Illustration of some of the Interview Data Coding (Claxton 2014)

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Findings and discussion Business Students Having conceptualised and compared all the data from the business students, four themes/categories emerged as the strongest. These are illustrated in Figure 4.

R E L A T I O N S H I P

Legitimising and Supporting individualised need

Supportive, responsive and meaningful communication

Participation and involvement and affirming my voice is counted Respectful, upholding relationships

R E L A T I O N S H I P

Figure 4: Interrelated Concepts for Being Valued as a Business Student

Legitimising and Supporting individualised need was where individuality was seen as legitimate, that personal concerns were respected and that an individualised response was emphasised in terms of needs and individual difference. For example “I am valued by the tutors – one example is when everyone in the class understands something except me. The tutor will

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explain something again even if I am the only one in the class who doesn’t understand it. That makes me feel valued.” Another example was “they know I have a baby and so if I need a bit longer to do my work they understand this”. The desire to recognise progress rather than attainment and the meeting of personal learning needs was strong. In an academic environment where external verification of standards of achievement is strongly regulated there perhaps needs to be thought around how tutors and the organisation can validate and celebrate progress more effectively as well as attainment. As employees these students will be looking for recognition of progress. Supportive, responsive and meaningful communication emerged from codes relating to a broad range of communication spoken and written and communicated on paper and virtually. Students felt valued when communication was clear and when it was shared appropriately. For example “what I found really good was that when I went to placement they knew about my so I didn’t have to explain it all again – they took account of it already”. Another said, “I told the leader of the course about and they made sure all the other tutors knew which meant they valued me”. Communication is seen as meaningful when it is relevant and addresses the point in question or illustrates a means of assistance. Responding to emails for help was seen as a crucial factor in making a student feel valued. As employees these students will be looking for this level of support. Participation and involvement and affirming my voice is counted was a category which was broad and many codes could have been part of this. However, the emphasis here was on participation and involvement in the learning process and, in particular, in the classroom situation which was dependent on the tutor’s leadership of the class situation. The classroom situation was viewed as crucially important to students concerning their experience of feeling valued. This is where students have voice, where their ideas are listened to, and their contributions are encouraged. They do not have much opportunity to show their contributions elsewhere. The comment “I feel much more valued when we have this sort of discussion where everyone can talk about their experience than when someone stands there and delivers a powerpoint and expects me just to listen to them” illustrates how teaching methods and skilled facilitation can directly affect how people are valued. The tutor affirming the contribution of students to class discussions was an important factor. As employees these students will want their voice heard and affirmed.

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Respectful, upholding relationships emerged from a number of codes which related to relationship with all significant others eg administrators, career advisers; but was particularly about relationships with tutors and peers. In particular, emotional ties illustrated in ‘I miss people when they don’t come to class or don’t come when we go out socially’ and ‘everyone in this class is important to me personally’ and ‘we always check up on each other to see if we are ok’ brought a feeling of being valued. This was also related to the previous theme in that having good relationships was the basis for students affirming their fellow students’ contribution in the classes. This affirming, respecting and upholding of each other was seen as evidence of valuing. As employees these students will want respectful upholding relationships with fellow employees. Underpinning all of the themes was a relationship with the organization as well as individuals within it. This related to tutors and administrators but also to those supported the hierarchy and its systems which were seen as a threat to being valued.

Employees Conceptualisation of the employee data also resulted in themes/categories. These are illustrated in Figure 4.

four

Understanding Being Valued: A Key Driver for Engagement

R E L A T I O N S H I P

Innovation – accessible systems for capturing and support

Being led by servant leader style – gracious self-sacrificing

Supporting pride enablement and mutual accountability

shared-purpose mutual sacrificing and working as one team

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R E L A T I O N S H I P

Figure 4: Interrelated Concepts for Being Valued as an SME Employee (adapted from Claxton 2014)

Innovation – accessible systems for capturing and support – employees felt valued because they were encouraged to innovate and this was seen as important for survival of the organization. Management provided a system for generating, collecting and processing ideas and this system was made accessible for all employees. One interviewee explained how a form was used to capture ideas but that he felt forms were difficult. Instead of insisting he completed the form – which would have lost his idea – he was asked to talk about his idea while someone else recorded it. Another member of staff was encouraged to draw their idea. There was a seriousness about ideas. Supporting pride enablement and mutual accountability – most employees stated that being able to take “pride in a good job” and “standing back and feeling proud of what I have made” was what made them feel valued.

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Most of the staff had been through apprenticeship training which held well-crafted work as a key valued – they referred to themselves as craftsmen or time-served – the women also use this term rather than craftperson. Pride was a strong motivator. Examples of ‘in vivo’ codes are “the main goal of my job is pride in my work”, “I can only be proud if the finish is perfect”. They was also a strong sense of accountability where there was clarity over expectations and affirmation by colleagues of a job well done. shared-purpose - mutual sacrificing and working as one team – employees felt valued because there was a strong sense of shared purpose illustrated through metaphors such as ‘one team’, ‘one family’, ‘we pull together as one team to survive’, ‘we all need each other’, ‘team security is the basis of all our activity’. Being in a recession may have contributed to this cohesion. Altruism was also evidenced through mutual sacrificing where employees would rather they took a cut in hours each than allow someone to be made redundant. Being led by servant leader style – gracious - self-sacrificing – employees felt valued due to the leadership style they experienced which was a servant leadership style. This style provided support and meant leaders were highly approachable and that they valued the employees as individuals and were supportive of their families. There was a genuine depth of concern and the leaders exhibited a high level of responsibility for the well-being of their employees. Employees remembered key events they had been supported and these key events still acted to make those employees feel valued. Leaders had made personal sacrifices eg not buying themselves new cars, paying for social events from their own salaries etc which was a strong message to employees that they were valued. The element of grace was evidenced in occasions where employees were rehired after being sacked due to deviant behaviour. These themes were inter-related and had a basis of relationship as core with an emphasis of trust implicit within that relationship.

Conclusion The purpose of this research was to explore ‘being valued’ the key driver for engagement using employees and business students as participants within their own context and across context.

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Within context there are clear areas here for further consideration in order to increase experience of being valued and thereby lead to gaining the benefits as shown by the APA 2012, illustrated in Figure 1. Across context the importance of relationship emerged from both studies. Relationship with individuals, relationships with groups and relationship with the organisation were all evidenced by the participants as effecting their experience of being valued. The data here does not show how the experience of feeling valued would be specifically affected if relationship in one of these areas was negatively perceived. This would be of interest for further research. Playing a part in innovation was also identified as a driver for employees to feel valued and innovation in itself is, of course, important in current times. Innovation is still not well understood. Leiblin (2007) says that “although it is important for driving economic growth there is still a lot to understand about how innovative opportunity is created within the organisation”. Literature tells us that location is not the important determinant of innovation efforts (Borje and Loof 2008) and that enhanced technical skills are more important than management, finance or exporting skills (Freel). Employees in this study were motivated to innovate because of a clear accessible system where their ideas were taken seriously and they were informed as to their progress. From this study there are suggestions for practical application for those who want to improve engagement. For those who want to lead on improving engagement in their learning programmes then these questions are suggested: x What makes communication: meaningful, supportive and responsive? How do I ensure that written and spoken communication is all these things? x How do I involve and affirm the voice of the learner in all aspects and decisions around their learning? x How do I ensure personal needs are legitimised and supported not just by me personally but by the organisational systems the learner uses? x How do I ensure respectful upholding relationships across learners and with those who provide the learning opportunities?

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For those who want to want to lead on improving engagement in their organisations or teams then these questions are suggested: ƒ How do I ensure every member of staff has opportunity to share their ideas in a way they feel comfortable with, to access innovation systems and to contribute to the promotion of an innovation climate? ƒ How do I better understand what staff want to be proud of in their work? How do I enable and support them to be able to do those things? Do I need to check there is alignment with employee and organisational view of what pride should be attributed to? ƒ How do I ensure there is clear accountability so that everyone is supported to play their part and be affirmed by colleagues when they do? ƒ What do I do to encourage a strong shared purpose and cohesive team? How can I help team members to genuinely want to support each other? ƒ What sort of a leader am I? Am I gracious? Am I self-sacrificing? How important are my staff, really, to me? Do I need to get to know them better and listen to them more? Of course, these studies are within context and all contexts are unique. The only way to find out exactly what makes learners and employees feel valued is to ask them. However, it is not an easy question and some may have never considered the question before. However, with the right approach they can reflect on and find the answers. Surveys are not very effective for this. Sitting down together and considering the questions “How do you know you are valued? and “What specific evidence tells you that you are valued?” will gather the data needed. Prepare to be amazed! Dr Julia Claxton is Principal Lecturer (PL) of Organisational Development, at Leeds Business School, UK. She is also PL for HRM/OB Research and Faculty PL for Student Engagement. She teaches, researches and consults in employee engagement, student engagement, leadership development and primarily uses methods of action learning and grounded theory. She is passionate about understanding how people evidence that they are valued at work. She has introduced employee engagement as new streams at conferences such as the UFHRD and IHRM in order to further promote publications in this area and has recently produced a double volume of a special issue of the Journal of Workplace Learning. She recently led on the curriculum of a European Leadership programme and

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has also been involved in European Cross-Cultural Management programmes. She is a member of the Academy of Management and works with regional and national business and public sector organisations including a current project in team coaching with the National Health Service of the UK.

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http://www.eubusiness.com/topics/sme/guides accessed on 22 January 2013, 16:23 CET Freel M., (1999), Where are the skills gaps in innovative small firms? International Journal of Entrepreneurial Behaviour & Research, Vol. 5 No. 3, 1999, pp. 144-154. Glaser B.G. and Strauss A.L., (1967), The discovery of grounded theory: strategies for qualitative research, Chicago, Aldine. —. (1992), Basics of grounded theory analysis, emergence vs forcing, Mill Valley, C.A.: Sociology Press —. (1998), Doing grounded theory: Issues and discussions, Mill Valley, C.A., Sociology Press —. (2002) Constructivist grounded theory? Forum: Qualitative Social Research, Volume 3, No. 3, Art. 12 available at: http://www.qualitative-research.net/index.php/fqs/article/viewArticle/ 825/1792 (accessed on 11th February 2014) Glaser, B.G. and Holton J. (2004), Remodeling Grounded Theory, Forum: Qualitative Social Research, 5(2), Art. 4, available at: http://nbnresolving.de/urn:nbn:de:0114-fqs040245 (accessed on 11 February 2014) Glaser B.G., (2005), The Impact of Symbolic Interaction on Grounded Theory, Grounded Theory Review, Vol. 4, Iss. 2, Wordpress Gruman J.A. and Saks A.M., (2011), Manage Employee Engagement to Manage Performance, Industrial and Organizational Psychology, Vol. 4, Iss. 2, pp. 204–207, Wiley Herzberg F., (1987), One more time: How do you motivate employees?, Harvard Business Review, pp. 5-16 Hewitt (2014) Trends in Global Employee Engagement, available at url: http://www.aon.com/attachments/human-capital-consulting/2014trends-in-global-employee-engagement-report.pdf (accessed on 10 November 2014) Hill R and Stewart J (2000), Human Resource Development in Small Organisations, Journal of European Industrial Training, Vol 24, no 2/3/4 pp105-117 Kahn, W.A., (1990), Psychological conditions of personal engagement and disengagement at work, Academy of Management Journal, Vol. 33, No. 4, pp. 692-724 Leiblein M. J., (2007), Environment, organization, and innovation: how entrepreneurial decisions affect innovative success, Strategic Entrepreneurship Journal, Wiley Online Library

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MacLeod D. and Clarke N., (2009) Engaging for Success: Enhancing Performance through Employee Engagement, Department for Business Innovation and Skills (BIS), London, report available at http://www.engageforsuccess.org/ideas-tools/employee-engagementthe-macleod-report/#.VGHbwO-2_nM (accessed 10 November 2014) Robinson, D., Perryman, S. and Hayday, S. (2004), The Drivers of Employee Engagement, Report 408, Institute for Employment Studies, Brighton Robinson D., Hooker H., and Hayday S., (2007), Engagement: The Continuing Story, Report 447, Institute for Employment Studies. Saks M.A., (2006), Antecedents and consequences of employee engagement, Journal of Managerial Psychology, Vol. 21, No. 6 , pp. 600-619 Schaufeli W.B., Salanova M., Gonzalez-Roma V., and Bakker A.B., (2002), The measurement of engagement and burnout: a two sample confirmatory factor analytic approach, Journal of Happiness Studies, Vol. 3, pp.71-92 Shuck, B., and K. Wollard. (2010), Employee engagement & HRD: A seminal review of the foundations, Human Resource Development Review 9, No. 1: pp.89–110. Strauss A. and Corbin J., (1998), Basics of qualitative research: techiques and procedures for developing grounded theory, Thousand Oaks, C.A., Sage Truss C., Soane E., Edwards C., Wisdom K., Croll A. and Burnett J., (2006), Working Life: Employee Attitudes and Engagement 2006, London, CIPD. White M. and Mackenzie-Davey K., (2003), Feeling valued at work? A qualitative study of corporate training consultants, Career Development International, Vol. 8, Iss. 5, pp. 228-234

CHAPTER THREE MANAGEMENT ACCOUNTING SYSTEMS IN SMES: A MEANS TO ADAPT TO THE FINANCIAL CRISIS? SANDRA COHEN, DEPARTMENT OF BUSINESS ADMINISTRATION AT ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS

SOTIRIOS KARATZIMAS DEPARTMENT OF BUSINESS ADMINISTRATION AT ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS

AND VASILIOS-CHRISTOS NAOUM DEPARTMENT OF ACCOUNTING AND FINANCE AT ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS

Abstract In the present study we examine the impact of the recent financial crisis on the management accounting systems of Small and Medium-sized Enterprises (SMEs) in Greece. More specifically, we assess whether and to what extent Greek SMEs have adjusted their management accounting systems as a reaction to the intense pressures deriving from the extensive financial crisis. For this purpose, we explore the application of budgeting and costing systems as well as that of various management accounting practices and techniques during two periods: in 2009, the year of the financial crisis outbreak, and in 2013, a period in which Greek economy is deeply in the financial vortex. The study is informed by the answers of 161 SMEs falling into the manufacturing, retail and service-providing sectors on a structured questionnaire. Results indicate that the various facets of the

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financial crisis resulted in SMEs adjusting their management accounting systems. Therefore, an increase in the number of SMEs starting to apply budgeting and costing systems within the examined period is evident. Additionally, the use of budgeting and costing for various managerial purposes, as well as the use of several modern management accounting and performance measurement techniques has been intensified, albeit moderately. Therefore, despite the crisis most of the SMEs have not embraced more sophisticated management accounting methods.

Introduction The role of Small and Medium-sized Enterprises (SMEs) in modern economies is crucial as they constitute the vast majority of firms’ population. Nevertheless, SMEs are considered to be more vulnerable to the intense pressures caused by a financial crisis and they often struggle to survive. As a result, an increased number of SMEs is forced to bankruptcy (OECD, 2009). The recent financial crisis has been a major challenge for all types of organizations revealing a plethora of problems and inadequacies in terms of culture, structure, planning as well as accounting practices (Hopwood, 2009; van der Stede, 2011). The implications of the financial crisis on management accounting have been characterized as “undeniable” (van der Stede, 2011; p. 606) while an impetus for readjustments on management accounting practices has been recognized as necessary (Hopwood, 2009). Therefore, many questions arise regarding the impact of a financial crisis on SMEs as well as the defense mechanisms, if any, that SMEs develop against it. The challenges, especially in terms of management accounting practices, are significant bearing in mind that the appropriate use of management accounting information can serve as a vital attribute for the survival and even the success of a small or medium-sized enterprise (Mitchell and Reid, 2000). In the present study we try to assess whether Greek SMEs have adjusted their management accounting practices and techniques as a reaction to the financial crisis. More specifically, we explore the management accounting techniques used by a sample of Greek SMEs in 2009, the year that the financial crisis started becoming evident in the country, and whether there has been a change in these management accounting systems by 2013, a period in which Greek economy is deeply in the financial vortex. Greece

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constitutes an interesting setting to study this research agenda as the country as a whole and the organizations operating in it have faced and are still facing extremely intense pressures due to the extensive financial crisis (Matsaganis and Leventi, 2013). To put it in numbers, it is estimated that the crisis led to the closing of 90,000 SMEs in Greece between 2008 and 2011 (SBA Fact sheet, 2012). This is very important since Greece is a country where the vast majority of enterprises are small and medium-sized (Eurostat, 2008). Moreover, SMEs are considered to be more significant in Greece compared to any other E.U. country (SBA Fact sheet, 2012). The study adds to international literature by examining the implications on management accounting systems that may emanate from a financial crisis. According to Hopwood (2009) and Van der Stede (2011) this area of research is understudied and requires further analysis. Most of the limited studies on the topic concentrate on the 1997 financial crisis in Asia and provide mixed and inconclusive results (Varum and Rocha, 2013). Moreover, the Asian crisis of 1997 differs from the global one of 2008 in several fundamental aspects, the most important being the fact that the latter originated in advanced economies (E.U.) and not in developing ones (Park et al., 2013). The two financial crises also present differences in terms of exchange rate regimes, breadth and persistence of the crisis, role of private and public sectors, and level of preparedness (Truman, 2013). Even though further research with international orientation is required before reaching generalizable conclusions, our study could be considered as an expansion of the research agenda to countries with a different -from the Asian- cultural profile. In this realm, our study offers an analysis within the European context and especially the Southern European one1. Additionally, the study contributes to literature by exploring the management accounting practices and techniques that are applied by SMEs, another field where research is not extensive (e.g. Drury and Tayles, 1993; Marriot and Marriot, 2000; Wijewardena and De Zoysa, 2001). The paper is organized as follows. In the following section the international literature relevant to the issue is presented. In Section 3 we develop our hypotheses and Section 4 contains the methodology applied. Finally, 1

Due to various structural and cultural differences evident between European member states, a generalization of the outcome to all E.U. countries could not be applicable. This fact is further highlighted by the different level of intensiveness of the crisis’s impact to different E.U. states. In general, Greece is considered to belong to the South-East European cultural cluster (Koopman et al., 1999) sharing commonalities with countries such as Italy, Spain and Portugal.

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Section 5 provides the results, while Section 6 concludes with a discussion on the findings and future research potentials.

Literature review In the international literature SMEs have been characterized as a “vital” and “key” force for an economy’s well-being (Mitchell et al., 1998; Mitchell and Reid, 2000; Nandan, 2010) and as a major driver of economic growth and adjustments (OECD, 2013). They are also viewed as being more flexible, innovative, agile enough to quickly react to changing markets, less bureaucratic, entrepreneurial, and “in-touch” with reality, compared to larger firms (Peel and Bridge, 1998). However, reasons such as the limited knowledge of the owners-managers on how to tackle the managing problems (Kirby and King, 1997), the dependency on limited number of customers and the production of standard products (Nandan, 2010) make this business sector prone to failure and lead many SMEs to struggle for survival. According to Hopper et al. (1999) SMEs receive intense pressures to reduce their costs, and at the same time to retain high quality. Ballantine et al. (1998) observed that SMEs have a failure rate of 11%, which is six times higher compared to large firms. Regarding the choice of management accounting practices several researchers argue that the organization size plays a role (e.g. Otley, 1995; Haldma and Lääts, 2002; Abdel-Kader and Luther, 2008). As SMEs are less complicated compared to larger firms it is more likely that they apply simpler management accounting systems (Mitchell and Reid, 2000). The survey of Drury and Tayles (1993) in 260 UK SMEs observed the existence of under-developed accounting systems while Merchant (1981) showed that larger firms use more formal sophisticated budgeting processes, compared to smaller firms which rely less on formal budgeting. Moreover, in larger firms budgeting seems to have a stronger relation with increased performance. According to Joshi et al. (2003) the size of an organization affects the nature of the adopted budgeting systems and furthermore organizations’ performance. Size constitutes a determining factor for the adoption of innovative management accounting practices such as activity-based management practices (Baird et al., 2004) and the balanced scorecard (Speckbacher et al., 2003). Apart from size, the nature of the environment into which a firm operates, also plays a very important role in the choice of management accounting systems (Chenhall, 2003). In general it has been observed that firms facing intensive environmental attributes such as high uncertainty, increased

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competition, turbulence and hostility, react by developing or adopting more sophisticated management accounting systems and by increasing their innovation skills (Chong and Chong, 1997; Abdel-Kader and Luther, 2008). The aforementioned environmental characteristics provide an overview of the conditions firms face during periods of financial crises. Nevertheless, the way small and medium-sized firms react –in terms of management accounting systems– in periods of financial crises has not been adequately studied. The majority of the limited studies on the topic concentrate on the 1997 financial crisis in Asia and most importantly they do not conclude to unanimous results (Varum and Rocha, 2013). For example, some of these Asia-based studies (e.g. Tan and See, 2004; Narjoko and Hill, 2007) provided evidence that smaller firms were more flexible and could more easily adjust to a financial crisis, while others, on the contrary, concluded that smaller firms were more vulnerable (e.g. Domaç and Ferri, 1999; Marino et al., 2008). Moreover, as already discussed the Asian and European crises are not homogeneous (Park et al., 2013; Truman, 2013). SMEs in Greece2 constitute the 99.8% of Greek enterprises and account for about 85.2% of private sector employment and 70.2% of the added value created by businesses in Greece (SBA Fact sheet, 2013). Greek SMEs have been considerably affected by the global economic slowdown, and many of them were forced to get out of business. The financial crisis plunged the Greek GDP growth rate to -3.1% in 2009, -4.9% in 2010 and 7.1% in 2011. As a consequence the unemployment increased drastically to 9.5% in 2009, 12.5% in 2010 and 17.7% in 2011 as a percentage of the total workforce3.

The Greek management accounting culture Although SMEs constitute the majority of Greek enterprises, their management accounting systems are rather under-researched as most of the management accounting studies in Greece concentrate on larger companies. As for the use of management accounting information in Greece it seems that in recent years there has been an improvement. The early study of Ballas and Venieris (1996) provided evidence that Greek firms use accounting mainly for fiscal consideration purposes and not for 2

In these percentages the European Commission’s SBA for Europe includes, apart from small and medium sized firms, the micro enterprises as well. 3 Data taken from the World Bank world development indicators http://databank.worldbank.org/data/home.aspx (assessed on 31/1/2014)

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managerial purposes. However, the findings in more recent surveys (Cohen et al., 2005; Pavlatos and Paggios, 2008; Venieris and Cohen, 2008; Angelakis et al., 2010; Cohen and Karatzimas, 2013) show an increase in the use of modern accounting practices and techniques (e.g. Activity Based Costing, Benchmarking, Customer and Competitor analysis, etc.) as well as in the use of budgeting for managerial purposes (Cohen and Karatzimas, 2011). Nevertheless, the preference to traditional management accounting practices is still highlighted (Angelakis et al., 2010; Cohen and Karatzimas, 2013). In some of these studies, the firm size has been found to be a determinant factor in adopting modern management accounting practices. More specifically, there is evidence that smaller firms prefer the application of simpler management accounting systems.

Hypotheses development Budgeting system Budgeting constitutes a multifaceted tool in management hands (Hansen and Van der Stede, 2004). Apart from its obvious use for planning and control purposes (Hilton et al., 2000), there is also a variety of other functions where budgeting could be useful. For instance, the budgeting procedure could be further exploited for internal communication, personnel motivation, as well as for performance evaluation purposes (Fischer et al., 2002; Hansen and Van der Stede, 2004). As budgeting is strongly correlated to firms’ strategy (Abernethy and Brownell, 1999) its importance substantially increases in periods of economic recession (Lääts and Haldma, 2012). In such periods, the planning, control and evaluation aspects of the budgeting mechanism constitute major pillars that ensure firms’ survival. That is why all attempts to improve traditional budgeting mainly focus on the strengthening of its connection to strategic and operational planning (Hansen et al., 2003). Commitment and reliance to strategic planning and its tools could result in firms’ taking advantage of emerging opportunities (Wilson and Eilertsen, 2010). Evidence on the use of budgeting during periods of economic recession shows that firms choose to adopt flexible budgeting in the short term (Lääts and Haldma, 2012). Based on the above discussion and since studies in relation to the Greek business environment (Cohen and Karatzimas, 2011) show a recent increase in the use of

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budgeting for several managerial purposes, the following hypothesis is tested: Hypothesis 1: SMEs in Greece react to the financial crisis by adopting more sophisticated budgeting systems

Costing system The globalization of the markets which results in massive economies of scale in production, the diversification of the manufacturing technology and the increased demand for product diversity have amplified the need for more sophisticated costing systems, such as activity-based costing, target costing and value chain costing (Cohen and Kaimenaki, 2011; Kaplan, 1994; Taipaleenmaki and Ikaheimo, 2013). These recently developed systems improve the quality of information and enhance decision making. Moreover, higher levels of cost system sophistication are positively associated with the importance of cost information (Al-Omiri and Drury, 2007). During an economic crisis, small enterprises have difficulties in dealing with its impacts, such as intense competition, unstable trading environment and cash flow problems (Yesseleva, 2012). According to literature (Libby and Waterhouse, 1996; Simons, 1990) firms facing very competitive market environments use more sophisticated management accounting systems. Increased competition leads to severe market conditions with under-cut prices and low profit margins (Al-Omiri and Drury 2007), increased customization of products and concentrated product diversity. Consequently, organizations are in need of more accurate cost information. They need to correctly calculate the costs of the increased variety of customized products and services in order to avoid improper decisions due to over-costing or under-costing. Based on the above discussion the following hypothesis is tested: Hypothesis 2: SMEs in Greece react to the financial crisis by adopting more sophisticated costing systems.

Management accounting techniques The recent trend in the management accounting practices results in firms enriching their traditional concept of internal and financial information with external and non-financial information (Chenhall, 2007). This combination gives rise to techniques such as the balanced scorecard, nonfinancial performance measures, benchmarking, competitor and customer

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analysis (Chenhall and Langfield-Smith, 1998). The new management accounting practices and techniques appear to focus on firms’ future performance and to provide a link among operations, strategies and objectives (Hyvönen, 2005; Taipaleenmaki and Ikaheimo, 2013). Several studies (Abdel-Maksoud et al., 2005; Hyvönen, 2005; LangfieldSmith, 2008) have indicated that for firms operating under increased global competition, rapidly changing technology and new demands on managerial approaches, the use of traditional management accounting practices and techniques is not suitable; on the contrary, the use of modern ones better suits them. As a result, firms facing the outcome of a financial crisis should focus on developing a strategic orientation. For instance, in periods of uncertainty firms adopt a more costumer-focused orientation (Cadez and Guilding, 2008). Based on the literature and since management accounting practices and techniques constitute a significant tool that could be used for the survival and even sustainability of SMEs (Mitchell and Reid, 2000), we examine the following research hypothesis: Hypothesis 3: SMEs in Greece react to the financial crisis by adopting more sophisticated management accounting techniques

Research design In the present study we focus on SMEs that operate in the Greek business environment. In order to define SMEs we use the definition developed by the European Commission (E.C.) in 20034. For the purpose of our study a questionnaire has been developed including four sections that correspond to two different time periods: The first period refers to the time of the financial crisis outbreak (i.e. year 2009), while the other to a time period deep into the financial crisis when all its effects are evident (i.e. year 2013). The two first sections of the questionnaire examine the characteristics and the uses of budgeting and costing systems, respectively. The third refers to the use of several management accounting practices and performance measurement techniques. The fourth section examines the potential impact of a set of 4

The E.U. through the Commission Recommendation of May 2003, has proposed the number of employees and either turnover or balance sheet total as the main factors defining the firm categories. More specifically, the workforce of Small enterprises is less than 50 employees and their annual turnover or annual balance sheet total is up to 10 million Euros. As for Medium-sized enterprises, they employ fewer than 250 persons and they have an annual turnover of less than 50 million or an annual balance sheet total that does not exceed 43 million Euros.

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factors on the application of management accounting systems by SMEs. Therefore, the questionnaire is structured in such a way that it permits the examination of any change made in the budgeting and costing systems as a result of the recent financial crisis. The selection of the examined practices and techniques included in the questionnaire is based on the Greek business environment characteristics as presented in previous studies on management accounting in Greece (e.g. Angelakis et al., 2010; Cohen and Karatzimas, 2013). The questionnaire5 was disseminated via e-mail to 3,000 SMEs in Greece, found in ICAP dataset. ICAP database covers time series financial data for 32,000 Greek companies. The questionnaire was addressed to either the president or the CEO of the firm. 161 completed questionnaires were received, which corresponds to a 5.4% response rate. More specifically, 102 (63%) out of the 161 firms were identified as Small and 59 (37%) as Medium-sized. The sample companies can be further divided to 41 firms belonging to the wider manufacturing sector, 41 to the service-providing sector and 79 to the retail sector. Regarding the firms’ legal form, 142 (91%) of the 161enterprises were identified as Public Limited Companies (P.L.C.), 12 (7.5%) firms as Limited Liability Companies (L.L.C.) and 2 (1.2%) firms as General Partnerships (G.P.). A T-test comparing early and late respondents indicated the non-existence of any statistically significant differences. Key financial characteristics of the 161 firms for the years 2009-2011 are provided in Table 1. Sales Revenues

Total Assets

Equity

9,414 22,700 2,450 Mean 3,843 4,867 1,478 Median St. 13,700 120,000 93,100 deviation Amounts in 1,000 €; N=162; Period 2009-2011

Income before taxes -2,177 43

Gross Margin (%) 27.7 24.72

31,400

17.4

Table 1: Descriptive statistics To have a better understanding of the financial characteristics of the sample firms, Diagrams 1 and 2 provide a comparative view of the three

5

The questionnaire is in Greek and is available at: https://docs.google.com/forms/d/1EWg5ZD5fOWPuQWEsGWC3rE9VyOD7QRO 9XhmF6CwLI5s/viewform.

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sectors in terms of median sales revenue (Diagram 1) and median total assets (Diagram 2) for the years 2009, 2010 and 2011. 5,000

4,000

3,000

2,000

1,000

0 Sales in '000€

2009

2010 Retail Service

2011 Manufacturing

Diagram 1: Median of Sales for each sector

As revealed in the diagrams, the retail sector shows a costantly decreasing trend in sales revenue and total assets throughout the three-year period. On the other hand, the figures of the manufacturing and service-providing sectors have remained rather stable after the first year’s decreasing trend.

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6,000 5,000 4,000 3,000 2,000 1,000 0 Assets in '000€

2009

2010 Retail Service

2011 Manufacturing

Diagram 2: Median of Total Assets for each sector

Results In the following paragraphs a brief presentation of the results is given. At first the results regarding the budgeting system, the costing system and the application of other management accounting practices and techniques are provided. This analysis permits the development of a high level management accounting profile of the sample companies at the two periods. Finally, a more thorough look into the characteristics of the change-deniers (i.e firms that did not proceed to adopting a budgeting system) is attempted.

Budgeting in SMEs From the responses (Table 2) a significant increase in the number of firms that apply a budgeting system during the examined period is evident. The percentage of companies applying a budgeting system increased from 73.9% of the sample companies in 2009 to 84.5% in 2013. Moreover, no company ceased the operation of its budgeting system during the crisis. Nevertheless, there is still a 15.5% of the sample that does not apply a budgeting system despite the crisis.

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Budget is developed 2013 Budget is developed 2009 Yes No Total

Yes

No

Total

119 17 136

0 25 25

119 42 161

Table 2: Budget development

When it comes to the characteristics of the budgeting system, it turns out that the degree of detail in the budget has also slightly increased. In 2013 almost 67% of the sample firms prepared a budget which is characterized as being detailed; the corresponding percentage in 2009 was 62%. Regarding the time period the budget refers to, no significant change is observed between the two periods. In both cases the majority of the firms choose to prepare an annual budget. However, there is a slight change in the way budget amounts are calculated. The responses reveal an increase in the number of firms choosing to apply a combination of two methods: “Calculating the amounts from a zero basis” and “Calculating the amounts as a percentage of the change in the previous budget’s amounts”. As budgeting is widely used for various managerial purposes and it is strongly related to a firm’s strategic objectives (Yuen, 2004; Hansen and Van der Stede, 2004) respondents were asked to rate the extent to which their firms use budgeting for planning, strategy implementation, communication with banks and performance evaluation. The results (Table 3) reveal a slight increase in the use of budgeting for the aforementioned purposes during the crisis period. Even though all four variables received a rating above the average by the respondents, the most important use refers to the “Evaluation of firms’ performance”, followed by the use of budgeting for “Planning”. 2013

2009

Firm’s performance 4.23 3.85 evaluation 3.93 3.62 Planning Implementation of firm’s 3.85 3.51 strategy 3.70 3.31 Communication with banks 1-5 Likert scale, where 1: Not at all, 5: Very much Table 3: Use of budgeting for managerial purposes

Difference

T-test (p-value)

0.38

0.000

0.31

0.000

0.34

0.000

0.39

0.000

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The increase in the use of budgeting for managerial purposes between the two periods is found to be statistically significant. The conduction of a Paired-sample T-test between the mean values of related variables reveals significant differences in the mean values of all variables between the two periods at the 1% statistical significance level. This finding is an indication of a change in the philosophy of the firms which in turn leads them to increase the use of budgeting for managerial purposes. On the whole, a significant number of firms started applying a budgeting system during the period under examination. Furthermore, a change, although of moderate magnitude, in the use of budgeting for several managerial purposes can be observed. Therefore, the first hypothesis is supported by the empirical findings.

Costing in SMEs Regarding the application of a costing system, the results show that firms not applying a costing system have decreased in number during the crisis period. While in 2009 almost 15% of the sample firms did not use a costing system, by 2013 this percentage has decreased to 3% (Table 4). Therefore, a move towards firms monitoring their costs more effectively can be observed from the data. 2013 2009 Yes No Total

Yes 137 19 156

No 0 5 5

Total 137 24 161

Table 4: Does the firm apply a costing system?

The respondents were further asked to rate the extent to which their firms use costing information for managerial purposes such as planning, pricing, cost control and employee performance evaluation. The results (Table 5) indicate that in both periods the costing system is mainly used for “Pricing” and “Cost control” purposes and to a lesser extent for “Planning” and “Evaluation of employees’ performance”.

Management Accounting Systems in SMEs 2013

2009

4.12 3.93 Pricing 4.10 3.88 Cost control 3.61 3.43 Planning 3.13 2.93 Employees performance evaluation 1-5 Likert scale, where 1: Not at all, 5: Very much

Difference

0.19 0.22 0.18 0.20

69 T-test (pvalue) 0.000 0.000 0.001 0.000

Table 5: Use of the cost system for managerial purposes

A Paired-sample T-test aiming to examine differences between the mean values regarding the use of costing information in the two periods revealed statistically significant differences for all cases at the 1% significance level. Therefore, there is corroborative evidence that SMEs used costing information more intensively for managerial purposes in 2013 compared to 2009. The increase in the number of firms choosing to apply a costing system during the examined period along with the slight increase in the use of costing information for various managerial purposes, provide empirical evidence that support the second hypothesis.

Management accounting techniques in SMEs As a next step, the firms’ representatives were asked to rate the extent to which their firm had been applying certain management accounting techniques during the two periods (Table 6). More specifically, the examined techniques referred to the application of “Competitor analysis”, “Customer analysis” and “Benchmarking”. The responses reveal a slight increase in the application of all three techniques. The most commonly applied technique for both periods turned out to be “Customer analysis” (mean value = 3.73 for 2013 and 3.24 for 2009). What should be further noted is that the use of “Benchmarking” although increased since 2009, is still applied only to a limited extent.

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2009

3.73 3.24 Customer analysis 3.40 3.07 Competitor analysis 2.86 2.52 Benchmarking 1-5 Likert scale, where 1: Not at all, 5: Very much

Difference 0.49 0.33 0.34

T-test (p-value) 0.000 0.000 0.000

Table 6: Use of management accounting techniques

A Paired-sample T-test revealed that the increases in the intensity of use of the management accounting techniques between the two periods were statistically significant at the 1% significance level. It can be therefore concluded that SMEs intensified the application of these techniques during the crisis period. Furthermore, the responses reveal that the measurement of performance is mainly made through the analysis of “Profits” and “Financial ratios” and less through the use of “Non-financial ratios” and the “Balanced Scorecard” (Table 7). Thus, a preference to more traditional performance measurement techniques compared to modern ones is observed. This comes in line with evidence from relevant studies (Hyvönen, 2005; Lääts and Haldma, 2012) which show that firms still choose to base their performance assessment on traditional financial indicators such as profits and financial ratios. 2013

2009

3.96 3.88 Profits 3.52 3.15 Financial ratios 3.29 2.86 Deviation from budget 2.91 2.57 Non financial ratios 2.12 1.91 Balanced Scorecard 1-5 Likert scale, where 1: Not at all, 5: Very much

Difference 0.08 0.37 0.43 0.34 0.21

T-test (pvalue) 0.231 0.000 0.000 0.000 0.001

Table 7: Performance measurement

The conduction of a Paired-sample T-test revealed that firms significantly increased the use of all methods to assess performance (differences are statistically significant at 1%) but for the case of “Profits”. “Profits” are used with the same intensity in both periods.

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It can be thus concluded that SMEs prefer to use traditional techniques rather than more innovative ones that are only scarcely applied. Therefore, the third hypothesis is not supported by the empirical evidence.

SMEs profile before and during the crisis Based on the results already discussed the profile of the Greek SMEs during the two examined periods could be drafted. At the outbreak of the crisis the majority of Greek SMEs apply a budgeting system (74% of the sample) and they prepare an annual budget that they consider to be detailed. For its development they use budgeted figures deriving from a combination of a zero basis process and an incremental methodology. Moreover, budgeting is mainly used for the evaluation of firm’s performance. Additionally, they have a costing system in place. The firms’ pricing is mostly based on a combination of costs and competitors’ pricing policy. Costing is further used for control and planning. Customer analysis is executed rather regularly, while performance measurement is mostly based on profits. Moreover, many SMEs avoid adopting more sophisticated and modern practices and techniques such as benchmarking, the balanced scorecard or non-financial ratios for performance measurement. Finally, they apply budgeting and costing for managerial purposes only at a moderate level. Four years after the crisis outbreak, the number of Greek SMEs that apply both a budgeting and a costing system has significantly increased. Budgeting is still developed on an annual basis, it provides the same, rather satisfactory, perceived level of detail and it is produced following the same dual method. However, a significant increase in the use of budgeting for managerial purposes other than just performance evaluation (i.e. planning and implementing strategy, and communicating with banks) is witnessed. The use of costing for planning is also increased. The firms embark on both customer and competitor analysis, while the assessment of performance is mainly conducted with the use of financial ratios and profit information. Nevertheless, traditional techniques are still preferred to modern ones.

Reasons leading to change The reasons that led to the aforementioned changes in the management accounting systems of the Greek SMEs require further examination. The last section of the questionnaire asked the respondents to rate the

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significance of the impact, if any, of four factors on the change in their management accounting systems during the examined period. These factors were the following: (a) measures taken by the firm in order to face the financial crisis (“Firm measures against crisis”), (b) the increased difficulties in receiving financial support from banks (“Bank finance reduction”), (c) the reduction of customers purchasing power (“Purchasing power reduction”) and (d) the increase in competition with larger firms (“Competition increase”). The results (Table 8) reveal that, according to the respondents’ perceptions, the factors which mainly affected their firms and led them to change their management accounting systems were the decrease in consumers’ purchasing power, the measures taken by the firms to face the financial crisis and the increased difficulties in receiving financial support from banks. The increase in the competition with larger firms was rated as a factor with less importance. By conducting a T-test to examine the statistical difference from the average value of 3 regarding the influence of these factors on management accounting systems’ change, it was found that only in the cases of “Firm measures against crisis” and “Purchasing power reduction” the values were statistically different from the average. Thus, these two factors constituted important driving forces behind the changes in the management accounting systems of Greek SMEs. Reasons for changes

1

N % 2 N % 3 N % 4 N % 5 N % Mean value St. deviation

Purchasing power reduction 30 18.6

12 7.5 34 21.1 47 29.2 38 23.6 3.32

Firm measures against crisis

Competition increase

25

34

15.5

21.1

15 9.3 43 26.7 41 25.5 37 23.0 3.31

26 16.1 22 13.7 33 20.5 46 28.6 3.19

32 19.9 28 17.4 40 24.8 38 23.6 23 14.3 2.95

1.527

1.336

1.403 1.343 1-5 Likert scale, where 1: Not at all, 5: Very much Table 8: Factors leading to change

Bank finance reduction

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Change-deniers It is interesting to take a closer look to the profile of the 25 firms (15.5% of the sample) which persist in not adopting a budgeting system even in a time period deep into the financial crisis. Out of these 25 firms only two do not have a costing system as well, while their vast majority (20 of the 25) corresponds to Public Limited Companies. These change-deniers do not differ from the rest of the sample regarding the use of costing for managerial purposes and the use of management accounting and performance measurement techniques. However, change-deniers perceive the four factors that could potentially lead a firm to change its management accounting systems as less significant compared to changeadopters.

Differences due to the actual size and sector The findings already discussed do not seem to be influenced by the firm size or the sector the firm belongs to. By conducting a T-test on the mean values of all variables for small and medium-sized firms no statistically significant differences were found. In the same realm, the conduction of One-way ANOVA analysis did not reveal any statistically significant differences among manufacturing, retail and service providing sectors.

Conclusions In this study we aimed at examining the impact of the severe financial crisis that is evident in Greece since 2009 on the management accounting practices and techniques applied by SMEs. Based on the relevant literature, it is hypothesized that SMEs would respond to the crisis by improving their existing management accounting systems, through the adoption of more sophisticated budgeting and costing systems, as well as by using innovative management accounting techniques and performance measurement practices. The responses of 161 SMEs on a structured questionnaire help us draw the profile of the Greek SMEs at two periods: at the outbreak of the crisis (i.e. year 2009) and at a point deep into the crisis (i.e. year 2013). The overall conclusion is that there has been an increase in the number of firms starting to apply budgeting and costing systems. Moreover, an increase is evidenced regarding the use of budgeting for managerial purposes such as firms’ performance evaluation, planning, strategy implementation and

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communication with banks. In the same realm, the use of costing is expanded to pricing, control, planning and employee performance evaluation purposes. Furthermore, the application of management accounting techniques such as Competitor and Customer analysis and Benchmarking are becoming more widespread thanks to the crisis environment. The same holds true for the use of financial and nonfinancial ratios, budget deviations and balanced scorecard for performance assessment. However, in most of the SMEs the increase in the intensiveness of use of these tools is only moderate. This finding provides an indication that, despite the crisis, the majority of SMEs do not apply, at least to a significant extent, more sophisticated methods. The cost of adopting sophisticated management accounting practices may be prohibitive for Greek SMEs to embark on such solutions during a period of recession. Larger firms could more successfully “commit resources” for the development and implementation of such practices (Carenzo and Turolla, 2010). According to the respondents’ perceptions, most of the changes in management accounting systems are decided either as a direct measure to respond to the crisis or as a means to face the reduction in the purchasing power of customers and the restrictions to banks’ financing. Therefore, the various facets of the financial crisis resulted in the adjustment of the management accounting systems of SMEs. Interestingly, the least important factor affecting firms in their decision to improve their management accounting systems is the intensification of the competition with larger firms. The conclusions of the study are subject to a number of limitations. Firstly, the restricted sample size constitutes a limitation. The results of the study are based on 161 responses. Despite the fact that all sectors are represented in the sample (41 firms belong to the manufacturing sector, 41 to the service-providing sector and 79 to the retail sector) the number of companies participating in the study is relatively low and the results should be interpreted having this in mind. Furthermore, since the questionnaire of the study was administrated in the year 2013 the sample is composed of surviving SMEs. Future field-based research with structured interviews, incorporating insights from both surviving and non-surviving firms will contribute to better understanding of the management accounting practices and techniques as a reaction to the financial crisis.

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This study aimed at shedding some light on how SMEs adjust their management accounting systems and adapt the use of management accounting information when they operate in the context of a financial crisis. As Greece is not the only country affected by the global financial crisis, it would be an interesting avenue for future research to study whether the Greek findings are also applicable to SMEs in other European countries, especially southern European ones, operating under similar financial and market conditions. Moreover, the identification of how firmspecific or management-specific factors may influence the adoption of management accounting practices and techniques would enrich our understanding on the way SMEs decide on the management accounting systems they actually use.

Sandra Cohen is an Associate Professor of Accounting in the Department of Business Administration at Athens University of Economics and Business. Her research interests lie in the fields of “Intellectual Capital”, "Management accounting", "Public Sector Accounting". Her research work has been published in several academic journals including: Financial Accountability and Management, Accounting Forum, European Journal of Operational Research, Omega, Applied Financial Economics, Journal of Applied Accounting Research, Managerial Auditing Journal, International Review of Administrative Sciences, The Learning Organization and Telecommunications Policy. Sotirios Karatzimas is a PhD Candidate in the Department of Business Administration at the Athens University of Economics and Business. His research interests focus on the fields of "Management accounting", "International Accounting Standards" for both the private and the public sector (IFRS, IPSAS) and "Public Sector Accounting". Part of his work has been published in International Review of Administrative Sciences and Global Business and Economics Review. Vassilios-Christos Naoum is a holder of a Ph.D. in Accounting from the Department of Accounting and Finance at the Athens University of Economics and Business. His research interests focus on "Management and Cost Accounting". Part of his work has been published in Management Accounting Research.

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CHAPTER FOUR ENGINEERING AN INNOVATIVE MANAGEMENT SYSTEM: ACCOMPLISHMENTS AND CHALLENGES LARISA MIHOREANU, ASE BUCHAREST

RODICA PAMFILIE, ASE BUCHAREST

ANDREI ANGHELUTA ALTERNATIVE SCIENCES ASSOCIATION BUCHAREST

AND CARMEN COSTEA USH BUCHAREST

Abstract Innovation as an economic concept appeared for the first time in Joseph A. Schumpeter’s pioneering work of entrepreneurship (Thomas, 2014) where it was defined as: any modifications with the purpose of implementing and using new types of products outlet market, new forms of organization of the production process, means of production and transport, etc. Later on, the concept enlarges with Innovative means applied to the action of applying innovation to new methods, ideas. We consider here deeper meaning of the concept translating it towards the management systems.

Introduction According to the European Commission documents, the innovation management system includes a company’s innovation chain, from idea

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generation to innovation result, together with other elements linked to leadership, and management skills. We retain here the ability to cooperate with third partners like R&D partners, clients and suppliers (European Commission, 2014) as a comprehensive way to assign priorities and allocate resources to competing projects. In contemporary world, innovation management concepts fit to new organization analysis and study of opportunities, to new technologies, as a reaction to specific business development and tools when new markets opportunities are considered. Both inventions and innovation spring from creativity, from the miraculous capacity to discover new structures in the assembly of the parameters that define any problem. Creativity faces-up two inseparable attributes: novelty and added value for society. The most of them remains the creative thinking as a particular combination of logic and intuitive approach. In fact, progress and development across civilizations have been fuelled by human inventiveness. As Schumpeter’s agent of innovation explained - the core of innovation is the firm’s entrepreneur. The market researcher’s aim focuses on the discovery of the unsatisfied customer’s demand. Every company may go along with the decision to create new products and services for new markets. Nevertheless, creative approaches of any field of activity become a must to come up with new and fresh ideas. Some businesses embraced the just in time methods, cloud based storage, interactive digital communication, logistics and feedback delivery (Angheluta, 2013). Once the analysis is carried out by the researchers, the results are sent back to the project innovative development teams to generate future proposals deservingness. Every innovative process goes beyond the classical several stages (Vacek, 2014): • Orientation: identification of a specific need, intention to create;• Predilection (choice); • Preparation (information collection, problem formulation); • Incubation: (seeking solution, evaluation of variants, unconscious thinking; • Illumination (synthesis, creation of ideas); • Realization (transformation of the idea into reality, fruition, recognition); • Confirmation (rating, evaluation, learning), • Validation (improvement). Innovation management describes the activities that transform the ideas into practical concepts generating business value (Decision-MakingSolutions.com, 2014). The final goal stuck on growing the company and market sustainability. The OLSO Manual, version 3 (OECD, 2005)

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proposed four degrees of the innovation management: product innovation, process innovation, marketing innovation, organizational innovation. Decisions are needed to be taken at every level; this implies appropriate information, good communication, sound motivation and different decision styles. Innovators do not view any change as a threat but as an opportunity for: Technological innovations based on specific technology, invention, discovery; it is defined as new products, processes, or major technological modifications. Social innovations are, sometimes, more important than technological ones - such as mail communication, education, social health care, etc. Societal innovations are the most difficult to analyse and apply because they involve an aggregate approach. During various stages of the innovation process, the research and development (R&D) can play both the role of the original source of ideas and the solutions before implementation as innovation must be labelled by the market. Often the researchers feel the temptation to focus on the quality of socalled creative person or inventor/innovator. In short, the innovator has a cumulus of personality traits (self-confidence, self-disciplined, attraction to complexity, intuitiveness, flexibility, energy, creative sense, with broad interests, take risks), cognitive creativity skills (creative thinking, capacity of generating alternatives, responsible engagement in divergent thinking), specific knowledge, and strong personal motivation. The organization can foster the innovator’s creativity by encouraging participative leadership, risk taking, in order to ensure its autonomy with supportive supervision, climate, and team working. In successful team, members work relaxed; they are interested in achieving joint goals, in an optimistic working mood and a non-bureaucratic atmosphere. Communication is then more open and team’s members are sincere to each other, which make the differences in opinions more easily accepted and the criticism is more constructive remaining objective as the rules and the roles are clearly defined. By his “The Rise of the Creative Class”, Richard Florida introduced the notion of 3 T's of the Economic Development (Technology, Talent and Tolerance) outlining that those areas with 3 T's hits high concentrations of creative professionals tend to have a more sustainable economic development (Florida, 2002).

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There are many creative thinking techniques applied to business problems; the most known are: brainstorming, brain-writing, trial and error method, team building, creative tools generating different perspectives - rolestorming, random inputs, metaphorical thinking, TRIZ of contradictions matrix (Develop Creative Solutions to Business Problems, 2014): 9 Brainstorming rules are based on expressiveness (collection of random ideas without constraints), non-evaluation (all are valuable, no criticism allowed), high production rate (production of as many as possible ideas in a short time frame), and crossbreeding (expand or mix other people’s ideas). 9 Brain-writing is a hybrid of both individual and group brainstorming, producing more ideas than brainstorming. 9 Trial and error principle is to select possible answers and then to apply it to the problem if this is not a valid solution until other subsequently possibilities are generated. This method is often used by people who have little knowledge in the problem area. 9 Team building is a group of people with complementary abilities working towards a common goal. Better communication is achieved by regularly inter-active training programs with specific goals, methodology, monitoring, and evaluation. 9 TRIZ (teoriyaresheniyaizobretatelskikhzadatch), Theory of inventive problem solving) is based on inventory problems matrix using rows to collect system features that one typically wants to improve, and columns that indicate undesired consequences. This method was used in Russia in innovation technology, for example in automotive industry to avoid inherent contradictions.

Towards an Innovative Management Mechanism The process of management innovation has two dimensions: -

horizontal dimension consists of four phases of the innovation process: (1) motivation is related to facilitating factors and circumstances leading individuals to consider developing their own management innovation; (2) invention is delineate the initial act of experimentation of a new management practice; (3) implementation refers to the technical process of establishing the new management innovation “in vivo” (in a real setting); and (4) theorization and labelling denote the social process whereby individuals inside and outside the organization will validate the management innovation.

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Vertical dimension consists of two types of agents which affect the process: (1) internal change agents, usually the proactive employees interested in creating, testing and validating of the innovations, and (2) external change agents, management or senior leaders, independent consultants, academics, management proactive researchers, entrepreneurs, journalists influencing the development of the new management practices in other organizations. Alongside the internal team, the external change agents give credibility to the original idea and provide legitimacy and expertise in many organizational and environmental contexts. The two dimensions are better stated in the following figure:

Figure 1: Managerial innovation mechanism

Source: Birkinshaw, J., Hamel, G., Mol, M.J., Management Innovation.

This figure shows clearly the evolutionary process of management practices, where changes are perceived not a simple left-to-right sequence of activities, but in the recursive way (repeated cycles of variation. For example, the feedback of the activity “problem-driven search” involves the internal change agents’ interaction back and forth between motivation and invention, whereas the activity „agenda setting” involves the interaction

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between internal and external change agents [for more details see Burgelman, R. A. (1983) A process model of internal corporate venturing in the diversified major firm, Administrative Science Quarterly, 28: 223– 244]. Figure 1 identifies the ten core activities indicated by the double arrows, and eight constituent parts indicating the important role of Organizational (administrative and social) context & Environmental context (set of exogenous stimuli that shapes the priorities and efforts within organizations) in designing management innovation mechanisms. Now we focused on some consideration of this model. Motivation phase refers to the preconditions and to the facilitating factors that lead individuals in a company to experiment with a new management innovation (in figure 1 is under “Novel problem” and “New threat or opportunities”). In this phase, internal change agents are the first ones on the “demand” side of the market, rather than stakeholders and individual managers who identify a specific problem or opportunity and push through a radical innovation. In practice, internal change agents evaluate a problem or opportunity through a dialogue with external change agents in order to establish supportiveness novelty in the current organizational context and in the present business environment. The external change agents can interact with internal change agents by linking their interpretation of changes in their environmental context, and influencing the feedback loop of the management innovation mechanism by three horizontal processes (idea contextualizing, idea refining, and reflective theorizing). Invention phase refers to either “Hypothetical new practice or “New planned idea”. Figure 1 shows three ways in which internal change agents might come up with three sub-processes: problem-driven search (planned activity in which individuals try to create a new practice in response to a specific problem or opportunity), trial and error (occurs when the new idea comes out from practice), and idea linking (when individuals in the organization make connections between the new ideas proposed by external change agents and the experimental efforts inside the organization). While each of these hypothetical new practices have their own values, in practice the invention is applied in combination with already existing ideas and practices. The external change agents have a reflective role of internal change agents in the invention phase, because it is a common activity.

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The implementation phase appears as an “in vivo” experiment of the management innovation (3 & 7 points in Figure 1.), making sense of the actions made by the internal and external change agents. There are two activities that internal change agents engage with: trial and error (try out the proposed new practice, and evaluate its progress against the original idea, progress is achieved by adjustments on the original concept), and the reflective experimenting (internal agents evaluate conceptual validity or progress, being able to learn from the consequences of its own actions). In the implementation phase the external change agents play less active role than in other phases, due to the lack of contextual knowledge. In some cases, the external change agents share their new idea (idea refining), and draw from their deep knowledge of a particular conceptual domain or their prior experience (reflective theorizing), attempting to direct the implementation efforts of the internal change agents (idea testing). The theorization and labelling action represents the last phase resulting in a theorized new practice (4 & 8 points) and implying institutionalized management innovation eventually for several years. This phase consists of two interlinked elements: theorization (building a logical link between the organization’s opportunities and the innovative solution), and labelling (selection of an innovation name that reflects its theorization). The role of internal change agents is to build legitimacy for the innovation among organization employees, and often theorize about the value of the new practice and label it as a consistent prevailing norms of the company organizational context, whereas external change agents focus on theorizing and legitimacy beyond immediate internal context. This form of internally focused theorization and labelling is achieved through a combination of reflective experimenting (new practice is interpreted in light of the internal change agents) and theory linking directly with external change agents (through their own reflective theorizing they verify the validity of the proposed innovation). These external change individuals focus on management ideas rather than practices, operate at a more abstract level than employees, are more positively disposed toward management innovation(theoretic legitimacy), and they have a less detailed understanding of the innovation than employees interested in valuable outputs (pragmatic legitimacy). Finally, the explanations for the innovation for the daily evidence (life legitimacy) are pursued by showing that management innovation is a necessary solution to a specific novel challenge faced by the organization.

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Living Innovation Laboratory process Many economists perceived the innovation as the primary corporate community’s source of success in the global market. Innovation was often discussed based on a particular case study for representative companies such as Apple Computer, General Electric, Dell Corporation, 3M, etc. However, some practitioners and companies, including Microsoft or General Motors, doubt that these findings would produce similar results in their corporations. Hence, this does not exist as a science yet, despite extensive and relevant studies. The innovation embodies a process dynamic, nonlinear, with a permanent client’s feedback. The studies of the market have detected real trends, new potential customers, mapping competitors’ movements, developing technology, financial and social impact to the innovation process. Living lab (oratory) emerged from the discussion, experience and application on innovation processes. Andrew Kusiak, in his so-called Living Innovation Laboratory (LIL), suggested that researchers analyse the behaviour of people “living in this house” in iterative mode with the goal to improve business management (Kusiak, 2007). Starting with the dialogue involving customers – producers, LIL is a simplified and intuitive black-box model of innovative management, in which inputs are the consumers unrefined requirements needs, manufacturer’ resources and environmental information on product and its service life cycle, all information gathered from the market research. It is stressed that innovation does not happen in isolation, but it is an integral component of all development activities. Likewise, the output is a set of requests to promote innovation. The Living Lab concept strongly calls end-users to participate in the development process. Whilst from the beginning LIL was perceived as a dynamic process, with important adaptive feedback, it still keeps openness features, involving five gradually main activities (first four are known as refined R & D requirements and the last as feedback to integrate legacy system): ¾ Co-creation, bringing together different points of views, concepts, knowledge, scenarios, models, etc. ¾ Exploration mainly in order to identify appropriate scenarios, clients’ behaviours, variants for development. ¾ Implementation of technological products, experiment with live scenarios, collecting and analysing data for next stage during the evaluation activity.

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¾ Evaluation of the innovative concepts, related with real life situations, technological & socio-economical context. ¾ Feedback loop of results, observations, new concepts and related technological artefacts through a confrontation with users' acceptance. Figure 2: The process of the Living Innovation Laboratory

Source: After Kusiak, A., Innovation: The Living Laboratory Perspective.

Data information knowledge from real-world „voices” of customs, experts mainly engineers and technologists, manufacturers, or legacy (all kinds of information that involve hypotheses, theories, innovation rules, previously mistaken etc.) are essential for products and services novelty, or management innovation. The volume of collected data can be very large, and could include the individuals (insider or company outsiders) opinions as users, customers, shareholders, or company workers. Environment validated in collaborative, multi-contextual, empirical dialogue of producers and program researches with customers on market evaluation, reducing development costs and business risks through: metaknowledge (the sum of what has been perceived, discovered, or learned

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using modelling methods, e-learning, modification of a knowledge domain etc.), negotiated protocol (define the rules during negotiation), and culture of corporate/ business (customs, rituals, loyalty, general behaviour of employees, values shared by the members of an organization). Resources come from customers, facilitators (people as learning or communicators who understand their common objectives and assists to work more efficient to achieve them), and computing platform include an operating system (OS), pieces of software, runtime libraries etc. Innovation results are output of the LIL. The innovation starts on a small scale, and could be an idea generated in an R&D project or marketing department to better meet the customer needs. It can have a long-term impact but there must be an immediate need for it. Outcome can refine existing requirements, determine their impact on business innovation, define functional requirements, and include new process models, business rules, and information requests. The modifications can be applied in future to face needs and new challenges, to upgrades system and integrate legacy system. Practice demonstrated that, irrespective of the motivation and sources, the innovation depends of a multitude of factors: the existence of a clear strategy for the organization, clearly formulated objectives, funding, capable management, the existence of a well-trained team, sometimes multidisciplinary, the existence of a clear and correct procedure of work, evaluation, and a competitive environment both internal and external to the firm. For example, maybe he was inspired by the launching “zero prototype” new technological item practice, OMW Group chosen own personalized LIL, under the name of ”innovation garage”, bought in 1996 at San Rafael, California a software company, inspired by the emerging PC-based solid modelling CAD and CAM systems, such as Solid works and SurfCam (OMW Co site, 2014). High skilled people were attracted by machine engineering and software, and the location was moved in Novato, California, supporting the company’s expansion each year with growth of revenues. Now this „technologically innovative garage” has nearly 600 square meters industrial space.

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R&D researchers have grouped the lessons learned from the past experience in the following four categories following Andrew Kustiak’s observations (Kusiak, 2007): ¾ Strategy: innovative ideas can be generated beyond product development, e.g. in process, technology, areas such as manufacturing, finance, supply chain, marketing; innovators use pyramid innovation (on top several large ideas, and a broad of ideas on base). ¾ Process: tight controls or limitation of planning and budgeting damaging innovation as signalled within the LIL analyse. ¾ Structure: tightened interpersonal structure between innovation efforts and other business functions should take form of formal controls. Innovations may cut established channels or combine elements of existing capacity in new ways. If companies apply preferential treatment, privileges, or prestige to some corporate citizens it will be a big mistake, because others employer in the company will suppress innovation. ¾ Skills: despite career or job rotation principle, any innovation requires for a period of time strong leaders (“connectors”) with great communication skills, and supporting collaboration.

Systemic Innovative Management In the 1960s, Robert McNamara and his colleagues from the U.S. government launched a significant management innovation - concept of systems analysis, particularly for the defence sector. In the 1970s and 1980s concept of operational researches opened era of the greatest management innovations, with a variety of mathematics models, flowcharts, and strong computational techniques background. The rise of the Internet facilities allowed companies to link their supply chains closely to customer demand, and this facilitated the globalization of the supply chains (Costea and Angheluta 2012). In the most recent decade, one plausible observation is that companies begun to open up their innovations processes involving customers, suppliers, third parties in general, generating an “open innovation” (Google concept) with less internal resources, reduced risk, aimed to attract new customers. In our view systemic innovative management as process for company` business is better characterized by the vision and strategy applied for two systemic practices (inputs, outputs), and two block-innovation (investment, organizational). Investment innovation focuses on the development of new

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products or services, and new teechnologies, while organ nizational innovation iis perceived as a process inn novation and marketing in nnovation. The innovaations stimuluus comes fro om inputs (inndividuals, groups g of people, insiide or from outside o of thee company), and is concrretized in outputs– item ms for custom mers’ needs (n new functions,, design, even n tradition or personall requirementts) validated within alreaady explained d Living laboratory. IIn this vision management of innovationns can be arran nged on a systemic fllow of verticcal and horiizontal hierarrchy, combin ning and summarize rresult of Figurres 1 and 2 intto Figure 3: Figure 3 Charrt of systemic innnovative manaagement

Source: Persoonal developmeent for Systemicc Innovative Maanagement

Managemennt innovation is i more than ju ust planning nnew products, services, brand extensions, or techhnology inventtions. It is noow part of inteernational context of innovation. Every business must iinnovate to compete continuouslyy. It must creeate new prod ducts and servvices for new markets. They must be creative, and implemeent new job titles that are rapidly appearing onn business. Product innnovation can often be traaced back to redesign thee product functions fo for the custoomer’s new requirements,, to incorporrate new functions (ddigitalization, recyclable r maaterials, designn etc.). As an example, IBM Co. suupports comppetitors’ produ ucts at its cuustomer locatiions, and shares technnical informatiion with them m.

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The technology innovation is a process initiated by the advancements in science and technology. The exploratory engineering investigations about product design further refine the inputs to meet the customer’s needs. Through competition and adaptation, the company concentrates on their cost-saving strategy. The best approach is to embrace the idea that innovation is constantly changing, and new ideas and technologies get to market. Process innovation aims to improve the existing business process. For example, many manufacturers decided to outsource non-competitive tasks. Now is spreading the idea of the service innovations as in case of the Xerox Co. which accounted more than 25 percent of its sales by services and repair activities for all copiers and printers, regardless of who made them. The marketing innovation plays an important role in guiding managerial innovation, allowing companies to provide shopping in hypermarkets, for example on dedicated platform, intranet retailing, implying many third parties and a wide variety of merchandise etc.

EU innovative management policy The Lisbon Strategy for 2000-2010 years, followed by the 2020 Europe Strategy aimed at securing Europe's global competitiveness, "smart, sustainable and inclusive growth and greater policy coordination between the EU and national governments" (Bongardt and Torres2010). The slogan of the Lisbon Strategy was “Growth and Jobs”, and for Europe 2020, the slogan is a “strategy for smart (building on knowledge and new ideas), sustainable growth (focus on green issues) and inclusive growth (advantages also for weaker citizens and regions)”. One of the EU flagships used to encourage innovation and instrument to implement the Union of Innovation is the program called Horizon 2020, with an allocated budget of nearly €80 billion for 7 years (2014 to 2020) additionally to the private funds. The goal is to ensure that the Europe’s world-class science removes barriers to innovation and makes easier and faster access for public and private sectors to innovation, to create a genuine single market for knowledge, research and innovation - European Research Area (European Commission, 2010). Product innovation is concerned not only on introduction of new goods, but also to increase the performance of innovation for the entire chain,

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from research to the moment of sale, especially through partnerships (Barroso, 2010). Horizon 2020 developed an online Participant Portalentry point for electronic administration of EU-funded research and innovation projects -where companies and institutions can find the calendar for the calls for proposals (‘calls’) that are published during the year. All calls can be found in the EU’s Official Journal, as well as on the Participant Portal. Everyone can submit online a proposal before the deadline announced. Many calls require a team of at least three partners, so if needed the EU portal helps to identify a potential partner. Proposals are evaluated by experts in their fields and the final applicants are informed about the outcome and grants (the grant agreement show the project duration, budget, costs, the European contribution, rights and obligations). Figure 4 – Horizon 2020 improved application process

Source: Personal design after Horizon 2020 application process

In order to apply innovation politics and programs, the European Commission uses a number of instruments that help national systems of innovation of the UE member countries, such as PRO INNO Europe, Inno barometer, European Innovation Scoreboard, Europe Innova, INNO Nets, and evaluate the performances of innovation accomplished by the

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European countries operational tool named “European Innovation Scoreboard (EIS)”. The present economical context, within the globalization approach of economical phenomena, rapid evolution in technologies and informatics, resources restrictions, comes with dramatic changes of the life style, complex challenges for multinational companies ask to explore and include new features of organization evolution and their management, to organize and mobilize their technical, industrial, commercial and human resources with the final goal to avoid financial risks and assure a better satisfaction of the loyal consumers. The different national environment structure implies a simultaneous vision integrated within global European vision on the innovation fields. It will need a careful planning of multidisciplinary R & D activities, detailed control of engineering, marketing, and managing methods. The combination of national with EU innovation strategy should generate “country brand” competitive advantage for Romanian companies, including on the organizational level and the entirely satisfaction of consumers.

Conclusions Effective innovations are surprisingly simple, if they are focused on specific needs and starts on a small scale. In business successful innovation always tries to win a leading position, otherwise one creates opportunities for competitors. The potential benefits due to innovation can be enormous. The management looking into the future must trust in the technologies leadership innovation styles. Some big companies have fully embraced the global online and real time, digital, interactive business. Despite many years of research, the published concepts are fragmented. The consequences of management innovation are complex, and it is necessary to separate out at least three different sets of consequences: (a) the impact of management innovation on various performance metrics inside the innovating firm; (b) the impact on the legitimacy of subsequent adopters of the innovation; (c) the benefits of management innovation to society as a whole, in terms of improvements in productivity or quality of life. With the abundance of data in the cyber world, new ways to acquire and analyse data are needed. The collected data and requirements are refined, analysed and assembled in the Living Innovation Laboratory. Living Lab approach is on in the multi-role and multi-faceted involvement of the

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customers and gives financial or procedural simplification, sometimes proven to be successful elsewhere. With new information gain until now it was clear that an integration approach and mechanisms were needed (our proposal is Systemic innovative management). It is interesting to observe the way in which the application of theoretical strategies is not exact, suitable to different situations, and adaptable to the international context. The increased need for flexibility is more pregnant in the case of multinational organizations which are more affected by the international environment. The effects of the frequent changes that take place in the economic, political and social environments, the strong competition, increased number of the consumers’ preferences have an impact on the strategies adopted by companies in order to obtain growth and profitability. Consequently, few mainstream ideas have to be kept in mind for future developments of innovative management approaches: 1. Business model innovation became as important as technological innovation. It is generally accepted that a better business model can often offer more positive results as the better technology. Seldom the companies prefers to invest money or time in exploring new business models of commercialize than spend much many on R&D. The process of management innovation does not always proceed as a linear sequence of activities from motivation through to theorization and labelling. The model of innovative management focuses on the activities, such as trial and error, that take place between the adjacent cells in Table 1 highlighting the fact that innovation is an interactive process. While some innovations may follow a linear sequence of activities from left to right, others do not. 2. Innovation management will become more collaborative, even the role of internal and external change agents are very different: internal change agents are employees of the organization, whereas external change agents not implied in internal affairs have superior knowledge, networks and greater accountability for delivering results outside. However, external ideas will interact with internal ideas, and this interactive process overpasses the boundaries of companies’ innovations. 3. Future studies might also identify new innovative ways of management practice “in vitro”. A useful direction will be to look more closely at how the processes of emergent management innovation and management fashion interact. It may be possible to choose solution by encouraging users to develop their own agendas and by putting

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forward ideas with interpretive viability). Another approach might be to examine the conditions under which a management innovation gets picked up by the fashion-setting community and turned into a management fashion. At an abstract level such practices and ideas incorporated in the Living Innovation Laboratory have proven to be successful and innovative“. 4. Most of the managing innovation comes from the study of products and technologies. Even now, the 40 world’s top advanced economies are interested specially in services business rather than industry or agriculture products. Today there are few studies on innovation in services management, which are likely to differ from how it works on products innovation. The same service could be perceived quite differently by customers therefore its innovation requires different tactics. 5. While our focus on process issues questions about why individuals engage in management innovation and the extent to which management innovation helps organizations performances are equally important. Future research might examine why certain types of management innovation create specific competitive firms advantage. 6. If we combine these conclusions, we can predict that the winning formula for managing innovation in the next decade will be innovations transfer inward and outward, so-called open-services innovation approach.” Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas… innovating with partners by sharing risk and sharing reward” (Chesbrough, 2003). On the open innovation system, for example within Horizon 2020 EU program, companies cannot rely entirely on their own research, but could buy license inventions (i.e. patents) from other companies, to set up joint ventures, or other forms of splitting off their businesses and management, technical and research intellectual property, encourage outsources for innovative opportunities, explore multiple channels of integration of capabilities with resources. Larisa Mihoreanu is a neuroscientist focused on innovative medicine to transform the patients’ life. She founded Guy Researchers’ Society at King’s College London and chaired the Young Researchers Group within the European Society of Complex Systems. Vice-president of Alternative Sciences Association, she studies Marketing and International Business (USH) doing her PhD in Business Administration. In 2009 Larisa received the CRS Jorge Heller Journal of Controlled Release Outstanding Paper Award co-sponsored by ELSEVIER.

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Rodica Pamfilie is a Professor and Dean at ASE Bucharest. Her research interests cover innovation and design management, commodity science, food safety and expertise. She is member of the International Association of Commodity Science and Quality Management – IGWT and editorial board Forum-WARE Vienna; (co)author of several outstanding books and over 150 papers and articles (Italy, Poland, Japan, Austria, Slovenia, Korea). Dr Andrei Angheluta is member of Alternative Sciences Association and Customer Service Manager at HAVI Logistics Romania. He holds a Ph.D. in Business Administration. His expertise is in multinational business since 2005 at Huawei, HP, DHL and HAVI . Dr.Angheluta’s full resume with experience, awards and publications is accessible at https://www.linkedin.com/profile/view?id=42471734&trk=nav_responsiv e_tab_profile Carmen Costea is Professor at USH Bucharest, PhD supervisor in BA, chair of Entrepreneurial Education Commission/ Consultative Council of Danube Region; Associate researcher at Romanian Academy. Recent awards: ASE Excellence for The FuturICT education accelerator authors: J. Johnson, C. Costea, et al (2013) The European Physical Journal Special Topicshttp://link.springer.com/journal/11734 2012, Vol. 214, Issue 1 and b) CNCS for An evolutionary game theory approach to market competition and cooperation ACS http://www.worldscientific.com /doi/abs/10.1142/S0219525912500440?journalCode=. More at www.spiru haret.ro/en

References Angheluta, A. (2013), „The complex relation between logistics processes and internet applied at corporate level”, Doctorate Thesis, ASE Bucharest Barroso, J. M. (2010), „Lecture given when he granted the title of Doctor Honorius Causa” at the University of Bucharest, Nov. 8, 2010 Birkinshaw, J., Hamel, G., Mol, M.J., „Management Innovation” Academy of Management Review, 33(4) 2008, pp 825-845 Bongardt, A., Torres, F. (2010), „The Competitiveness Rationale, Sustainable Growth and the Need for Enhanced Economic Coordination”, Review of European Economic Policy “Intereconomics”, Vol. 45, May/June, issue 3

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Burgelman, R. A. (1983), „A process model of internal corporate venturing in the diversified major firm”, Administrative Science Quarterly, 28: 223–244 Chesbrough, H. W. (2003), „Open Innovation: The new imperative for creating and profiting from technology”, Harvard Business School Press, Boston, ISBN 978-1578518371 Costea C., Angheluta A. (2012), „Utilization of e-logistics to prevail over difficulties of today’s economic environment”, Rome Conference on Evolution and Complexity, Italy Cummings, B. S. (1998), „Innovation Overview and Future Challenges”, European Journal of Innovation Management, Vol. 1 No. 1, pp 21-29. Decision-Making-Solutions.com (2014), Decision Innovation, http://www.decision-making-solutions.com/aboutus.html (accessed Dec. 2014) Develop Creative Solutions to Business Problems (2014), in „Mind Tools toolkit - Creativity Tools”, available at: http, accessed January 2014. European Commission (2014),”Executive Agency for Small and Mediumsized Enterprises (EASME)”, 1049 Brussels, http://ec.europa.eu/easme/ European Commission (2010), „Horizon 2020: The EU Framework Programme for Research and Innovation”, http://ec.europa.eu/programmes/horizon2020/en/what-horizon-2020, accessed on June 2014 Florida, R. (2002), The Rise of the Creative Class: And How it’s transforming work, leisure, community and everyday life, Perseus Book Group, New York Kusiak, A. (2007), „Innovation: The Living Laboratory Perspective”, Computer-Aided Design & Applications, Vol. 4, No. 6, pp 863-876 Organization for Economic Cooperation and Development (OECD, 2005), „Innovation in science, technology and industry, Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data”, 3rd Edition, ISBN 978-92-64-01308 OMW Corporation site http://www.omwcorp.com/about.php, accessed September 2014 Thomas, K. (2014), „Prophet of Innovation: Joseph Schumpeter and Creative Destruction”, Harvard University Press, https://www.princeton.edu/~tleonard/papers/McCraw.pdf (accessed December 2014). Vacek, J. (2014), „Innovation management”, Innovations and Projects UWB, Faculty of Economics, www.kip.zcu.cz/kursy/imi/, (accessed Dec. 2014).

CHAPTER FIVE LEADER PROGRAMME IN APULIA: RURAL DEVELOPMENT AND INNOVATION NEEDS STEFANO DE RUBERTIS, UNIVERSITÀ DEL SALENTO, ITALY

ANGELO BELLIGGIANO UNIVERSITÀ DEL MOLISE, ITALY

AND MARILENA LABIANCA UNIVERSITÀ DEL SALENTO, ITALY

1. Introduction1 Rural territories are undergoing profound changes. The transformation of their economies calls for a review of the sectorial policies which are becoming inappropriate and inefficient in responding to the needs emerging. In the “new rural paradigm” the goals do not focus exclusively on agriculture but, following a territorial approach, involve the tourism sector, information, communication technologies, and industry. Among the main instruments, financial support has been replaced by investments, involving a great variety of sectors and actors. Local specificities are seen to bring significant competitive advantages, but require major innovations in terms of multilevel governance (Ward and Brown, 2009, p. 1239). In the European domain, this has made it more complex to govern public policies in agriculture and has produced different responses at local level, generating a greater demand for participation, autonomy for collective 1

This paper is the result of joint reflection of the authors; however, section 2 is the work of Angelo Belliggiano, section 3 is by Marilena Labianca and section 4 is by Stefano De Rubertis. The sections 1 and 5 were written jointly.

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groups and a gradual shift of responsibility away from the central authorities (Belliggiano, 2010, p.70). There is important literature dealing with the role of innovation in rural development (Dargan and Shucksmith, 2008; Neumeier, 2011; Ward and Brown, 2009; Murdoch, 2000; Dwyer et al., 2007). Some significant studies, especially those focusing on urban and regional development, attribute a minor role to rural areas, a role that is at times completely passive and marginal (Ward and Brown, 2009). Dichotomic visions of this kind (urban vs. rural) rule out the possibility of taking the holistic, integrated approaches that seem to be advocated by the more recent literature on innovation. Recent studies are increasingly recognizing the importance of the role played by a great variety of actors, by forms of uncodified knowledge and more generally by social capital in processes of innovation (Belussi, 20022; Belussi et al., 2003; Dargan and Shucksmith, 2008; Neumeier, 2011). Signs of the new orientations are also found in the literature on rural development that interprets innovation as a process of coevolutionary learning in a network of actors (Dargan and Shucksmith, 2008; Shucksmith, 2000). As Dargan and Schucksmith (2008) and Mohan and Mohan (2002) argue, many authors emphasize the role of social networks and of social interaction for exchanging knowledge both within a territory and between the territory and the extra-local. In this case networks and social relations are considered crucial to promote learning and innovatory economic development in territories (Murdoch, 2000). According to a positive interpretation, social capital represents a resource for individual and collective action by allowing the actors to achieve difficult objectives or hard to reach (Coleman, 1990). It facilitates efficiency (Putnam 1993; Coleman, 1990; Ray, 2002), certain actions of actors within a structure, promotes the diffusion and sharing of information (Coleman, 1988) and “contributes to shape tacit and contextual knowledge embedded by individuals belonging to a community” (Belussi et al., 2003, p. 7). However, as other forms of capital, also the social capital, under certain circumstances and contexts can be disruptive or even lose its effectiveness (Coleman, 1990). As Mohan and Mohan (2002) and Naughton (2014) argue, there isn’t a single definition of social capital, the definition remains contested, for this reason it’s necessary a more careful critical analysis of the concept. Given the 2

Belussi (2002) proposes a contribution about social capital focused on trust.

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dynamic and variable nature of social capital (Bagnasco et al., 2001), therefore it’s required not only a thorough analysis of the relationships between agents, but also of the goals and the contexts in which they operate (Piselli, 2001; Naughton, 2014). In particular, the LEADER approach and its implementing is based on partnership building and in general on social capital (Shucksmith, 2000). In the Leader experience, innovation is seen in social and cultural terms rather than as technological innovation, although the rhetoric of national politics often appeals to the latter (Dargan and Shucksmith, 2008; Neumeier, 2011) and the networks of actors actually created locally prove to be the result of a reductive interpretation of the meaning and value assigned to them by the theory (Belliggiano and Salento, 2014). In short, despite the fact that social innovation (of the context) appears to be one of the factors in successful rural development, the dominant practice has underrated it and local and national development programmes have granted it only lukewarm support (Neumeier, 2011). In this scenario, the Leader approach represented a paradigm shift, being oriented to the social and cultural construction of the territories’ institutional capacities (Dargan and Shucksmith, 2008). But a general difficulty was found on the part of the Local Action Groups (LAGs) in dealing with the goal of innovation in its entirety and complexity, a goal at times seen as involving an overload of responsibilities and expectations, and at times reduced to banal “usual” business techniques (Dargan and Shucksmith, 2008, p. 282). At the same time, there were cases where the concept of innovation was re-elaborated and “digested” locally, in terms of social and cultural innovation, producing significant results consistent with the goals of the LAGs (Dargan and Shucksmith, 2008, p. 286). In the programming period 2007-2013, the Leader approach has had a significant impact on the rural development policies of European regions and in particular of Italian ones. The integrated development of rural areas through the introduction of participatory planning has been the most celebrated type of innovation policy in Europe. The effectiveness of the expenditure shown in three subsequent programming of the "Community Initiative" (Leader I, II and plus) pushed it to borrow this model for the implementation of the second pillar of the CAP in 2007-2013. Although not all Italian regions have decided to orientate significantly their programming in this direction, this chapter aims to highlight, through the emblematic case of Puglia, the opportunities and the threats underlying the

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attempt to innovate, in this direction, regional policies for rural development in order to improve their efficiency. Specifically, Puglia, the region dealt with in the present chapter, is the Italian region of the “convergence objective” that has placed the greatest emphasis on the use of the Leader approach in planning for rural development. In view of these aspects, the attempt was made to understand how the Region and the territories comprising the Leader areas interpret innovation. In the case examined, in terms of the capacity to promote and consolidate processes aimed at innovation, there emerge opportunities and constraints linked to structural issues in implementing the policy instrument (section 2), to local decisions about strategies and contents (section 3), and to the models of governance adopted (section 4).

2. Structural obstacles to innovation The role of knowledge and innovation in the development of local areas, especially rural ones, has special importance for the convergence objective regions and in this specific case for Puglia. It is well known that in the knowledge economy, innovation is widely considered a key factor in the economic growth and competitiveness of a region, while the related social and cultural aspects are often overlooked (Dargan and Shucksmith, 2008). It is only in the last few years that innovation has been seen in the literature as a process of co-evolutionary learning that takes place within social networks (Granovetter, 1985; Atterton, 2007, pp. 229-233; Murdoch et al., 2000, pp. 115-120; Winter, 2003, pp. 24-25; Camagni, 2008, pp. 3340; Belussi and Pilotti, 2002, pp. 128-129). In this sense the Leader approach, added to the CAP (Community Agricultural Policy) in the last planning cycle, represents an emblematic change in that as well as seeing the territories’ economic, social and cultural growth and their institutional capacities as the basis of sustainable rural development (Dargan and Shucksmith, 2008), it is in itself a modality of innovation long neglected in public policies of rural development. Moreover in Europe and Italy, knowledge and innovation are domains of intervention found transversally in the 2007-2013 development plans. That is why both the National strategic plan for rural development (NSP) and the Regional rural development plans (RDP) recognize the strategic role of innovation to a greater extent than in the previous plans (INEA et al., 2009).

Leader Programme in Apulia

Axes I. Competitiveness II. Environment III. Rural develop. IV. Leader Technical assist. Total

% EAFRD Italy EU average Calabria Campania minimum average 10 34 37 41 40 25 44 43 41 36 10 13 9 10 15 5 6 8 6 5 = 3 3 2 4 = 100 100 100 100

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Puglia Sicily 40 35 4 18 3 100

42 42 8 6 2 100

Table 1: Distribution of EAFRD - European Agricultural Fund for Rural Development, Agricultural funding per Axis and funding cap for convergence objective regions, 2007-2013 programming (%) (De Rubertis et al., 2013; EU, 2011, p. 323; MPAF, 2012). Some Axis III measures are carried out through Leader, so the amount allocated to that Axis may be below the set minimum.

The four Axes to which the European Agricultural Fund for Rural Development (EAFRD) is allocated express EU priorities: increase the competitiveness of agricultural and forestry sectors by supporting restructuring, development and innovation (at least 10% of the Fund’s resources); enhance the environment and natural space by supporting the management of the territory (at least 25% of the funding); improve quality of life in rural areas and promote diversification of economic activities (at least 10% of the funding); improve governance capacities through the Leader approach (at least 5%) (Reg. EC1698/05; EC, 2011, p. 4). Despite the broad range of opportunities offered by the community approach, the European regions have favoured the first two Axes, competitiveness and environment (see table 1), adopting a productivist approach (see De Stefano, 2003) focused on growth and not on development, but consistent with the concept of “innovation”(I) recently proposed by the World Bank (2006; 2012) namely “the process by which individuals or organizations master and implement the design and production of goods and services that are new to them, irrespective of whether they are new to their competitors, their country, or the world” (World Bank, 2012 , p. 2). In most of the Italian regions Axes III and IV together (“improve the quality of life in rural areas and promote the diversification of economic activities” and “improve governance capacities through the Leader approach”) received only 15% of the funds, that is, the minimum envisaged; while amongst the convergence objective regions, Puglia alone chose to allocate over 20% of the EAFRD (Sotte and Ripanti, 2008, p. 15)

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to rural development, and in particular to the Leader approach, showing interest in the kind of innovation that the World Bank (2006, 2012) calls “innovative system” (IS), defining it as “a network of organizations, enterprises, and individuals focused on bringing new products, new processes, and new forms of organization into economic use, together with the institutions and policies that affect their behavior and performance” (World Bank, 2012, p. 2). On average, the Italian regions allocated 37% of EAFRD funding to the first Axis (EC, 2011, p. 4) (improve competitiveness of agricultural and forestry sectors), while the convergence regions allocated a considerably higher percentage which was also above the community average (see table 1). Most of the measures included in Axis I are designed to reduce the know-how and infrastructure gap compared to the richer regions. The production chains, the quality of agricultural and forestry products, staff training, entrepreneurial abilities, the generational turnover, physical and digital infrastructures are the main issues of innovation designed to improve the competitiveness of Puglia and of the other convergence objective regions. The unsatisfactorily small size of farming businesses, penalized by a relatively rigid landowning structure, is one of the weaknesses always present in the territorial diagnoses examined. The latter concentrate above all on identifying obstacles to growth so the strategy deriving from them is essentially confined to the introduction of innovations in products or in the process of adapting regional production systems to the needs of markets above local level. Axis II, coherently with such a vision, although focusing exclusively on environmental aspects (biodiversity, landscape and renewable energies) tends to borrow technologies and production models already successfully applied elsewhere, in order to make innovative local investments mainly oriented to preserving and strengthening firms’ production capacities. A significant role in the fact that regional decisions conform to traditional “developmentalist” strategies is to be attributed to the incomplete efficacy of the model of governance. The National strategic plan for rural development (NSP) should have been a mere summary of the regional leanings, designed to eliminate the overlapping and inefficiencies found in the previous plan (Mantino, 2008, pp. 203-205). Instead, it strongly influenced the architecture of the Regional rural development plans and the regions slavishly conformed for the sake of convenience. The national centralization of the strategy for rural development which derived, while on the one hand limiting the planning autonomy of the

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regions, on the other forced them to allocate more and more funds to encouraging the innovation of development models, promoting social networks in which the various actors, participating in co-learning processes (Dargan and Shucksmith, 2008, p. 275), experience forms of innovation that affect their own economic behaviours and related performance. The set minimum for each Axis of the RDP therefore raised the funding allocated to this objective - underlying both the third and fourth Axis – making a national increase from 9 to 16% compared to 2000-2006 planning (Mantino, 2008, p. 130). This increase in many regions was carried out by merely shifting funds previously destined to Axis I. Although the third Axis declared innovative actions of a systemic kind, it continued to be subject to approaches of a productivist type aimed mainly at the innovation of products and processes (Sotte and Ripanti, 2008, pp. 15-16) and therefore related more to the aims of agricultural development than to those of rural development (Marenco, 2007, p. 434; Belliggiano, 2010, p. 84). Despite the reshaping of Axis I to the benefit of Axis III, the fund allocation of the last planning period, while remaining significantly in favour of Axis I (see table 1), confirms an approach still focused on the theme of “competitiveness” which for innovation takes on a more limited meaning, namely that based on the results of scientific research. This belief is confirmed by the justifications of the NSP both related to the need for greater funding for the first two Axes, and to the lower needs of the third Axis. In the first case, by stressing the need to modernize the agro-industrial and forestry sector and to expand eco-compatible “production” activities (MPAF, 2010, pp. 91-92) the NSP more or less explicitly evokes the need for innovation in the sense of the search for new technological solutions. In the second case, however, by repeating the priority of agricultural and forestry activities in a rural economy3, it acknowledges above all the need to raise the productivity of these sectors, which can be achieved through technological innovation, in this case in order to overcome the limits of the small physical size of the beneficiary businesses. The same approach can be seen in the arguments in the NSP to explain the internal equilibrium of the Axes. For Axis I, for instance, the emphasis is 3

“[…] a sustainable rural development strategy for rural areas cannot disregard support for the interventions in the agricultural and forestry sector and the incentivization of eco-compatible farming and forestry practices […]” (MPAF, 2010, p. 92).

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placed on the role of technological innovation to bridge to the gap in agroindustrial and forestry competitiveness, with special reference to the convergence objective regions, for whom it is stated that: “[…] this need is more strongly felt and therefore assumes greater priority” (MPAF, 2010, p. 93). This approach to the first Axis obviously also conditioned that of the others, and as a result in Axis II greater priority was given to innovations in the process aimed at introducing farming techniques with a lower environmental impact, rather than to non-productive environmental actions. In Axis III the focus was on the territory’s ability to attract new investments in production, in virtue of the possibility of overcoming any structural constraints by introducing technological innovations connected specifically to ICT. .

It is therefore no surprise that in Puglia, as in the other convergence regions, the strategy of the third Axis reflects the NSP orientations in order to legitimize its proposals and to be surer of receiving funds. This attitude however has forced the regions to adapt the narration of their specificity (socio-demographic, economic and structural) to the mainstream rhetoric of territorial competitiveness (see Garcia Alvarez-Coque et al., 2013, p. 2; Bélis-Bergouignan, 2011, pp.75-78; Aznar-Sanchez and Galdeano-Gomez, 2011, pp. 105-111) making the regions, in drawing up their RDP, adjust their potential (economic, environmental and cultural) to what the national “direction” feels is uniformly widespread in rural areas. These documents, in fact, show a surprising correspondence of strengths and weaknesses underlying the needs which justify the Programmes’ strategic decisions. Such correspondences, apart from the natural analogies of regional contexts due to their location in the same geographical area (the South), would seem to derive from the planners’ concern with conforming as closely as possible to the models of innovation proposed by the NSP. These would seem only slightly top heavy in favour of technological innovation, as shown in table 2, where the various categories of strengths and weaknesses indicated in the RDP are linked to two pre-defined categories of innovation (I and IS). The regions’ decision to distribute over 80% of the funding between the first and second Axis, linked to the needs underlying the strengths or weaknesses that can be described using the conventional approach to innovation (I), would confirm a tangible preference or advantage on the part of the regions to reshape their approach to systemic innovation (IS).

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Campania

Calabria

Sicilia

109 Description

Strengths e.g. quality (brands, typical products) – organic products – agritourism, etc. e.g. Nature 2000 networkecological-economic equilibrium, etc. e.g. cultural resources – agricultural multifunctioning, etc. Proximity to urban centres and markets

Sectorial

I

I

I

I

Environmental

IS

IS

IS

IS

Cultural

IIS

IIS

IIS

IIS

Geographical

-

I

-

I

Organizational

-

-

-

IS

Local partnerships

Others

-

I

-

-

Youth population-positive demographic levels – technological development

Sociodemographic

IS

IS

IS

IS

Economic

IIS

IIS

IIS

IIS

Structural

I

I

I

I

Sectorial

I

I

I

-

Socio-economic

IS

IS

-

IS

Strategic

-

I

-

I

IIS

IIS

-

-

Others

-

IS

-

-

I+IIS IS+IIS

3+3 3+3

6+3 4+3

3+2 2+2

4+2 4+2

Weaknesses

Environmental

e.g. aging – depopulation – population scattering, etc. e.g. development lag - lack of integration, etc. e.g. infrastructure – lack ICT, etc. e.g. business size – family workforce –organization, etc. e.g. services (personal and business) – socioenvironmental degradation, etc. Management territorial resources – seasonal tourism e.g. environmental and landscape degradation –human pressure –soil exhaustion, etc Development dichotomy (mountain-valley) – CAP reform

Table 2: Diagnosis of the III Axis (RDP) in convergence regions and approaches to innovation (our elaboration on De Rubertis et al., 2013). I = technological innovation; IS = innovative system; IIS = I+IS, make up the approach to innovation underlying the strengths and weaknesses found in the RDP Campania, Puglia, Calabria and Sicily.

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Such a representation of the territory has discouraged the setting up of strategies inspired by the “new paradigm” of rural development (Ploeg van der et al., 2000, p. 398; Ploeg van der, 2006, p. 343), which, as we know, hinges on the re-socialization of agriculture, or on the realignment of production to society’s new needs, as well as on the reconstruction of the local socio-economic base and on making agri-businesses multi-functional (Ploeg van der et al., 2002, p. 13). In the NSP, and therefore in the RDP, however, agricultural development aims have been privileged, clearly for compensation purposes linked to the splitting of the CAP into two pillars, which prevented the regions from pursuing strategic objectives more tangibly oriented towards innovative systems (IS).

3. Token innovations in content Puglia is the region, among those of the convergence objective that has placed greatest faith in the Leader approach, anticipating that the Axis III measures would be accomplished through the LAGs, to which quite high average funding was allocated. This shows a specific strategic orientation on the part of the region. Specifically, the Axes in question (III and IV) are deeply connected and revolve around three main features: the size of the territory, the integration with other planning instruments existing in the local area and the importance of governance. And continuing to think in terms of policies, it can be said that Axes 3 and 4 are more exactly covered by the Policy of diversification of agricultural activities, of quality of life and the Leader approach (Camaioni and Sotte, 2009, p. 34). Moreover, the features marking regional planning concern planning based on a coordinated, integrated and participatory approach involving the actors from the territory and the recognition of the role of innovation (Regione Puglia, 2008). Reading the RDP reveals not only the role taken by innovation in rural development, but also a pronounced ideological aspect (as we shall see below). Already in the selection of the Leader areas, the Region underlines that as well as requiring certain features such as homogeneity, an adjoining location, the adoption of an integrated, bottom-up development approach, the use of specific modalities for involving partners, greater priority would be given to territories capable of adopting innovative strategies towards the local context (Regione Puglia, 2008, p. 477). In view of these aspects, the attempt was made to understand how the Regione Puglia and the territories comprising the Leader areas interpret

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innovation, at least from the programmatic and operational point of view. To achieve this, the research was divided into two interconnected stages: 1) textual analysis was used to try to understand the interpretation attributed to the term ‘innovation’ in the main rural planning documents, namely the Regione Puglia’s RDP and the Local development plans (LDP) of the 25 Apulian LAGs; 2) through the collection and analysis of the calls for applications published from 2010 to 2015, we tried to assess the role and the type of planning competence sought by the LAGs4. The documentary analysis carried out on the RDP reveals not only a significant frequency of the term “innovation”, but also a specific meaning, highly dependent on European and national tendencies (as previously discussed and as is clearly evident in the RDP)5. Axis 1, “Investments in human and physical capital” (according to the CGSCommunity strategic guidelines for rural development), becomes “Expansion of the physical, digital, and infrastructure provisions” both in the top priority goals of the NSP and RDP. In the RDP specific goals are indicated “Improve the conditions needed to enable agricultural and forestry businesses to remain in rural areas, by enhancing the infrastructure and the sustainable use of water resources, including treated wastewater for irrigation and drinking water for use on farms” and “Raise the professional skill levels of staff in the agricultural and forestry sector and improve knowledge and competence on respecting environmental and safety requirements in the workplace as laid down by community regulations. Promote a generational turnover in agriculture by establishing young people in farming.” (Regione Puglia, 2008, p. 201). The Region’s planning aims to improve the level of knowledge, professional competence and entrepreneurial capacities of local workers, to improve the essential services offered to and used by the population, especially the weaker groups, also in Axis III. Here special attention is placed on the improvement of villages, of the anthropic and scenic aspects of the rural heritage, with specific interventions for the care and maintenance of the territory, the safeguarding of the landscape and the valorization of the cultural heritage (Regione Puglia, 2008, p. 203).

4 Public calls for applications designed to select the best initiatives and projects are the instruments used to dispense most of the funding envisaged in the Plans. 5 In the RDP there are specific tables drawn up to show the perfect coherence between national, regional and Community Strategic Orientations related to Axis I, II, III and IV. For more detail see Regione Puglia, 2008, pp. 201-204.

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However, the declination of Axis IV (see Regione Puglia, 2008, p. 204) is emblematic, with the improvement of governance reduced to the mere increase in the territory’s planning competence while the more complex activation of endogenous potential is reduced to merely valorizing local resources. This axis shows the highest degree of hierarchization along with a close alignment to European and national goals. This is confirmed by the lack of any further specification with the indication of clear goals, as happens instead in all the other axes. As regards the widely acknowledged need to bring innovation into Puglia’s production system, the solution proposed it to invest more in product and process innovations in order merely to attain goals of business competitiveness and territorial appeal for foreign investors. The table below shows the main results of the textual analysis carried out on the RDP using the descriptor method (based on Fiori, 2002)6, which was re-elaborated and adapted. Descriptors of values Section of document

Analysis of context (p. 30; 37; 42-43; 46; 47; 241) SWOT analysis (p. 124;125)

Technological Innovation of Innovation as innovation of process/ strategy transformation product for (attractiveness / facilities competitiveness competitiveness) XX

XXX

X

X

Axis III specific goal (p.151)

X

Axes and Measures financial weight (p. 161)

X

Axis I corrective measures (p. 170)

X

CGS, NSP, RDP coherence Axis I and Axis III (p. 192; 201; 203) Analysis by sectors, priority investments (p. 231) Business service system (p. 160) Priorities justification according to CGS and NSP (p. 191)

6

XX

X

X X X XX

The analysis is carried out in two main stages. In the first stage the frequency of the term innovation is calculated and the value descriptors are identified. In the second stage the frequency is calculated as the number of times the term appears in the different areas/sections of the RDP, in relation to the descriptors previously identified.

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Descriptors of values Section of document

Technological Innovation of Innovation as innovation of process/ strategy transformation product for (attractiveness / facilities competitiveness competitiveness)

Axis I Goals (p. 193)

X

NSP coherence and new challenges for RDP (p. 208) Funding Plan to re-launch the economy and National Plan (p. 209) Axis I strategy (p. 230) Goal Measure 111-Training and information (pp. 243-244) Field of action Measure 114 Consultancy services (pp. 256-257) Field of action Measure 121-Business modernization (pp. 262-263) Goals Measure 122- Increasing the economic value of forests (pp. 278279) Intervention motivations Measure 124Cooperation for development of new products, processes and technologies (p. 295; 297) Goals Measure 312- Support for development and for business start-up (p. 446) Field of action Measure 331-Training and information (p. 470) Measure 413-Local development strategies (p. 476) Measure 421 – Development of interterritorial and trans-national cooperation projects (p. 487; 489) RDP funding modality (p. 522) Total

X X X X X X X

XX

X X X

XX

8

6

XX 21

Table 3: Strategic Rural Plan of the Puglia Region: results of the textual analysis for the interpretation of the term ‘innovation’ (Regione Puglia, 2008, our elaboration).

Overall what emerges is an interpretation of innovation and therefore of territorial development that can be likened to what could be called a Fordist vision, in terms of innovation of product, process, technology, standardized knowledge almost alien to the context apart from the

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reference to specific local activity such as the mechanization of grape and wine production. The textual analysis of the LDP confirms that the leading role taken by the Region influences the “innovation strategies” of the Apulian LAGs, especially those with strong local roots. Specifically, the contents of the plans refer explicitly to integration and innovation, and in consideration of the initial situation and the context, propose to intervene by constructing and reinforcing the networks of players and sectors for an integrated development (such as the LAG of Terra D’Arneo, Terre dei Trulli e di Barsento, S.M. di Leuca, Valle d’Itria, Terra d’Otranto, Terre del Primitivo, Città di Castel del Monte), to play a leading role coordinating the instruments of intercommunal cooperation existing in the territory (like the LAG of Terre di Murgia, Colline Joniche), to develop local social capital, in many cases elaborating original operative solutions. These projects have a variable degree of innovation: creating thematic think tanks7; interventions to extend the participation of people from outside (Murgia Più LAG); setting up real agencies for the development of tourism in the area (Luoghi del Mito LAG); creating local "platforms" and centres designed to promote innovation and project a strong, competitive image of the area (Piana del Tavoliere LAG, Ponte Lama LAG); establishing complex networks of travelling information points to take innovation to farming businesses (Sud Est Barese LAG)8. The territories propose and are accountable for such projects (like the detailed study in stages that accompanies the Local Innovation Platform) which in many cases are the real innovations for the local area. However, there are still a limited number of them compared to the LAGs present in the region. In many cases these were the pilot projects described in the LDP, but which would benefit from a thorough investigation to check not only their tangible implementation, the stage of achievement reached, but also the actors promoting them and the modalities of actual involvement of the local community members, as well as their possible replicability. As has been said, in the second stage of the study, centred around the collection and analysis of the public calls for applications, the focus was on the role of the LAG and the type of projects proposed. 7

This solution is quite commonly found in the various LAGs, as is the construction of interactive portals to facilitate information provision, participation and exchange of ideas and proposals from the territory. 8 The projects are those declared and indicated by all the LAGs, in the “Innovation” section of the LDP.

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The calls for applications published between 2010 and 2015 show that resources and therefore planning competence concentrated in particular on Axis III, especially for interventions related to the Diversification of agricultural activities (Measure 311, about 30% of the calls for applications), followed by the Promotion of tourist activities (Measure 313, about 14%), Protection of the rural heritage (Meas. 323, 13%), Creation and support of entrepreneurial activity (Meas. 312, 13%), then to a much smaller extent Interventions in the field of Social services (Meas. 321, just 6%) and of Training and Information (Meas. 331, about 4%) in favour of rural areas especially for certain categories of individuals, above all young people and women (see table 4). The quality of the projects and the high number of calls for applications per measure would strongly suggest that the RDP planning indications (see table 4 for the specific goals corresponding to Axis III) were not followed. Of special interest is the actual carrying out of Axis IV consisting of merely providing services for the setting up of the Apulian LAGs (Meas. 431 over 20% of the calls for applications). Axis

Measure

Action

311 1. Investments serving the supply of farm holidays in a III Quality of Diversification business context life in non2. Investments serving the supply of educational and teaching rural areas agricultural services to the local population with special reference to the and activitiy school-aged (Teaching farms) diversifica 3. Investments serving the supply of social-health services for tion of weak sections of the population (Social farms) rural 4. Marketing of typical products economy 5. Promotion and use of energy from non-renewable sources 312 Support 1. Creation and development of micro-businesses in the for business sector of typical local artisanry based on processes typical of start-up and the rural world development 2. Marketing of the territory’s traditional typical products 3. Services to the population especially children and the aged 4. Services for leisure 313 1. Creation of natural, gastronomic, eno-gastronomic Incentivation itineraries of tourist 2. Creation of tourist information and welcome centres activity 3. Paths and information boards for access to natural areas and small accommodation facilities 4-5 Incentivization of tourist activity 323 Protection 1. Protection and enhancement of the rural heritage (typical and elements of farming landscape, buildings, rural environment, enhancement equipment)

Calls (%) 30

13

14

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Axis

Measure of rural heritage 331 Training and information

Action

Calls (%)

2. Special maintenance of monumental olive trees

1. Training to raise levels of knowledge, professional skills and entrepreneurial capacities for rural areas, especially 4 amongst the young and women 2. Information to promote knowledge about the diversification of non-agricultural activities and for the socioeconomic development of the territory 321 Essential Teaching, cultural and recreation services services for the Innovative services for society concerning inclusion and 6 economy and social integration rural Childhood assistance services populations Transport services to educational and teaching facilities 431Manageme Management and animation, acquisition LAG competences 20 IV LEADER nt, animation, (raising awareness, animation and participation of the various acquisition of territorial players, development and inter-territorial LAG cooperation) competences Total 100 Calls for applica -tions

Table 4: Summary results of analysis of the calls for LAG applications in Puglia (Rete Rurale Nazionale, 2014, our elaboration).

This all shows little attention to innovation in terms of increasing knowledge in rural areas and of governance. The innovation essentially concerns businesses more than the territories: very few interventions are designed to improve the social, cultural and institutional context. The innovation promoted to the benefit of businesses and production processes has a strictly economic and technological connotation and shows little interest in the systemic processes of social construction on which it should be grounded. The great dependence on community, national and above all regional strategic orientations as well as the marked hierarchical role of control exercised by the Region, leave LAGs no space for autonomy especially on the operative level. Although the LAGs have bowed to regional requirements, they have in some cases shown creativity and profound understanding of the territories where they operate, proposing original, innovative solutions (which however, need to be investigated in greater depth).

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In short, on a regional scale there seems to be a conceptual aporia that economic orthodoxy and the resulting practices have difficulty overcoming. According to Conti (2013, pp. 9-10) “We are […] in the presence of an economy which at the various territorial levels (global, local etc.) is based on the relational dimension as the foundation of a process of learning and of knowledge formation. It is an issue constantly disregarded by orthodox economic thought, which confines itself to acquiring the knowledge in its produced form, codified in theories, laws, patents: in this way, knowledge was interpreted in terms of stock, namely as a certain set of information and technology available on the market at a given point in time”. This observation does not yet seem to have borne fruit in the regional context under examination. In such contexts the role of the public actor therefore becomes essential. Such figures must not be confined to controlling or formally monitoring processes, but should assume a central role in changing the way the local area is regulated, in the capacity to coordinate local governance networks in a multi-level perspective, on different scales, “combining the innovation and competitiveness of businesses with the sustainability of development and the quality of life of individuals” (Messina, 2009, p. 16).

4. Governance of innovation and innovations in governance Many of the criticisms highlighted seem to be due to the governance decisions made on a regional scale, in the narrow limits of autonomy granted by the coordination on national and community levels. The model of governance adopted has proved to be the bearer of a series of problems and inconsistencies that have threatened the potential for innovativeness that the programme intended to stimulate. On the one hand, the possibility of innovating in terms of goals and strategies has been smothered, since they were so closely tied to national and community ones. On the other hand, the leeway allowed in the modalities of activation of participatory planning has led, due to the lack of established practice and instruments for monitoring, to the production of representations of territories (and of their "futures") that are poorly supported, if not blatantly distorted, thus annulling the efficacy of the programme. While on the one hand, Puglia chose to espouse the Leader approach, on the other, it greatly limited the scope of the approach. In actual fact, although LAGs have considerable responsibility in deciding the strategies

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and the implementation of the instruments (only for the measures in Axis III), they have almost no leeway to carry out experimental initiatives (Cacace et al., 2010, p. 18). The LAG is prevented from adapting the regional calls for applications (related to the single measures for which the funding is dispensed each time) to the different specificities of the Leader areas, the assessment grids are rather rigid and the authorizations related to tasks of administrative control are narrow, though onerous. The desire to curb LAG initiatives and keep them under control emerges clearly when reading the public call for applications in which the Puglia Region invited the LAGs candidates to present their respective Strategic documents (SD). The invitation specified the contents and the organization that every LAG was to have. In particular, it underlined that the overall territorial and rural development strategy (to be put into effect with a bottom-up approach) was to be based on the interaction between staff and actors belonging to different economic sectors in such a way that the needs of one’s area would be met. The LAGs’ freedom of action, already confined only to Axis III Measures, was further reduced by forcing them to sum up the strategy they intended to propose within a limited number of “unifying themes” (see table 5). Moreover, the measures that could be activated were specified: diversification of non-agricultural activities; support for the development and setting up of businesses; stimulus to tourist activities; essential services for the economy and the rural population; protection and enhancement of the rural heritage; training and information. 1.valorization of local production resources and creation of related circuits 2. valorization of natural and cultural resources 3. recovery of the identity of rural areas 4. creation of new production activities in non-agricultural sectors and of services and valorization of existing activities and services 5. improvement of the quality of life in rural areas, by providing lowthreshold support services to populations especially the weaker categories (women, youth, disabled) Table 5: Unifying themes (our elaboration).

Variety in planning was further reduced by the decisions of the LAG during the final drawing up of the LDP, created on the basis of their respective Strategic Documents previously approved by the Region.

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In table 6 the actions considered innovative are those that, by moving away from the traditional exclusively sectorial approaches or relatively sectorial approaches of the NSP, emphasized the role of the context and of the multifunctionality of agriculture. Main unifying theme

LAGs Attention to context and % spent on % spent on (N.) multifunctionality of actions for actions for production ** agriculture and farming context * businesses 16 Attention to weak context in Valorization of local 50 50 production resources and almost one third of the LAG. creation of related circuits Relatively greater attention to business multifunctionality Creation of new 4 Good attention to context. 45 55 production activities in Multifunctionality neglected. non-agricultural sectors and of services, and valorization of those existing Recovery of the identity 1 Good overall attention to 45 55 of rural areas relation between context quality and economic performance. Little attention to multifunctionality Valorization of the natural 4 In at least two cases, great 39 61 and cultural resources attention to cultural quality and quality of life; however , development is seen merely as growth, in one case even as an instrument of growth

Table 6: Attention by LAG to context and multi-functionality (De Rubertis, 2013; Local development plans of the Local action groups in Puglia, programming period 2007-2013). *Context actions: creation of itineraries, paths and tourist information centres; services for the aged and for children; teaching, health, cultural, recreation, transport, information services and special maintenance of monumental olive trees, restoration of buildings of collective interest; interventions for drawing up strategies for local development and territorial animation; activities connected to the functioning of the LAG; cooperation projects. ** “Production” actions: farm hospitality; production and marketing of artisanal products in the firm; production and sale of energy from renewable sources; typical artisanal products; rural tourism; small scale hospitality.

The 16 LAGs that identified their main unifying theme as the “valorization of local production resources and creation of related circuits” obviously placed great emphasis on the opportunities to strengthen the production

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chains and improve their lines competitiveness and that of the businesses participating. So much interest in market factors pushed into the background, in the respective LDP, the centrality of the territorial context which in almost one third of the cases is weak or even lacking altogether in the chapters devoted to themes, goals and strategies. However, as has been said, the idea of development more or less explicitly expressed was found not to coincide with mere economic growth, as seems to be often shown by the planners’ care in referring to the concept of business multifunctionality as the driving force for rural development. In actual fact, in the financial sections of the LDP, the spending is distributed equally between the actions we can call “on context” (50%) and those more directly “on production” (50%), differing from the regional average which dedicates about 47% of the total spending to actions “on context” (De Rubertis, 2013). The four LAGs that took as their unifying theme “creation of new production activities in non-agricultural sectors and of services and valorization of those existing” showed, in their respective LDP, good attention to the quality of the social context, perhaps precisely because the theme chosen shifts the emphasis from the sector of intervention (agriculture) to the conditions, including external conditions, that can improve performance. Interventions in favour of production chains and tourism growth are obviously envisaged, while the issue of multifunctionality is overlooked. Despite the interest in “context” processes, this group of LAGs on average allocates the majority of their funds (55%) to actions that we have called “on production”. The unifying theme “recovery of the identity of rural areas” was claimed by only one LAG, whose plan presents interesting original aspects, manifests overall interest in relations between the quality of the context and economic performance; no special importance is attached to issues related to the multi-functionality of rural businesses, which however, through actions “on production”, receive 55% of the total spending. “Valorization of the natural and cultural resources” was the unifying theme adopted by four LAGs: in at least two cases great importance was placed on goals of improving the cultural quality and quality of life. Overall, development seems to be interpreted mainly as a process of economic growth, and in one case is seen as the instrument of economic growth. Interventions “on context” receive less than 40% of the spending.

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Unifying theme number 5, “improvement of the quality of life in rural areas, by providing low-threshold support services to the population with special attention to the weak groups” (women, the young, the disabled) was never chosen as the top priority by the Apulian LAGs; in just a few cases it was taken up as a secondary theme. The idea of development that emerges overall from reading the LAG plans is not associated only to economic growth; the latter however is the dominant component and ends up drastically limiting the potential for innovation in the territories. The limited possibilities of choice flattened the potential variety of the proposals and practicable solutions, leaving very little space for innovation in the ways of regulating development from the bottom up. Despite the numerous constraints placed on the identification of goals and strategies, great liberties were evident in the assessment of the quality of territorial diagnoses (on which every LDP is based) and of the participatory processes that should have characterized the whole planning process. Despite being formally documented on paper, the participation of stakeholders and the planning team’s openness to the territory is hard to assess, but the quality of the results presents important evidence: some sections of the LDP of the 25 LAGs in Puglia were even shown to be absolutely identical in contents, in the text and also in the graphic layout. The issue has a certain importance: different partners operating in different territories may have been induced to express, albeit within the limited freedom allowed by the instrument, identical strategies and goals. The effects on the coherence of the plans is obvious, but once again their innovative potential is undeniably reduced, as is shown by the distribution of the funding, mainly oriented to actions on context only in the LAGs where it was not possible to recognize shared planners (De Rubertis, 2013). The presence of shared planners and the “affinities” in the plans could somehow be linked to the phenomena of proximity, since in many cases the LAGs involved are adjoining. But it could also be the cause or the effect of malfunctioning of the mechanisms of inclusion and participation that preceded the planning process. Such behaviour also interfered with the quality of the plans and their “external” coherence, namely their correspondence to “another” plan existing in the same territory revealed

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further defects in mechanisms of regional, national and community governance. The absence of adequate multilevel measures of governance made it difficult if not impossible to coordinate with other plans and projects which, elaborated on a different scale, affect the same territories. The most evident case, documented in previous works (De Rubertis 2013, 2010; D'Amico and De Rubertis, 2014) is that of the weak linkage with the Vast Area strategic plans. The latter were identified by the Puglia Region as a mature evolution of previous experiences of integrated programming: with a very broad multi-sectorial range of action, following the logic of plurifund financing, they were supposed to guide the process of regional territorial development. The level of coordination between Leader Areas and Vast Areas strategic planning was low and extremely disappointing. Every LAG’s decision on whether or not to refer to the process of strategic planning, which had been started some time before the Leader approach, was the result of local decisions. The weakness in governance in this case therefore concerned the regional and sub-regional scales. However, also in cases where the LDP expressed the intention to take into account the parallel actions of Vast Area strategic plans, no reflection of this was found on the rest of the planning and on the actual allocation of financial resources.

5. Conclusions In planning for rural development, despite the greater range of opportunities offered by the community approach, the European regions have mainly favored interventions on the first two Axes (competitiveness and environment), taking a productivist approach and focusing on growth, not on development. The National strategic plans for rural development (NSP) should have represented a mere summing up of regional leanings, in order to eliminate the overlapping and inefficiencies occurring in the previous programming; in actual fact it has been observed that, at least in the case of Italy, the NSP has significantly affected the design of the Regional rural development plans (RDP). In Italy, most of the regions have allocated the lowest funding to interventions in Axis III and IV; amongst the convergence objective regions, Puglia alone took the plunge and allocated a greater amount of

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financial resources to rural development and specifically to the Leader approach The analysis carried out on the main planning documents for Puglia, in the 2007–2013 period, confirms the marked dependency on national and community orientations, probably with the main aim of guaranteeing the conformity of the projects to the criteria required for them to receive funding. Some LAGs, in their respective Local development plans (LDP) actually interpreted innovation in social and cultural terms, putting less emphasis on the merely technical-productivist aspects. But in these cases, too, as can be seen from the monitoring conducted on the actual allocation of funding, the implementation stage saw the re-emergence of a marked dependency of all territories on a systemic alignment to regional constraints and directions. In other words, innovation once again refers essentially to the productivity and competitiveness of businesses, with interventions directed only minimally to improving the social, cultural and institutional context. This attitude denotes a (perhaps unconscious) conformism of the LAGs to the mainstream rhetoric of rural development based on a merely productivist approach that in many cases reveals deeply rooted conservativeness in the planning and implementation of programmes. The model of governance adopted, too, involved problems and inconsistencies that threatened the potential for innovation that the programmes originally intended to stimulate. On the one hand, the opportunity to introduce innovative strategies and goals was stymied, since the latter were closely tied to those of the community and the nation. On the other hand, with the lack of consolidated practices and adequate monitoring instruments, the leeway granted in modes of activating participatory planning led to the production of representations of the territories and of their futures that were poorly supported if not blatantly distorted, thus annulling the programme’s success. Hence the efficacy of the activities of territorial animation carried out by the LAGs was not up to the expectations of the local actors, especially businesses. As a result, the latter tend to show growing distrust and disaffection towards such initiatives, thus undermining an approach to development that based its success on the innovative potential associated with it. In short, while on the one hand Puglia is set out to espouse the Leader approach, on the other is considerably limited the impact of that approach

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by greatly reducing the autonomy granted to the LAGs in implementing experimental initiatives.

Professor Stefano De Rubertis, Professor of Economic-Political Geography, Department of Economic Sciences at the University of Salento, Italy. His prime research interests are in territorial development, tourism and rural areas with a focus on Southern Italy and Mediterranean countries, areas in which he has published and consulted. Professor Angelo Belliggiano, Associate professor of Agricultural and food economics, Department of Agricultural, Environmental and Food Sciences at the University of Molise, Italy. His prime research interests are in rural development policies, alternative food chains and food behavior, areas in which he has published and consulted. Dr Marilena Labianca is a lecturer, Geography of development and Economic Analysis of the Territory at the University of Salento, Italy. She has earned her Ph.D. in Economic-Political Geography from University of Bari and is currently Research fellow at the University of Salento. Her prime research interests are in strategic planning, local development and governance for Southern Italy, in particular Puglia.

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CHAPTER SIX NURSES-MANAGERS’ ACTS IN ORGANIZATIONAL CONFLICT SPECTACLES: THE CHALLENGES OF PUBLIC SECTOR MANAGEMENT IN THE ERA OF GLOBALIZATION HELENA DESIVILYA SYNA, THE MAX STERN YEZREEL VALLEY COLLEGE (YVC)

MICHAL SHAMIR THE MAX STERN YEZREEL VALLEY COLLEGE (YVC)

AND ORIT SHAMIR-BALDERMAN THE MAX STERN YEZREEL VALLEY COLLEGE (YVC)

Abstract The paper presents the challenges faced by nurses-managers in public health care systems while managing organizational conflicts in the era of dual concerns: cost-effectiveness and professionalism. It is based on research embracing the conflict engagement perspective, which illuminates the role of power relations in nurses’ construal of their organizational conflict experiences. The study used a qualitative methodology -focus groups. Thirty women nurses – heads of units or departments, employed in Israeli public medical centers, took part in the study. The findings underscore the dynamic and evolving nature and the centrality of power ploys in the processes of conflict engagement at organizational sites. The upper echelon nurses engage organizational conflicts using both direct, active patterns of influence as well as constrained and distanced conflict engagement modes, preferably clearly expressing their voice, reflecting professional creed of protecting human

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dignity. They appear cognizant of political games and act upon this understanding while engaging organizational conflicts. Globalization processes worldwide have led to marked transformations in work organizations including the public sector and specifically health-care organizations. The most prominent changes constitute a mounting concern with cost-effectiveness on the one hand and a greater emphasis on professionalism on the other hand (Gasper and Truong, 2008; Gephart, 2002). Consequently, health-care organizations akin to other institutions have become sites of conflicts within and between stakeholder groups (Bidwell et al., 2013). Each party attempts to mold organizational practices, resorting to intra-organizational negotiation with the other parties and to mustering external support from professional groups, governmental representatives and social movements. This article concentrates on the internal scene of organizations where conflicts play out. Specifically, it explores the organizational settings which are saturated with tensions between free-market demands and the norms and values of professional conduct (Dawson, 2009). These conflicting pressures have become increasingly vivid in nurses-managers' daily practice (Desivilya Syna, 2010; Eizenberg et al., 2009). We focus on the manifestations of such dual demands in the nurses-managers encounters with interperson al., intra-group (within nurses' teams) and inter-group (nurses-physicians, nurses-patients and patients' families) conflicts. The study aimed to elucidate the challenges faced by nurses-managers in public health systems, concentrating on their experiences of coping with organizational discords while illuminating the role of power relations in nurses’ construal of these encounters and their actual responses to conflict issues. We have embraced the conflict engagement perspective (Hansen, 2008; Kolb, 2004; Kolb and McGinn, 2009; Mayer, 2004; Putnam, 2001) in explicating nurses-managers' experiences at the organizational conflict sites. Such an approach has not received adequate attention in the organizational conflict literature, especially in the context of public healthcare organizations and the management practice healthcare professionals. Another novel feature of the current study is the concentration on nurses-managers as parties involved in their own organizational conflicts, unlike most extant research which investigated managers' role as third parties intervening in other organizational members' disputes.

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The paper commences with the presentation of the conceptual framework; namely, portraying the less visible, albeit vibrant organizational conflict sphere and delineating the conflict engagement perspective while drawing on constructivist and critical theory orientations. Then we describe the methodological approach, subsequently portray the major findings and close with the discussion of major insights and future research directions.

The hidden side of organizational discords Conflicts in organizational context constitute ubiquitous phenomenon (Desivilya Syna, 2011; Kolb and Putnam, 1992; Putnam, 2010). Disputes and discords arise from discrepant expectations, attitudes and perceptions of diverse actors and their tendencies to hold a grip on organizational processes and outcomes. Consequently, power concerns figure prominently in organizational settings, sometimes in an explicit form, but more often in a symbolic fashion. The strength of such discords can vary with the specific circumstances, the formal and informal status of the involved parties. We therefore draw on Kolb's and Putnam's (1992) definition of conflict: "Conflict is said to exist when there are real or perceived differences that arise in specific organizational circumstances and that engender emotion as a consequence." (p. 312). Notwithstanding the emotional flavor of organizational discords, most research endeavors adopted the rational approach, focusing on clear definition of conflict issues, subsequently analyzing the overt and explicit patterns (strategies and styles) underlying organizational actors' attempts to resolve organizational conflicts, and looking at the outcomes of such actions. Consequently, studies on conflict management employed the Dual Concern Model originally proposed by Blake and Mouton (1964), later adopted with some modifications by several scholars (Pruitt and Rubin, 1986; Rahim, 1983; Thomas, 1976). The underlying assumption of this conceptual framework posits that the conflict-management strategy adopted by an individual emanates from two underlying motives: concern for self and concern for the other side. Furthermore, the model postulates that the level of these two motives depends on the specific contextual features of the conflict, which in turn shape the strategic choice of the parties: (a) Dominating (high concern for self and low concern for the other), manifested in attempts to persuade the other side to accept one’s position; (b) Obliging (low concern for self and high concern for the other), reflected in compliance with the other; (c) Avoiding (low concern for self and low concern for the other) that is refraining from confrontation

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with the conflict issues; (d) Integrating (high concern for self and high concern for the other), that is seeking mutually beneficial alternatives for resolving the conflict; (e) Compromising (moderate concern for self and moderate concern for the other), evident in actions designed to identify middle-ground agreements (Desivilya Syna et al., 2009). Yet, research which explored the subjective conflict experiences of organizational members of various ranks (including mid-level and upper echelon managers) on a basis of ethnographic studies and narrative accounts revealed, that conflicts constitute an inherent component of organizations' daily activities, often not consciously recognized or labeled as discords. Furthermore, the vast majority of organizational conflicts linger at the hidden sphere – "behind the scene," often approached informally by organizational actors, not necessarily resolved but rather transformed into different forms (Desivilya Syna and Rottman, 2012; Di Virgilio and Di Pietro, 2013; Kolb and Putnam, 1992; Putnam, 2001; Walsh et al., 1988). Indeed, Di Virgilio and Di Pietro's (2013) recent survey study of employees in public administration showed that formal modes of conflict served merely as a general direction, but were barely germane in the daily organizational practice. Instead, their research pointed at the centrality of informal processes in dealing with conflict. The latter patterns have evolved in specific contexts shaped by organizational culture, in turn driving the interpretations of organizational conflicts and subsequent reactions; namely, methods of dispute management. Di Virgilio and Di Pietro's study corroborates earlier tenets maintaining that conflict processes in organizations are socially constructed, thus intertwined with organizational power dynamics (Desivilya Syna and Rottman, 2012; Kolb and McGinn, 2009; Kolb and Putnam, 1992; Owens and Hekman, 2012; Putnam, 2010; Walsh et al., 1988). Our research aimed to further explicate conflict processes at the hidden sphere; specifically, to distil the contextually embedded mechanisms of conflict management in nurses-managers' practice. We draw on Foucault’s theorizing concerning power relations, notably his constructivist version of critical theory. The latter conceptualization revolves around the use of power in social relations, in particular its manifestations in communication modes and language application geared at promoting dominant discourses (Foucault, 1994). It sheds light on the distinct ways whereby power is reflected in social interactions, especially

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how established and seemingly neutral truths and knowledge motivate organizational acts thereby fostering certain organizational practices while gradually obliterating others. It is worth noting that organizational actors often remain oblivious to such influence attempts. Yet, organizational members at times strive to resist power manipulations. Analysis of organizational interactions following Foucault's perspective, may inform us how organizational members act individually or collectively to realize their opposition; namely attempt to modify discourses in a way that reframes their inferior power position, consequently uplifting their influence (Kolb, 2004).

Conflict Engagement Perspective The main markers of Foucault's conceptualization concerning organizational power in conflict analysis constitute the focus on relationship construction, the dynamic and evolving nature of such processes and the central role ascribed to interaction and communication processes (Glenn and Susskind, 2010; Putnam, 2010; Sargent et al., 2011). Our version of the term conflict engagement springs from such a framework. Specifically, it denotes the process of relationship building among the involved parties while elucidating the structural and dynamic features of conflicts (Desivilya, 2011; Desivilya and Rottman, 2012; Mayer, 2004; Tjosvold, 2006). Negotiation construed as an ongoing activity in organizations (Kolb and McGinn, 2009) comprises the primary device for implementing conflict engagement. It involves the parties' informal decision making that is establishing the 'rules of the game' as to how to handle their interdependent relations (Desivilya Syna and Rottman, 2012; Fuller, 2011; Kolb, 2004). In line with Glenn and Susskind's (2010) contention based on discourse and conversation analysis perspectives, such negotiation process which develops in the course of the parties' interaction, serves as a sensemaking mechanism, allowing them to create a mutual meaning; namely, the rules of engagement. In a similar vein, Sargent et al. (2011) underscore the contribution of dynamic interactions among conflicting parties to generating meaning and interpreting conflict experiences. Negotiating the meaning of conflict through interaction can result in reframing discords: shifting experiences of threats to one's values and identities, to mutually acceptable rules of engagement and to joint opportunities.

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Putnam (2010) also emphasizes the central role of communication processes, manifested in the rival parties' interactions, with regard to the meaning construction of conflict experiences, notably in engaging discords by means of negotiation. Discourse analysis which focuses on the use of language illuminates the ways whereby the parties make sense of their own and the other's negotiation goals, needs, how they orient their actions (including formulation of strategies) and what are their emotional responses in conflict situations. To recap, conflict engagement perspective stresses the relationship construction aspects through interactive meaning generation by the parties who are involved in a discord. How does it inform managerial influence in conflict situations; namely, fosters meaningful expression of the parties' voices? Specifically, how do nurses-managers maneuver in the course of actual conflict episodes in the context of the dual concerns of economism (cost-effectiveness) and professionalism? In an effort to shed light on this query, we resort to Siira's (2012) typology tapping managerial influence as third parties in organizational conflicts. Drawing on social complexity perspective, which considers conflicts as intrinsically dynamic and potentially functional for organization's sustainability, this scholar proposed a two-dimensional framework of managerial influence: directedness and communicative influence, subsuming five patterns of influence: direct, indirect, distant, constraining and enabling. According to this conceptual framework, direct influence pertains to explicit intervention in conflict interaction by addressing conflict parties in tandem or separately. Indirect influence is enacted through intervention in the context, structures, or circumstances associated with the conflict interaction, but neither communicating directly with the disputants nor intervening directly in their interaction. Distant influence purports to the effects on conflict interaction by the third party's mere presence, while refraining from any action - direct or indirect. Constraining influence denotes third party's exclusion of disparate perspectives in conflict interaction. Enabling influence pertains to third party's promoting inclusion of diverse perspectives and views in conflict interaction. We have adapted the scheme above in order to portray managers' conflict engagement efforts as parties directly involved in organizational discords. Accordingly, attempts of direct influence involve confronting the other conflict parties with regard to the conflict issues in the course of an

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interaction; indirect influence entails dealing with the contextual features of the particular conflict; distancing constitutes maintaining contact with the other parties, albeit not confronting the conflict issues; constrained influence denotes suppressing ones' own discordant or diverse voice in the interactions with the other conflict parties; and finally enabled influence refers to expressing one's own diverse views in the interaction with the other conflict parties. In order to elucidate the dynamic and evolving features of the nursesmanagers' conflict engagement experiences, especially with regard to power relations in the course of conflict, we also employed the concepts introduced by Kolb (2004): 'move' – raising one's own power position while making the other lose their position, such as by undermining his or her professional competence; and 'turn' – rehabilitating or regaining one's power position either focusing on restoring one's own standing vis –a -vis the other, for example by exposing the other's manipulation attempt (restorative turn) or improving one's position while making the other a partner in this process of changing relationships (participative turn). We were particularly interested to explore the awareness of the study participants concerning control maneuverings; namely, grasping the traces of organizational politics (Samuel, 2004) in conflict processes. Moreover, we endeavored to learn about nurses-managers' attempts to resist such manipulation acts while striving to modify the power relations in their favor. Thus, we aimed to examine the strategic functions of direct, indirect, distancing, constrained and enabled influence in the conflict engagement dynamics; namely, reflections of these patterns as attempts of positioning used as moves, counter-moves, restorative or participative turns. In sum, this paper, attempted to narrow down some of the research gaps in the organizational conflict domain, shedding light on the conflict dynamics in health care public organizations, particularly as it is played out at the hidden sphere by nurses-managers. The main question revolved around nurses-managers' engagement with organizational conflicts (intrateam, inter-group conflicts with physicians, with patients and their families) while exploring these organizational actors' construal with respect to the strategic functions and effects of such attempts, notably their capability to modify power relations, express authentic voices and exert influence on decision-making processes. We also examined the role of the socio-economic context with its dual concerns of cost-effectiveness and professionalism on conflict processes in public health care organizations.

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Methodology The original impetus for the current research stemmed from the mounting challenge of coping with moral dilemmas faced by nurses in general and particularly nurses in management positions as a result of the dual concerns for cost-effectiveness and professionalism. This perplexing endeavor was relayed to the first author by her colleague who had occupied various senior posts in the nursing management arena' leading to further inquiry with heads of nursing services in large university hospitals. Preliminary individual interviews with the heads of nursing services in two major medical centers clearly revealed that salience of ethical issues in nurses-managers daily practice. Moreover, these upper echelon nursesmanagers pointed out that moral dilemmas not only call for intra-personal solutions but are also manifested in frequent experiences of organizational conflicts with peer nurses- mangers, supervisors, subordinate nurses, physicians, patients and their families. Consequently, we decided to add the conflict engagement focus to our study, assigning a marked weight to this component in the data collection process. The findings with regard to coping with ethical issues were reported elsewhere (Desivilya Syna, 2010; Eizenberg et al., 2009). As indicated earlier, this article revolves around nurses-managers' conflict engagement experiences in public-health care organizations. The study was based on a qualitative methodology, mainly focus groups. Focus groups are a form of group interviewing based on interaction within the group discussing issues introduced by the researcher. The central feature of focus groups constitutes the insights emerging in the interaction among participants as embedded in their subjective experiences (McLafferty, 2004). We opted to use this research instrument because we were interested in obtaining several perspectives about the same topic and gaining understanding into the participants' shared understandings of everyday organizational practices. Thirty women nurses – head of units or departments, employed in public medical centers, took part in the study. They participated in five different focus groups. The focus groups were designed to elicit narrative accounts of organizational conflicts experiences encountered in everyday nursing and management practice. Specifically, we focused on the participants’ construal of organizational conflicts, their nature, awareness with regard to power manipulations, the ways of coping with such schisms and the perceived ramifications of such attempts – expression of authentic voices, efforts to resist control maneuvering and influencing decision-making. The focus groups were tape-recorded and subsequently transcribed verbatim.

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Data analysis entailed content analysis, which was executed in accordance with the principles of qualitative research: ensuring that at least two of the researchers analyzed each group interview to accord further validity to the interpretation. The data were analyzed in three main stages: in the first, “open coding”, we read each group interview from beginning to end to gain an initial impression of the main emerging themes. Then we conducted a mapping analysis, in which we laterally assembled the data. Finally, we reverted back to the group interviews for a focused analysis, aiming to identify the interviewees’ construal with regard to the concepts and notions arising from the professional literature (such as the nature of influence in conflict engagement - direct, indirect, distancing, enabled or constrained and the strategic function of conflict engagement – move, counter-move or turn) (Lincoln and Guba, 1985; Shkedi, 2003; Strauss and Corbin, 1998).

Findings The content analysis of our data revealed a great deal of organizational conflicts faced by nurses-managers (all of them women), many of them emanating from the free-market demands, which led to clashes of professional orientations, values and needs in their relations with physicians, peer-nurses, patients and their families. Power maneuvering that is organizational politics was quite salient in conflict encounters of the study participants (Samuel, 2004). Drawing on the constructivist version of critical theory (Foucault, 1994), which underscores the processes of building power relations through negotiation of meaning we attempted to identify patterns whereby nursesmanagers engage organizational conflicts. Thus, we resorted to Siira's (2012) adapted typology of managerial influence in organizational conflicts along with Kolb's (2004) conceptualization with regard to the dynamic features of organizational discords, especially the notions – 'moves' and 'turns'. The group interviews' analysis evinced two common patterns of engaging organizational conflicts: enabled influence and direct influence. The former purports to expressions of authentic voice even though it might be controversial. The choice of this mode of influence was manifested with regard to several different issues in nurses-managers' daily practice in hospitals, primarily associated with constructing physicians-nursesmanagers relations and nurses-managers – patients relations. For example,

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when the issue of prolonging life of a patient came up a nurse-manager noted that: "The patient has the right to decide what to do at the end of his/her life, it just eliminates many conscientious and ethical problems etc…" (Focus group no. 2). Such a statement contradicted a physician's opinion, but was in line with a patient's wishes, welfare and dignity. Another nurse indicated: “I am doing what I feel is right. If it is wrong, I’m saying so and am not willing to cooperate. Does not happen a lot. Overall, there is cooperation, listening, and this is because it is an oncology department. A physician who does not listen is out… Consulting and asking nurses’ opinion is very important because she is with the patient throughout the day” (Focus group no 1).

The two narrative accounts above point at nurses-managers' tendency to muster patients' support of their views in order to gain influence. Thus, they demonstrate awareness of organizational politics and consequently act upon such understanding, in particular embracing an active stance in intergroup politics. They build coalitions in order to position themselves, thereby fostering their expression of meaningful voices in decision-making processes (Bacharach and Lawler, 1980; Kolb, 2004; Pfeffer, 1981). The second prevailing pattern of engaging organizational discords entailed direct influence; namely, directly confronting conflict issues with the other parties. This mode of coping was found mainly in the context of intra-team nurses' relations especially concerning workload issues and its effects on health care. Nurses felt at ease raising disagreements and controversial issues in the course of departmental staff meetings, as expressed by one of the study participants: “With our direct supervisor H. we raise issues and she moves them up. This is hierarchy. Even with H. we raise these issues, but as we said in our staff meetings we try to develop a joint team discussion. We are talking about problems or dilemmas even if we don’t have enough time, we're raising issues.” (Focus group no. 5).

Conflict issues, associated with nurses-physicians relations and engaged by means of direct influence, often revolved around patients' rights and welfare as demonstrated by the following quotation: "So one of our nurses-managers tried to talk to the head of the department that maybe instead of moving the patient to our department, move him,/her back after recovering from 'comminution' back where it's done. There's a nurse and a doctor who do that. It’s a process of an hour or two and then

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the patient goes home, but in the meantime there is a problem. We have 6-7 comminutions a day and we get to the urology department at 6-7 pm and see what urology is like.... We (the nurse-manager along with the other nurses) talked about it at the staff meeting. The nurse-manager asked the head of the department, if there is such an option. What does the nurse actually do?She/he helps the doctor-anesthesiologist and then goes to the comminution machine and then a doctor down there performs the comminutions, and the nurse is sitting and waiting until it's over. It takes sometimes half an hour, an hour or two finding a room for the patient. So meanwhile the patient can get back down to the comminution area instead of going to the urology department, and then go home…"(Focus group no 4).

Interestingly, this particular instance of conflict engagement reveals an attempt of indirect influence in addition to the use of direct influence; namely, changing the structural element surrounding the discord in order to foster problem-solving, Another case of direct influence has occurred in a situation where physicians build coalitions with patients while excluding the nurses (Samuel, 2004). Notwithstanding the latter's frustration and anger, they attempt to resist such power manipulations (move) in an effort to regain their position (turn) (Kolb, 2004). Thus, they engage such conflicts by means of direct and explicit negotiation in a form of a joint discussion, as put by one of the study participants: “We talked to the head of the department and we said that it is not realistic to receive a patient at the department suddenly in the evening without examination of the E-R, without the examination of a doctor on call, but we solved it…. This also happened at the Women's E-R., it was similar at the beginning until we really got angry..." (Focus group no. 4).

Maintaining professional standards and institutional regulations and division of responsibilities between the clinical nursing staff and physicians, constitutes another domain illustrating the direct influence pattern, including undertaking formal action – filing a complaint, as reported by one of the head nurses: "I came in the morning and said to the nurse on duty that she should have dropped the ceiling over this physician's (on duty) head and immediately reported the incident to the department head physician and to the head of the hospital's nursing services because I wanted her to see that the department does not follow the regulations, there is some problem with the department management… the nurse on duty did not want to confront the

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Conceivably, the nurse-manager opted to use direct influence, while dealing with issues of principle which are universally relevant throughout the hospital nursing and medical staff (such as professional standards and institutional regulation) due to her sense of confidence in potential support from her peer professional group. Such a confidence in professional and moral support fostered the nurse-manager's capacity to restore her power position vis-à-vis her physician counterpart (Kolb, 2004). The third pattern of influence which emerged from the content analysis was constrained influence; namely, suppressing ones' own discordant or diverse voice in the interactions with the other conflict parties. This mode of conflict engagement was evident in cases reflecting clashes between individual principles and professional ethics in general and specifically concerning prolonging life, as reported by one of the head-nurses:” … True, a young girl that was at the end of her life and we had a problem with the husband: he decided to make decisions on her behalf, which meant not giving her any medication, not to comfort her even though she was in pain, excruciating pain, and the service manager, just said that in such a situation we should not even ask the husband, and we decide what to do. I mean we need to make a decision, which treatment to give her. All the time until her death this girl suffered, was in torture, torment, it really was torture…Even Sh. and I, both doctors, the nurses all of us talked …(with the husband)…, and at the end somehow we decided that we give her the medicine and that's it! The decision was that this is a medical decision and that was it, we do not give him the chance to decide for her.” (Focus group no. 2).

Interestingly, the latter quotation demonstrates a shift in the use of influence in the course of engaging the conflict issue – initially constraining one's voice while later switching to the enabled influence pattern, deciding in favor of the patient despite the husband's opposition. This finding corroborates previous research and theoretical arguments concerning the dynamic, evolving and contextually embedded nature of

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conflict processes in organizations (Glenn and Susskind, 2010; Kolb, 2004; Putnam, 2010; Sargent, Picard and Jull, 2011). The use of constrained influence pattern tended to underscore the impact of the macro level context; namely, reflected the nurses-mangers' predicament in responding to the dual concerns of economism (costeffectiveness) and professionalism (Desivilya Syna, 2010; Eizenberg et al., 2009). Specifically, the nurses-managers emphasized the professional orientation of care whereas physicians tended to underscore costeffectiveness, as demonstrated by the following quotation of a head nurse of maternity department: "The physicians are in favor of bringing in as many women for labor as possible, this creates overcrowding in the maternity department, it's impossible to provide a quality service as promised to women, but it's a free market, hospitals compete for each woman in labor. I feel terrible to breech promises concerning the quality of treatment…” (Focus group no. 3).

Distancing, namely maintaining contact with the other parties involved in the discord while avoiding direct confrontation with the conflict issues, was least prevalent in comparison with the other conflict engagement patterns. One instance where distancing pattern was adopted was in the domain of cultural diversity, as relayed by one of the study participants: "... On Yom Kippur, we have been working for years with the guys from the Arab sector. They have a great respect for us and we respect them. This year is was the first time that she turned on a toaster on Yom Kippur. We considered it very serious because such a thing has never happened I did not think as the nurse-manager I am supposed to make it clear, it's obvious. There are procedures. It caused an unrest within the team. Prior to my intervention as the person in charge, one Jewish nurse, talked to the nurse who turned on the toaster and told me that the nurse said, 'Why do I have to respect you on Yom Kippur when you do not respect me on Ramadan month. I fasted a month’. I summoned the nurse and said that there are procedures and regulations. You chose to work in a Jewish hospital there is nothing to do. These are the hospital regulations, not mine. I’m not religious but I have no choice. I must respect those who keep the religious tradition. Order was restored I'm sure it will not happen again. We’re working for years together and we respect each segment and respect each other. When the nurse is fasting on Ramadan and at 5 pm she

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The latter quote constitutes another example of a shift in conflict engagement patterns: from distancing to direct influence. Presumably, when the overall team climate is benevolent, featuring mutual understanding and respect, the nurse-manager refrains from confrontation so as not to disrupt it. Thus, she initially adopts a passive stance, evading direct confrontation. Following a change in the circumstances - in that specific case the other nurse's intervention - the nurse-manager has employed the direct influence pattern so as to ascertain her resolve as becoming to her organizational formal position. Such a modification in the nurse-manager's reaction seems to point at her engagement in sensemaking and social construction of the conflict experience, adapting the choice of the specific influence pattern to the evolving circumstances (Glenn and Susskind, 2010; Kolb, 2004; Owens and Hekman, 2012). Another case where the use of distancing pattern has emerged was following an appraisal of the conflict as intractable which, in turn, led to rationalization of inaction, as demonstrated by the following quotation: "there is a limit of struggle for change/working on the basis of one's conscience, I won't waste my energies after several attempts which were unsuccessful, if I feel that there is 90%, not 100% I would not succeed, I would not go in this direction. I believe when the opportunity reappears, when there is a sparkle of hope to change, a window of opportunity nurses will act, of course not everybody at the same moment, everyone has her/his own red spot or limit ; it depends on personal strength, philosophy, stubbornness, hutzpa, the way they woke up in the morning, their habits, decisions…" (Focus group no. 3).

Evidently the use of distancing moves conflict engagement to the hidden sphere – "behind the scene" – but as manifested in an earlier example can eventually surface at the main "stage" with the change in circumstances and opportunities to employ enabled and direct influence patterns of coping with organizational discords.

Discussion The study attempted to learn about nurses-managers', employed in public health care centers, encounters with organizational conflicts while shedding light on power maneuvering in the participants’ construal of these experiences and on their actual engagement patterns. We were

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especially interested in discerning the spaces where organizational discords are played out: at the front of the stage as well as at the hidden sphere – behind the scene. Moreover, this research aimed to elucidate the impetus for engaging conflicts, functions and effects of nurses-mangers' conflict engagement acts: their awareness of organizational politics in conflict spectacles, their capability to change power relations, sound meaningful voices and play significant part in decision-making processes. We also attempted to explicate the role of the macro-level context with its dual concerns of cost-effectiveness and professionalism in conflict processes at the public health care organizations' arena. The findings revealed that nurses- managers, face the ramifications of globalization in their daily practice (Gasper and Truong, 2008; Gephart, 2002). In line with Dawson's contention (2009) nurses-managers encounter organizational conflicts, which often emanate from the collision between professionalism (providing high quality response to patients' call) and economism (operating in cost-effective and efficient way). In addition, we found that nurses-managers appear highly aware of power manipulations and maneuvering underlying organizational conflict processes, hence reckoning their need to actively participate in political games (Kolb, 2004; Kolb and Putnam, 1992; Samuel, 2004). Indeed, the narrative accounts of the study participants showed that they often act upon such an understanding, attempting to reconcile the contradictory demands of professionalism and cost-effectiveness and deal with the ramifications of such dual concerns. Thus the prevailing modes of conflict engagement which emerged from the content analyses were: direct and enabled influence (Siira, 2012). Nurses-managers’ indicated employing active modes, engaging organizational conflicts at the overt sphere by raising the issues with their direct supervisor (the head of nursing services) as well as confronting the physicians in their respective departments. The study participants employed such an active stance sometimes as a response to the physicians' move', such as undermining their professional competence or attempts of exclusion from decision-making processes; they used direct and enabled influence in order to restore their position and regain control (Kolb 2004; Siira, 2012). Notwithstanding the importance of such restorative turns, nursesmanagers also resort to direct conflict engagement patterns proactively rather than reactively; namely, asserting their power position and ensuring that their voices are heard on significant issues, such as in cases of

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maintaining professional standards, institutional regulations and protecting patients' rights, dignity and welfare. When such a firm orientation is infeasible nurses-managers operate at the hidden sphere, resorting to more passive and less direct conflict engagement, or act as shock absorbers, compensating for the public health system's drawbacks of economism (Gasper and Truong, 2008). The more passive, emotion-focused, conflict engagement patterns – constrained influence and distancing seemed somewhat less apparent in nurses-managers' narrative accounts (Siira, 2012). They were manifested by and large at the "hidden" sphere and embraced following an appraisal of the conflict as intractable which, in turn, led to rationalization of inaction (instances of moral dilemmas, irreconcilable clashes between cost-effectiveness and personal or professional values, and occasions carrying potential personal consequences (Sargent et al., 2011). The finding that nurses-managers adapt conflict responses to the specific circumstances reflects their remarkable capabilities of conflict engagement (Mayer, 2004). They appear to perform (not necessarily consciously) conflict assessment – constructing the meaning of conflict in terms of its developmental stage, the characteristics of the other parties, their own action (or inaction) capacities and the structural features, subsequently "fitting the forum to the fuss". This once again indicates their skillful acting in organizational politics (Kolb and McGinn, 2009; Samuel, 2004; Sargent et al., 2011). The study also revealed the dynamic and evolving nature of organizational discords and consequently of conflict engagement acts (Glenn and Susskind, 2010; Kolb, 2004; Owens and Hekman, 2012). Nursesmanagers reported shifting from one pattern to another over time depending on the evolving circumstances, and their own pursuits of mustering support - building coalitions and networks. Thus they initially used constrained influence or distancing and subsequently switched to enabled or direct influence – restoring their power position (Kolb, 2004; Siira, 2012).

Limitations and Future Research Directions Notwithstanding the contribution of this research, several limitations should be noted. Our point of departure has been the emphasis on studying the interaction-based conflict processes. However, the current study

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examined one conflict party's point of view based on that actor's narrative accounts. Future research may explore the perspective of the other parties, especially the professional counterparts, such as physicians, subordinate nurses and upper level administrators. Another weakness revolves around the use of a single research tool – a focus group. Although it deemed particularly suited for attaining our research aims, using other research methods, such as individual interviews, observations of staff meeting, and use of longitudinal design, such as following a few nurses-managers in daily practice over extended periods, such as in Kolb and associates (1994) study on mediators' profiles, can yield a more extensive perspective on the dynamic, evolving and contextually embedded nature of organizational disputes.

Conclusions The current research corroborates previous findings and extends knowledge on conflict engagement at organizational sites, illuminating their dynamic and evolving nature and underscoring the centrality of power maneuvering in such processes. The study indicated that nurses-managers actively negotiate value, support and commitment, gradually amplifying senior women's voices and affirming their organizational power (Kolb and McGinn, 2009). Hence, they appear to engage the challenges of the globalization era quite successfully – play their acts in organizational conflict spectacles with considerable virtuosity. The upper echelon nurses engage organizational conflicts using both direct, active patterns of influence as well as constrained and distanced conflict engagement modes, preferably clearly expressing their voice, reflecting professional creed of protecting human dignity but at the same time providing high-quality care. Thus, their management practice while coping with organizational discords incorporates feminine perspective: reveals recognition of power dynamics, relational understanding and emphasis on experience (Kolb and McGinn, 2009). Their efforts geared at improving the situation and enhancing the power position constitute an integral component of comprehensive campaigns, which can be labeled 'gendered politics' (Samuel, 2004).

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Prof. Helena Desivilya Syna - a professor of social/organizational psychology, chair of MA program in Organizational Development and Consulting, the Max Stern Yezreel Valley College in Israel and EMAB fellow. Her research focuses on organizational conflict and behavior interperson al., intra-group, intergroup relations and diversity management (gender, national minorities). She has published articles in international peer reviewed journals and book chapters on these topics and edited a book: A paradox in partnerships: the role of conflict in partnership building. Michal Shamir, PhD candidate, Department of Sociology and Anthropology, Hebrew University, Jerusalem , Israel . Lecturer and a member of the admission committee for organizational counseling MA program, The Max Stern Yezreel Valley College. Orit Shamir- Balderman, PhD candidate, Faculty of Management, University of Haifa, Haifa, Israel. Lecturer and a member of the admission committee for organizational counseling MA program, The Max Stern Yezreel Valley College.

References Bacharach, S. B. and Lawler, E.J. (1980). Power and politics in organizations, San Francisco, Jossey-Bass. Bidwell, M., Briscoe, F., Fernandez-Mateo, I., and Sterling,A. (2013). “The Employment Relationship and Inequality: How and Why Changes in Employment Practices are Reshaping Rewards in Organizations”. The Academy of Management Annals. available at: http:/dx.doi.org/10.1080/19416520.2013.761403. downloaded 1.29.2013. Blake, R. A., and Mouton, J. S. (1964). The managerial grid, Houston, Gulf. Dawson, D. (2009). “Conflicting stories of virtue in UK healthcare: bringing together organisational studies and ethics”. Business Ethics: A European Review, Vol 18 No. 2, pp. 95-109. Desivilya-Syna, H. and Rottman, A. (2012). “The Role of Power Asymmetry Sensitivity in Jewish-Arab Partnerships”. Conflict Resolution Quarterly, Vol 30 No. 2, pp. 219-241. Desivilya-Syna, H. (2011). “The Role of Negotiation in Building IntraTeam and Inter-Team Cooperation”. In M. Benoliel (ed.) Negotiation Excellence: Successful Deal Making, Tuck Link, Singapore, World Scientific Publishing (WSP), pp. 361-381.

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—. (2010). “Gender, globalization and ethics in public healthcare system: the challenges of nurses-managers in engaging moral dilemmas”, Global Management Journ al., Vol 2 No.2, pp. 34-41. Desivilya Syna, H., Somech, A., and Lidogoster, H. (2009). “The role of team identification task and relationship conflict and conflict management patterns in team innovation: The case of advanced technology work teams”, Negotiation and Conflict Management Research, Vol 3 No. 1 pp. 28-48. Di Virgilio, F. and Di Pietro, L. (2013). Organizational Conflict: A Critical Approach on Formal and Informal Management Processes, RN-id1927855. available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1927855 Eizenberg M. M., Desivilya, H., and Hirschfeld, M. J. (2009). “Moral distress questionnaire for clinical nurses: instrument development”, Journal of Advanced Nursing, Vol 65 No. 4 pp. 885–892. Foucault, M. (1994). “The Subject and Power”. In P. Rabinow and N. Rose (eds.), The Essential Foucault, New York, New Press. Gephart, R.P., Jr. (2002). “Introduction to the brave new workplace: Organizational behavior in the electronic age”, Journal of Organizational Behavior, 23, pp. 327-344. Glenn, P. and Susskind, L. (2010). “Special Section Communication and Negotiation. How Talk Works: Studying Negotiation Interaction”, Negotiation Journ al., Vol 26 No.2 pp. 117-123. Hansen, T. (2008). “Critical Conflict Resolution Theory and Practice”, Conflict Resolution Quarterly, Vol 25 No. 4 pp. 403-427. Kolb, D.M. and McGinn, K. (2009). “Beyond Gender and Negotiation to Gendered Negotiations”, Negotiation and Conflict Management Research, Vol 2 No. 1 pp.1-16. Kolb, D.M. (2004). “Staying in the Game or Changing It: An Analysis of Moves and Turns in Negotiation, Negotiation Journ al., Vol 20 No. 2 pp. 253-274. Kolb, D.M. and associates (1994). When Talk Works: Profiles of Mediators, San Francisco, CA, Jossey-Bass Publishers. Kolb, D.M. and Putnam, L.L. (1992). “The multiple faces of conflict in organizations, Journal of Organizational Behavior”, 13, pp. 311-324. Lincoln, Y. S. and. Guba, E.G. (1985). “An exploration of quality in qualitative research”. In M. Kopala and E. Merrick (eds) Naturalistic inquiry. Beverly Hills, CA: Sage. Mayer, B. (2004). Beyond Neutrality: Confronting the Crisis in Conflict Resolution, San Francisco, Jossey-Bass, pp. 181-214.

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CHAPTER SEVEN MOBILE CUSTOMER RELATIONSHIP MANAGEMENT: INNOVATIVE PERSPECTIVES AND FUTURE TRENDS IN TOURISM GEORGE MASTORAKIS, ASSISTANT PROFESSOR, DEPARTMENT OF BUSINESS ADMINISTRATION, TECHNOLOGICAL EDUCATIONAL INSTITUTE OF CRETE, AGIOS NIKOLAOS, GREECE

NIKOLAOS TRIHAS, LECTURER, DEPARTMENT OF BUSINESS ADMINISTRATION, TECHNOLOGICAL EDUCATIONAL INSTITUTE OF CRETE, AGIOS NIKOLAOS, GREECE

EMMANOUIL PERAKAKIS, APPLICATION PROFESSOR, DEPARTMENT OF BUSINESS ADMINISTRATION, TECHNOLOGICAL EDUCATIONAL INSTITUTE OF CRETE, AGIOS NIKOLAOS, GREECE

IOANNIS KOPANAKIS ASSOCIATE PROFESSOR, DEPARTMENT OF BUSINESS ADMINISTRATION, TECHNOLOGICAL EDUCATIONAL INSTITUTE OF CRETE, AGIOS NIKOLAOS, GREECE

AND CONSTANDINOS X. MAVROMOUSTAKIS ASSOCIATE PROFESSOR, DEPARTMENT OF COMPUTER SCIENCE, UNIVERSITY OF NICOSIA, 46 MAKEDONITISSAS AVE., NICOSIA, CYPRUS

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1. Introduction The travel and tourism sector provides an ideal context, towards investigating the influence of sophisticated technologies, such as interactive digital television (iDTV), next generation (e.g. 4G, 5G) mobile networks and Internet based applications in marketing, especially regarding the efficient deployment of Customer Relationship Management (CRM) systems (Buttle, 2009; Wilde, 2011). Such technologies provide new business opportunities in establishing, enhancing and commercializing customer relationships, through a better understanding of customers’ requirements and their requests fulfilment. Advances in interactive digital television, Information Communication Technologies (ICT), Internet based technologies and their efficient convergence may play a crucial role to enhance the procedures of gathering and processing information, regarding customers’ personal preferences. More specifically, interactive digital television can be exploited to deploy sophisticated wireless networks, towards supporting the provision of multimedia applications and access to Internet based services. In addition, Internet Protocol Multimedia Subsystem (IMS) is considered as a favourable technological solution (Camarillo and Garcia-Martin, 2011) that may be adopted in future mobile and digital television systems to provide advanced capabilities and added value data services (Trihas et al., 2013). Furthermore, for an efficient CRM implementation, Information Communication Technologies have been identified as a major catalyst and one of the key success factors (Jayachandran et al., 2005). Advances in ICT have allowed automation and effectiveness in these methods, dropping expenses, growing precision and permitting widespread understanding about each consumer on an international basis. As an outcome, a lot of enterprises are turning to new technological solutions, towards increasing consumer facilities through the development of extensive CRM structures (Kumar, 2010). CRM initiates from the notion of consumer orientation and has progressively been deployed to the tourism businesses, enriching the connection among tourism enterprises and their clients (Wu and Lu, 2012). According to Sigala (2005), CRM is important in the tourism industry, mainly for two reasons: first, travellers are becoming more value sensitive, less brand loyal, more cultured and experience explorers and second, the tourism businesses go through increased globalization, competitiveness, developing consumer acquisition costs and growing client expectations. That means that tourism organisations performance and competitiveness is significantly dependent

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on their ability to efficiently satisfy customers (Sigala, 2005). Tourism enterprises should therefore adopt CRM systems primarily to provide better services, meet customer needs, attract and retain customers, as well as to establish good interactive relationships (Wu and Lu, 2012). In fact, travel and tourism firms and organisations have been among the innovators and early adopters of CRM (Vogt, 2011). The growth of loyalty clubs has enabled more tourism organisations, airlines, casinos and hotel chains in particular to know more about the consumer patterns of their customers (Buhalis, 2003). The airline industry was the first to adopt relationship marketing plans that aimed to bond customers to brands through specific loyalty programs (Kim et al., 2001). From the other side, the hotel industry applied strategies that focused on transactional tactics such as gifts for repeat guests and familiarization tours for meeting planners (Bowen and Shoemaker, 1998). It is also important to mention that investments, required for the development of a CRM system in tourism industry largely depend on the size of the business. In a small firm, it is reasonably easy to stay in contact with travellers personal preferences. The volume of data, which have to processed considerably increases as the business scale and target increase (e.g. for the case of an airline company or a major international hotel chain). For this case, CRM systems need important investments for technological solutions, procedure restructure, as well as human resources (Piccoli et al., 2003; Özgener and øraz, 2006; Mastorakis et al., 2012). In addition, considerable consideration has to be dedicated to mobile marketing and mobile customer relationship management services, due to mobile networks characteristics, offering highly valuable and unique advantages, creating and managing personalized customer relationships. In particular, mobile networks provide companies with great possibilities to build and maintain efficient relationships with their customers, combined with a large reach, low costs, immediate feedback and localization possibilities. Mobile networks are well suited to enhance traditional CRM systems, offering interactivity that allows a company to develop intimate relationships with customers. Moreover, a small number of research approaches has only been proposed so far, focusing on mobile CRM services, elaborating with managing the customer relationship and supporting marketing services (Camponovo et al., 2005; Karamoozian et al., 2012; Sinisalo et al., 2007; Valsecchi et al., 2007), while mobile networks are mainly exploited for sms/mms marketing purposes (Dickinger et al., 2004; Drossos et al., 2007; Rittippant et al., 2009) with a very low impact to design effective mobile marketing strategies. In this

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direction, the basic aim of this chapter is to fill this gap, by recommending a mobile CRM model that is established according to the technological convergence, as well as a real implementation of mobile CRM applications in tourism sector with an efficient analysis. The main principle is to develop and sustain personal connections with each client, increasing common advantage for both parties, via customised, collaborative and value-added advertising based facilities. The underlying confidence is that these individual connections lead to enhanced consumer acquisition, fulfilment and reliability, enabling for better incomes, as well as for a more efficient marketing planning to be performed. In this context, the portfolio of mobile CRM applications according to the proposed model of this chapter, effectively elaborates on several cross-functional procedures, like campaign management, consumer contact and lead administration, offering contract management, as well as customer complaint and retention management. The proposed CRM model is based on the convergence of IMS with iDTV systems and future mobile networks, in order to enable for efficient marketing data processing and analysis in tourism sector. As CRM systems rely upon customers’ information, the proposed model facilitates tourism enterprises and organisations to track customers’ preferences and subsequently provides them superior added value via customized services. As a result, marketers will be able to base much more cost effective marketing decisions on a detailed knowledge of the behaviour and preferences of their existing or potential customers. Towards enabling for an efficient information analysis and processing, data mining methods are proposed, such as predictive visual analytics in order to optimally predict future purchasing patterns. Finally, data revealing mobile users’ preferences is optimally displayed to marketers, through user-friendly interfaces, providing an actual mean to automatically customize services for individual market segments. In this context and according to this introduction, the second section elaborates on a literature review related with mobile CRM approaches that have been proposed by today. After this literature review, the third section is dedicated to present the proposed mobile CRM model based on technology convergence, elaborating on user-friendly web technologies interfaces and issues related with the implementation to collect survey information. The innovation of this model is based on the exploitation of the digital television as a wireless network to deploy mobile CRM systems in comparison to previously published research approaches. The fourth section elaborates on the userfriendly interfaces for an actual mobile customer relationship management system implementation and finally this chapter paper is concluded, by

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highlighting implications of the research and challenges for further investigation.

2. Literature Review on Mobile Customer Relationship Management Enterprises have realized the benefits of synergy among their communication efforts that led advertising agents to offer an integrated marketing communication (IMC) mix. An integrated marketing communication strategy has to employ more than one communication medium, considering the argument that one of the reasons that IMC was developed is the fragmentation of traditional mass media and the emergence of new media. Such media include emerging mobile networks and cutting edge Information Communication Technologies, which are more effective and efficient, regarding message distribution to the targeted group. Interactive media moves viewers from passive to active participants and increases their involvement with the content provided, allowing information to be presented in more aesthetically pleasing and entertaining ways (Schweda, 2005). Additionally, sources that are delivering messages to customers are classified in three categories; planned sources, which are the traditional forms of communication like advertising, the unplanned sources, which are more effective and are not intentionally developed by the company like chat rooms, blogs, comments and behaviour of employees/costumers and the often unconsidered sources like distribution channels, design or technical support services (Mastorakis et al., 2014). In this light, technological achievements have changed already to some degree the most discussed and common in use mean of communication: advertising and its future role on television and mobile networks (Mastorakis et al., 2011). One evolutionary technological development is interactive digital television (iDTV), where tele-viewers are invited to move to a more interactive television world, visit Web addresses and other Internet based applications. Despite the nature of required interaction by advertisers, either offline (not linear and deferred reaction to a received message even through a different medium), or online (which means that a message incites for a simultaneous correspondence from the viewer and simultaneous data exchange with the service provider), this interaction enables the messages from the enterprises to become more personalized to the finest level of one-to-one communication. Most features of the existing forms of mass media are not able to achieve this two way communication model. The new digital networks provide several chances for tourism

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businesses to reach niche markets, through advertising placements in their travel programmes. Enterprises, like Thomas Cook, preserve their own digital television networks, where potential travellers watch films of destinations and make their bookings via interactive connections (Middleton et al., 2009). Digital communication can be achieved, when a user has visited a web page, enabling in this way the web analytics experts to find out several data about the viewers and their preferences. In this direction, several online marketing solutions have been deployed, allowing businesses to reach the maximum possible relationship with their clients to offer multiple choices for their needs (Chaffey and Smith, 2008). The extent to which a company has adapted digital communication as a strategy varies, mainly due to their different orientation, mission, budget and the importance they attribute to the online and two-way communication platforms. However, one of the great advantages that this interaction offers is the development of either online or offline communities around the company’s products. These communities offer important benefits, such as better segmentation through the appropriate management of the input data created by the communities, the overall view of stakeholders, end users and media intermediates, low cost of immediate distribution and increased world of mouth. This open and free dialogue builds strong virtual brand communities, which enhance trust to the company, provide rich information, regarding purchase process, depicts feelings and motivations, which help the company to gain a better behavioural segmentation of the market, improve the direct marketing efforts and expand its CRM system or databases (Mastorakis et al., 2013a). In addition, evolving mobile networks can be used to offer multiple services and applications to mobile users over a large geographical area. Mobile marketing exploits mobile medium, as a communication and entertainment channel between brands and users. This is a perfect personal channel enabling direct, interactive and targeted ubiquitous communication at any time. This channel of marketing can be exploited for mobile devices, including handsets, smart phones, tablets, laptops and PDAs, while communication is feasible through short message services (SMS), multimedia messaging services (MMS) and full multimedia third, fourth or fifth generation (3G, 4G, 5G) services. This way of communication is highly personalized, interactive and has a strong immediate impact. In a general context, mobile marketing has been proven to generate a solid increase in sales.

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Furthermore, interactive digital television systems could play a vital role, towards enabling mobile users to interact with service providers, by utilizing interactivity channels established between customers’ premises and multimedia content providers. More specifically, interactive DVB-H (i.e. Digital Video Broadcasting for Handhelds) networking architectures (Gardikis et al., 2008; Leroux et al., 2007; Mastorakis et al., 2011) have been realized based on a generic interactivity model, enabling for the provision of asymmetric data transfer among the service provider and the mobile users. In such cases, DVB-H channel provides forward data traffic, while reverse data traffic is transferred through several interaction channels (e.g. mobile or wireless networks). According to such configurations, service provider’s side may incorporate both interactive and one way digital television services. Interactive multimedia services include video and audio on demand and Internet facilities, such as WWW access, e-mail services, while one way digital television services include TV programmes that utilize digital transmission formats (Mastorakis, 2011a; Mastorakis et al., 2011). Both interactive and one way services are transmitted into one stream and distributed to mobile users via the digital television delivery media, according to the DVB-H standard. Each user receives the provided services via a mobile handset, while user’s requests for interactive services are forwarded by this device to an interactive interface module that may utilize mobile networks technology. This is essential to address the issue of measurement of the viewing behaviour of mobile users. On the other hand, the delivery of multimedia based services and applications is requested to be increased during the next years. This will create the need for adopting a common Internet based architecture to provide heterogeneous applications and services, while the users will be able to have access to personalized interactive services through any mobile or portable device. Towards satisfying this request, the IP Multimedia Subsystem (IMS) (Bertrand, 2007) was initially standardised to alleviate the gap among present networks and Internet based technologies to enable operators supporting the provision of novel services, as well as attracting new subscribers. IMS is a basic network architecture, which allows the proper communication among different networking entities by exploiting open standards supporting Internet-based interfaces, as well as fixedmobile convergence (Mastorakis, 2011b). IMS comprises of a network architecture that enables the systems integration, which is appropriate to support the provision of multimedia services to end users of wired or mobile networks. An IMS mechanism defines the process on how the services will connect to the underlying network. In addition, IMS-enabled

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broadcasting systems are able to support the provision of heterogeneous services, by interconnecting different communication networks paradigms. Towards this direction, the IMS was standardised to offer personal communication infrastructures, converting television services experience from a personal domain to a social interactive experience (Mastorakis et al., 2013b). More specifically, users profile management will be the basis for further personalized multimedia services experiences, while having a single database that is based on the mobile network models with additions to meet iDTV special needs, can be of a great value for marketing data analysis and planning purposes. In addition, continual advances in mobile technology, the rapid evolution of the mobile services market and its quick rise to maturity, and market dynamics may offer many challenges to marketing (Chen and Ching, 2007). In fact,considerable attention has been devoted lately to mobile marketing and in particular to mobile customer relationship management (mCRM). According to Leppäniemi et al. (2006, p. 10), “mobile marketing is the use of the mobile medium as a means of marketing communications”, while Sinisalo et al. (2006, p. 2) define mobile CRM as “utilizing mobile medium (i.e. mobile phone, smart phone or PDA) for the purpose of managing customer relationships and activate customers to start dialogue with company via mobile medium”. The mobile business industry is rapidly emerging thanks to a set of technologies which potentially enable a large variety of innovative services. In effect, the mobile and personal nature of wireless devices combined with the voice and data transmission capabilities of wireless networks provides a set of unique features such as ubiquity, flexibility, instant connectivity, 24h reachability, localization, personalization, dissemination and convenience which are commonly considered the most valuable distinctive advantages upon which mobile services can build their value proposition (Camponovo et al., 2005; Kim et al., 2008; Nguyen et al., 2007). These characteristics of the mobile medium does confer it highly valuable and unique peculiarities which can be exploited as a complement to other channels to create and manage personalized customer relationships (Camponovo et al., 2005). Due to recent advancements in mobile technology, along with the rapid proliferation and inherent characteristics of mobile devices, the mobile channel has emerged as a new, potential tool for marketing activities (Smutkupt et al., 2010). Moreover, Liljander et al. (2009) argue that mobile phone technology has become sophisticated enough to allow more complex customized programs, which enable companies to offer new

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services to customers as part of customer relationship management programs. As e-business gives organizations competitive advantage, mbusiness promises plenty of opportunity in the future. Wireless changes the way organizations and customers interact with each other (Nguyen et al., 2007). Sinisalo et al. (2006) also mention that the utilization of mobile medium may offer several benefits to both the companies and the customers. The benefits may include learning from and about customers, revealing their needs and interests, and on this basis, making it possible to provide customers with better and more personalized service. Giving personalized communication and services to the clients may increase the emotional bond between the company and the clients (Faed et al., 2011). The potential of mCRM is acknowledged among academics as several authors have highlighted the positive effects for organizations when offering mCRM applications to their customers, with the most important of them related to the increased customer loyalty (Chen and Ching, 2007; Faed et al., 2010; Fjermestad and Romano, 2003) and the enhancement of the brand image of a company (Chen and Ching, 2006; Helenius and Liljander, 2005; Liljander et al., 2009; Nysveen et al., 2005). Tourism has always been at the forefront in embracing technological innovations and it seems that after the Internet, mobile technologies are today most pervasively influencing the industry. The growing field of mTourism is closely linked to the increasing worldwide penetration of smartphones and related mobile applications (Schieder et al., 2014). In particular, it is possible to access a wide variety of tourism and hospitality related mobile applications that, among other things, include gaming, music, communication, social media, news, and booking features (Adukaite et al., 2014). The topic of mobile applications in tourism has been extensively investigated by various scholars, with the main focuses of mTourism-related studies today being mobile tourist guides, locationbased, context-aware and personalization services, Augmented Reality (AR) and travel recommender systems for attractions and destinations, as well as how mobile applications are used or could be used effectively and efficiently by various suppliers such as airlines or hotels (Schieder et al., 2014). Furthermore, recent studies (Dickinson et al., 2014; Kramer et al., 2007; Lamsfus et al., 2013; Wang and Fesenmaier, 2013) have also shed light on how mobile technologies, in particular mobile applications, are actually mediating or impacting the tourist experience and behavior. Apart from significantly easing travelers’ planning behavior, providing them with more flexibility and spontaneity during the on-trip phase, augmenting their

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contextual temporal and spatial awareness, and thus enriching the overall travel experience, smartphones and apps have also been found to direct tourists’ behavior by fundamentally influencing their choices and movements (Schieder et al., 2014). Wang et al. (2010) argue that today’s travelers are constantly seeking for information in order to reduce their uncertainty and they make use of their smartphones as travel assistants throughout all trip phases. Especially before and during the trip, they rely on mobile technologies to simplify the travel by searching for information about transportation, accommodation, attractions and activities. Travelers also use smartphones in order to communicate with others through emails, calls, text messages and social media. Furthermore, the phones also represent self-entertainment tools for gaming, listening to music, photographing, sharing pictures, watching movies or reading news (Adukaite et al., 2014). The penetration of mobile technologies represents today one of the most significant trends in the eTourism domain. Thus, taking into account the growing importance of mobile marketing and mobile CRM, several research approaches have been published, proposing mobile CRM systems and models. The mobile CRM model that is proposed in the next section goes beyond the current state-of-the-art, by elaborating on a novel research approach based on technology convergence. The innovation of this model is based on the exploitation of the digital television as a wireless network to deploy mobile CRM systems in comparison to previously published research approaches that are based on the exploitation of traditional networks to support CRM capabilities and services.

3. Mobile Customer Relationship Management Model Interactive communication among customers and the businesses is crucial, towards establishing an efficient mobile CRM procedure and enabling the fulfilment of the users’ expectations. In this direction, emerging technological solutions can play a crucial role, towards enabling the efficient communication among the businesses and mobile users. Towards allowing an affective relationship to occur among those two parties, the first step for the adoption of a new technology by an enterprise is to exploit several business systems, by using a common interface. In this way, the mobile users can interact and report back their preferences, as well as their needs. The second step includes a data analysis of the results that are the basis, towards adopting new models to understand the real needs of mobile users. In this framework, the new technological solution

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in mobile networks, digital television networks, Internet based technologies, as well as their convergence could play an important role to effectively optimize the process of gathering and analysing data, which are important for mobile marketing and CRM in the tourism sector. A new mobile CRM model may enable customers’ collaboration with company, by utilizing digital media and allowing the use of immediate response communication to create avaluable relationship. Exploitation of interaction channels, according to the generic interactivity model (ETSI, 1997), are also important to transfer mobile users’ requests to the related businesses, via the support of interactive services in iDTV systems. More specifically, Figure 1 depicts the proposed mobile CRM model that enables for the real time collection of data, stemming from mobile customers. This data is stored in the IMS Module/Database of Figure 1, facilitating marketing analysis phase, in order to design and deploy targeted mobile advertising strategies. Data analysis is performed, by exploiting data mining methods, such as predictive visual analytics, facilitating marketers to predict future probabilities and trends based on observed events.

Figure 1 Mobile customer relationship management model.

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The analysis and processing of marketing data that are collected based on the proposed CRM model enables for the efficient realization of the mobile customers’ behaviour and the prediction of their future purchasing configurations. The techniques used for the analysis can be exploited towards recognising the sales performance by product type, geographical section, purchasing characteristics and network strategies. Then demographics and buying behaviour are exploited to define the new services or products that can be introduced into the market of tourism sector. In addition, several social metrics can be used based on predictive analytics models to reproduce particular purchasing data and generate scenarios to confirm the precise combinations for delivery of further tourism products and services. The main target of this predictive analytics approach is enable decision-makers examining several data and taking efficient decisions. For specific decisions, it is advisable to consider the opinion of expert users into the procedures of marketing data planning for introducing creativity and flexibility. Explicit benefit of such analytics process is that the decision makers in the sector of tourism could focus their total perceptual skills into the analytical process, while enabling them to apply innovative computational competences to expand the total process. In this direction and towards addressing all such matters, new methods have to be introduced for effective data analysis. Predictive analytics can be increasingly popular for mobile marketing and CRM, providing useful techniques and applications for optimum design of advertising strategies.

4. User-friendly Interfaces for Mobile Customer Relationship Management Systems Implementation There are two main demands for the display of information in the proposed CRM model of this chapter. The first one is associated with the presentation on the client-side (i.e. mobile viewers), while the second one elaborates on the presentation of the gathered information to marketers. For both cases, Web Technologies (HTML5/CSS/JS) can be utilized for optimum results. On the client-side, the new capabilities of HTML5 can produce impressive, TV quality, graphics, effects, text and of course video (Daoust et al., 2010), that is user-controlled using JS. Information can be gathered in real-time using Ajax technology to send and receive data to/from the server database. On the marketers’ side, HTML5 can be exploited to achieve real-time, easy-to-read visualization of the gathered data. One important advantage of real-time data visualization is that it is highly customizable and interactive, to allow the extraction of the most

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useful information. Also, since such web technologies are compatible with most devices, and are not based on a platform specific API, the analytics will easily be available on numerous devices, such as regular PCs, TVs, tablets and mobile devices.

iDTV Commercial (iDTVC) implementation for gathering survey information from mobile users Interactive marketing is one of the most remarkable new features, particularly for CRM professionals. Several new systems support the provision of marketing services, like instant purchase (T-Commerce), social media exploitation, on-demand product descriptions, newsletter subscriptions, as well as customer surveys. Towards validating and testing the proposed concept of this chapter, an interactive mobile television application was developed, where mobile viewers watch a video TV-Spot offering an option to interact with an overlaid questionnaire that will gather information and then store the input data to the IMS databases. While video is playing, questions are overlaid using HTML text and CSS3 transaction effects. The smooth transitions are important for a more TVlike experience and avoid looking like off-place content from another medium, such as a PC. The mobile viewer can choose to respond to the questions using the remote control, while this is managed using JavaScript event handling. At the end of this video, after the questionnaire is completed, requested data is sentand stored over the proposed network to the IMS databases, along with other collected data, such as location information, language etc. It is important to note here, that this iDTV application is also universally compatible with most interactive devices that exploit a browser and handle HTML and JavaScript. Figures 2 and 3 depict related screenshots from a mobile device incorporating the application developed for marketing purposes based on the proposed model.

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Figure 2 Introoductory HTML L5 text informin ng users about tthe questionnaiire.

Figure 3 Sam mple video-relateed interactive question. q

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Real-time data presentation on the marketer-side For a system with a big amount of data from various mining methods, data visualization is vital, so that it can be of actual use to the marketing professionals. A great example of real-time data representation on the web can be seen in Google’s Analytics system (Figure 4), which is a tool for the website administrator to view visualized data of site traffic. The system uses the new HTML5 features, along with CSS, JavaScript and Ajax web technologies to represent complex data into graphs, charts and tables, with the ability for real time manipulation and filtering from the user. A very important role in this is the new HTML5 Scalable Vector Graphics (SVG) and Canvas objects, where web code can be used for drawing real-time graphics on a web-page, a feature that was previously impossible in older HTML versions. SVG is a language used for the description of twodimensional graphics in XML. SVG enables for three types of graphic objects: vector graphic shapes (e.g. paths consisting of straight lines and curves), multimedia (such as raster images, video, and audio) and text. Graphical objects can be grouped, styled, transformed and composited into previously rendered objects (W3C, 2008). Additionally, there are available JavaScript libraries, such as WIJMO, that can assist in rapidly visualizing data on the web browser, by providing UI widgets and utilizing the jQuery libraries (ComponentOne, 2012) to easily create Charts, Graphs, Forms, Trees and many other visualization objects. Using the aforementioned tools, the system can provide very useful real-time visualization of the mined data, which will be available from a web-browser, as a SaaS (Software as a Service), compatible with multiple devices.

Figure 4 HTML5 real-time graphical representation of data.

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5. Discussion and Conclusion This chapter studies the convergence of IMS, as an emerging technological solution, to be adopted in sophisticated mobile networks and iDTV systems and support the provision of cutting-edge capabilities, as well as added-value services. Considering such emerging technological advances, this chapter elaborates on a convergence model that can be adopted as a new research paradigm in tourism CRM. In an unstable and unpredictable environment of tourist sector, characterized by strong competition and sophisticated demand, the implementation of CRM concepts with focus at development of high quality relationships with consumers and stakeholders is becoming imperative of gaining a competitive advantage. Guaranteeing travellers’ satisfaction is a safe method to make current customers loyal, as well as attract new prospective ones. The overall target of CRM is to enable marketers to track existing and potential customers’ preferences and subsequently give them superior value via customized service. The proposed model allows for a more effective procedure to take place, by gathering and processing data from mobile users that is vital for optimum marketing planning. In addition, the proposed data mining methods and web technologies enhance the proposed research approach, towards facilitating for an effective marketing data analysis and an efficient way to automatically customize services for individual mobile customers or market segments, respectively. The proposed CRM model could be a part of the tourism firms’ marketing strategy, providing an extra way for collecting qualitative customer data through mobile devices which today are an essential tool for every tourist. In fact, mobile devices have completely changed the way tourists search for information and buy their travel services, impacting the whole travel industry. Travelers are now equipped with advanced smartphones, tablets and laptops which allow them to enhance their holiday experience, doing everything from researching destinations to booking hotels and even giving online feedback. Having in mind that today there is a wide availability of free Wi-Fi across many airports, businesses and destinations, the tourism enterprises have tremendous opportunity to reach travelers and enhance their brand. It is clear that mobile is impacting every step of the travel process and tourism firms that do not have a mobile presence are likely to face a competitive disadvantage and a loss of sales. On the other hand, firms which have a mobile marketing strategy need to think optimizing it by adding new and emerging features.

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Finally, several open issues will be considered for further investigation and research. The proposed approach will be extended in the future considering cloud computing approaches that will be studied to enhance the current research. In addition to cloud computing approaches, in future analysis empirical researches could be carried out in order to appreciate the added-value for tourism enterprises generated by the use of mobile CRM and in order to examine the consumer willingness to adopt the mobile technology and the existing barriers to a wide adoption. Dr. George Mastorakis received his B.Eng. in Electronic Engineering from UMIST, UK in 2000, his M.Sc. in Telecommunications from UCL, UK in 2001 and his Ph.D. in Telecommunications from University of the Aegean, Greece in 2008. He is serving as an Assistant Professor at Technological Educational Institute of Crete and as a Research Associate in Research & Development of Telecommunications Systems Laboratory at Centre for Technological Research of Crete, Greece. Dr. Nikolaos Trihas holds a B.Sc. from the Department of Business Administration at the University of the Aegean, Greece, a Master Degree (M.Sc.) from the Interdepartmental Program in “Tourism Planning, Administration and Policy” and a PhD in e-Tourism from the same university. Currently, he is a lecturer at the Technological Educational Institute (T.E.I.) of Crete, where he lectures courses on marketing. Mr. Emmanouil Perakakis is a full-time Application Professor at the Department Business Administration (Agios Nikolaos) at the Technological Educational Institute of Crete. He holds a B.Sc. degree in Computer Science from the University of Essex and a M.Sc. in Advanced Computing (Internet Technologies and Multimedia) from the University of Bristol. Since 2011 he is a part-time Ph.D. student at Brunel University, researching UX web design for the internet connected TV. Dr. Ioannis Kopanakis is an Associate Professor and Vice Rector at the Technological Educational Institute of Crete. He holds a Diploma in computer science from the University of Crete (1998), Greece, a M.Sc. in information technology (1999) and a Ph.D. in computation (2003), both from UMIST, UK. He is the scientific Director of the e-Business Intelligence Lab (www.e-BILab.gr).

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Dr. Constandinos X. Mavromoustakis is currently an Associate Professor at the Department of Computer Science at the University of Nicosia, Cyprus. He received a five-year dipl.Eng in Electronic and Computer Engineering from Technical University of Crete, Greece, his M.Sc. in Telecommunications from University College of London, UK and his Ph.D. from the Department of Informatics at Aristotle University of Thessaloniki, Greece.

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convergence: a novel approach adopted in interactive marketing”, paper presented at the 4th Annual EuroMed Conference of the EuroMed Academy of Business. Mastorakis, G., Pallis, E., Zacharopoulos, V., and Bourdena, A. (2011), “New Business Strategies and Marketing Opportunities Utilizing a Liberalized Spectrum Management Framework”, WSEAS TRANSACTIONS on BUSINESS and ECONOMICS, Vol. 8, No. 2, pp. 39-49. Mastorakis, G., Bourdena, A., Pallis, E., and Zacharopoulos, V. (2011), “New Business Strategies and Marketing Opportunities Exploiting TV White Spaces”, paper presented at the 5th International Conference on Management, Marketing and Finances, MMF’11, Meloneras, Gran Canaria, Canary Islands, Spain. Mastorakis, G., Trihas, N., Karditsis, I., and Kopanakis, I. (2012), “Tourism relationship marketing empowered by the convergence of IP multimedia subsystem and interactive digital television”, paper presented at the International Conference on Contemporary Marketing Issues (ICCMI 2012), Thessaloniki, Greece. Mastorakis, G., Trihas, N., Perakakis, E. and Kopanakis, I. (2013a), “Adopting Network Multimedia Systems in Interactive Digital Television: A Strategic Method towards Enhancing Tourism Relationship Marketing”, in Cantoni L. and Xiang Z. (Eds.), Information and Communication Technologies in Tourism 2013, Springer, Wien, pp. 472-482. Mastorakis, G., Trihas, N., Perakakis, E., and Kopanakis, I. (2013b), “A Technology Convergence Model Adopted in Tourism Relationship Marketing”, paper presented at the 7th International Conference on Management, Marketing and Finances, MMF’13, Cambridge, USA. Mastorakis, G., Trihas, N., Perakakis, E. and Kopanakis, I. (2014), “ECRM in tourism exploiting emerging information and communication technologies”, Anatolia: An International Journal of Tourism and Hospitality Research, forthcoming. Middleton, V.T.C., Fyall, A., Morgan, M. and Ranchhod, A. (2009), Marketing in Travel and Tourism, Butterworth-Heinemann, Oxford. Nguyen, T.H., Sherif, J.S. and Newby, M. (2007), “Strategies for successful CRM implementation”, Information Management & Computer Security, Vol. 15, No. 2, pp. 102-115. Nysveen, H., Pedersen, P.E., Thorbjørnsen, H. and Berthon, P. (2005), “Mobilizing the brand. The effects of mobile services on brand relationships and the main channel use”, Journal of Service Research, Vol. 7, No. 3, pp. 257-276.

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Leroux, P., Verstraete, V., De Turck, F. and Demeester, P. (2007), “Synchronized interactive services for mobile devices over IPDC/DVB-H and UMTS”, in Broadband Convergence Networks, 2007. BcN'07. 2nd IEEE/IFIP International Workshop on (pp. 1-12). IEEE. Özgener, ù. and øraz, R. (2006), “Customer relationship management in small–medium enterprises: The case of Turkish tourism industry”, Tourism Management, Vol. 27, No. 6, pp.1356-1363. Piccoli, G., O’Connor, P., Capaccioli, C. and Alvarez, R. (2003), “Customer Relationship Management – A Driver for Change in the Structure of the U.S. Lodging Industry”, Cornell Hotel and Restaurant Administration Quarterly, Vol. 44, pp.61-73. Rittippant, N., Witthayawarakul, J., Limpiti, P. and Lertdejdecha, N. (2009), “Consumers’ perception of the effectiveness of Short Message Service (SMS) and Multimedia Message Service (MMS) as marketing tools”, World Academy of Science, Engineering and Technology, Vol. 53, pp. 815-821. Sigala, M. (2005), “Integrating customer relationship management in hotel operations: managerial and operational implications”, International Journal of Hospitality Management, Vol. 24, No. 3, pp.391-413. Sinisalo, J., Salo, J., Karjaluoto, H. and Leppaniemi, M. (2006), “Managing Customer Relationships through Mobile Medium Underlying Issues and Opportunities”, paper presented at the 39th Hawaii International Conference on System Sciences. Sinisalo, J., Salo, J., Karjaluoto, H. and Leppäniemi, M. (2007), “Mobile customer relationship management: underlying issues and challenges”, Business Process Management Journal, Vol. 13, No. 6, pp. 771-787. Schieder, T.K., Adukaite, A. and Cantoni, L. (2014), “Mobile Apps Devoted to UNESCO World Heritage Sites: A Map”, in Xiang, Z. and Tussyadiah, I. (Eds.), Information and Communication Technologies in Tourism 2014, Springer, Cham, pp. 17-30. Schweda, A. (2005), “The Influence of Interactive Media upon the Adoption of Interactive Television for Holiday Planning”, in Frew A.J. (Ed.), Information and Communication Technologies in Tourism 2005, Springer,Wien, pp. 474-485. Smutkupt, P., Krairit, D. and Esichaikul, V. (2010), “Mobile Marketing: Implications for Marketing Strategies”, International Journal of Mobile Marketing, Vol. 5, No. 2, pp. 126-139. Trihas, N., Mastorakis, G., Perakakis, E. and Kopanakis, I. (2013), “Efficient e-Marketing in Tourism through a Novel Customer

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Relationship Management Model”, GSTF International Journal on Business Review, Vol. 3, No. 1, pp. 135-140. Valsecchi, M., Renga, F. M. and Rangone, A. (2007),“Mobile customer relationship management: an exploratory analysis of Italian applications”, Business Process Management Journal, Vol. 13, No. 6, pp. 755-770. Vogt, C. (2011), “Customer Relationship Management in Tourism: Management Needs and Research Applications”, Journal of Travel Research, Vol. 50, No. 4, pp.356-364. W3C (2008), “Scalable Vector Graphics (SVG) Tiny 1.2 Specification”, available at: http://www.w3.org/TR/SVGTiny12/ (accessed 10 November 2012). Wang, D. and Fesenmaier, D.R. (2013), “Transforming the Travel Experience: The Use of Smartphones for Travel”, in Cantoni, L. and Xiang, Z. (Eds.), Information and Communication Technologies in Tourism 2013, Springer, Berlin and Heidelberg, pp. 58-69. Wang, D., Park, S. and Fesenmaier, D.R. (2010), “An Examination of Information Services and Smartphone Applications”, in Proceedings of 16th Annual Graduate Student Research Conference in Hospitality and Tourism. Houston, TX. Wilde, S. (2011), Customer Knowledge Management. Improving Customer Relationship through Knowledge Application, Springer, Heidelberg. Wu, S.-I. and Lu, C.-L. (2012), “The relationship between CRM, RM, and business performance: A study of the hotel industry in Taiwan”, International Journal of Hospitality Management, Vol. 31, No. 1, pp. 276-285.

CHAPTER EIGHT WORK-BASED LEARNING AS AN INTEGRATED CURRICULUM: ENHANCING GRADUATE EMPLOYABILITY IN A CHANGING HIGHER EDUCATION LANDSCAPE? NIKI KYRIAKIDOU, SENIOR LECTURER, LEEDS BECKETT UNIVERSITY, FACULTY OF BUSINESS AND LAW, UK

SALLYANN HALLIDAY RESEARCH FELLOW, LEEDS BECKETT UNIVERSITY, FACULTY OF BUSINESS AND LAW, UK

AND STEFANOS NACHMIAS SENIOR LECTURER, YORK ST JOHN UNIVERSITY, YORK ST JOHN BUSINESS SCHOOL, UK

1. Introduction Recent changes in the socio-economic environment have transformed the UK labour market. Research findings suggest that there will be an increase in the demand for higher level skills by 2020 and projected a continued polarisation of the labour market across the UK (UKCES, 2014). One in five jobs (20%) now require degree level skills and the proportion is likely to rise in the years ahead (CBI, 2012). However, in an increasingly competitive labour market, employers are looking beyond simple academic achievement when considering applicants for a job. Thus, there is an increasing focus on employability in higher education (HE) and how graduate skills should be developed and enhanced (Knight and Yorke,

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2013). For example, appropriate employability skills are now the most important factor taken into account when businesses recruit graduates, with four in five employers (81%) valuing these skills above other factors such as degree subject (70%) and class (46%) (CBI, 2012). This chapter draws on qualitative case study work undertaken with Higher Education Institutions (HEIs) as part of a large European Union Lifelong Learning (ERASMUS) Programme funded research project lead by researchers in the Faculty of Business and Law at Leeds Beckett University, UK (Work Based Learning as an Integrated Curriculum: Partnership Development and Delivery by HE and the Labour Market) and research undertaken with employers by researchers at York St John Business School, York St John University, UK. For both pieces of research, the aim was to explore the development of appropriate skills and abilities through work-based learning which assimilates the business environment and equips students with the necessary skills and competences that reflect the requirements of the business community. Given there is a need to distinguish the difference between employment as a graduate outcome and the pedagogy aspects of employment skills, this chapter will explore and discuss how a work-based learning as an integrated curriculum approach could be used to help meet the managers' demand for ‘employable’ graduates.

2. Graduate employability in a changing Higher Education landscape: The case of the UK The HE landscape in the UK is changing, with recent reviews of HE reinforcing the importance of universities making an increased and enhanced contribution to the economy and society more generally (Knight and Yorke, 2013; Wilton, 2011). Changes in the labour market, skills requirements and employers expectations have resulted in increased pressure on HEIs to provide degree programmes that develop essential skills and attributes (Tymon, 2013). The Wilson Review (2012) highlighted the central role that universities play in providing these highlevel skills, a world-class research base and a culture of enquiry and innovation. Employability is a complex term to be defined due to its multidimensional nature: the employer, the student and the HE. In general terms, graduate employability is a critical issue for policy makers, HEIs and employers. Employability is considered as ‘a set of achievements, skills, understandings and personal attributes that make graduates more likely to gain employment and be successful in their chosen occupations’ (Yorke and Knight, 2006:56). This consists of a broad range of academic and non-academic skills or softer skills and abilities which are of value in

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the modern workplace. It is, essentially, about being capable of getting and keeping fulfilling work. It is the capability to move self-sufficiently within the labour market to realise potential through sustainable employment (Hillage and Pollard, 1998). Nevertheless, the current trend of placing increased emphasis on graduates skills has raised criticisms since it threatens other developmental outcomes, such as self-actualisation, passion and wisdom (Brown and Hesketh, 2004). Employability is primarily determined by the labour market rather than the capabilities of individuals. This shows the different approaches to graduate employability and the range of factors that are encompassed in the term. Employability is constructed as primarily a matter of an individual’s skills necessary to move self-sufficiently within the labour market (Yorke and Knight, 2006). This raises questions as to what extent graduates can move effectively to the labour market and fully utilise graduate skills. Evidence suggests that graduates have not developed appropriate skills in their degree programmes needed for the modern workplace (Cumming, 2010). Possession of a university degree is assumed to provide access to a graduate job, where graduates secure employment and predictable career progression (Purcell and Elias, 2004). However, it is no longer possible to talk of a uniform graduate labour market with any degree of accuracy. The emergence of the recession and changes in HE tuition fee structure are having an impact upon graduate employability (HEFCE, 2012). There is, arguably, the ‘graduatisation’ of jobs as many graduates search for employment in areas where financial rewards and qualifications are often to be less than expected (Connor and Shaw, 2008). The imperative now is ‘employability for life’ with a less optimal match between academic qualifications and employers expectations (Tomlinson, 2007). Elias and Purcell’s (2003) typology of graduate occupations highlights the fragmented nature of graduate employment. They suggest that the proportion of graduates claiming their academic qualifications were required for their jobs declined consistently from the traditional graduate job (over 90%), to the non-graduate job (approximately 33%). It should be noted that there was a marked fall in the proportion of graduates in nongraduate jobs claiming they did not require their academic qualifications compared to the category of ‘niche graduate jobs’ where the proportion was approximately 62%. Non-graduate occupations are those where “graduates are…likely to constitute under-utilisation of their HE skills and

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knowledge”(Elias and Purcell, 2013). Included as examples are sales assistants, filing and record clerks, routine laboratory testers, debt, rent and cash collectors (Elias and Purcell, 2003).

3. Employers perception and expectations on graduate employability A modern, competitive economy needs workers who have skills, knowledge and attitudes that can be taken to any work situation, and the ability and willingness to continually adapt and prosper in a changing world. One in five jobs now require degree-level skills, and the proportion is likely to rise in the years ahead (CBI, 2012)1. In many employment sectors, employers are looking for ‘work-ready’ graduates with clear evidence of such skills in addition to high level graduate attributes. However, it seems that there is a divide between the ‘business perspective’ and the ‘academic perspective’ as current graduate-level skills and competencies are not able to be fully utilised. Employers frequently criticise HE for the lack of ‘work-readiness’, business awareness and employability skills required for graduate-entry level employees to ‘hit the ground running’ (Wilton, 2008). For example, a survey by the Confederation of British Industry (CBI, 2006) suggested that almost a third of employers considered graduates lacking in generic employability skills. Archer and Davidson (2008) explored employers’ attitude towards graduate employment. Their results demonstrated some dissatisfaction around graduates’ skills (233 employers surveyed), particularly relating to commercial awareness, analysis and decision-making, communication and literacy. Branine (2008) further supports such findings - he found that 60% of the participants (survey of 700 UK-based employers) mentioned problems of poor-quality graduates in terms of employability skills. In an increasingly competitive employment market, employers are looking beyond simple academic achievement when considering applicants for a job. It seems that graduates hold satisfactory qualifications (Cumming, 2010); however, they are lacking key soft skills and qualities to undertake complex tasks (Archer and Davison, 2008). Employability skills are now the most important factor taken into account when businesses recruit 1

CBI (2012), Learning to Grow: What Employers need from Education and Skills: Education and Skills Survey 2012. CBI, London.

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graduates, with four in five employers (81%) valuing these skills above other factors such as degree subject (70%) and class (46%) (CBI, 2012). Many employers now expect to see evidence of other skills and achievements that boost someone’s attractiveness as a potential employee. Employers want graduates who not only add value but who have the skills to have an immediate contribution to the workplace in the face of continuous and rapid economic and technological changes (CBI, 2008). Research undertaken exploring employers’ perceptions of the employability skills of new graduates has found that while there are variations in the exact definition of employability, there is a broad understanding of what qualities, characteristics, skills and knowledge constitute employability both in general, and specifically to graduates. Employers expect graduates to have technical and discipline competences from their degrees, but also require graduates to demonstrate a range of broader skills and attributes that include team-working, communication, leadership, critical thinking, problem solving and managerial abilities (Lowden et al., 2011; Saunders and Zuzel, 2010; Archer and Davison, 2008). The picture is less promising in Small and Medium-sized organisations (SMEs) as most employers have the general perception that the work they have to offer is unsuitable for graduate skills (Hart and Barratt, 2009). Evidence suggests that graduates are not prepared to make the cultural leap from the academic to the business world due to deficiencies in ‘core and transferable skills’ (Branine, 2008). Graduates are not equipped with interpersonal skills and are lacking in business sense (Smith et al., 2004). The paradox is that many SME managers and owners complain about the lack of appropriate skills in the graduate labour market with respect to filling their vacancies (Martin and Chapman, 2006). This sentiment is supported in research conducted by Woods and Dennis (2009), where they investigated SMEs’ perception about employing graduates. They found that while nearly 60 per cent of respondents reported that their firms needed graduates, only 22% felt that the graduates they had seen were well prepared for the ‘world of work’. Despite the ambiguity, there is evidence that supports graduate contributions to SME success. Hunt et al. (2007), highlight the importance of graduate skills and knowledge on the basis of improved SME performance. Holden and Jameson (2002) go a step further and argue that a contribution cannot be expected simply by virtue of employing a

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graduate. A matching of the individual and job must take place, and knowledge transfer must be actively encouraged. One of her caveats of relevance to the discussion here is the notion that employers always know best when it comes to determining skills needs. Wolf (2004) argues that while an individual employer will know what they need in terms of workforce skills, employer organisations are no better at determining education policy than central government. The issue of student employability is clearly increasingly important, with growing interest from a range of stakeholders including employers, students and policy makers associated with the labour market destinations of graduates.

4. Understanding work-based learning Given that practical skills and knowledge are becoming increasingly important for success in the workplace, HEIs that offer work related programmes of learning can arguably provide a bridge for the student between the academic present and their professional future employment (Patrick et al., 2009; Martin and Rees, 2012). Policy debates in this area increasingly highlight a need (and more importantly perhaps) a demand for an improved alignment of education and industry and the importance of preparing graduates for ‘the world of work’ and the future labour market. The main argument here is that perhaps a more integrated curriculum design is the future direction for HEIs to move towards given the ‘cost’ of education’ and the lack of congruence between business practice and the university curriculum. Such ambiguity results in higher education becoming constrained with little relevance for practitioners (Duane, 2012). This confirms Garvey and Williamson’s (2001) call for the development of an ‘open’ curriculum (context boundaries loose, loose classification and evaluation uncertain but to circumstances and need) which is necessary to offer a more ‘subjectivist’ approach to curriculum design, allowing learners to take control over learning and skills development. Work-based learning is perceived as a core pedagogical tool in HE. The term ‘work-based learning’ logically refers to all and any learning that is situated in the workplace or arises directly out of workplace concerns. It is planned activities that educators use to develop knowledge, skills and understanding of the work context through the experience of work, learning about work and working practices, and learning through the skills for work (Quality and Curriculum Authority, 2013). Work-based learning is not only about developing skills within the educational institutions, but

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also a process of reinventing, refreshing and renewing work related skills aiming to enhance student employability prospects. It is a process where students learn about their capabilities and career prospects, practising skills, experiencing the world of work and learn how to manage workbased problems (Knight and Yorke, 2004). According to Zhang and Kyriakidou (2014:96): there are various forms of work-based learning interventions linked with different set of needs and roles within an organisation. It varies from Experiential (which is learners’ centre) to didactic (which is trainers’ centred); from on- the- job to off- the- job training; and from individual to group learning needs. For example, Marchington and Wilkinson (1998) categorised training and learning methods according to two dimensions, namely pedagogical/andragogical and individually or group- based. Simmonds (2003) categorised learning interventions based on locations (that is on-the job and off-the job training methods). In additions, Gudykunst and Hammer (1983) differentiate learning methods on didactic (for example lectures) and experiential (for example action learning.

Didactic • Benefits • Challenges

• Benefits • Challenges Lecture

Lecture

Discussion

Discussion

Repeated instruction and practice

Case study E-learning

DLI

On the job

Off the job

Role play

Coaching Shadowing

Simulation games

Mentoring Budding

• Benefits • Challenges

Action learning Sitting by Nellie

Site visits Reflective journals

• Benefits • Challenges

Experiential Source: Zhang and Kyriakidou in Stewart and Cuteron, (2014:96)

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Reflecting on the figure, there are various work-based training methods that can enhance the learning experience of the trainer based on his/her learning styles and needs. Each of the training methods is associated with particular learning intervention, all of which have benefits and challenges.. Lecture

Discussion

Case study

Simulations

Group dynamics

E-learning Off-the-job skill instruction On-the-job training

Coaching

A structured presentation to covey required information, for example product knowledge, new policy/ procedure. Free exchange of information and ideas, but working to a clear brief provided by the trainer, for example a discussion of barriers to effective internal communications. Presentation of scenario (real or fictitious) describing organisational practice and behaviour. Trainees are asked to analyse the documented problem and/or reflect on described practice, for example an unfair dismissal case, a financial problem, departmental reorganisation. Provides realistic scenarios for developing managerial skills in strategic decision-making and operations management in virtual reality (Stewart and Rigg, 2011, p.209). Learners are put into groups to carry out a simulated exercise and behaviour is examined, for example group decision-making, intergroup conflict, intragroup communication. Learning is delivered through the internet or an organization’s intranet. A skill is taught by explanation, demonstration and practice, for example how to operate a computer. Sometimes referred to as “sitting by Nellie”. Training is undertaken at the workplace, often involving demonstration followed by supervised practice. Often used by semi-skilled jobs but potential for developing individual skills in all types of work. Developing a person’s skills and knowledge so that their job performance improves, hopefully leading to the achievement of organisational objectives. It targets high-performance and improvement at work, although it may also have an impact on an individual’s private life. It usually lasts for a short period and focuses on specific skills and goals (CIPD, 2010).

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Exercise/project

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Relates primary to the identification and nurturing of potential for the whole person. It can be a long-term relationship, where goals may change but are always set by the learner. The learner owns both the goals and the process (Clutterbuck and Megginson, 2005). Learners asked to undertake a particular work-related task, leading to a required outcome, for example, computerizing client records or setting up a staff absence control system. Involves a small group of people meeting together at regular intervals to work on one or more issues that they can explore through questioning each other and they can take action to experiment with potential resolutions (Stewart and Rigg, 2011).

Source: Adapted from Glaister et al. 2013: 166-169 (in Stewart, J., Gold, J., Holden, R., Iles, P. and Beardwell, J. 'Encountering HRD' in Human Resource Development: Theory & Practice).

Work-based learning also has support from the authentic learning literature. A critical element of authentic learning is the notion of the ‘community of practice’ where students are exposed into the ‘real world’ via learning activities that seek to simulate aspects of the authentic work conditions (Bennett, 2005). The underlying argument here refers to authentic learning as an intrinsic part of the learning experience where knowledge is entangled in a wide variety of work situations. Authentic learning has also been seen as an enmind process where learners are engaging with the discipline as an authentic activity. The term authenticity is perceived as intersections of the situated lived experiences (of the students) and the disciplinary ‘mind, expressed through planned and enacted pedagogical context and events (Stein, Isaacs & Andrews, 2004). Nevertheless, perspectives agree that authentic learning intentionally integrates knowledge and practice. It acts as ‘portable skills’ that newcomers to any discipline have the most difficulty acquiring on their own judgments and synthesises the ability to explain unfamiliar business context (Lombardi, 2007). The following case study (Case Study 1) provides a critical perspective into work-based learning and how it can be embedded into curriculum.

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Case Study 1: The University of Chester The University of Chester has been adopting approaches to curriculum development that have involved developing the means to accredit learning that occurs in and through the workplace. Work based and integrative study programmes (WBIS) are managed through the University’s Centre for Work Based Studies (CWRS). They facilitate learning across a range of areas, and at the heart of their approach and philosophy is the recognition that knowledge capital rests outside the academy. Work-based learning (WBL) provision at Chester reflected political considerations that sought to include ‘enterprise’ within Higher Education curricula and encouraged Universities to prepare students for work through effective site of learning. WBIS was first validated in 1998 and is one of the oldest negotiated WBL Frameworks in the UK. Prior to the development of WBIS, there was drive from within Chester as an Institution to create a ‘shell framework’ of negotiated WBL to respond to individual learner needs and engage with employers to deliver flexible, tailored programmes of learning. WBIS is a framework comprising of two programmes. The postgraduate modular programme (accreditation framework for work based and work related learning) and the undergraduate modular programme (Enhancing your employability through WBL). These programmes provide an accreditation mechanism for work based and work related learning for National Qualifications Framework (NQF) levels 4-7. Specific prevalidated modules have been written for the programmes within the framework. An example of WBL as an integrated curriculum is the programme developed for the ‘Forum of Disability Centres (UK) Education. The philosophy of the programme is one of self-directed learning, allowing participants to explore areas of professional interest to develop evidenced based practice and new ways of thinking within the mobility sector. WBIS places a strong emphasis on reflective practice and learning that is closely related to the workplace. The Forum was interested in how students apply their learning and how they can evidence this in terms of their assignment that was reflected in the WBIS Framework. The Forum sought to devise an education programme through WBIS to meet their needs by developing the following modules:

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x

Professional Roles and Responsibilities This module is designed to help participants gain a deeper understanding of professional practice and the legislative frameworks that are relevant to the work of Mobility Centres. Through completion of this module individuals are able to demonstrate a deeper understanding of the responsibilities of their role and critically reflect upon current practices within the mobility sector.

x

Understanding Medical Conditions and their Impact on Driving Skills The purpose of this module is to enable participants to demonstrate a deeper understanding of the interplay between physiological and psychological conditions and their impact upon the driving function. Upon completion participants are able to critically evaluate current workplace practices in relation to the assessment of fitness to drive and are able to demonstrate enhanced understanding of the legislative requirements for drivers with medical conditions.

x

Assessment and Evaluation of Fitness to Drive The completion of this module enables participants to expand upon their understanding of how physical and cognitive disorders can influence fitness to drive. Through consideration of the legal, technical, and safety implications that relate to vehicle adaptation, as well as gaining a deeper understanding of the cognitive constructs that combine during driving, participants are able to critically evaluate current assessment methodologies and workplace practices.

The flexible aspects of the Framework allow the design and delivery of work-based learning that ranges from individualised negotiated programmes of learning (individual routes) to corporate programmes of learning (corporate routes) developed and designed in collaboration with individual employers and groups of employers. WBIS is also used with employers to undertake accreditation of their in-house programmes (‘codelivery’). Employees start the programme when it suits them and they do not have to follow an academic year rigidly. Students/employees find it more obviously applicable to their roles than separate study. The employees undertaking this training are ‘Driving Advisers’ (who are typically clinicians or people with a driving background).

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Through a rolling programme of activity, Driving Advisers complete all three modules, however, with the flexibility of the negotiated learning structure of the WBIS framework, there are also opportunities to elect to complete single modules (if appropriate to an individual’s role within a Centre). The successful delivery of this provision is determined by the quality of the staff developing and delivering the curriculum. The Forum tutor team comprises of experienced practitioners within the mobility sector and every Forum tutor completes additional training with the University of Chester to ensure they can offer appropriate academic guidance and support to learners. Evaluation is undertaken through module feedback, workshop feedback forms, Internal monitoring processes, staff-student committees (1 per month). A management group oversees WBIS corporate programmes. As part of WBIS, CWRS have developed with the University for Industry and the University of Derby an ‘exit review and forward planning’ module (this was a taught and assessed module running over a full academic year originally – which has been changed). It encourages students to use it as a way of looking back at what met their expectations, what worked well and what didn’t work well. This is viewed as a useful evaluation mechanism since it goes into depth and is a good way to get feedback on the programme. Currently, this approach to evaluation and feedback is not commonplace across Higher Education Institutions who have WBL Frameworks in operation. Generally, the WBIS programme team feel that it is difficult to assess the impact of the programme in the workplace, across multiple sites. The Forum of Disability Centres (The Forum of Disability Centres (UK) education programme) reports that WBL improves the competencies of staff working in the Mobility Centres. WBL validates the Forum’s accreditation processes and it makes them stronger as an organisation in terms of their relationships with funders and their ability to influence policy. At the current time, the participation and involvement of staff in this training does not save the organisation/the Forum of Disability Centres money. There are, however, quality improvements that represent Value for Money in the view of the organisation.

Work-based learning could be adapted through authentic or ill-defined problem tasks, integrated assessment approaches (both summative and formative), collaboration and reflection activities, multiple interpretations,

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utilisation of market data, and discipline task and real word problems and simulations that are loosely related to the discipline (Lombardi, 2007; Herrington & Oliver, 1999). Weber and Englehart (2011) highlighted the need to provide distinctive learning opportunities including capstone projects, service learning projects, team teaching and integrative case studies. Such activities allow educators to adopt activities which have realworld relevance. Work-based learning could inform appropriate assessment strategies to provide a platform to foster open-ended inquiry and stimulate self-directed learning (Rule, 2006). Many HEIs offer work placements opportunities either as extra curriculum activity or work-based learning modules as part of the programme. Work placements are seen as an effective applied method of inculcating appropriate awareness, skills and abilities in graduates and promote productive collaboration and partnerships between HEIs and employers (UKCES, 2009). The following case study (Case Study 2) highlights the need to integrate curriculum development and practices, and enable students to get ‘first hand’ experience of the real world of work. Case Study 2: The University of Northumbria The Corporate and Executive Development Centre is a small centre of staff based in Northumbria Business School. Their work focuses on the delivery of WBL programmes at UG and PG level and they also deliver non-accredited programmes (e.g. short courses). The Centre has a number of examples of working with employers to create ‘bespoke’ programmes that meet particular needs. The Centre makes use of Northumbria’s ‘Work Based Learning Framework’ to explore how they can create modules that build up credits to create an accredited programme for an employer, with the standard WBL programme validation process used to create modules and programmes to meet employer’s needs. Employers are recruited by the Business School to be a ‘partner organisation’. As a partner organisation, they agree to take students on a two-year work-based ‘Learning Partnership’, recruiting them to a suitable position which provides a ‘graduate level’ role. Working with employers, the University promotes the opportunity within the company to students and employers select those who meet their required selection criteria. Once students are recruited, they are managed by the employer as a full time employee and the University supports them through regular placement visits, by an Academic Performance Coach, to ensure that everything is going well.

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Critical Success Factors/Good Practice Market Need x Developing this type of provision was seen as a way for Northumbria Business School to provide employers with what they are looking for. As such, the external environment played a key role in the development of the programme. x The programme design facilitates employers being able to recruit early the best student talent prior to graduation and also to improve retention of good, talented staff. x A lower recruitment cost for employers is a key advantage of the programme – hiring new talent in this way provides a lower cost recruitment route. x The delivery approach can have a number of advantages for employers. Students can provide a fresh, inquiring perspective to challenges employers are facing, as well as contribute to ‘core’ business delivery with a high level of enthusiasm. Curriculum Planning x Northumbria has a WBL Framework which sets out the principles and processes of WBL and focuses on responding to employer needs/professional practice. x Institutional support from ‘the top’ is important in supporting developments and embedding the type of flexible, work practice focused approach adopted within this programme. The culture of the University supports the delivery of the programme. x The approach/programme blends the academic development of students with their job role with an employer. Curriculum Design x Mock interviews and assessment centres help employers build up relationships with students to ensure they select the right people for the company. x The programme has been developed and designed to include two year WBL element so that greater value from the experience can be derived from the student through reducing the amount of time taken for them to settle into periods of work placement. x Retention is arguably improved as the student’s career can start immediately without the usual one year break for them to return to final year study at University. Delivery x In their final year, students undertake organisational research as part of their dissertation, which can be of great value to the employer organisation.

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x

For the duration of the programme, students receive guidance on their work based projects from Business School staff, acting as Academic Performance Coaches, who have strong practitioner/business backgrounds this ensures that students on the programme are fully supported during their studies and that any difficulties and issues are picked up and dealt with in a timely way. x The skills, knowledge and experience of the team that deliver the Programme are a critical success factor. The Programme team have worked in business before becoming academics and as such have the skills and experience to undertake this work (both students and employers appreciate and benefit from this). Evaluation x The programme team have constant contact with Partner employer organisations and as such there is a continual feedback loop of what is working and what is not working in relation to programme delivery. This process helps to ensure that any issues are picked up on at the earliest opportunity. x The programme team share ‘good practice’ to continually improve the programme. x Students are expected to be promoted or successfully move on to a different employer at the end of the two year work-based Learning Partnership. Problem based learning has received some criticisms. Stinson and Milter (1996) suggest that it is the faculty attitude, capability and orientation that has an impact on a ‘doing it for real’ basis of business learning for students. For most faculty members it is the emphasis on disciplinary expertise resulting in lecture/discussion type teaching, demonstrating Stein, Isaacs and Andrews (2004) notion of ‘codified’ knowledge. This confirms Lowden et al.’s (2011) argument that current culture in many institutions reward research activities and underestimate the value of teaching and other scholarly activities. Nevertheless, employers are looking for graduates that are able to demonstrate appropriate skills and abilities needed to achieve strategic objective. The narrative is now learning through work (learn from direct experiences), learning about work (develop knowledge of work) and learning for work (develop appropriate skills) (QCA, 2003).

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5. The importance of work-based learning Findings have overwhelmingly highlighted that employers, students, graduates and HEI representatives value work-based learning as particularly effective approaches to promote the employability of graduates. A CBI survey (2011) ranked work experience as third most important recruitment factor and UKCES (2009) concluded that developing employability involves work experience. Lowden et al. (2011) found that employers, students, graduates and HEI representatives valued work-based learning as an effective way to promote employability. It is not about recognising the need to develop distinctive learning opportunities, but it is a matter of developing the appropriate ‘authentic’ culture amongst key stakeholders through the development of preparatory learning initiatives in the curriculum. The following case study (Case Study 3) demonstrates how work-based learning can be embedded into postgraduate teaching and the role of action learning in developing appropriate skills. Case Study 3: Building Work-Based Learning into the Postgraduate Teaching Postgraduate programmes have criticised for being insufficient to respond to the current and budding needs of the workplace and develop capable managers to keep pace with the ever-changing economy. In many cases, the mismatch of the graduate skills with industry demands leads to a high turnover, dissatisfaction and most importantly low return in educational investment. Human Resource Management (HRM) is an ideal example. It is an educational subject that individuals perceive as being more operational/practical and less strategic. This perception cause issues in terms of understanding the fundamental aspect of HRM and the need to develop appropriate skills in delaying with modern workplace issues. To address longstanding issues in terms of skills transferable, work-related learning is being adopted (HRM postgraduate module) to test whether such learning philosophy would enable learners to develop knowledge, skills and understanding of the work context. In other words, the element of ‘project management’ has been embedded in formative and summative assessment as an intrinsic part of the learning experience where knowledge is entangled in a wide variety of work situations. The idea behind this work-related learning was to allow students to develop a new HR strategy for a local chemical organisation (WSBC). HRM influences core functions

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(financial, marketing, operations) within the organisation, and business generic knowledge could be perceived as a crucial factor in simplifying key HRM models as well as to analyse the role of HRM in improving strategic management processes. They were able to debate key HR related issues and create a tangible, useful product to be shared with their world. Therefore, students have been asked to help the WSBC to improve its human resource provision, primarily through the analysis of existing organisational practices and development of plans for improvement. A key requirement for students was to apply theory into practice and identify the HR future needs. Such an approach offers students the opportunity to authenticate learning and knowledge. The HRM module was the foundation to develop an appreciation of the theoretical and practical issues as well as to understand the role of HRM in improving strategic management processes. The students divided into four groups aiming to undertake a research to explore whether a more strategic focus on managing people could allow the company to meet its strategic objectives. Each group received appropriate information about the company practices, management style and HR activities. Student reviews found that the company has not implemented any formalised systems and practices to support business integration and implementation. HR is not a core function in the company. The management recognises that HR might create the space and circumstances for improving performance and productivity, but there is no formal strategic approach to people management. The attraction and selection of employees is also characterised by spontaneous activities, less formalised practices, and heavily reliant on recruitment agencies to provide for candidates. The company has not been recruiting heavily due to low turnover as people have been working for a long time. Training and development is not tied to strategic planning and performance. The company has not put in place formal training plan to allow its employee develop further their skills and abilities. The management recognise that training and development could be a key feature to engender loyalty and commitment among employees; however, no formal plan has been adopted to develop abilities of individuals and satisfy the current and future needs of the organisation. The findings of their investigation were presented in a formal report and presentation to the company’s senior management team. They analysed what measures of performance outcome could be adopted to monitor individual performance as well as what would be the most appropriate reward strategy for the staff employed. They also identified key barriers to

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workplace learning and development and discussed and considered developmental strategic choices available to the company.. They also suggest a comprehensive strategy on how the company could improve its recruitment, selection and inductions approach making reference to functional and applicable strategic practices. al thinking, problem solving, communication, teamwork skills, creativity, organisational ability, work ethics and technology are essential attributes needed by employers. The HRM simulation is a pragmatic and realistic approach which equips them appropriate skills and abilities. It is at this interface between how students, educators and practitioners identify, practice and interpret these skills that appears to have a significant impact upon employability and skills development. Students learnt the academic principles behind effective HRM and then implemented these principles in an assessed simulated management project. Students have the opportunity to contribute to the new development of HR strategy at the WSBC and make considerable progress in key academic and business skills. Students involved demonstrated excellent ability to management and effective communication, and apply learning to real business issues. As postgraduate students, the ultimate aim must be the development of knowledge, understanding, skills and attitudes around HRM. In addition to this, some students had the opportunity to take forward this project to undertake further research on the dissertation module. The unique feature of this teaching philosophy is to encourage students to think creatively and innovatively, and to take initiatives to challenge themselves and, take responsibility and ownership of their own learning. Work-based learning enhances graduates to employability and provides a range of benefits to students and employers. Pedagogy for Employability (2012) strongly supports the notion of work learning integration and commented that work experience can contextualise learning and influence graduate employment whilst Little and Harvey (2006) found it enhanced personal development. Of course, experience alone does not contextualise learning. The quality of the experience, the support provided and the opportunity for students’ to reflect on development are essential. Nevertheless, HECSU (2009) suggest that work experience provides a route into employment; this is confirmed by High Fliers (2012) who suggest a third of students will be recruited by their placement/internship organisation. This suggests that work-based programmes can provide an effective vehicle for personal and professional growth. Students can gain expertise and specific skills, often around a practical theme rather than an

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academic discipline (Lester and Costley, 2010). Martin and Rees (2012) argue that the work-integrated learning experience is increasingly providing a point of difference for students in enhancing their employability. Indeed, from a student perspective, higher tuition fees and levels of debt on graduation, may mean that employment prospects become one of the main points of differentiation when students choose between comparably priced HE institutions. Nevertheless, vocational education requires students to take effective action in understanding the changing economic situation and evolving jobs market.

6. Conclusions This chapter has explored and discussed how a work-based learning as an integrated curriculum approach could be used to help meet managers' demand for ‘employable’ graduates. The qualitative case studies presented within the chapter offer examples of how HE institutions are trying to develop and embed more work related learning into programme design and delivery. As such, within the context of qualitative research undertaken into the key features of a work-integrated curriculum approach to undergraduate programme design, a number of conclusions can be drawn. Work-based learning promotes a critical stance as such programmes offer opportunities to embrace learning and build the selfknowledge and self-confidence needed to prepare students for the world of work. Learners most often value include increased confidence, a propensity to reflect and to want to understand, and a hunger for further learning and development. Such learning can be highly developmental particularly when it is linked to a personally-valued purpose and engaged with critically and reflectively (Lester and Costley, 2010). This means that HEIs should to move into the ‘territory’ of the workplace (Scott et al., 2004) necessary for students to respond to work-wide developments effectively and better position themselves in the labour market. The case studies provide further evidence for, and demonstrate the effectiveness of, these types of approaches to curriculum development, design and delivery. They provide a good platform for practitioners, employers and academics to develop effective learning resources for skills development. In such a complex labour market, analysis has demonstrated that an integrated approach to curriculum development, theory application and employer involvement could enhance graduate skills further.

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Work-based learning influences organisational performance and employers often report the benefits of work based programmes in comparison to more ‘traditional’ UG programme routes. All three case studies highlight the importance of employer dialogue in developing integrated work based programmes. Literature highlights that organisations can manage insecurities and reduce the risks to their companies for making the investment (Hager, 2000) as graduates have an increased professionalism and motivation, particularly if this can be capitalised upon through their development and roles within the organisation (Lester & Costley, 2010). This means that the benefits of work-based learning activities is twofold: students develop appropriate skills and abilities for the workplace and employers can utilise such skills to add to the organisation’s intellectual capital. To conclude, the notion of ‘employability’ in particular indicates that HE has a role in developing knowledge and skills of relevance to the labour market, which are transferable to, and applicable in, employment. A fundamental question, arising from the notion of employability, is the extent to which the development of work-based integrated learning experiences require a university education.. Furthermore, there is the question of the extent to which work-based learning are exclusively associated with what is termed a ‘graduate job’ and a ‘graduate career’. (Holden et al, 2010). The analysis of the case studies presented in this chapter as well as the discussion here contributes to existing literature and debates by highlighting that a work-based integrated learning experience enhances graduates employability and provides a range of benefits to students and employers in an ever changing globalised economy.

Dr Niki Kyriakidou is a Senior Lecturer in HRM/OB at Leeds Beckett University, UK.Her research interests revolve around International HRM, Cross Cultural Leadership and Career development and her doctoral research thesis investigated the perceptions of graduate students and medical staff regarding their career development within the Greek labour market. She has 15 years experience on cross-cultural projects in graduate employment and skill needs of the knowledge base economies of the Northern European Countries. Her current publications are in a range of areas including International leadership and management, workplace learning and development, and cross cultural HRD.

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Sallyann Halliday is a Research Fellow at the Policy Research Institute and Co-Module Leader of the Postgraduate Dissertation Scheme in the Faculty of Business and Law at Leeds Beckett University, UK. Sallyann has 14 years of experience in academic and applied social policy research and consultancy. Her role at the University involves research and enterprise activities and teaching at both undergraduate and postgraduate level. She has extensive experience of undertaking research exploring changes in behaviour and attitudes, particularly in relation to work, education and skills. Dr Stefanos Nachmias is a Senior Lecturer in HRM working at Nottingham Trent University, Nottingham Business School. His role here at the University has been to teach at undergraduate and postgraduate level, research activities and external collaborations. He has previously worked at York St John University and Leeds Metropolitan University. He received his PhD in Business and Graduate Recruitment in 2012 by exploring hospitality students' career intentions in the UK. Stefanos scholarly interests range from graduate recruitment, SMEs development, career decision-making and labour markets to learning and curriculum development as well as diversity management

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CHAPTER NINE RE-THINKING THE MANAGEMENT OF TEAM PERFORMANCE: NO LONGER DISINGENUOUS OR STUPID CAROLINE ROWLAND CHESTER BUSINESS SCHOOL, UNIVERSITY OF CHESTER, UK

Introduction This chapter deals with the topic of team performance and current management practice. In a challenging and turbulent economic climate, characterised by pressures to improve productivity and reduce costs, performance management has taken a more central role in helping to ensure competitive advantage (CIPD, 2009; CIPD, 2013). A focus on teamwork has become an almost universal feature of performance management in modern organizations. Leaders are saying that teamwork is an essential component in the achievement of organizational objectives. However, the emphasis of appraisal, development and pay continues to be on the individual (Armstrong and Baron, 2005). As organizations have developed more structured approaches to strategic management, there has been a move towards the integration of these processes with the management of human resources. This has involved many organizations in the introduction of formal performance systems, frequently characterised by appraisals or performance reviews (Prowse and Prowse, 2009). As the prevalence of performance appraisal has grown so has its influence in shaping employee perceptions of justice. Outcomes and processes which are perceived as unfair in an organization will result in a workforce whose contribution through enthusiasm and “going the extra mile” is not fully achieved (Suliman, 2007; Rowland and Hall, 2012).

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Equity theory and Organizational Justice are concerned with the fairness by which the benefits and burdens of an organization are allocated and the fairness of the process by which decisions are made (Adams, 1963, Greenberg, 1987; Folger and Bies, 1989; Beugre, 1998; Greenberg, 2006). Equity is a useful concept through which to examine the outcomes and processes of performance review and management. It is central to the psychological contract and to employee engagement and discretionary effort. This chapter uses the concepts of equity, justice and motivation to explore the procedures, outcomes and implementation of teamwork in contemporary organizations. The challenge for managers is to bring about commitment to discretionary effort, which is increasingly a crucial feature in gaining competitive advantage. This chapter examines current theory and practice and offers a new way to approach team management that requires a radical re-think of management practice. Themes that are explored are drawn from the author’s own research and grounded in secondary literature and it is hoped that this discussion will engage both academics and practitioners. The outcomes clearly indicate that both managers and employees see a potential for teamwork, which is rarely achieved in practice. This is almost universally seen as desirable and perceived as an effective method in gaining commitment. However, the reader will be drawn into the discussion that shows at the same time management say they value teamwork they appear to be rewarding individuals. Commitment will be shown to degenerate into resigned compliance with widespread resentment and perceptions of inequity. Organizations are sending out mixed messages that are causing tensions which may affect productivity. The first task then is to consider the current literature in some detail to consider current practice. The author will then present findings and conclusions and arrive at a new model that confronts the challenges created by present day practice and offers a positive way to contribute to teamwork throughout organizations.

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Theoretical background Equity and Justice Social scientists have been interested in concepts of fairness and justice since the beginning of the 20th Century. In the 1980s the workplace became a focus for what has become known as Organizational Justice (Greenberg, 1987). Theorists have made a distinction between distributive justice – the fairness of outcomes- and procedural justice – the fairness of process to achieve these outcomes. In more recent times there has been a theoretical separation within procedural justice between how decisions are made and how they are implemented and communicated (Bies, 2001). Notions of distributive justice are present in political theory (Marx, 1969). However, the early focus of Organizational Justice was grounded in the contributions of Homans (1961) and Adams (1963), whose equity theory suggested that workers compare their own input/output ratios with that of others. Their findings indicated that both behaviours and attitudes changed where there were disparities as workers attempted to achieve equilibrium. Models of fairness and justice in outcomes go back considerably further. Aristotle considered justice to be people receiving that which they deserved. Bentham (1789) considered the outcomes of utilitarianism/fairness to be happiness. Later commentators suggest linkages of happiness to both work and personal performance (Blanchflower and Oswald, 2011). Stakeholder theory considers the ‘sustaining corporation’ to be making a positive contribution to human performance (Clifton and Amran, 2011). Utilitarianism cites the importance of healthy, respectful and supportive organizational culture and fair treatment, security and recognition (Ashkanasy, 2011).

Teamwork, Motivation and Reward Since the early 1980s much has been written about the importance of teams and the benefits of team working. In many areas this research has focused on motivation and contributions to organizational success. In recent decades there has been a shift away from behaviourism and expectancy theory coalescing around the three main areas of goal setting, social cognitive theories and organizational justice (Latham and Pinder, 2005).

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The importance of management culture and explicit and implicit management values have been partially explored (Hofstede, 2001, 2010; Solatari, 2006) but little has been discussed regarding teams. The appraisal, performance and reward of individuals has been well reported but those of teams has received less attention. Meyer, (1994) and DeMatteo et al, (1998) indicated possible systems of appropriate rewards for teams. However, there is a paucity of literature concerned with linkages between team reward motivating performance despite the almost universal belief that teams are a crucial component in organizational effectiveness (Irlenbush and Ruchala, 2006; Prowse, 2009; Clopton, 2011). Indeed Irlenbush and Ruchala’s experimental work on the incentive effect on team compensation concluded that it was a “starting point” for further research. The importance of teams is reflected in the belief that they can achieve more than individuals and that this synergy is a pivotal part of gaining competitive edge (Clark, 2005; Mullen, 2010).

Appraisal and Performance Management Appraisal is part of the majority of performance management systems and can result in increased pay and other rewards such as promotion, career opportunities or actions to remedy disciplinary or capability issues, perhaps resulting in dismissal. Appraisal systems can result in unfair or inequitable distributions of organizational rewards and punishments. If the outcomes of appraisal are considered unfair then it might explain the attitudinal and behavioural outcomes predicted by Adams (1963), including reduction of effort and a lack of engagement. Since the late 1950s research into appraisal systems has shown repeatedly that schemes which link interviews with remuneration are at best unhelpful and at worst counterproductive (Maier, 1958; Kerr, 1975; O’Neill, 1995; Oliver, 1996 and Prowse and Prowse, 2009).The same is true for schemes linked to teamwork (Geary, 1992; Mullen, 2010). No evidence currently exists from any controlled study in the UK or USA to show that long-term improvements in the quality of performance result from appraisal-based extrinsic rewards. Nonetheless, providing information for remuneration purposes continued to be one of the major objectives of appraisal, along with objective setting and training needs analysis for employee development purposes (CIPD, 2009).

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However, there are few reported instances of group or team appraisal. There is some evidence of the evolution of e-appraisal carried out in a small number of organizations and in some instances there is an element of self-appraisal (Payne et al, 2009). There is clearly a link between the methods in use, the reasons why appraisal is employed and the underlying philosophies of performance management (Neeley, 1998; Bennett, 2006; Rowland and Hall, 2010). Recent shifts in both the articulated purposes of appraisal and the methods employed may signal a fundamental change in the underlying philosophies of human resource management. At face value the trend seems to support this interpretation. The values of utilitarian instrumentalism, exemplified by the Michigan school (Fombrun et al, 1984) appear to have given way to the Harvard approach of developmental humanism (Beer and Spector, 1985). Concepts of ideology, politics and power have been replaced by ideas of empowerment, commitment, culture and consensus. Yet there seems to be little congruence between the espoused theory of “people are our greatest asset” and theory in use (Rowland, 2012). It is clear that many organizations have taken a more strategic approach to human resource management and see performance management as fulfilling a key integrative role. However, the extent to which this strategic emphasis reflects a change in values remains largely unanswered and perceptions of fairness are not fully considered in a climate where discretionary effort is critical to success.

Research Focus Recent downturns in economic activity have placed a world-wide premium on effective performance and the harnessing of discretionary effort for competitive advantage. At the same time the connection between performance management, equity, teamwork and fairness has not been adequately explored. The focus of the author’s research was on whether employee perceptions of the fairness of performance management systems have an impact on the effectiveness of team performance and discretionary effort. The following questions were of interest: Do mixed messages regarding team and individual contribute to perceived disparities in organizational rewards and burdens?

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Do employees perceive procedures and outcomes as fair? Are the espoused standpoints of organizations regarding teams congruent with the theories in use as perceived by employees? Are there tensions between control, commitment and practice that influence the effectiveness of performance management?

Methodology A mixed methods approach was used that included documentary analysis, formal and informal interviews, questionnaires and observation as primary tools. Literature reviews were carried out to establish comparable current research findings and theoretical frameworks. The research started with an exploratory phase using informal interviews followed by content analysis to identify emerging trends and patterns. The information came from three main samples: Sample one was a ten year study and comprised of over 100 managers engaged on management development programmes at two higher educational institutions in the UK over a period of ten years. The sample was also a convenience sample representing both the public and private sectors. There was a 100% response rates from these participants due to personal and prolonged contact with each participant. All participants in this sample were interviewed informally and also completed a semistructured narrative account described below. Samples two and three were taken simultaneously from two large service and manufacturing organizations. They comprised of a purposive diagonal ethnographic survey of 40 employees followed by a postal questionnaire sent to all employees and completed by 495. Response rates were 30% from Organization A and 16% from Organization B. All participants were based in the United Kingdom and were in full time employment. All participants in sample one (100 persons), and all those from samples two and three who had taken part in the ethnographic survey (40 persons) completed a semi-structured account of how appraisals, performance management and reward systems operated in their organizations. They were also asked to give their own perceptions of the effectiveness and appropriateness of any of the systems and outcomes they had experienced. Content analysis then took place and identified themes. These were used to design questionnaires with categories that could be interrogated by a

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mixture of quantitative and qualitative means. The emphasis of the questionnaires was to test the tools, systems, procedures and outcomes of appraisal and the participant’s perception of linkages to individual performance, team performance, motivation and organizational effectiveness. Significance testing was undertaken by means of Chi-Squared (Bhattachary and Johnson, 1977). The purpose of this was to examine whether there were any significant differences between responses from different organizations, sectors, occupations, length of service and gender.

Findings Ethnographic survey findings Several themes emerged from this survey that were common to both organizations. The common themes were the distrust of appraisal and performance related pay and a strongly held belief that there was an inequity of treatment between high and low producers centering on arbitrary standards of discipline. A large proportion of those interviewed were cynical about appraisal and although they believed that in an ideal world it could be a useful and positive experience, in reality it was often “just going through the motions” and was not carried out in a fair and systematic way. Most participants were strongly against being rated for performance related pay even some that received it. In one case, a manager responsible for administering the performance related pay systems said, “it is unrealistic and complicated … we must spend many hundreds of man hours performing paper exercises which have very little impact on the performance of people, thus the business”. During the ethnographic survey many participants spoke about the importance of team work. These values were observed to be strongest amongst managers and workers directly involved on the shop floor. Nevertheless, these beliefs were also expressed by senior managers and administrators. “In my area we are highly reliant on teamwork. I have little or no control over spares from Stansted or Copenhagen. This is a common hold up, on a typical day this happens at least twice. I am not over fond of P.R.P., I don’t think it would work.” (Participant 6, Organization B, Ethnographic Survey)

Management values and systems at both organizations encouraged teamwork by speaking positively about the need to work together and the

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organization of work. However, both workers and managers were often dismissed this as being disingenuous. “If you speak the truth you are perceived as being a non-team player - it seems to be mainly a production thing. People are frightened to speak the truth. Real teamwork is not just talking about teams.” (Participant 1, Organization A, Ethnographic Survey)

Union views Both organizations in the survey had strong union memberships representing over 75% of the workforce. Union officers from both organizations were interviewed using the same semi-structured format experienced by other participants. Interviews at both organizations revealed strong inculcated beliefs in equity, collectivism and teamwork. All union representatives stated that performance management should be team centred rather than focused on the individual. However, payment for team results was also seen as divisive and participants believed that it would result in the isolation of winners and the alienation of losers. This in turn would lead to demotivation across the workforce. These findings reinforce the views of Porter and Lawler (1968) and Deery et al. (1999). They speak of deeply entrenched beliefs in the importance of equity and pluralism that would make changes based on individual reward very difficult to implement. Typical employee comments at the host companies concerning individual and team based payments were “PRP … it didn’t work, too divisive” and “team PRP - it would be a nightmare, too many elements out of your control”. This divisive aspect of performance management seems to confirm Grint (1993) and Clifton and Amran (2011) who see a major problem of appraisal schemes often being their aim to limit the collective aspects of work and individualise the employment relationship. Interviews with union representatives at both organizations found there was a belief that there were hidden agendas for performance systems other than development and rewarding contribution. Evidence and anecdotes were given of the use of yearly reviews being used for redundancy choices or as tools for disciplinary action. Performance related pay was seen as wide open to systematic abuse with constant references to favouritism, subjectivity and politics. It was seen as counter to the central values of

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trade unionism represented as pluralism and equity. Quotes were made such as “We are against PRP,” “We refute the principle and we would not co-operate,” “We tried it once; it didn’t work - too divisive.”

Management Views All managers talked at length about the importance of teamwork. They spoke about it as being “crucial”, “central” and “vital”. One organization had a widely publicized slogan “Prosperity through teamwork.” Interviews with senior managers showed a variety of beliefs. Some were in favour of individual measurement and rewards, some were for team measurements and rewards and some were for all in the organization sharing the same reward in the form of gain sharing. As a rough guide those who tended to favour individual and team rewards tended to be managers from a human resource background and those who favoured the gain share approach were from an operations background. This reflects similar findings from Armstrong and Baron (1998)) who observe that human resource practitioners may often have different perceptions than operations managers. These findings indicate an interesting divide worthy of further investigation and are fertile ground for bringing together two perspectives to drive forward innovation. Interviews with Managing Directors at both organizations found a similar prevailing theme. This was a desire for rewarding contribution. Both recognised the need for a general framework and the need for equity. There was recognition that the large number of variables would prove difficult in the design and implementation of such a system. Both Managing Directors favoured a less complicated bonus or gainshare system. Individual performance pay was discussed but was not seen as being highly beneficial. Change and good performance management systems were seen by both Managing Directors as being crucial and were high priorities. Again, an interesting contrast to the approach taken by the Managing Director was apparent in the interviews with the Human Resource Directors at both organizations. Both took a positive view towards performance related pay, in particular it was seen as a motivator and reward for contribution. Both HR Directors believed that a large balance of the workers’ wages should be based on individual contribution.

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All managers in the study recognised the complexity and difficulties inherent in such systems but were convinced of their potential to increase productivity. This difference of emphasis on the benefits of PRP is consistent with the findings of Geary (1992), Armstrong and Baron (1998), and (Kessler, 2008). They draw conclusions concerning different perceptions between Human Resource practitioners and Operations Managers and also workers and middle managers concerning performance related pay.

Employee Views Observations, surveys and interviews confirmed that the majority of people felt that equity and change could only be ensured if teams were empowered and trusted the management. Meyer (1994) argues much the same, he sees the overriding purpose of performance management as being devised and used by teams to help the team to help improve performance rather than for the use of top managers to gauge progress. Many of those interviewed at both organizations spoke of the difficulties of controlling external variables that teams depended on to achieve targets. These were things such as parts or services from within the organization, or from different bases and also parts from suppliers based in the UK or abroad. An interesting belief prevalent in past surveys carried out by the author at other organizations and also occurring in both the Organization A and B concerns individual perceptions. This is the belief by individuals that performance related pay would work for them if fairly supervised but not for others. This belief was underpinned by the conviction that the individual’s own performance was well above average and therefore he or she would benefit from PRP. However, for most other people it would not be of benefit because many of them were below average and some even needed disciplining. “If we had PRP I would be a very wealthy person indeed.” (Organization A, respondent 483)

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Share schemes were discussed and views were positive. These schemes had proved popular and workers had made money from them. Gainshare was also discussed and again opinions were positive. The success of the John Lewis retail group was frequently mentioned and their sharing of profits with workers who are all deemed as partners.

Questionnaire findings Data were interrogated to see if there were any groups that were unrepresented by the survey. No groups were unrepresented. The information was based on up-to-date personnel print outs from both organizations. There was no statistical significance in expected frequency between organizations. These participants were found to be a representative sample consistent with the profiles supplied by both organizations in the form of personnel and departmental records. The findings of the questionnaire showed a marked consistency between organizations and also consistency between gender, occupation and length of service in the majority of cases. This allowed for generalisability in many areas. Respondents were asked to comment on anything not included in the questionnaire concerning teamwork, performance related pay or company culture that they felt was important.

Results Almost 75% of those who responded had experienced some form of performance management including formal appraisal at their present organization and many had also experienced appraisal in their previous organization. The results from the questionnaires showed that there was no majority in either organization in favour of individual performance pay. Over 25% in each organisation were strongly against it, and a further 20% at Organization B and 26% at A were against it. These results point to a strong culture of collectivism. This argument is further strengthened by identical questionnaire results showing the belief that performance related pay would be counter-productive. “It would cause disagreements within teams” (64% of respondents from each organization) and “it would cause

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disagreements between teams” (58% of respondents from each organization). The results from questionnaires showed a majority in each organization being against performance related pay. Over 25% of respondents from each organization were strongly against it. 41% of respondents from A and 59% of respondents from B would like all workers to receive the same yearly performance pay based on the performance of the organization. This seems to be in line with the CIPD (2009; 2013) who concludes that profit sharing is a popular choice with workforces at it is perceived as giving all in the organization a chance to share in its success.

Separate Ten year Study Sample There was a pervasive and almost universal concern about “fairness “from all participants in both the study of two organizations and the ten year study of managers. There was no shift in emphasis over a ten year period up to and including 2010. “It’s a joke, PRP does not work it prevents sharing”. “It is about your face fitting”. “We call ourselves teams but managers don’t walk the talk”. “What’s the point, we are making people redundant and it is not the poor performers who are going.”” We are supposed to share ideas and work as teams but I am paid on my individual performance.”

Content analysis showed a marked emphasis on the tension between the espoused theory of fairness and teamwork and perceptions of inequality, subjectivity and inconsistency.

Summary of Findings and Discussion Employees and managers at all levels spoke openly at both informal and formal exchanges. There were no significant differences between responses from males and females, different age groups, length of service and area of work. The issues that arose from the research at both organizations, the ten year study and the body of research and literature prior to this gave rise to some interesting discussion concerning performance-related pay, team working and theory in use. An interesting pattern emerged from all the research was:

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The similarity in beliefs from the diagonal slice of the workforce taken from Organizations A and B and the participants in the ten year study who were all managers. The preference of HR professionals for individual performance rewards as opposed to the preference of operations managers and workers for team based reward schemes. The universal practice at both organizations and the other samples of rewarding individual contribution yet the consistent and emphatic official message that “it is all about teamwork”. There was a convincing body of evidence from all sample groups based on anecdotes, conversations, ethnographic surveys, formal interviews and questionnaires to make the following observations: Findings reflected a cultural web where values of steady state strategy, teamwork and pride of membership were highly regarded. Teams and the belief in their importance played a major part in the cultural assumptions, values and heroes making up the cultural web at every organization examined (Johnson and Scholes, 2005; Hofstede, 2001, 2010). Anecdotes and statements from both questionnaires and interviews constantly referred to entrenched beliefs on the shop floor concerning hard work, a job well done, knowledge, quality and discipline. Pluralism and teamwork were also highly esteemed. The belief that everyone should work hard was well represented and as such represents the normative nature of the established culture. Managers and workers at both organizations spoke freely about different standards of performance management and many expressed anger and frustration concerning discipline. “At this time I do not believe there is a proper and accurate way to measure staff individual or team performance.”

Union officials stressed the difficulties of measuring activities and placing similar value on different activities. Statistics were often seen as open to manipulation and distrusted. Rewards for individuals were seen as counter to the union’s belief in equity and objectivity.

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Equity was a central issue in all research findings. It was mentioned by almost every participant and was of equal concern for managers and employees alike. Perceptions of inequalities arose in many areas but most concerns occurred in the areas of discipline, payment and trust. Anecdotes, observations, interviews and questionnaires constantly referred to the need for team work, fairness, unfair treatment, inequity; and most involved strong emotions concerned with self- worth. Anecdotes of workers taking action to balance the perceived inequity were also related (Adams, 1963; Porter and Lawler, 1968.) There was widespread evidence of pervasive cultural beliefs holding equity as a lynchpin of working life. “I would like openness and honesty.” The belief that everyone should work hard represented the normative culture of participants. Both managers and workers spoke at length about different standards of performance management and many expressed anger and frustration concerning the procedural and distributive justice of discipline in their workplace. “Nothing happens here if people aren’t pulling their weight.” Trust was a concern for many participants and there were many complaints about managers and their different agendas. Some managers also spoke about the need to build and establish trust. Equity and trust were found to be highly valued but it was debatable if they existed other than as espoused theory at organizational level. It had been expected that the notion of equity would be an important aspect of this research but the overwhelming pre-occupation of the majority of participants provides a rich source for future research and discussion. Observations, surveys and interviews confirmed that the majority of people felt that equity and change could only be ensured if teams were empowered and trusted the management (Meyer, 1994; Brown, 1995; Brebels et al., 2011). There was a widespread distrust of both appraisal and performance related pay. Performance management systems were viewed as bureaucratic, costly and often a waste of time. Performance related pay (PRP) was seen as being too dependent on variables outside the individual’s control. This was seen as unfair by many who were unclear as to how it could consciously increase organizational performance. The concept of PRP remained popular with Human Resource Directors and personnel practitioners despite the reservations of managing directors, the deep misgivings of many operations/line managers, the resistance by

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the majority of workers and the total opposition of the unions. Experiments with performance related pay at both organizations and further enlargements of such systems still remain a distinct possibility, despite the negative experiences in the past. There was an interesting and widespread belief by most individuals that PRP would work for high producers like themselves but not for the vast majority of others who were either not competent or not motivated. The possible move to person based pay rather than job based pay did not reflect the espoused belief systems of both organizations, or those of participants in the long-term study. These belief systems valued team working, quality and achieving value for stakeholders and it is the enactment of these beliefs that motivate workers (Brown, 1995; Latham and Pinder, 2005). There was common belief of workers that more money did not result in their doing a better job. This was opposed by the belief of some managers and both senior Human Resource executives that money would motivate workers to perform better once they realised they had been rewarded for their contribution. Managing Directors at both organizations struggled with the conundrum of which comes first, paying for performance or performing for pay? There seemed to be no preferred strategy. This situation was also reflected in the research with managers at other organizations participating in the longterm study. Human Resource Directors were working towards the future adoption of HRM mechanisms of performance related pay for both teams and individuals. However, this strategy may not solve management problems but could in many ways generate new ones (Kerr, 1975; Geary, 1992). Engagement and satisfying feelings of equity appear to be the key in establishing team performance see figure 1 below:

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Figure 1. Engagement Matrix

Hofstede’s (2010) research into culture concludes that institutions may often write down their missions or values but other value systems may also exist in the organization. These assumptions underlying the explicit ‘official’ values of the institution are evident in the day-to-day conversations of people. They may also be so taken for granted that they can only be observed in what people actually do. The author’s free access to both host organizations and the relationship of mutual trust enabled these findings to be further tested. Over a period of several years the author observed interesting differences between the explicit management/ institution values and the implicit but equally influencing values of the workforce and unions.

Conclusions This research builds on previous research in the following respects: x It places teamwork and performance firmly within a framework of organizational justice; perceptions of fairness are important in harnessing goodwill (Greenberg, 2006; Irlenbush and Ruchala, 2006).

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x Dissatisfaction with processes and the resulting distributive justice had a negative impact on employee perceptions of fairness and could act as a barrier to organizational effectiveness (DeMatteo et al, 1998; Holbeche, 2001; Cook and Crossman, 2004; Rowland, 2012). x It confirms findings that performance management reinforces power relationships and is often perceived as being open to abuse (Geary, 1992; Greenberg, 2006). x It further supports the case put forward by others that effective performance will not be obtained unless all dimensions of organizational justice are satisfied within the performance management system and that there is a strong argument for all stakeholders views to be incorporated in the system (Cook and Crossman, 2004; Suliman, 2007; Simmons, 2008; Brebels et al. 2011.) x Performance management often ignores systems factors (Deming, 1986; Soltani et al, 2006; Clopton, 2011), particularly relationships in teams and between teams; and can work against the establishment of a quality culture. It often seeks to act as an agent to bolster managerial power rather than to enhance quality. x There is a pronounced disparity between espoused theories and theories in use (Townley, 1993; Suliman, 2007). Unitarist assumptions of a commonality of interests are a much repeated management message in selling teamwork. Ironically, the theory in use, which may be inferred from the actions of many managers, is that performance management acts to reinforce management hegemony through political processes. In denying a plurality of interests it serves primarily as a covert compliance system. . In essence managers are saying one thing and doing another especially in terms of performance related pay and teams. This has generated much cynicism in workforces. These conclusions add considerable weight to the research findings that confirm that most appraisal and performance systems do not work well and can be divisive (Armstrong and Baron, 1998; Kaplan and Norton, 2007; and Holloway, 2009). Performance management systems based on individual rewards are not congruent with established cultures of teamwork and the move to autonomous self-managed teams. They are commonly perceived as being divisive and contrary to team productivity. Although literature confirms the place of equity theory in motivational studies it does not emphasise the crucial role it seems to play in the arena of performance management and measurement (Latham and Pinder, 2005).

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It is postulated that this importance may well be seen in organizations and cultures other than those in this study. The move by many organizations to performance management systems, which espouse teamwork and a shared mission, lies uneasily with the current widespread approach to performance management which is reliant on individual appraisals and performance related pay. Many of these same organizations believe that performance related pay is congruent with a unitarist value system. However, in practice their application of performance-related pay undermines unitarism by introducing a culture of individualism and plurality of interest. A fundamental issue that has yet to be resolved lies at the heart of the performance management debate. This is team versus individual contribution. One side believes that emphasis on the individual stretches targets and increases personal productivity for those who have significant discretion over their own output. The other side believes that individual targets are counter-productive because they create individual competition at the expense of the collaboration so crucial to team success. To achieve positive outcomes organizations need to be clear about why teamwork is espoused, is in place and how it fits with strategy, culture and philosophy. This may well involve a complete and dramatic change to the way organizations think about performance management. There is a need for creativity and innovation in attitude and perspectives and procedures in both motivating and rewarding teams. For decades adherents of the human relations movement have argued that organizations, with their emphasis on control systems, discourage the full participation of their members. This may well be detrimental to performance and could affect competitive advantage (Deming, 1986; Wiese and Buckley, 1998; Simmons, 2008). Organizational experience is often demotivating rather than empowering. A growing emphasis on knowledge management has encouraged organizations to believe in the rhetoric “People are our greatest asset.” Only by creating a culture in which people can fulfil their potential can organizations survive, compete and grow in today’s global environment. Yet, few organizations have thought this through to the extent that the development of teams and individuals is a key component of corporate strategy, embedded in all aspects of the organization. The idea that individuals need to be controlled persists. If a control philosophy permeates notions of empowerment,

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development and continuous improvement, paradoxically it will dilute both control and engagement.

Towards New Ways of Thinking This research clearly indicates that both managers and employees see a potential for teamwork, which is rarely achieved in practice. Teamwork is almost universally seen as desirable and perceived as an effective method in gaining commitment. If, at the same time, management say they value teamwork but appear to be rewarding individuals then commitment degenerates into resigned compliance with widespread resentment and perceptions of inequity. The research also confirms the findings of others most significantly in terms of reinforcing perceptions of mistrust, inequity and managerialism. Happiness and stakeholder interests are not addressed and stakeholders are often left feeling aggrieved. Organizations are purposive entities. They have goals and need to measure the achievement of those goals. But, by sending out mixed messages the cynicism engendered by the performance management system and process may hamper development. Creating an environment where individuals can grow and develop as part of a team may be an appropriate competitive strategy. If, at the same time, performance review is focused on individual contribution then commitment to teamwork may be prevented. This research also confirms the findings of others most significantly in terms of reinforcing perceptions of dishonesty, mistrust, inequity and managerialism; both employees and managers are often left feeling dissatisfied. Measurement and performance related pay of individuals is of dubious relevance in team working environments. Judgements, about how individuals contribute to teams, are probably best made by teams themselves. If teamwork is to contribute to the achievement of an organization’s goals, then the organization needs to be clear how this fits with strategy, culture and philosophy. Management and Organizations now have a chance to move away from two widely held employee perceptions. Perception one is that Management in general is disingenuous and pretends that it know less than it actually does about what motivates teams. Perception two is that Management is ill- informed and lacks the skills and leadership required to allow people to engage and the organization to flourish. Both perceptions are major barriers to healthy organizational communication and effectiveness.

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New ways of thinking should include: Facing up to the new realities regarding teams and managing performance and leaving behind comfortable expediency regarding individual performance related pay. This means accepting there is no quick and easy solution and that change to contemporary practice will have to be innovative and involve difficult conversations that have often been avoided by managers. Accepting that there will have to be a radical re-thinking of current models. Instituting new models that acknowledge the importance of teams and act to counterproductive tensions between individual and team behaviours. Performance systems and procedures say much about organizational value systems and how these relate to societal values. This chapter shows that it is helpful to examine teamwork and reward through the lens of concepts of fairness and wider frameworks of employee perception and motivation, which have not previously been considered. To achieve competitive advantage through teamwork and discretionary effort organizations need to not only say they value teams but must be seen as practising what they preach.

Caroline Rowland is Professor of Leadership and Management and Associate Dean at the Faculty of Business Enterprise and Lifelong Learning, University of Chester. Her qualifications include an MBA from Henley Management College and a PhD from the University of Manchester. Her interests and research are in the areas of Performance Management and also in Organizational Culture. Further details may be found at http://www.chester.ac.uk/chester-business-school/dean/carolinerowland

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CHAPTER TEN INNOVATION AND SME GROWTH IN LOW TECH SECTORS: THE CASE OF PALESTINE SUHAIL SAMI SULTAN MBA DIRECTOR, FACULTY OF BUSINESS AND ECONOMICS, BIRZEIT UNIVERSITY

1. Introduction Small and medium-sized enterprises (SMEs) as an important engine of growth have received increased attention in both developed and developing countries. These enterprises are often regarded as the "backbone" of the economy, serving as major sources of development, new jobs and a seedbed for entrepreneurship. Such a prominent role is mainly attributed to their flexibility in responding to emerging opportunities and their flexibility in the face of adverse conditions. For over a decade of economic volatility and political instability, the Palestinian private sector has demonstrated dynamism and the ability to adapt to changes. However, the forces of globalization are increasingly powered by far reaching developments, in technology, knowledge and markets. These forces are also currently affecting life styles of people, changing the paradigm of consumerism, business and industry. In order to cope up with these forces, the Palestinian private sector will have to be very creative and efficient. By virtues of smallness, SMEs can be flexible, adapt and have capacity to develop and implement new ideas. Further, the SMEs are the fertile ground of innovation on account of simple organizational structure, low risk and receptivity (Harrison and Watson 1998). Despite this, SMEs across industries have not been able to realized innovation potential (Chaminade and Vang, 2006) and innovations is the

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important determinant of success of SMEs in the current context of global market forces (Hoffman et al. 1998). The development of SMEs ranks high on the Palestinian Authority’s (PA) policy agenda. However, relatively little is known about the dynamics determining their start up, expansion and closure. Understanding of these dynamics is extremely important for meeting development agenda of PA. Enterprises are facing increasing pressures on account of global competition, constantly changing production system and pace of upgrading in both product and process technologies. Further, these enterprises have to meet international standards on quality assurance, environmental standards, labor norms, social ethics as these are now the critical determinants of global competitiveness. The Palestinian Central Bureau of Statistics (PCBS) released the final results of its 2012 Establishments Census, covering firms in the private sector, nongovernmental organizations and government bodies in the Palestinian Territory. The enterprises show underdeveloped structures, with industrial enterprises mainly involved in light industries and the production of basic consumer goods, particularly food and beverages, wearing apparel, non- metallic products, metal products and furniture products. A total of 134,505 establishments were in operation in the West Bank and Gaza in 2012.2 More than half of all Palestinian establishments are wholesale and retail businesses, almost 30% operate in the services sector and 12.4% are manufacturing firms. The survey results show that the Palestinian economy is dominated by small and medium family-owned businesses: more than 85% of all establishments are owned by a single individual. Private and public shareholder companies and partnerships constitute less than 11% of all firms. The Small and Medium Enterprise (SME) character of the Palestinian economy is again reflected in the fact that only 137 establishments employ more than 100 people (100 in the West Bank and 37 in Gaza). Of those, 27 are manufacturing establishments, 26 are health care institutions, 17 are educational establishments, 13 offer financial services and 12 operate in the ICT sector. The vast majority of establishments in the Palestinian Territory employ less than nine workers. Considering the challenges being faced by SMEs this chapter attempts to understand factors that drive SMEs to innovate, identify nature of SME innovations and achievements of SME innovations. The chapter also analyzes and compares the growth rates of innovative SMEs with noninnovative SMEs. These aspects about innovative SMEs have been studied

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in three industry sectors: agribusiness, furniture and stone and marble industries.

2. Innovation and SMEs Schumpeter (1934) proposed a list of various types of innovations: (1) introduction of a new product or a qualitative change in an existing product; (2) process innovation new to an industry; (3) the opening of a new market; development of new sources of supply for raw materials or other inputs; and (4) changes in industrial organization. It is crucial to know why technological change occurs, why firms innovate. Based on Oslo Manual, an innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations. The minimum requirement for an innovation is that the product, process, marketing method or organizational method must be new (or significantly improved) to the firm. Innovation activities are all scientific, technological, organizational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations. Innovation activities also include R&D that is not directly related to the development of a specific innovation. Oslo Manual presents four types of innovation: 1) A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics. Product innovations can utilize new knowledge or technologies, or can be based on new uses or combinations of existing knowledge or technologies. 2) A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. Process innovations can be intended to decrease unit costs of production or delivery, to increase quality, or to produce or deliver new or significantly improved products.

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3) A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. Marketing innovations are aimed at better addressing customer needs, opening up new markets, or newly positioning a firm’s product on the market, with the objective of increasing the firm’s sales. 4) An organizational innovation is the implementation of a new organizational method in the firm’s business practices, workplace organization or external relations. Organizational innovations can be intended to increase a firm’s performance by reducing administrative costs or transaction costs, improving workplace satisfaction (and thus labor productivity), gaining access to nontradable assets (such as non-codified external knowledge) or reducing costs of supplies. There are four major categories of factors primarily relating to innovation. These concern business enterprises, science and technology institutions, and issues of transfer and absorption of technology, knowledge and skills. In addition, the range of opportunities for innovation is influenced by the surrounding environment of institutions, legal arrangements, macroeconomic settings, and other conditions that exist regardless of any considerations of innovation. Thus, It is important to distinguish between internal and external (or endogenous and exogenous) sources of change. Internally, interest is likely to focus on the roles of the R&D department, and the involvement of all parts of the firm, particularly the marketing side, in decisions to innovate and on innovation activities. Externally, the focus will be on public research institutions as sources of technical information, and on inter-firm or inter-industry technology flows. Consideration of external sources of innovation or technological change ought logically to extend to international sources of technology, and be structured in such a way as to throw light on some of the unresolved problems with the technology balance of payments. However, capacity of SMEs in innovation varies significantly, depending on their sector, size, focus, resources, and the business environment in which they operate (Burrone and Jaiya, 2005). Particularly innovation in the manufacturing sector is a very complex process, which is propelled by numerous factors (Becheikh et al. 2006).There are internal and external factors that lead firms to innovate (Porter and Stern, 2001). Firms should have in-house competence in the form of technically qualified and motivated entrepreneurs or managers with innovative ideas and technically

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skilled employees. Similarly, there must be a market demand for the innovated products in the form of an explicit customer demand or implicit market opportunities. Of course, these internal and external factors may vary from firm to firm or from industry to industry or even from economy to economy and from time to time. SMEs undertake processes of innovations in the form of material substitution, change in technical process of manufacturing, etc. to achieve cost reduction or quality improvement or product innovations in the form of changing product shapes/dimensions/sizes or introducing improved or new products, or both (Freeman and Soete, 1997). SME innovations are more likely to involve product innovation than process innovation (Hoffman et al. 1998)). Reid’s (1993) study ascertained that 60 percent of the surveyed firms had undertaken both product and process innovations. Martinez-Ros (1999) found that product and process innovations are interdependent and closely linked. SMEs need innovative products in order to gain and maintain competitive advantages (Lee, 1998). If they succeed, they will be able to realize a greater share of such innovated products in their total sales. Lehtimaki (1991) observed in the context of Finnish SMEs that on the average, the contribution of innovated new products was more to total sales than to profits. Roper (1997) whose study focused exclusively on product innovations in German, UK, and Irish SMEs, ascertained that the output of innovative SMEs grew significantly faster than that of non-innovators implying that innovated products contributed to the faster growth of the former. Engel et al. (2004) found that sales turnover of innovative firms grew faster than that of non-innovative firms. They found a significant relationship between the share of innovative sales and sales turnover change of firms. Lumiste et al. (2004) found that innovation effects were felt in terms of both product-oriented results such as (i) improvement in quality of goods and services, and (ii) increased range on goods and services, and process-oriented results like increased production capacity and improved production flexibility. Roper (1997) comparing the innovation strategies of German, UK, and Irish SMEs, observed that there is a strong association between innovation and turnover growth. But Edwards et al. (2001) argued that growth is not necessarily dependent on those factors attributed to ‘innovative potential’. Of course, they further stated that this does not mean that innovation does not lead to growth, rather there is a need to develop methods to assess the relationship. Bala Subrahmanya (2001) observed that SMEs of North East

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England pursued radical innovations as a strategy of firm growth though he did not explicitly probe the relationship between innovation and growth. Danneels and Kleinschmidt (2001) claimed that innovative products present great opportunities for SMEs in terms of growth and expansion into new areas though they did not study the relationship between innovation and growth. Lumiste et al. (2004) found that innovation helped Estonian SMEs to improve their performance in terms of market share and diversified range of goods and services. However, they did not study whether the size of those SMEs changed over time. Organization is a critical dimension of innovation, but its measurement appears to be very difficult both conceptually and in practice. Moreover organizational change is highly firm-specific, making it still more difficult to summarize in aggregate, sector or economy-wide statistics. In consequence, organizational innovation has not been included in the measures recommended in this chapter. This chapters concentrates on two of Schumpeter’s categories, new and improved products and processes. This is not merely a matter of excluding changes which are insignificant, minor or do not involve a significant degree of novelty, but also of deciding how to treat aesthetic changes in products which may have an important effect on their appeal to customers and thus on the performance of the firm concerned. There are four primary issues concerning innovation and growth of SMEs: (i) driving forces, (ii) dimensions, (iii) achievements, and (iv) outcomes. What factors drive SMEs to innovate? Whether these factors are internal or external to SMEs or both? What kind of innovations do SMEs undertake? Are they exclusively product focused or process focused or do they necessarily have to undertake both together? What are the achievements of innovation by SMEs? If innovation is successful, whether new products or improved products emerge due to product or process innovations, the share of such innovated products is likely to increase in the total sales of the firm. If this happens, such firms would be able to achieve growth in their sales turnover and employment resulting in the growth of firm size. Figure (1) presents the conceptual framework of the study.

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Figure 1: Innovation and SME growth

Internal Factors -

Self-motivation Entrepreneurship Experience Innovative ideas

External Factors -

-

Demand Competition Related and Supporting Industries Economic Incentives

Innovation and Product and/ Process

Share of Innovated Products in Total Sales

Drivers

Dimensions

Achievements

Outcomes

Growth of Sales and Employment

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However, all of these studies are related to industrialized countries and therefore their relevance to a developing country like Palestine might be questioned. This chapter discusses three low tech sectors in Palestine with a special focus on agribusiness, furniture and stone and marble sectors. These sectors managed to stand in front of the instable political and economic environment in the region. The Palestinian economy depends significantly on imports of certain food items that could be produced domestically to compete on local markets. There is a need to further explore the various agricultural and food business sub-sectors as entry points for providing value-chain support that would aim at developing high quality to meet the needs of both local and export markets. The rationale for choosing the agriculture and food business sector also arises from the importance of providing employment and income generation opportunities to women. It also plays a key role in food safety and security. Caiazza, Volpe and Audretsch (2014) discuss the role of institutions, actors and activities in promoting innovation in agrofood system. The authors show that innovations in the agro-food industry depend on a multiple forces interacting with each other under specific rules in order to create new ways to deal with social or economic processes. The relevance of this topic for the whole economy leads to investigate main drivers of innovation in agro-food system. The furniture industry evolved in Palestine almost 55 years ago and has grown to become one of the major promising Palestinian productive sectors. Prior to the political crisis and economic recession beginning in 2000, the sector witnessed the establishment of many firms as a result of the growth of the Palestinian economy and the development of this industry to include new categories like interior design, hospitality and commercial furnishings. The study of (Trigkas, Papadopoulos, and Karagouni, 2012) aim to analyze the wood and furniture innovation system in the region of Thessaly, Greece, and the recording and benchmarking of innovative activity of enterprises in order to detect best practices applied, and to propose ways of increasing efficiency through improvement of the use of innovation inputs. The authors show that efforts have to be made to import innovation into the production process by means of investment in technological equipment. Generally, an increase in innovation performance incurs an increase in sales. The efficiency of the innovation system is evaluated as adequate when the majority of firms apply innovation inputs satisfactorily. However, there is additional margin for improvement regarding R&D, staff training and the diffusion of innovation. The analysis of the innovation system at the sector level in the

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region may lead to a better innovation-oriented policy and decision making. In Palestine, the stone and marble industry is considered as the biggest industry in terms of number of firms, sales volume, employment rate and total investment. The Palestinians are exporting to more than 50 countries worldwide. Della Corte, Zamparelli, and Micera (2013) propose a model of innovation and internationalization for SMEs and at testing it on tradition-based firms. These are SMEs whose productions reflect their territory's cultural identity. They are often micro-firms and weak in global markets. Since these firms characterize the European and Italian offer, the scientific challenge is to verify whether there are possible strategic paths, mainly based on interfirm collaboration and dynamic knowledge, that can help them getting higher levels of competitiveness. More specifically, the proposed model aims at understanding if it is possible to overcome these firms’ weaknesses through collaboration in networking perspective. The authors find that tradition-based “Made in Italy” SMEs, as depicted in the empirical analysis, are characterized by limited size and scarce financial resources. This situation determines a difficult access to innovation in order to compete in global market. Thus, the research has highlighted that the only internationalization path, useful for this kind of firms, is cooperation, in a networking perspective. Firms that succeed in this process not only set the basis for survival but even to gain competitive advantage.

3. Methodology The researcher used quantitative method and the questionnaire as a tool to collect the primary data from a random sample of 120 SMEs (employing less than 50 employees); 40 SMEs from agribusiness, furniture and stone and marble industries in Palestine. These firms were under the examination during the period (2009-2013). Each SME is the entity for which the required data and information are received and statistics are compiled. The questionnaire consists of three parts: The first part covers the characteristics of SMEs, entrepreneurial background, location and year of establishment. The second part covers the driving forces, objectives, sources, achievements in innovation. The third part includes the economic variables such as employment, and sales turnover. The questionnaire was finalized after the taking into account the views from academics, industry experts and representatives of SME associations. The Cronbach alpha was calculated as 0.75.

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To measure innovation, internal and external sources were measured. The internal sources of innovation are: self-motivation; entrepreneurship; inhouse R&D; marketing; and production. While the external sources of innovation are the following: demand; competitors; clients; consultancy firms; suppliers; educational institutions; and other related and supporting industries. On the other hand, the main obstacles or barriers to innovation are: economic factors; lack of appropriate sources of finance; lack of skilled personnel; lack of information; lack of infrastructure; and no need to innovate due to earlier innovations. In order to identify drivers and achievements in innovation of SMEs in three industries, quantitative data were collected and analyzed making use of frequency tables for innovative SMEs. The data on comparison of the growth rate of innovative with non-innovative SMEs, were analyzed through the use of percentage of growth of economic variables for both innovative and non-innovative SMEs. For finding out the relationship between innovation and growth, the data were analyzed for innovative SMEs using correlation analysis, analysis of variance (ANOVA), and regression analysis. Questionnaire design is crucial for the quality of the data collected on innovation. Small changes in the definitions or explanations given in the part of the questionnaire will all affect the information gathered. To evaluate the reliability of answers, firms were asked to indicate the degree of uncertainty by saying whether their figures are based on detailed accounts or are fairly accurate or rough estimates. Although this kind of question may well raise the share of participants who give rough estimates only, the response rate may be higher. Care must be taken to exclude activities which are part of the innovation process but rarely involve any R&D (e.g. patent work, licensing, market research, manufacturing startup, process re-engineering, tooling up). At the same time, some activities are at least partly counted as R&D (e.g. pilot plants, prototypes, industrial design, process development).

4. Analysis and Results The main results of the research study are the following:

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Drivers, Dimensions and Achievements of Innovations All SMEs in the three sectors selected for the study were the new start-ups for implementing their innovative ideas and/or to exploit market opportunities in 1980s and later. Majority of the entrepreneurs are in the age group of 40 to 50 years and hold associate degree or BA degree. Their size characteristics revealed that size structure of the SMEs is more towards small to medium sized enterprises (i.e. less than 50 employees). Table (1) shows that the majority of SMEs are innovative in all the three sectors. A greater proportion of SMEs in the stone and marble sector is innovative as compare with agribusiness and furniture sectors. SMEs are generally known for informal innovations, without any exclusive structure and support systems for innovation. Most of the innovation was carried out along with the day-to-day manufacturing operations. Table 1: Innovative and Non-innovative SMEs

Classification

Number of SMEs Agribusiness

Furniture

Stone and Marble

Innovative

32

25

35

Non-innovative

8

15

5

Total

40

40

40

SMEs which have a track record of innovation are more likely to generate growth in sales than non-innovating firms. Both internal and eco-system factors are important in shaping SME innovation and growth in sales. For Palestinian SMEs specifically, however, the evidence base remains limited in some areas. Table (2) presents that a majority of the SMEs identified both internal and external factors as the driving forces for their innovations as discussed by Porter and Stern (2001). However, a considerable number of SMEs in the stone and marble sector has identified external factors as the driving force for their innovations. Very few enterprises attributed exclusively internal driving forces for innovations. It is clear that both internal factors such as self-motivation, technical education background, work experience, and innovative ideas of entrepreneurs on the one hand, and external factors such as customer requirements, information given by

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suppliers of equipment and materials, and competition are responsible for a majority of SMEs to innovate. Table 2: Internal and External Drivers of Innovation

Drivers of Innovation

Number of SMEs Agribusiness

Furniture

Stone and Marble

Internal Factors

2

4

5

External Factors

5

6

10

Internal and External

25

15

20

Total

32

25

35

Internal enablers - there is strong evidence for the importance of skills, R&D, and capital investment in shaping SME innovation and growth. The evidence base is weaker - particularly for SMEs – in terms of the value of design, intellectual property management, people management, employee engagement, and other firm characteristics such as family ownership, year of establishment and location. External enablers - purposive links formed between SMEs and their partners – play a positive role in innovation and growth in sales, particularly in strong eco-systems. Targeted supply-side and demand-side policies have also proven effective in promoting SME innovation and growth in sales. Less is known about which eco-system characteristics are most important in influencing SMEs’ innovation and export success. Innovation in SMEs was found to be at the both levels product level and/ or process level. Product focused innovations comprised of the introduction of new products and/or the improvement of existing products through changing product designs and dimensions or quality improvement to suit customer requirements. Process-based innovations involved the introduction of new process technology for existing products, adoption of cost reduction techniques, etc. Table (3) shows that a higher proportion of SMEs in the three sectors has undertaken both product and process focused innovations.

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Table 3: Dimensions of SME Innovation

Classification

Number of SMEs Agribusiness

Furniture

Stone and Marble

Product Innovation

3

5

6

Process Innovation

10

5

8

Product and Process

19

15

21

Total

32

25

35

Table 4: Percentage of Innovated Products and/ or Processes in Total Sales

Percentage Share

Number of SMEs Agribusiness

Furniture

Stone and Marble

Zero

4

6

3

Up to 10%

16

11

7

10% - 15%

8

5

10

15% - 25%

4

3

15

Total

32

25

35

Table (4) presents the share of innovative products in total sales in innovative SMEs. A higher percentage of innovative SMEs have succeeded in converting their innovations into sales in the stone and marble sector as compared with furniture and agribusiness sectors. Among those SMEs working in the stone and marble sector have succeeded in crease sale on account of innovations. The majority accounted for a share of innovated products in total sales in the range of 10 percent to 25 percent. Thus, as shown in the table, more successful innovative firms

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might realize a higher share of innovated products in total sales compared to less successful innovative firms.

Innovative and Non-innovative SMEs The growth performance of SMEs has been analyzed using the SMEs data on sales and employment. The SMEs were asked provide data on growth of employment and sales during the last five years. Table (5) presents the growth of sales and employment for innovative and non-innovative SMEs. It is clear that innovative SMEs have enjoyed a higher rate of growth compared to non-innovative SMEs in terms of sales, and employment in all the three sectors. However, the growth rates of the two variables differed within as well as across the sectors. In all the three sectors innovative SMEs registered a higher growth of sales then by employment as compared with non-innovative SMEs . It is to be noted that employment of non-innovative SMEs was declined absolutely in the furniture sector. Table 5: Growth (Percentage) of Innovative and Non-innovative SMEs

Agribusiness

Furniture

Stone and Marble

Variable

Innovat ive SMEs

NonInnovat ive

Innovat ive SMEs

NonInnovat ive

Innovat ive SMEs

NonInnovat ive

Sales

18.3

12

15.5

12.1

24.5

10

Employm ent

6.2

1.2

4.3

-10

6.8

2

Innovation and Growth of SMEs To find out the relationship between innovation and SME growth, the researcher testify whether there is any statistically significant positive correlation between the average rate of growth of sales and percentage of innovated products in total sales. The percentage share of sales could be due to:

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x x x x

235

technologically new products commercialized during the last five years; technologically improved products commercialized during the last five years; products that are technologically unchanged, or subject only to product differentiation, produced with changed production methods during the last five years; products that are technologically unchanged, or subject only to product differentiation, produced with unchanged production methods during the last five years.

The results (shown in table 6) indicate that there is a statistically significant positive correlation (at 0.05 level) between sales growth and percentage of innovation sales in total sales. Table 6: Correlation between Sales Growth and Innovation Sales

Number of SMEs

Correlation Coefficient

Agribusiness

Furniture

Stone and Marble

0.38*

0.34*

0.40*

*Significant at 0.05

To analyze whether higher growth SMEs should have higher shares of innovated products in total sales compared to lower growth SMEs; the innovative SMEs of each sector were divided into two groups: high growth SMEs, and low growth SMEs. The results clearly indicate that higher growth innovative SMEs, on average, have a higher share of innovated products in total sales compared to low growth innovative SMEs in all the three sectors (see table 7).

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Table 7: Share of Innovated Products in Total Sales

Agribusiness

Furniture

Stone and Marble

No. of SMEs

% of IPs in Sales

No. of SMEs

% of IPs in Sales

No. of SMEs

% of IPs in Sales

H. Growth

12

22.5

19

19.5

22

31

L. Growth

20

15.4

6

11.2

13

22

x

IPs = Innovated Products

The results clearly indicate that the percentage share of innovated products in total sales has a significant influence on the average rate of growth in innovative SMEs in all the three sectors. Thus if an innovative SME could expand the scale of production and achieve an increase in innovation sales, it will be able to experience a significant improvement in its performance. This enables us to conclude that innovation sales do contribute to firm growth.

5. Conclusions This research paper has presented the driving forces to innovations, and achievements of innovations carried out by SMEs in the agribusiness, furniture and stone and marble sector in Palestine. It also discussed how far the growth rates of innovative SMEs are different from that of noninnovative SMEs. Finally, it has explored and analyzed the relationship between innovation and growth with respect to innovative SMEs of the three sectors. Majority of SMEs in all the three sectors are innovative. However, Most of the innovative SMEs attributed the sources of their innovations to a combination of internal factors such as self-motivation, technical qualification, knowledge, experience, and innovative ideas of entrepreneurs, and external factors like customer requirements and demand, information provided by suppliers of equipment and materials, market opportunities, and competition.

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Majority of innovative SMEs in the three sectors focused on both product and process innovations and managed to convert their innovative efforts into sales as they realized varying proportions of innovated products in their total sales. This has enabled the majority of them to achieve sales growth. Innovative SMEs registered higher growth relative to noninnovative SMEs in terms of sales turnover and employment. There was a statistically significant positive correlation between innovation sales and sales growth. Innovative SMEs, which experienced higher growth accounted for a higher share of innovated products in their total sales and employment relative to those which experienced lower sales growth. To conclude, the overall analysis lends substantial confidence to the argument that innovation contributes to the growth of firms. The results of the survey suggest that the starting point for developing Palestinian SMEs is to enable them to improve their competitiveness through innovation. This is a rather difficult task, given the adverse environment facing these enterprises. It requires a cohesive policy framework that addresses the multitude of factors influencing enterprises’ performance at the macro, meso (institutional environment) and micro levels. This policy framework should also be consistent with the PA’s development vision, in which the private sector should play a crucial role. The Palestinian Authority’s role should support the creation of an enabling environment that fosters SME development. They should support SMEs, particularly in priority sectors. They should include simplifying and streamlining licensing requirements, investment incentive programs, employment skill upgrading programs, and reconsidering existing investment laws so as to enable SMEs to benefit from tax holidays. In addition, the PA can establish a special inter-ministerial body to monitor SMEs’ performance and ensure that their development interests are incorporated into trade and industrial policy, in accordance with the overall sectoral focus of the development strategy. The PA may also consider seeking the donor community's assistance in establishing a special fund for fostering SME development. The fund can provide support for market support institutions; technological innovation; linking SMEs with foreign enterprises; and enterprise training activities, loan and exchange of research personnel, and internship programs. Other policy measures may include research and development (R&D) tax breaks and state-subsidized R&D programs.

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Suhail Sami Sultan holds a doctorate degree in Business Administration from Maastricht University in the Netherlands and Master of Philosophy and Master in Business Administration from Maastricht School of Management in the Netherlands. Currently, Dr. Sultan is the director of MBA program at Birzeit University in Palestine and works as a national consultant with many international organizations in the region. Dr. Sultan published many articles in prestigious journals.

References Bala Subrahmanya, M. H. (2001). ‘Technological Innovations in Small Firms in the North East of England: Dimensions and Implications’. The International Journal for Entrepreneurship and Innovation, 2 (3), 141–52. Becheikh, N., R. Landry, and N. Amara (2006). ‘Lessons from Innovation Empirical Studies in the Manufacturing Sector: A Systematic Review of the Literature from 1993–2003’. Technovation, 26 (5/6): 644–64. Burrone, E., and G. S. Jaiya (2005). Intellectual Property (IP) Rights and Innovation in Small and Medium-Sized Enterprises. Geneva: World Intellectual Property Organization. Caiazza, R., T. Volpe, and David B. Audretsch (2014). ‘Innovation in agro-food chain: policies, actors and activities’. Journal of Enterprising Communities: People and Places in the Global Economy, 8 (3). Chaminade, C., and J. Vang (2006). ‘Innovation Policies for Asian SMEs: An Innovation System Perspective’. In H. Yeung (ed.), Handbook of Research on Asian Studies. Cheltenham: Edward Elgar. Danneels, E., and E. J. Kleinschmidt (2001). ‘Product Innovativeness from the Firm’s Perspective: Its Dimensions and their Relation with Project Selection and Performance’. The Journal of Product Innovation Management, 18: 357–73. Della Corte, V., G. Zamparelli, and R. Micera (2013). ‘Innovation in tradition-based firms: dynamic knowledge for international competitiveness’, European Journal of Innovation Management, 16 (4), 405 - 439 Edwards, T., R. Delbridge, and M. Munday (2001). ‘Linking Innovative Potential to SME Performance: An Assessment of Enterprises in Industrial South Wales’. Paper presented at the 41st European Regional Association Meeting, 29 August–1 September, Zagreb, Croatia.

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Engel, D., M. Rothgang. and L. Trettin (2004). ‘Innovation and their Impact on Growth of SME – Empirical Evidence from Craft Dominated Industries in Germany’. Paper presented at the EARIE 2004 Conference, 2–5 September, Berlin, Germany. Freeman, C., and L. Soete (1997). The Economics of Industrial Innovation, Third Edition. London: Pinter. Harrison, N. J., and T. Watson (1998). ‘The Focus for Innovation in Small and Medium Service Enterprises’. Conference Proceedings of the 7th Annual Meeting of the Western Decision Sciences Institute, 7–11 April, Reno, NV, USA. Hoffman, K., M. Parejo, J. Bessant, and L. Perren (1998). ‘Small Firms, R&D, Technology and Innovation in the UK: A Literature Review’. Technovation, 18 (1), 39–55. Lee, K.-R. (1998). The Sources of Capital Goods Innovation: The Role of User Firms in Japan and Korea. Amsterdam: Harwood Academic Publishers. Lehtimaki, A. (1991). ‘Management of the Innovation Process in Small Companies in Finland’. IEEE Transactions on Engineering Management, 38 (2), 120–6. Martinez-Ros, E. (1999). ‘Explaining the Decisions to Carry out Product and Process Innovations: The Spanish Case’. The Journal of High Technology Management Research, 10 (2), 223–42. OECD (2005). The Measurement of Scientific and Technological Activities: Proposed Guidelines for Collecting and Interpreting Technological Innovation Data, Oslo Manual, 3rd Ed. Palestinian Central Bureau of Statistics. (2012), Establishments Census. Retrieved July 26, 2014, from PCBS: http://www.pcbs.gov.ps/site/lang__en/732/default.aspx. Porter M., and Stern, S. (2001), Innovation: Location Matters, MIT Sloan Management Review, 42 (4), 28-36. Reid, G. C. (1993). ‘The State of British Enterprise: Growth, Innovation and Competitive Advantage in Small and Medium-Sized Firms’. International Journal of Industrial Organization, 11 (1): 147–50. Roper, S. (1997). ‘Product Innovation and Small Business Growth: A Comparison of the Strategies of German, UK and Irish Companies’. Small Business Economics, 9, 523–37. Schumpeter, J. (1934), The Theory of Economic Development, Harvard University Press, Cambridge, Massachusetts. Trigkas, M., Ioannis Papadopoulos, I., and Karagouni, G., (2012) "Economic efficiency of wood and furniture innovation system", European Journal of Innovation Management, 15(2), 150 - 176

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UNCTAD (2004), Palestinian Small and Medium sized Enterprises: Dynamics and Contribution to Development, New York and Geneva. UNU-WIDER (2010), Importance of Technological Innovation for SME growth: Evidence from India, Working Paper. USAID (2006), Cluster Competitiveness Assessment: Eight Industrial and Services Clusters in Palestine, Washington.

CHAPTER ELEVEN DIGITAL INNOVATION AND BUSINESS MANAGEMENT SAVINO SANTOVITO ASSOCIATE PROFESSOR, UNIVERSITY OF BARI, ITALY

AND ANTONIO IAZZI RESEARCHER, UNIVERSITY OF SALENTO, LECCE, ITALY

1. Introduction New digital technology and the internet have resulted in significant changes for management: attention and analysis are shifting from “value creation in individual firms” to “value creation in networks”. In the context of an interconnected global economy, in which value is generated on a shared basis by various operators and partners, a key issue for business management is how to maximise value acquisition while minimising risk exposure, considering the interests not only of shareholders, but also of all the other stakeholders, who are exerting ever greater pressure on firms. As well as increasing the size of economic operators, considering Metcalfe’s law (network economics) and the high operating leverage (first copy economics), the globalisation of trade and markets is also generating greater exposure to risk. Thus, risk management has also become a critical part of running a business. Indeed, when income falls as a result of greater competition, it is necessary to transfer or share risk exposure with other operators in the sector. The gradual spread of active one-to-one interconnection on the internet, first via e-mail, chat rooms and blogs and subsequently via social networks and wikis, is also strengthening a new form of shared,

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community-driven value creation, as an alternative to traditional ownership systems. Indeed, global entrepreneurial forms that differ significantly in organisational terms now coexist: for-profit proprietary firms, founded on patents or copyright, such as Microsoft and the Encyclopaedia Britannica, alongside not-for-profit community institutions, founded on inclusivity, open-source resources and creative commons, such as Linux and Wikipedia. Once centred on product (marketing 1.0) and subsequently on consumer/user participation (marketing 2.0), business management is thus currently shifting towards models (Kotler et Al., 2010) in which the centrality of human beings prevails (marketing 3.0) and the firm acknowledges its responsibility for social well-being and environmental sustainability.

2. From value creation to value acquisition In the past, having identified and analysed consumers and users’ needs, market-oriented firms fine-tuned products and services which, thanks to a strategy of differentiation, signalled by branding, were purchased, used and appreciated by their customers. In this context, the roles of the various economic operators were clearly distinct: firms designed and made available products and services that were desired and used by consumers and users. Value was created entirely within the firm and was then exchanged with customers via economic transactions on the market: the product or service was sold to many customers (transactional marketing). Indeed, traditional studies of Industrial and Commercial Management confirm this view of firms focused on production processes and technical aspects of commercial exchanges (contracts, commercial operators, etc.). As a result of the progressively increasing importance of the service component in economic production and exchange processes, this managerial logic evolved towards greater customer care and attention: the aim was to acquire customers and provide them with multiple products and services (relational marketing). The brand acquired greater importance, in that it was able to convey the uniqueness and identity of the various products and services offered by the firm, which adopted a strategy of diversification. In the past, the demarcation line between the firm and its customers was clearly visible. It separated the firm, an open business entity composed, according to the Viable Systems Approach (VSA) (Golinelli, 2010), of a governing role and an operational structure, from the external market, more or less directly reachable, via distributional channels. Although a

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firm shrinks (Coase, 1937) when it begins to conduct business transactions (market exchanges coordinated via the price mechanism), it expands when it decides to abandon such transactions and organise its activities internally (continuing to expand until the costs of organising an extra transaction inside the firm become equal to the costs of performing the same transaction via a market exchange). With the growth of the internet, technological evolution has generated new possibilities for relocating increasingly significant phases of the production process outside the firm. Firms that once increased their size by internalising functions and activities, since the costs of internal organisation and coordination were lower than transaction costs, subsequently experienced a substantial reduction in such costs, affecting the identification and coordination of suppliers and the drawing up and fulfilment of contracts. This in turn prompted them to break up their market activities, transforming the value chain and seeking new reconfigurations of resources, structures and processes in order to satisfy the final consumers. Consequently, with the growth of outsourcing, the firm’s internal operational structure is externally dispersed into a network of relations between operators, making its management more complex while simplifying its internal operational structure (what were once internal activities coordinated in accordance with hierarchical relations are now transformed into external market and production-chain relations). The systemic firm is characterised by relational networks, which require a shift of attention away from physical objects and their ownership towards network-based connections and interactions (Vicari, 2007). In order to orient the firm towards success then, in addition to operational outsourcing, in which non-strategic activities are externalised, i.e. entrusted to more efficient and less costly external suppliers, its management must also reconsider the fundamentals underlying value creation for the final consumer. The activities that generate value within individual firms are more conveniently distributed in the market by means of “specialized outsourcing” than by “capacity outsourcing” (Panati and Golinelli, 1991). Moreover the optimal combination of contributions from all potential partners in the network is determined purely in terms of how to best satisfy and create value for the final consumer, who also becomes a partner in the same network. Vertical integration gives way to horizontal cooperation, physical economies of scale give way to network economies of scale, close connections with a few partners give way to loose ties with many other partners (e.g. the growth of peer to peer networks, blogs, communities, wikis, social networks, etc.), and hierarchical organization forms give way to distributed decision-making systems that are closer to

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the consumer (Hartman et Al., 2000). Business management is evolving in this direction, with the option of externalising even strategic functions, whose success depends on the dissemination of knowledge and information, and above all on a shared vision of the goals and mutual trust among the individual operators (Mauri, 1999). Evolution of managerial orientation From

To

goods

services

transactional marketing

relational-experiential marketing

one2many one2one differentiation diversification internalisation externalisation value chain value network firms with well-defined boundaries consumers

firms with ill-defined boundaries

value creation

prosumers value acquisition

The traditional value chain is transformed into a value network, in which the various economic operators seek to acquire a part of the value produced in collaboration with others: the capacity to acquire value depends on the firm’s power to make deals and on its ability to negotiate the highest remuneration for its contribution to the network. The firm’s management shift from marketing to societing (Fabris, 2008) and the firm’s current task is to extract value from markets, effectively monetising the resources produced, including the contribution of customers, communities and society as a whole (Dalli, 2009). However, we are not sure if the purpose of the firm should be redefined as “creating shared value” (Porter and Kramer, 2011) rather than just profit

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per se. As to whether this new perspective could drive the next wave of innovation and productivity growth in the global economy, reshaping capitalism and its relationship to society, there is no consensus in the literature. (Crane et Al., 2014).

3. The declining significance of price and the growth of free goods and services The shift in managerial orientation from transactional marketing (one-tomany), founded on ways of creating value within the firm, to be subsequently exchanged with customers via economic transactions in the markets (the product or service had to be sold to many customers), towards one of relational marketing (one–to-one), based on care and attention for the customer (the customers acquired must purchase many products and services), requires diversification strategies, with servitization of products (Dalli et Al., 2011), in which firms propose to their customers combinations of multiple products and services, all connected by their uniqueness and distinctive identity in that they are associated with a single brand. Thus the traditional transactional approach (oriented to material goods), has been partially superseded by the interactive relational process (oriented to services), which requires the fulfilment of expectations when the service is provided, in order to consolidate customer loyalty and ensure the firm’s long-term survival (Carù, 1996). The service economy has progressively grown in importance compared to the goods economy, as has intangible investment compared to material investment and the competitive advantage arising from access to information compared to ownership of physical resources. Products contain more and more information and knowledge and less and less raw material, seen for example (Normann, 1996) in the price of a car, about 1/4 of which corresponds to direct production costs (materials, labour and use of machinery) and the remaining 3/4 is made up of services (marketing, distribution, research and development, financing). Production processes have also been renewed in operational and managerial systems and instruments, making far greater use of the information resource, with a considerable reduction in repetitive tasks performed by human beings (Scicutella, 2011). In economic activities characterised by the prevalence of the services component, the active presence of the customer is so important as to cause

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managerial orientation to evolve towards experiential marketing, in which successfully winning over, satisfying, and ensuring the loyalty of customers requires the ability to provide them with an experience that is so positive, intense and unique as to be transforming. Thus the customers themselves play an active part in value creation (prosumers) and management will consequently be focused on the customer rather than on the market, strengthening the conviction that every individual consumer must be offered a large number of different services over a long period (Peppers and Rogers, 1993). The value network, in which a number of operators are organised (Lorenzoni, 1992) and agree on the distribution of benefits, with the customer at the centre of the system, replaces the value chain and nullifies the differences between primary and support activities, especially where the latter also help to maximise customer satisfaction, involving them in both the system of relations and the sharing of risk. Indeed, the growth of new communication technologies reduces the incidence of transaction costs. The internet is a network linking computers and servers distributed throughout the world in real time, enabling twoway transfer of data, voices and images. It is asynchronous, since it makes it possible to deposit messages even in the absence of the recipient, providing continuous, multimedia connectivity at ever-decreasing costs (Demattè, 2000). The internet thereby enables the dispersion across the market, among a number of firms (many-to-many), of activities that previously generated value within a single firm. The value chain has been reconfigured so as to create new aggregations of resources, structures and processes that are hard to define in terms of the classic business categories but are designed with customer satisfaction in mind (Tapscott et Al., 2000). Firms that traditionally operated in single sectors now tend to face each other in one big competitive arena, and find themselves considering whether to choose competition or cooperation with other economic players operating in a range of sectors. The by-now innumerable cases of agreements and networks among firms, outsourcing, just-in-time production protocols, franchising and leasing all represent different implications of the same general tendency towards the shrinking material component in the economy. Indeed, one of this macro-environment’s main evolutionary characteristics is the “dematerialisation of the economy” (Rifkin, 2000), in which material investment and the private ownership of the means of production are gradually giving way to the strategic importance of intangible activities and access to third-party resources. As a resource, short-term access is becoming strategically more important

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than long-term ownership. As long ago as October 1996, the then Governor of the Federal Reserve Board, Alan Greenspan, observed that “while the weight of current economic output is probably only modestly higher than it was a half century ago, value added, adjusted for price change, has risen well over threefold” (Greenspan’s speech given at the 80th Anniversary Awards Dinner of The Conference Board, New York, October 16, 1996). We are also witnessing the “dematerialisation of information”, the separation of information from its previous material basis (the goods in which it used to be embedded, i.e. physical media, individual persons and individual organisations with specific roles), together with the ability to distribute and transfer information at very low costs (Rullani, 1997). This has led to the concept of first copy economics, in accordance with which digital technologies tend to increase the fixed costs necessary to produce the master copy, against the negligible variable costs of making and distributing subsequent copies. This situation is clearly seen in internet firms (websites, portals, search engines, etc.), software houses and music and film studios, all characterised by higher operating leverage and break-even points generally corresponding to higher levels of output, which consequently entails greater exposure to risk. However, while digital context pushes up fixed structural costs, the growth of management models based on cooperation between operators in a network has tended to mitigate its effects by means of the abovementioned contractual agreements, which function as alternatives to the proprietary purchase of the factors of production. In addition, analysis of the new business context confirms the growth of business strategies that involve offering customers ranges and combinations of various goods and services, all connected by their uniqueness and distinctive identity in that they are associated with a single brand. In such diversification strategies, promotional policies regarding composite packages of goods and services no longer allow the customer to correctly identify, verify and compare the individual prices of each single product or service. Banks offer zero-interest mortgages together with expensive life insurance policies for the borrower, and cars are sold at prices that include interest payable on promotional financing plans (apparently) offered at zero interest. The same cars may even be sold at below-cost prices, offering ever longer warranty periods, on condition however that the customer signs up to scheduled maintenance operations at service centres belonging to the network. Passenger flights to various tourist destinations are sold at near-zero prices considering that the costs are largely covered by contributions from regional governments and/or the donation of part of the income earned by tourist structures and hotels in

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the localities served. Prices become progressively less transparent and harder to compare, partly a result of the customisation of the packages on offer, with no two alike: examples include the different pricing options for mobile and landline telephone services and connection to the internet, or the prices of special offers typically seen in the leaflets of big firms selling consumer products, which highlight the monthly payment rather than the total price, or the range of prices for the same passenger flight or hotel accommodation, which depend on the behaviour of the customer in terms of how early they make their booking. In short, the complexity of the combinations proposed by firms no longer allows customers to effectively assess the price they are asked to pay for each product or service, as was previously possible in a more explicitly transactional economic context. It should also be considered that since one of human beings’ main needs is to socialise, the interactive capacity of the internet increases the well-being of each single individual in proportion to the total number of people using it: consider for example how the usefulness of the telephone, fax, e-mail and currently Skype and Facebook, increased as the initially small number of users grew to encompass almost everybody. Metcalfe’s law (1995), which explains the positive externalities of a network in the assertion that “the value of a telecommunications network is proportional to the square of the number of connected users” (Valdani, 2000), is generally applicable to entrepreneurial situations in the new economic context and even modifies the concept of value itself: the growth of the “services-for-free” strategy is driven by the observation that value is created by facilitating distribution and abundance and is eroded by scarcity. In such a context firms are obliged to implement dimensional growth strategies based on price reduction (low-cost) or elimination (providing the service for free). This is necessary in order to maximise the number of users, which increases the level of service obtained by individual customers. For example, increasing the number of users on E-Bay maximises the outcome of each auction, just as a high number of presences on Google optimises the results of searches, Amazon’s huge customer base enriches the variety of profiles on which personalised purchasing suggestions are founded, and increased user activity enhances the value of Wikipedia and all other social network and peer-to-peer sites. Firms are now obliged to think globally, in an environment that seems to get relatively smaller and smaller. Globalisation now seems to be a given: it has turned the planet into one big playing field, generating extraordinary opportunities and wiping out distances. Wherever one is located, the world has become entirely transparent and accessible, with every corner now reachable (Friedman, 2006). The logic and technological development of peer-to-

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peer (P2P) architecture is replacing the traditional server-client scheme in order to favour network growth, going beyond the boundaries, limits and bottle-necks arising from the potential saturation of servers. “Peering” and Peer-to-peer (P2P) generally entail networks of computers or other devices that do not have hierarchical nodes organised into fixed clients and servers, but a number of equivalent nodes (or peers) that function as clients and servers towards the network’s other nodes. While the serverclient logic meant that an increase in the number of clients reduced the network’s quality and efficiency, in the P2P logic, expansion of the network tends to enhance its efficiency. The opportunity to optimise the network by means of its progressive expansion therefore heightens the need for policies to increase the number of users and consequently business activities founded on the provision of services for free in relation to the users (final consumers) and on the continuous search for new services for paying customers (generally, other firms).

4. Sharing risks and benefits among firms and clients It has been pointed out that firms can expand and maximise the number of customers by means of strategies that involve significant price reductions, leading to widespread and high-profile cases of low-cost and free services. Low-cost business strategies are to be found in multiple economic sectors, for example futures contracts for fine wines in the food and agriculture sector, communities of fans who finance production by emerging artists (sellaband.com, downlovers.it, uplovers.it) in the music business, new forms of social lending in the financial sector, etc. Low-cost business strategies are also clearly seen in the tourism sector in the form of advance booking discounts common in hotel reservations and passenger flights. Concerning the latter, it is clear that greater competition (resulting from sector-specific liberalisation policies and institutional measures in favour of final users and consumers) has obliged airlines to reduce prices and consequently accept slimmer profit margins and lower income on invested capital. Thus, assuming the existence ex-ante of a direct relationship between risk and income (which is the essence of the link between finance and business management), there is a need for management to adopt measures designed to reduce the firm’s risks in proportion to its diminished income (Golinelli, 2000). Firms accomplish this risk reduction precisely by increasing sales characterised by low-price options, applied, for example, to tickets sold well in advance, generally in numbers above what is strictly available (overbooking), which limit or exclude any

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subsequent variation (such as a change of date or flight time) or refund (for cancellation of a flight, etc.). It is clear that such a management approach is entirely consistent with a contextual framework of intense competition in the sector, which drives down prices and reduces the potential income of firms, whose room for manoeuvre is limited to risk reduction. In the past, the risk of unsold seats weighed entirely on the airlines, which could afford to fly planes with empty seats thanks to its high prices. Today, reduced ticket prices oblige them to transfer that risk to the customers, themselves now part of the value network, by means of overbooking and selling tickets at low prices well in advance of the travel date with no options for subsequent changes (or with considerable limitations and/or penalties). Basically, if for some reason the aeroplane was to fly empty, the cost would be covered by the customers, to whom the risk is transferred. Even firms’ financial policies are subject to this tendency: the spread of consumer credit represents the visible effect of the need to persuade even customers (consumers and users) to contribute the necessary financial resources to cover costs and safeguard the financial equilibrium of a specific supply-chain (Scicutella et Al., 2005). Similarly, the possibility of advance booking at considerably reduced prices accompanied by harsh cancellation clauses, also adopted by numerous operators in the hotel sector, directly or by means of automatic reservation portals, confirms the spread of business management policies that entail sharing with customers both value (via reduced prices) and risk (by refusing refunds in the event of cancellation). It is clear that the price paid by the individual user is conditioned by their own behaviour, which in turn depends on their personal propensity for risk-taking and advance planning of their activities, consequently assuming responsibility – with varying degrees of awareness – for any effects and burdens arising from subsequent variations to their personal plans. Another example, emblematic of the same tendency to share both value and risk among firms and users, can be seen in the production and distribution of music, as in the case of “Sellaband”.

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The case of Sellaband Via its own portal, the firm aims to enable emerging music groups to promote new tracks, acquire fame and accumulate sufficient funds to record a professional album. With the support of music business professionals, all those groups who manage to attract enough customers/investors (fans/believers) are offered a producer, a recording studio and an A&R (Artists and Repertoire, a division of a record label that seeks out new artists and producers and provides them with the necessary skills to make music, recording facilities and publicity). The groups are asked to create a profile and upload some representative samples of their music in order to attract fans and believers, who, believing in them and in their music, purchase “parts” at $10 each. Every artist has to sell 5000 parts (believers can buy more than one), thereby obtaining a budget of $50,000, with which to record and produce their first album. If a group does not reach the threshold of $50,000 (or "50K" as it is referred to on the site), investors can obtain a refund of their money or invest it in other artists at any time. When a recording is made the believers receive one copy (in limited edition format) of the album product per part purchased, but they can decide not to keep any extra copies (assuming they bought more than one part), putting them directly on sale through an on-line shop hosted on the site’s own web pages, either directly receiving the proceeds of the sale or using the money to support other artists. Some of the tracks on the album are made available free, while the others can be bought separately or on a CD. Further income is possible if any of the tracks are used for advertising jingles, theme tunes for TV or radio shows, or film soundtracks. Created in a shared manner, value is thus shared among the artists, the Sellaband firm and the customers/investors, who also share in the risk. Source: See www.sellaband.com, created by Johan Vosmeijer (ex Sony/BMG), Pim Betist and Dagmar Heijmans in 2006 in order to launch new musical production and to remove barriers on entry to the music business.

The detailed analysis of the case of Sellaband allows us to highlight the managerial contexts in which the logic of user participation and risk/benefit sharing – something that all firms are now getting to grips with – is most clearly having an impact: -

users participate actively in the selection of products (innovation);

-

before they are customers, they are also investors of financial resources, sharing the business risk (finance);

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they help to promote the best products and facilitate production (marketing).

The significance of these changes is confirmed by their impact on various areas of business management, while the success of the participatory and shared business model in numerous sectors is fuelled by the fact that the product obtained has, for users, a higher value than the money invested. The recent growth among firms of “low-cost” management strategies also confirms that such policies are sustainable and are justified exclusively by the significant improvement of management, oriented to sharing activities pertaining to both value creation and risk, the latter being identified and offloaded outside the firm (Golinelli, 2005). The proposed examples are paradigmatic of the currently widespread tendency in business management to rediscover the importance of relational and contractual techniques and to bring even the final customers (consumers and users) into the value network. The goal is to transfer greater value to customers by reducing prices and to induce them to share the risks with the operators they deal with. In such a context, there is a clear danger of a propensity towards opportunistic behaviours (i.e. moral hazard), incompatible with a properly ethical approach to management. Thus, the value network distributed among numerous firms broadens the management’s field of interest, prompting it to rediscover the relevance of technical and commercial knowledge, expanding the object of enquiry to include an analysis of how to distribute risk and value among the various operators. Currently, many firms are taking an interest in enterprise risk management (ERM). Highly useful in this context is an analysis of the interactions between operators, including commercial contracts in the traditional buying-and-selling format (the typical relationship for the exchange of goods and services), not forgetting the complexity of the other relational aspects activated by firms in various innovative ways.

5. The socialisation of business activities Whereas in the past firms planned activities and strategies designed to help them enter markets and achieve success by taking business away from their competitors, in the current situation they compete by seeking to attract, gain the loyalty of, and internalise customers/users in their value chain. Therefore it is customer and user markets (Brondoni, 2007) that now actively engage firms’ attention, following the rule of network

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externalities (consider the effects of the above-mentioned Metcalfe’s law), generating value for customers in proportion to their increase in numbers. We are now thus witnessing the rise of “brand community” activities by means of users who spread the word and contribute to the brand’s reputation, while the managerial approach to marketing is evolving towards non-conventional forms of tribal and viral marketing (Cova et Al., 2007). New consumer behaviours are thus redefining the notion of value, and the centrality of the customer is replacing that of the product. Thanks to the spread of new digital technologies, consumers are fully involved in the firm’s operational processes and have become “prosumers” (Toffler, 1980). As long ago as the 1980s there was an awareness that the business world was going to shift towards mass production of highly personalised products, merging the roles of producers and consumers. Firms are now moving from forms of mass personalisation to forms of sharing and cooperation based on file sharing, peering and active user participation. The classic conceptual distinction between hierarchy (within the firm) and market (outside the firm), i.e. between the system-firm and its environment (Usai, 2007), is tending to fade or even to become inverted, posing new problems for business management. The latter must now deal with hierarchies outside the firm (e.g. the supra-system of stakeholders and financial covenants) and markets within itself (with the flattening and/or overturning of the organisational pyramid, as well as the greater presence of consumers, acting via forums, blogs, social networks, peer2peer networks, wikis, etc.). Indeed, inside the firm, management decisions appear less and less suitable for planning and controlling spontaneous phenomena and orientations by partners, consumers and customers. The concepts of market and firm are being respectively replaced by those of supra-systems and sub-systems, in which management functions on the various levels are increasingly critical. For example, in the financial suprasystem, there are covenants, mentioned above. In medium- to long-term financing contracts for production or commercial purposes, these are contractual clauses that give the lender the right to renegotiate or revoke the credit if certain developments occur and may even dictate the borrower’s economic and financial performance. Covenants introduce a form of external hierarchy, limiting the management’s autonomy, which

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has also been reduced by the spread of brand communities and wikis. A wiki is a web site (or any collection of hypertexts) that is regularly updated by its users, the content of which is developed collectively by all those who have access to it (Tapscott and Williams, 2008). In the knowledge economy, in which the components of the firm are not so much individuals as items of knowledge in relation to each other, even the physiognomy of production inside the firms themselves is no longer based on input owned by the firm. Rather, it is made up of intangible, relational and human resources, i.e. modular factors linked to specific individuals working with personal computers and connected to the network as social persons, even independently of the firm (peer production) (Benkler, 2008). Therefore, the rise of Web 2.0 (the evolution of the internet characterised by high participation and control on the part of users, openness, peering and sharing; O’Reilly, 2005) and the spread of social networks also contribute to firms’ structural evolution towards “enterprise 2.0” (McAfee, 2006), based on networks of personal cooperative relations, not represented in business activities or organigrams. The awarding of the Nobel Prize for Economics in 2009 to Williamson and Ostrom confirms the contemporary relevance of the firm-hierarchy and market-democracy dualisms, which appear to be evolving towards a reduction of hierarchy within firms and accentuation outside them. This is giving rise to intermediate organisational forms of market-hierarchy, which act as alternatives (or are complementary) to the public sector, in which for example the Common Pool Resource (CPR) institutions studied by Ostrom manage and regulate themselves. The current relevance of commons (once used to indicate grazing land or meadows that could be used by all) is also confirmed by the spread of creative commons to regulate the circulation and dissemination of creative works offered for sharing and public use. In Italy this recalls the tradition of usi civici (literally, “civic uses”), which were feudal provisions designed to guarantee a population’s survival or wellbeing, allowing members of a community to use certain areas for gathering firewood, grazing their animals, picking mushrooms, etc. It is currently interesting to note the coexistence of business activities of global dimensions that are significantly different in nature and organisation: for-profit proprietary firms, founded on private property of assets, together with not-for-profit community institutions, founded on commons and open-source resources. There are innumerable examples of businesses which, starting from mass personalisation, increasingly involve the customer in planning functions

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and seek their active participation even in the distribution and promotional phases. Mass personalisation can be made compatible with low costs thanks to new technologies that facilitate modularity: firms dismantle products and services into a series of standardised modules that can be assembled in varied and innovative ways, enabling products to be personalised at later stages of the process. Also of great interest for mass customisation is the possibility of co-designing the product together with the customer. The centrality of users and people is fundamental to the current postmodern firm, founded on reflexive knowledge resources, based on shared and collective exploration of people rather than on the replicable exploitation of machines: the shift from replicable knowledge to reflexive knowledge developed by extended epistemic communities of people (acting collectively within firms, between firms and between customers) influences the ways in which value is created (Rullani, 2005). These communities recall forms of distributed knowledge or “swarm intelligence”, also found in the animal kingdom, in which the behaviours of individuals become significant at group level, creating networks of interactive exchange between individuals that maintain their own specific identity: in this sense it is possible to distinguish forms of “connective intelligence” from “collective intelligence” (Tagliagambe, 2007). The advanced versions of knowldege-Based View, such as Open Innovation (Chesbrough, 2003) and the Network Theory (Ahuja, 2000) highlight how the knowledge is able to multiply the product when it is shared and exchanged. The contribution resulting from customer participation in the value creation process will be perceived by them with more or less awareness: how many users of Google, E-mule, Skype, Joost or Wikipedia are aware that the success and quality of the service depends to a large degree on their own individual connection and activity? But is the users’ contribution to value creation adequately compensated by zeroing the price of the service provided to them? That is, should the overall value created be more equally shared among the operators? Is it sufficient that the users remain simple clients authorised to freely use the services, or is it necessary to accord a higher value to their role as suppliers? The answer to these questions should take account of the legal nature of the firms that are successful in a particular context: the success of “proprietary” firms like Microsoft or Google indicates a reduced awareness on the part of users of their own role and contribution, while the growth of alternative

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organisations and “community” institutions such as Linux or Wikipedia indicates that greater worth is attributed to the active role of users, who may be structured in foundations, a legal form that seems be acquiring greater importance (see for example the Wikimedia Foundation and the issues arising from the governance of such organisations). The inadequacy of the legal framework and copyright regulation in the face of expanding computer literacy disseminated via the internet shows that there is a need for socialisation of intellectual property, which should not be seen as mere piracy. Increasing numbers of people are convinced that there is nothing illicit about downloading files from the internet for free. For example the peer-to-peer site thepiratebay, launched in 2003 after the closure of Napster, shows that the illegal downloading of files via the internet is not limited to teenagers, but is rather a social phenomenon, a sort of cultural rebellion against the copyright system. These not-for-profit entities, the zero cost of access for users and the disassociation between a service and its price (donations can be paid unilaterally by the users as a free contribution to the project) call for reflection on the issues of governance and management raised by these firms. The theme also requires further study in the light of key decisions by proprietary firms – such as the already-cited Microsoft and Google – regarding development policies founded on initiatives open to cooperation and zero-pricing. Examples of this include the release of source code to independent developers by Microsoft (there were signs of this as long ago as 1998, when IBM was among the proponents of the Open Source Initiative, beginning to support Linux) and the decision by Google to make the content of entire books no longer covered by copyright (or parts of those still covered) freely accessible, in agreement with publishers and authors. In addition to Google Books there is also Google Editions, an online shop for the sale of e-books, to make more recent works available. Obviously, since users’ input is fundamental for the optimisation of the service, they are becoming more aware of their role as suppliers and the value of their contribution. This raises the problem of their equitable and congruous remuneration, which may no longer coincide with merely granting them free access to the service. The need for a more equitable redistribution of collectively created value obliges the management of the firms concerned to face ethical issues concerning respect for the expectations and goals of all classes of stakeholders. The strategy of Google, a firm based on continuous innovation, the constant proposal of new solutions in the interest of its users and the implementation of projects

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of significant social interest, confirms the need to better remunerate the collectivity of users via new services, in order to head off any dangerous exodus or boycotts, which would result in the loss of a critical production factor. Firms must therefore not forget that consumers/users (no longer merely customers) are increasingly being transformed into suppliers, or that new customers prepared to pay for services must be sought elsewhere, in order to generate financial income, necessary for the firm’s survival. Google’s real customers are not its users (suppliers of precious information), but the firms behind the sponsored links or those that purchase statistical information, just like airlines’ main customers are not travellers but regional organisations and/or tourist and hotel structures in the localities served, and big stores’ main customers are suppliers who buy shelf space and information about the final consumers.

6. Conclusions Without wishing to understate the complexity of the managerial issues raised by digital innovation, it is worth schematically setting out the main topics identified, linking them to specific areas of business management, in order to provide a “dashboard” for navigating any pitfalls. In general, with all the limitations and the caveats inherent in any attempt to summarise such a wide-ranging topic, the impacts of digital innovation and the internet can be described as follows:

1

-

by facilitating relations between actors, they tend to boost cooperation between firms, simplifying the operational structure and conferring greater complexity on the management of relations (commercial technique);1

-

they spread cooperation between firms and facilitate the promotion of assorted combinations of goods and services provided at prices that are hard to compare with those of other providers (marketing: from transactional to relational);

-

they tend, as per the first copy economy, towards business models characterised by greater operating leverage and consequently greater

See the previous paragraph n.2.

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risk (production);2

2

-

they require, as a result of Metcalfe’s law, numerical growth in users linked to entrepreneurial projects, via price reduction or elimination and the growth of the “free” economy (marketing);

-

with the globalisation of entrepreneurial projects and the spread of lowcost strategies, they reduce income and increase risk levels, eliminating the classic risk-income relationship, with negative consequences for the capacity to create value for financial investors (finance);3

-

they may favour moral hazard, as a result of the ability to implement risk sharing policies, transferring risk to the users who participate in the value creation process (finance);

-

together with the growth of the services component, they bring customers closer to firms to the point of incorporating them in the value chain, transferring their duties and activities and transforming them into prosumers (experiential marketing);4

-

by facilitating user participation, e.g. in the form of brand communities favoured by viral and tribal marketing strategies, they break down the firm’s boundaries, inverting roles and transforming the users into suppliers of basic information, necessary for producing knowledge to sell to new categories of customers (strategic marketing and non-conventional marketing);

-

with the socialisation of business activities and the growth of peering and wikis, they raise the need to revise the norms regulating the protection and circulation of intellectual property, passing from copyright to creative commons (technical-legal-commercial);

-

they generate a new dualism between proprietary capitalism oriented to profit, such as Microsoft and Google and non-profit “community” organisations like Linux and Wikipedia; structured as foundations and endowed with greater awareness, they attribute greater worth to the active and fundamental role played by users (institutional and societal).

See the previous paragraph n.3. See the previous paragraph n.4. 4 See the previous paragraph n.5. 3

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In relation to these reflections, based on digital innovation and the spread of new communication technologies, it seems reasonable to make some final considerations. First of all, concerning the current approaches to value creation, firms prefer and increasingly tend to concentrate on risk management and risk control rather than income maximisation, seemingly conditioned by the widespread provision of free goods and services. In the second place, events that may be destructive of value can arise from poor managerial decisions in terms of risk control, a vulnerability that particularly affects entrepreneurial structures characterised by high operating leverage and a need to grow in size by pursuing low-cost strategies. There is therefore an increased threat to the survival of global firms based on the traditional proprietary model oriented to profit, since users have greater awareness of the importance and high value of their input and organise themselves into community institutions (outside the firm), in which the socialisation of activities and mass cooperation prevail (wikinomics 2.0). Lastly, mass cooperation in the new entrepreneurial community institutions implies a new centrality of human beings, oriented to social well-being and environmental sustainability (marketing 3.0). Professor Savino Santovito Phd, is Associate Professor of Management at Department of Economics – University of Bari, where he teaches Business Management, Web Marketing and Innovation Management. His prime research interests are in Risk management, ICT, innovation and value creation, Viable systemic approach in firms management, Investment and financial decisions, Marketing management of agrifood firms, fields in which he has published and consulted. Further information can be found at http://www.uniba.it/docenti/santovito-savino Dr Antonio Iazzi is Permanent Researcher in Management at University of Salento - Department of Management, Economics, Mathematics and Statistics, where he teaches International Marketing and Sectorial Analysis and Competitive Management. His research interests include destination marketing, trade relations and logistics, international marketing. full resume with experience, awards and publications is accessible at http://www.unisalento.it/web/guest/scheda_personale/-/people/antonio.iazzi

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References Ahuja, G. (2000), “Collaboration Networks, Structural Holes, and Innovation: A Longitudinal Study”, Administrative Science Quarterly, vol. 45 n.3, pp. 425-455. Benkler, Y. (2002), “Coase’s Penguin, or, Linux and the Nature of the Firm”, Yale Low Journal, vol. 112, no.3 pp. 369-446. Brammer, S., Jackson, G. and Matten, D. (2012), “Corporate Social Responsibility and Institutional Theory: New Perspectives on Private Governance”, Socio-Economic Review, vol. 10, no.1 pp. 3-28 Brondoni, S. M. (2007), “Market-Driven Management ed economia d’impresa globale”, in AA.VV., in Market-Driven Management, Concorrenza e Mercati Globali, Giappichelli Ed., Torino pp. 25-29. Carù, A. (1996), “Il contributo del marketing dei servizi all’evoluzione degli studi di marketing”, Sinergie, no.40, pp. 69-98. Chesbrough, H. (2003), Open Innovation, Harvard University Press, Cambridge, MA. Coase, R. H. (1937), “The Nature of the Firm.” Economica, New Series, vol. 4, n.16, pp. 386-405. Cortini, M. and Logorio, M. B. (2007), Economia del dono. Aspetti psicosociali nello scambio di esternalità tra imprese, Aracne ed., Roma. Cova, B. Giordano, A. and Pallera, M. (2007) , Marketing nonconvenzionale, Il Sole24Ore, Milano. Crane, A., Palazzo, G., Spence, L.J., and Matten D. (2014), “Contesting the value of creating shared value”, California Management Review, Winter/February, vol. 56 n.2, 130-153 Dalli, D. and Lanzara, R. (2011), La servitization dei prodotti, in Varaldo, R., Cinquini, L. and Di Minin, A. (2011), Nuovi modelli di business e creazione di valore: la scienza dei servizi, Sprinter, Milano. Dalli, D. (2009), “Il ruolo dei consumatori nel processo di creazione e redistribuzione del valore di mercato. Elementi teorici, evidenze empiriche e spunti critici”, AA.VV., Proceedings of the Conference “Aidea”, Ancona (Italy), 2009. Demattè, C. (2010), “Internet, una rivoluzione annunciata, ma sottovalutata” Economia & Management, n.1, p.6. Fabris, G. (2008), Societing. Il marketing della società postmoderna, Franco Angeli, Milano. Freeman, R.E., Wicks, A.C. and Parmar, B. (2004), “ Stakeholder Theory and the Corporate Objective Revisited, ” Organization Science vol. 15 n.3, pp. 364-369

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Friedman Thomas, L. (2006), Il mondo è piatto. Breve storia del ventunesimo secolo, Mondatori Golinelli, G.M. (2010), Viable systems approach (VSA): Governing business dynamics, Cedam, Padova. —. (2005), Recenti sviluppi nelle relazioni tra economia e finanza nel governo dell’impresa: spunti di riflessione, Sinergie n. 67, pp. 13-21. —. (2000), L’approccio sistemico al governo dell’impresa. L’impresa sistema vitale, vol. I e II, Cedam, Padova. Hartman, A. Sifonis, J. and Kador, J. (2000), Net ready, strategies for success in the e-conomy, McGraw-Hill, Milano. Kotler, P. Kartajaya, H. and Setiawan, I. (2010), Marketing 3.0 (From Products to Customers to the Human Spirit), Wiley & Sons, Inc., Hoboken, NJ, USA. Lorenzoni, G. (1992), Accordi, reti e vantaggio competitivo, Etas Libri, Milano. McAfee, A. P. (2006), "Enterprise 2.0: The Dawn of Emergent Collaboration" in Sloan Management Review vol. 47, n.3, pp. 21-28. Mauri, A. (1999), Fiducia e conoscenza nei rapporti di outsourcing. Lo sviluppo dell’impresa virtuale, Sinergie n. 50, pp. 91-128. Neri, L. (2009), La baia dei pirati, Castelvecchi, Roma. Normann, R. (1996), “Services in the neo-industrial economy”, Sinergie, vol. 40, pp. 3-11 O’Reilly, T. (2005), “What Is Web 2.0. Design Patterns and Business Models for the Next Generation of Software”, available at http://oreilly.com/web2/archive/what-is-web-20.html, 10.11.2014. Panati, G., and Golinelli, G.M. (1991), Tecnica economica industriale e commerciale, La Nuova Italia Scientifica, Roma. Peppers, D. and Rogers, M. (1993), The one to one future: building relationship one customer at a time, Doubleday, New York. Pine, II B. J. and Gilmore, J. H. (1999), The Experience Economy, Harvard Business School Press, Boston. Porter, M.E. and Kramer, M. R., (2011), Creating Shared Value, Harvard Business Review, vol. 89 n. 1/2, pp. 62-77. Rifkin, J. (2000), L’era dell’accesso. La rivoluzione della new economy, Mondadori, Milano. Rullani, E. (2005), “Valori d’impresa e conoscenza in un contesto ambientale a complessità crescente”, Sinergie n.67 pp. 103-122. Rullani, E. (1997), “Il ruolo dei servizi nella realtà dell’impresa moderna”, Sinergie n.42, pp. 45.59. Scicutella, M. (2011), La gestione d’impresa, Cacucci Editore, Bari. Scicutella, M., Baldassarre, F. and Santovito, S. (2005), “Le relazioni di

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natura finanziaria nell’evoluzione dei rapporti di fornitura”, Sinergie, n.21, pp. 201-240. Simons, R.L. (2013), “The Business of Business Schools: Restoring a Focus on Competing to Win”, Capitalism and Society, vol. 8 n.1, pp. 1-37. Stasolla, V. (1979), La programmazione ed il controllo della produzione nella gestione delle imprese industriali Cacucci Ed., Bari. Tagliagambe, S. (2007), “Soggetti individuali e soggetti collettivi: il nodo della relazione tra individui e imprese”, Sinergie n.72, pp. 187-223. Tapscott, D. and Williams, A. D. (2008), Wikinomics 2.0. La collaborazione di massa che sta cambiando il mondo, Etas, II ed., Milano. Tapscott, D. Ticoll, D. and Lowy, A. (2000), Digital Capital, Harvard Business School Press, Cambridge, MA. Toffler, A. (1980), The Third Wave, New York: Morrow. Tridente, N., and Stasolla V. (1992), Tecnica Commerciale, Cacucci Ed., Bari. Usai, G. (2007), “Metodo e contenuti nell’utilizzazione dell’approccio per sistemi in economia e gestione delle imprese”, Sinergie n.72, pp.141160. Valdani, E. (2000), L’impresa pro-attiva, McGraw-Hill, Milano. Vernuccio, M. (2009), “Corporate Branding e Social Media. Nuovi orientamenti nella comunicazione d’impresa.” in proceedings of Aidea conference, Ancona, Italy. Vicari, S. (2007), “Soggetti o sistema? Osservazioni sulla natura dell’impresa”, Sinergie n.72, pp.119-139.

CHAPTER TWELVE DIAGNOSING THE COMPETITIVENESS OF SMES ON INTERNATIONAL MARKETS: CONCEPTION AND TESTING OF AN INNOVATIVE SOFTWARE AMEDEO MAIZZA, PROFESSOR AND DEAN, FACULTY OF ECONOMICS, UNIVERSITY OF SALENTO, LECCE, ITALY

LEA IAIA AND FEDERICA CAVALLO PH.D. STUDENT, FACULTY OF ECONOMICS, UNIVERSITY OF SALENTO, LECCE, ITALY

1. Aims and methods of the research A firm’s ability to enter a foreign market entails the activation of a screening process that starts with the selection of those markets held to be interesting in that they are compatible with the specific features of the product on offer, the characteristics of the firm and the expectations of its management. Starting from this assumption, the study aims to identify a suitable method for analysing foreign markets and establish criteria for monitoring firms’ internal skills (with the aid of a software application created ad hoc), in order to adopt a suitable internationalisation strategy that also makes use of the internet. The field of inquiry chosen for the application of the proposed method – wine tourism, see the box below – derives from specific research interests (which are connected to projects currently in progress). However, it also reflects current market trends, especially the growth of “destination Puglia” – a region with a long tradition of winemaking, now characterised by a strong shift towards higher quality – as an ideal location for wine tourists. This is confirmed by the American magazine Wine Enthusiast, whose list of the “Ten best wine travel destinations” for 2013 includes only one Italian region: Puglia.

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Wine tourism Wine tourism, which is currently seeing strong growth, is defined by Hall and Macionis (1998) as ‘‘visitation to vineyards, wineries, wine festivals and wine shows for which grape wine tasting and/or experiencing the attributes of the grape wine region are the prime motivating factors for visitors’’. The phenomenon can be considered from various perspectives (Getz, 2000; Sparke, 2007): i) for destinations seeking to attract wine tourism, it entails drawing up and implementing a new wine-related strategy; ii) for operators involved in wine production and distribution (producers, distributors, retailers), it offers an opportunity to reach new market segments; iii) for wine consumers, it corresponds to a new form of tourist consumption. Indeed, depending on one’s perspective, it is possible to describe wine tourists with reference to the intensity of the wine-related motivation (high-low) associated with their journey and to the degree of “experientiality” that they establish with the “wine” element (Charters, Ali-Knight, 2002). The first of these considerations concerns a tourist who either: i) does not choose his/her holiday a priori on the basis of elements linked to “wine” as a product, but enjoys them during the stay, due to their presence among the wine-related goods and services on offer in the destination, or ii) chooses the holiday almost exclusively on the basis of specific winerelated goods and services on offer in the destination. In the second of the above-mentioned dimensions, the degree of experientiality oscillates from an almost negligible level associated with the simple activity of purchasing wine to a maximum level associated with the tourist’s participation in a series of activities designed to help them acquire deeper knowledge of the “wine” universe, enjoy wine-based experiences and share the knowledge acquired and the experience gained. The analytical approach followed is set out schematically below (Fig. 1).

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265

Figure 1 The methodologicaal approach

The first steep aimed to identify i targeet countries foor a firm’s goods and services, i.e. the potentiallly useful marrkets, via twoo screening ph hases (see Fig. 2): 1.

2.

x x

Stuudy of “Wine travellers”, i..e. identificatiion of the cou untries of origgin of the wine w tourists (the top fivve in terms of flows gennerated) for eaach of the “Teen Best Wine Destinations”” selected by TripAdvisor,, in order to o identify thee top 10 nattionalities (cuumulative freequency) of wine tourrists in the studied desstinations; Asssessment of the t countries’’ attractivenesss in accordaance with the following criteria c (Johan nsson, 1997; Brouthers & Nakos, 20005; He & Weii, 2011): Couuntry analysiis, analysis off the sectors involved in the wine touurism productiion chain, i.e.. those pertainning to both wine and touurism; Acccessibility annalysis, know wledge of thee propensity of wine touurists to interacct with the intternet, includinng Social Nettworks.

Chapter Twelve T

266

Figure 2 Foreeign markets scrreening processs (1st step)

The second step in this stuudy (internal analysis a for esstablishing thee strategic appproach to webb-based internaationalisation)) entailed testiing a software appplication calleed Minerva, which w will be eexplained in greater detail below w, the purpose of which wass to measure a firm’s skills, resources annd abilities in three separatee fields: x

x x

Tarrget market dynamics, d con ncerning idenntification of the most signnificant envirronmental an nd market vaariables for operating effeectively in innternational co ontexts (macrro analysis, conducted c for example usinng the PEST model); m Appproach to inteernationalisattion, concerniing the attentiion that a firm m pays to annalysis of secttor dynamics and the stud dy of the foreeign market inn which it inteends to operatte (meso analyysis); Sysstemic orienntation, conccerning wheether the necessary n connditions exist within the fiirm for the em mergence of a system (miicro analysis).

The joint asssessment of the t informatio on obtained in the two steeps of the above-mentiioned proceddure constitu utes the staarting point for the formulation of an expanssion strategy (3 ( rd step) that can enable th he firm to conquer foreeign markets via v internet-baased communiication.

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2. Screening foreign markets: theoretical principles and practical application Success in foreign markets requires careful strategic planning in order to develop an international dimension in line with market opportunities, i.e. the existence in the target countries of compatibility between potential demand and the firm's products (Vrontis, Vignali, 2006). The identification of such opportunities and the consequent choice of which spaces to exploit are thus highly important for firms since they constitute the basis on which the international marketing strategy is formulated (Kotler, 1991). A firm's expansion in foreign markets often involves difficulties linked to information gathering, which is fundamental for the decision-making process. Indeed, firms frequently experience difficulty in obtaining both primary and secondary data for certain markets, or management is not able to verify their reliability. The firm’s choice of markets may be guided by one of two distinct analytical approaches: 1. Non-structured, 2. Structured. With the non-structured approach the firm’s decisions are based on an external stimulus, that is they choose to operate in a foreign market reactively, following a light strategy. This often happens when the firm follows a competitor in an attempt to replicate its success, or responds to a request from an interested local consumer. In other words, the criterion for choosing to export is often the fruit of an “emergent strategy” (Mintzberg, 1987), due to the difficulties described above. This can be seen in one of the earliest approaches to the selection of foreign markets, the so-called SLEPT approach, in which the analysis of the context is based on a country’s social, legal, economic, political and technological characteristics (Doole and Lowe, 2004, p. 7) with firms assessing and selecting foreign markets in terms of “cultural affinity”, thus considering the “country risk”. Specifically, the key criterion is the “psychic distance”, i.e. the differential in the socio-economic, linguistic, educational and religious characteristics of the firm’s country of origin and the country in which it is seeking to sell its products. To this may be added the firm’s perception of the new target market and its similarity with markets in which its already operates, so that

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the “country risk” is inversely proportional to the firm’s affinity with the country in question: the greater the similarities, the more the risk involved in the economic activity can be contained. The direct consequence of the need to contain the risks involved in the process of expansion is that firms frequently turn to markets that are close to their own, facilitating international marketing in the planning and implementation phases (Fornari, 1995). In contrast, the structured approach envisages a screening process organised into a number of observation steps that aims to identify the existence of a target country, i.e. a potential market for the firm’s products. This entails following clearly defined objective criteria that guide the firm towards the optimal choice in terms of the product-market-country relationship. Based on macro data, the structured approach studies the contexts of distribution and consumption in order to obtain information that will be useful in the subsequent process of strategic planning. Obviously, the utility of the screening process is closely dependent on the reliability and depth of the data, which is why finding sources that can effectively support the analysis, selection and final choice of target market is indispensable. In this regard, the parameters used in the selection process are as follows: 1.

attractiveness of the country, i.e. assessment of its potential: x in general terms (so-called country analysis), with reference to macro-variables that describe the main economic, demographic, geographical and regional features, adaptable depending on the internationalisation strategy that the firm intends to follow; x in specific terms (so-called industry analysis), which requires knowledge of the competitive characteristics of the firms operating in the country in question, in order to identify any gaps in the market;

Diagnosing the Competitiveness of SMEs on International Markets

2.

269

accessibility of the country, understood as the conditions of access to the market in question, including any limitations in terms of barriers to entry.

High

Countries to select

High priority countries

(4)

(1)

Countries to exclude

Countries to conquer

(3)

(2)

Low

High

Low

Accessibility

The combined reading of the information arising from the analyses of market attractiveness (general and specific) and accessibility makes it possible to construct a selection matrix for the target markets in question (Fig. 3).

Attractiveness

Figure 2 Country selection matrix

As can be seen from Fig. 3, the attributes identified for each market cause the countries to occupy different squares in the matrix, being classified as “High priority countries” (1st quadrant), presenting excellent opportunities in a market that is readily accessible due to the low barriers to entry, with potential that can be fulfilled in a relatively short time; “Countries to conquer” (2), in which, despite the presence of attractive conditions, the firm will need to carefully assess the effort required to establish and keep a competitive position in the target market (given the high barriers to entry, which dissuade the company from entering the competitive arena in the first place but – assuming it is successful – then defend it from would-be competitors); “Countries to select” (3), readily accessible but characterised by modest market possibilities, exploitable only at times when the firm enjoys a surplus of resources; “Countries to exclude” (4), not included – at least in the period immediately following the analysis – in the list of

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possible markets to aim at, since there are no favourable conditions of any kind.

3. Analysis of the target market for Web-Based Wine Tourism organisations Currently, there are few data available for determining with relative certainty the best wine tourism destinations, since no official source has conducted an overall survey of the global context, and such data as does exist is frequently not up-to-date. It should also be pointed out that wine tourism itself is hard to study, since wine is not always the tourist's only motive for travelling. In order to describe the goods and services on offer in the wine tourism sector in the international context, a number of web sites specialising in tourism and/or wine tourism were analysed. This entailed canvassing the opinions of “oenonauts”, people with expert knowledge of wines and terroirs, using the only tool able to provide data in real time, i.e. the internet. This approach involved analysing a large quantity of information, more or less relevant. A key source, given the size of its pool of reference, the number of opinions listed and the relative reliability of the data provided, was a study by TripAdvisor (1st screening, Fig. 3) based on feedback from users on the most popular international wine tourism destinations. The survey showed that the TripAdvisor wine tourists' favourite destination is Bordeaux in France, the city that gives its name to the famous wine. This is followed by Napa Valley in California, also famous for wine production, and then Tuscany, the best-known Italian region in the world for the quality and variety of its wines. The table below shows the complete list of the top ten destinations chosen by wine tourists (Tab. 1).

Diagnosing the Competitiveness of SMEs on International Markets

RANKING 1

PLACE Bordeaux, France

2

Napa Valley, California

3

Tuscany, Italy

4

Champagne-Ardenne, France

5

Barossa Valley, Australia

6

La Rioja, Spain

7

Sonoma Valley, California

8

Valle Central, Chile

9

Stellenbosch, South Africa

10

Marlborough, New Zealand

271

Table 1 Top world wine tourism destinations according to the Trip Advisor community

The aforegoing procedure represents the beginning of a process requiring a specific study of the wine tourism sector in each destination/country, in order to verify the provenance of the wine tourists (2nd screening, Fig. 2). Table 2 summarises the aggregate data for the first five nationalities of origin of foreign tourists visiting each destination listed in Tab. 1. The frequency in the third column refers to the number of destinations visited by wine tourists from the country of reference (for example, wine tourists from the United Kingdom have visited six destinations).

I II III IV V VI VII VIII

COUNTRY United Kingdom Germany United States France Australia Japan Netherlands Argentina, Austria, Belgium, Bolivia, Brazil, Canada, China, New Zealand, Peru, Singapore, South Korea

Table 2 International wine tourists main countries of origin

FREQUENCY 6 5 5 3 2 2 2 1

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Overall, the study considered wine tourists from 18 countries of origin: top of the list is the United Kingdom (with a frequency of six), followed by Germany and the United States (both with a frequency of five). In other words, the countries just listed can be said to be characterised by outbound tourism with a high propensity for journeys motivated by wine, since travellers from these countries were found to have visited six (United Kingdom) and five (Germany and the United States) of the ten top wine tourism destinations investigated (France, California, Italy, Australia, Spain, Chile, South Africa, New Zealand). Visiting areas that are geographically distant from one’s country of origin and located in parts of the world that are very different and distant from each other is a sign of strong motivation behind the journey (based on the obvious consideration that in tourism for pleasure a destination’s distance is positively correlated with the strength of the desire to visit it; Crompton, 1979). Even France is in a good position, with a frequency of three. After France come Australia, Japan and the Netherlands, all with a frequency of two. In this way, it was possible to identify seven potential markets, excluding the other eleven countries, for which the frequency (one in all cases) was so low as to preclude an objective choice. Consistent with the aims of this study, a further three potentially fruitful markets were selected from the most frequent nationalities of international wine tourists in Italy (Unioncamere-Isnart, 2010), i.e. the Netherlands (14.6%), Germany (9.4%), Austria (6.2%), France (5.9%), the United Kingdom (5.3%), the USA (4.4%), Spain (3.8%), Japan (2.8%) and Switzerland (1.7%). The only three countries in this list that were not selected in the previous step are Austria, Spain and Switzerland. Thus, analysis of markets held to be potentially suitable for the aims of this study yielded the ten following countries, listed in alphabetical order: a. b. c. d. e. f. g. h. i. j.

Australia, Austria, France, Germany, Japan, the Netherlands, the United Kingdom, Spain, the United States, Switzerland.

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Having drawn up the list of the countries that meet the criteria for the first screening, the next step was to assess the potential market.

3.1 Attractiveness and accessibility analysis Determining the countries’ “relative attractiveness” requires a second level of screening designed to assess foreign markets in terms of potential demand. To this end, a model was created in order to rank the countries on the basis of the variables held to be most descriptive of the markets. The attributes chosen for assessing the countries’ attractiveness can be divided into categories and described in accordance with the summary given above and set out in greater detail here: Country analysis a. analysis of the main macroeconomic indicators (income per capita, inflation rate, propensity to consumption, GDP growth rate) needed for understanding the national economic framework and the population’s consumption capacity (cfr. Tab. 3, point 1.a); b. study of the country’s degree of the openness on the basis of data on international commerce and foreign investment, with particular focus on exchange with Italy (cfr. Tab. 3, point 1.b); 2. Industry analysis In the specific case reported here, the following two sectors were considered: a. the wine sector (national production and consumption, average consumption per head, wine imports from Italy), in order to study in detail the behaviour of the country’s wine consumers and the degree of appreciation of Italian wine products (cfr. Tab. 3, point 2.a); b. outgoing tourism (total departures by travellers, the proportion of these involving trips to Italy, propensity to travel, propensity to travel to Italy, presences and arrivals in Italy, average stay and presences in Puglia); this variable indicates the tendency of citizens to travel and their preferences concerning destination Italy (cfr. Tab. 3, point 2.b); 1.

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3.

Accessibility, especially the propensity to use the internet (the number of users as a percentage of the total population) including Social Networks (the percentage of users who use Facebook), with data on both parameters taken from Internet World Stats. This attribute concerns the use of the internet as a channel for obtaining information and socialising with other users. This is in line with the features of the model and specifically the need to establish a competitive strategy for foreign markets centred on web-based communication (cfr. Tab. 3, point 3).

Below is an example of a country record containing the data necessary for the proposed analysis (the sources used in Table 3 are listed in the methodological note). 1. GENERAL INFORMATION Geographical region Oceania

Source a

Currency

Australian Dollar (AUD)

a

Area (square kilometres)

7,692,300

a

Population

22,157,065

a

Capital (population)

Canberra (333,000)

a

1.a MACROECONOMIC INDICATORS

Source

Income per capita

€ 26,967

a

Inflation rate Propensity to consumption Unemployment rate

1.8%

a

94.9%

b

5.7%

a

GDP growth rate 0.9% GDP growth forecast for 2.0% 2010 1.a MAIN ECONOMIC SECTORS** Agriculture 3.20% Manufacturing 11.10% Construction 7.50% Extraction/mining 5.30% Tertiary 72.80% 1.b INTERNATIONAL TRADE * Total imports (bn) € 64.53 Total exports (bn) € 68.00 Balance of trade (bn) € 3.47

a a Source a a a a a Source a a a

Diagnosing the Competitiveness of SMEs on International Markets Machinery; electrical equipment, combustible oils and petroleum products (32%); pharmaceuticals and processed steel Main imports products (increasing); motor vehicles (40%); cars, particularly with engines smaller than 1,000 cc. (+22.7%) and up to 1,500 cc. (+7%) Raw materials and agricultural products (particularly industrial and bituminous coal) (+56%), especially towards Asian markets; Main exports natural gas (+26%) and iron (+34%); precious metals, particularly gold, pearls and diamonds (increasing) Asia (52%), particularly China (17%; +12%), Japan (8.1%), Singapore (5.7%), Thailand (5.4%), Malaysia (3.7%), South Main trading partners – Korea (3.3%); the USA (11.8%, the second Suppliers biggest exporter to the country); Europe (over 21%), particularly Germany (5.3%) and the United Kingdom (3.4%); New Zealand (3.1%) Asia (70%), particularly China (21.2%), Japan (20.1%), South Korea (7.9%), India Main trading partners – (6.8%), Taiwan (3.3%), Singapore (2.5%), Customers Thailand (2%); Europe, particularly the United Kingdom (6%); the USA (4.7%) and New Zealand (3.7%) 1.b FOREIGN INVESTMENT** Foreign investment (bn) € 256.10 Investment in foreign € 211.00 countries (bn) Foreign investment – EU (33%), USA (24%), Japan (9%) Source countries Investment in foreign countries – Receiving USA (39%), EU (30%) countries 1.b TRADE WITH ITALY (VALUE)* Total imports from Italy € 1.62 (bn) Total exports towards € 0.36 Italy (bn) Balance of trade with -€ 1.26 Italy (bn)

275

a

a

a

a

Source a a a a Source a a a

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1.b EXCHANGE WITH ITALY (SECTORS)* Capital goods such as machinery (particularly air compressors, machinery for bottling, paper processing and packaging); Main products imported chemical-pharmaceutical products from Italy (particularly nucleic acids and antibiotics); motor vehicles; glasses frames; home furniture Bituminous coal (-26%); wool (-70%); Main products exported leather and hides to Italy (-37.7%); wheat (+90%) 1.b ITALY-AUSTRALIA INVESTMENT FLOWS** Italian investment in € 0.33 Australia (bn) Australian investment in € 2.30 Italy (bn) Italy is Australia’s 15th biggest foreign Italian investment – investor (€ 330 m); the investment comes sources mainly from Luxottica, ENI, Gruppo Parmalat and Endemol 9% of the FDI in Italy comes from direct Investment in Italy – Australian investment (particularly sources insurance, financial services and media) 2.a WINE SECTOR National wine production – thousands of hl 11,710 (+11.62%) (variation 2006/2009) World ranking (market 6th (4.38%) share) National wine consumption – thousands of hl (variation 4,931 (+2.4%; +7.6%) 2008/2009; variation 2006/2009) World ranking (market 11th (2.10%) share) Average consumption per capita (litres) (variation 23.19 (+7.6%) 2006/2009) World ranking 23rd Australia is not among Italian wine’s main export markets. However, imports to Italian wine exports to Australia of Italian products such as wine, Australia beer, mineral water and vinegar have increased by 35% (AUD 47.9 m)

Source

a

a Source a a

a

a Source c c

c

c c c

a/d

Diagnosing the Competitiveness of SMEs on International Markets 2.b OUTGOING TOURISM Total departures by Australian travellers 5,789,000 (+6%)** (variation on previous year) Propensity to travel – ratio of number of 26.13 journeys to population x 100 Market share of total 2.1%; 2nd favourite European destination departures for destination after the United Kingdom** Italy Propensity to travel to Italy – ratio of number of arrivals in Italy to total 10.60% departures from Australia x 100 Total Australian presences in Italy (variation 2008/2009; 1.572.543 (-10.9%; 1.0%) percentage of total presences in Italy) Total arrivals in Italy (variation 2008/2009; 613.799 (-10.2%; 1.5%) percentage of total arrivals in Italy) Average length of stay 2.6 Presences in Puglia 0.3% of total foreign travellers in Puglia*** 3. INTERNET USE Internet penetration index – percentage of 80.1% (+158.1%) population (variation 2000/2010) Facebook penetration 44.8%**** index

277 Source e

e/a

e

f/e

f

f f g Source h

h

Table 3 Country Record for Australia

The information retrieved (and set out in the above table by way of example for one country) was assessed by assigning a score to each macro-category (on a five-point scale). The score is based on a comparison of the average value calculated for the ten countries initially selected (Australia, Austria, France, Germany, Japan, the Netherlands, the United Kingdom, Spain, the United States, Switzerland) with the individual country value. The score awarded was subject to three levels of weighting

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(producing a combined maximum possible score of 100) – described here by way of example and thus modifiable depending on the importance attributed to the category by the evaluator – on the basis of: 1.

2.

3.

the contribution of each indicator to the quantification of the macro-category (e.g. the role of “income per capita” in the quantification of the “1.a - macroeconomic indicators”); the contribution of each macro category to the determination of the countries’ attractiveness/accessibility (e.g. the role of “1.a macroeconomic indicators” in the quantification of general attractiveness identified with “Country Analysis-1”); the importance of the various aspects of attractiveness and accessibility to the final assessment of the market in question (e.g. the role of general attractiveness that is “Country Analysis1” in the quantification of the final score).

Concerning attractiveness, the weighting was made necessary by the different impact of the indicators on the assessment: i) of the individual macro-categories (1.a, 1.b, 1.c, 1.d, 2.a, 2.b); ii) of the contribution of each of these to the construction of the two coefficients of attractiveness (1.a, 1.b, 1.c, 1.d for “Country Analysis-1” and 2.a, 2.b for “Industry Analysis2”); iii) of the contribution of the two coefficients of attractiveness (generic, that is “Country Analisis-1”, and specific, that is “Industry Analysis-2”). Concerning accessibility, the weighting affected the assessment; iv) of the propensity to use the internet for commercial transactions; v) the propensity to use social networks. By way of example, see the evaluation form for the Australian target market (Tab. 4). On the basis of the analysis conducted, the following summary of country scores was obtained, showing the size of the potential market (i.e. the consumers that may be interested in the product/service in question on the basis of their disposable income and motivation) (Tab. 5).

Total imports from Italy (bn) Total exports towards Italy (bn) Main products imported from Italy

Foreign investment (bn) Investment in foreign countries (bn)

Total imports (bn) Total exports (bn) Balance of trade (bn)

Income per capita Inflation rate Propensity to consumption GDP growth rate

COUNTRY ANALYSIS (1)

Variables

Weightin g

Weighted value

Score (1-5)

1

1.d RELATIONS WITH ITALY

1

1.c FOREIGN INVESTMENT

1

1.b INTERNATIONAL TRADE

3

1.a MACROECONOMIC INDICATORS

Score (1-5)

25/100

15/100

15/100

25/100

1st Weighti ng

0.25

0.15

0.15

0.75

Weighted value

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1.50

Total weighted value

20

Weighti ng

0.30

Score

279

National consumption of wine – thousands of hl (variation 2008/2009; variation 2006/2009)

World ranking (market share)

National production – thousands of hl (variation 2006/2009)

INDUSTRY ANALYSIS (2)

2

2.5

Score (1-5)

Main products exported to Italy Italian investment in Australia (bn) 1 Australian investment in Italy (bn)

Variables

280

20/100

15/100

Weightin g

Score (1-5)

20/100

1st Weighti ng

0.40

0.38 2.40

60/100

2.a WINE SECTOR

Weighted value

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1.44

0.20

Weighted value

2.11

Total weighted value

80

Weighti ng

1.69

Score

1.5

Total departures by Australian travellers (variation on previous year)

Propensity to travel

2.5

2.5

Score (1-5)

Italian wine exports to Australia

World ranking

Average consumption per capita (litres) (variation 2006/2009)

World ranking (market share)

Variables

0.75

0.88

Weighted value

Score (1-5)

1st Weighti ng

15/100

0.23

1.68

40/100

2.b OUTGOING TOURISM

30/100

35/100

Weightin g

0.67

Weighted value

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Total weighted value Weighti ng Score

281

Presences in Puglia

Average length of stay

Total arrivals in Italy (variation on previous year; percentage of total arrivals in Italy)

(variation on previous year; percentage of total presences in Italy)

Total presences in Italy

Propensity to travel to Italy

Market share of total departures for destination Italy

Variables

282

1

2

1

1

3

Score (1-5)

10/100

10/100

20/100

20/100

25/100

Weightin g

0.10

0.20

0.20

0.20

0.75

Weighted value

Score (1-5)

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1st Weighti ng Weighted value

Total weighted value Weighti ng Score

Score (1-5)

Table 4 Evaluation form for Australia

Facebook penetration index – percentage of population

Internet penetration index – percentage of population (variation 2000/2010)

ACCESSIBILITY (3)

Variables

4

2.5

Weighted value

AUSTRALIA

Weightin g

Score (1-5)

40/100

60/100

1st Weighti ng

3.10

Total weighted value

Accessibility

Total attractiveness

1.60

1.50

Weighted value

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100

Weighti ng

3.10

1.99

3.10

Score

283

INDUSTRY ANALYSIS (2 = WINE SECTOR 2.A + OUTGOING TOURISM 2.B)

Switzerland

United States

Spain

United Kingdom

Netherlands

Japan*

Germany

Austria

Australia COUNTRY ANALYSIS (1)

France

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0.30 0.69 0.32 0.53 0.34 0.44 0.33 0.27 0.42 0.37

1.69 2.17 3.18 3.16 1.33 1.67 2.14 1.86 2.56 2.15 (1.4 (1.4 (2.7 (2.2 (0.9 (1.0 (1.7 (1.5 (2.1 (1.5 4+ 9+ 3+ 1+ 6+ 8+ 0+ 5+ 2+ 0+ 0.67 1.23 1.20 1.75 0.70 1.01 0.98 0.78 1.08 1.19 ) ) ) ) ) ) ) ) ) )

TOTAL ATTRACTIVENE SS (1+2)

ACCESSIBILITY (3)

1.99 2.86 3.50 3.69 1.66 2.11 2.47 2.13 2.98 2.52

3.10 2.30 2.70 2.10 1.90 2.40 3.40 2.30 3.10 2.70

NB: *Score incomplete due to missing data within the sub-category Table 5 Country-market scores

The data set out above enabled the construction of a map of those countries that are potentially amenable to the promotion of wine tourism, considering the opportunities existing in the various markets (Fig. 4). This map made it possible to classify the countries in question on the basis of the accessibility and attractiveness variables, the latter determined by taking the sum of the assessments derived from the country and industry analyses (the latter derived in turn from the aggregate score assigned to the wine and outgoing tourism sectors).

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Figure 4 Priorrity map of targget markets for Puglia SMEs

A glance aat the prioriity map shows that the countries with w high attractivenesss and accesssibility are France and the United States S of America (“H High priority countries”). A comparisonn of the two countries shows thatt France is characteriseed by a coonsiderable level of attractivenesss, while the population p of the USA has a strong prop pensity to use the intternet. Counttries with po otential demaand but con nsiderable difficulties in terms of access a (“Coun ntries to conqquer”) in term ms of the necessary iinvestment include Germ many (top oof the list for total attractivenesss) and Ausstria. In con ntrast, countrries that aree readily accessible bbut have limiteed potential in n terms of winne tourism (“C Countries to select”) are the Unitted Kingdom m, Australia aand Switzerlaand. The analysis connducted showss that Spain, the t Netherlandds and Japan currently do not reprresent interestting markets//countries forr the firms co onsidered (“Countries to exclude”).

3. The T Minerv va softwaree The Minerva software waas conceived and a implemennted on the baasis of the results set out above. Named N after the Roman divinity rep presenting wisdom, commerce and the arts (ofteen accompaniied by the go oddess of victory Nikke) its purposse is to supp port the strattegic decision n-making process of SMEs that inntend to emb bark on a couurse of grow wth on an international scale. The basic iddea is to provvide managem ment with a soort of interactive guide that enabless them to leaarn about theeir specific atttributes in reelation to “internationalisation”, as well as the basic theorettical principlees for the implementattion of such a key process. In a nutshell,, the aim was to set out

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a logical procedure supporting the strategic decision-making process. SME managers are prompted to compare information gathered and processed as per the preceding pages with their own firms’ internal characteristics, in order to verify the existence of any strong and/or weak points, and to identify elements useful for improving their performance. The software’s logical architecture draws inspiration from consolidated diagnostic models in managerial literature (especially SWOT analysis and the McKinsey matrix), which represent the theoretical basis on which the software’s algorithm is delineated. The algorithm focuses on three areas: 1.

2.

3.

approach to the market (macro analysis): identification of the most significant environmental and market variables for operating effectively in international contexts; competitive capacity (meso analysis): measuring how much attention the firm pays to analysing sector dynamics and studying the foreign market in which it intends to operate; managerial orientation (micro analysis): assessment of the presence within the firm of the necessary conditions for the emergence of a system, the systemic approach (Golinelli, 2005) being the project’s main theoretical point of reference.

These areas were organised into specific assessment points, made up of various factors, on which each firm is prompted to assess itself via a series of closed response questions. To each of the possible responses a score – on a five-point scale – and a weighting factor (unknown to the respondent) are assigned. By multiplying the score for the specific answers provided by the weighting assigned ex-ante to each factor, weighted scores are obtained. The combination of weighted scores makes it possible to obtain, firstly for each assessment point and secondly for each area, the total scores (Tab. 6).

Operating structure …

Strategic orientation

….

……

ASSESSMENT POINTS

Table 6 Minerva software architecture

APPROACH TO THE MARKET (macro analysis) COMPETITIVE CAPACITY (meso analysis) MANAGERIAL ORIENTATION (micro analysis)

AREAS

Decision-making skills Mechanism for entering foreign markets … …

FACTORS

….

1-5

1-5 1-5

Micro analysis weighted subtotal: 50

0.3

1-5

Macro analysis weighted subtotal: 20

WEIGHTING [b]

Meso analysis weighted subtotal: 30 0.4

SCORE (selfassessment) [a]

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…..

….

WEIGHTED SCORE [c = a * b]

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Added together, the total scores enable SMEs to assess their viability and measure their level of competitiveness, expressing the degree to which they possess the skills, resources and abilities held to be useful for launching or strengthening their internationalisation processes. The result of the self-assessment test is accompanied by an explanatory system based on three main colours: red (indicating weak areas for the firm), yellow (indicating areas of improvement) and green (indicating the firm’s strong points, useful for the construction of a solid competitive advantage). Each of these results enables the firm to work on its strong points and weak points, thereby seeking to optimise the relationship between the firm’s internal features and those of the market(s) of reference. Each of the Areas, Factors and Assessment points is accompanied by an explanatory pop-up containing bibliographical references for further reading, citations and multimedia material, whose purpose is to encourage management to study and learn more about elements considered essential for running an enterprise in the complex international market. The software was tested via a pilot study conducted on 32 firms in the wine tourism sector. Firstly, during a day of training on the theme of export business management, the research project was presented to the firms, who were then asked to express an opinion on the usability of the software. Although the results of the pilot cannot be generalised (the test was conducted on a carefully selected sample), it can be argued that the businesspeople involved showed widespread appreciation of the analytical procedure performed on their firms and the suggestions arising from the self-assessment. Specifically, in terms of usability, particularly positive views were expressed regarding the pop-ups, considered an innovative and stimulating tool for drawing attention to theoretical principles that are often neglected. Also appreciated was the approach used in the work as a whole, i.e. the combination of external analysis and internal diagnosis. As highlighted above, both are guided by theoretical principles adapted for the specific characteristics of the case under study but potentially applicable to a variety of contexts. These principles are also made explicit with examples and links to videos and/or citations present on the web. In this way, the software served a dual purpose: 1) to support the decisionmaking process regarding international marketing; 2) to prompt management to pay greater attention to theory, thereby seeking to improve managerial culture in SMEs. Indeed, the software and the analytical approach to markets are intended specifically for SMEs, which are known

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for their relative lack of managerial culture and training – something which – thanks to the use of new technologies (e.g. e.learning) – can today be resolved. Overcoming the difficulties posed by a firm’s lack of intangible assets means giving minor organisations a boost that will enable them to face with sufficient competitiveness the challenges of the global market.

4. Conclusions The objective of this study was to establish an analytical procedure useful for identifying target markets and assessing the competitive capacity of SMEs. The first step was to create a format suitable for choosing foreign markets potentially exploitable by wine tourism SMEs in Puglia, whose limited financial and human resources may put them at a disadvantage. The goal is then was to meet a dual need: efficiency and relative simplicity. With reference to the former, aiming primarily to contain costs, emphasis was placed on identifying authoritative sources from which to draw useful (and open source) data for drawing up reports setting out preliminary knowledge of the potential markets. On the basis of analytical assumptions widely accepted by the literature on this topic, the study then implemented a method that prompts the compiler to respond to a series of questions, on the basis of which the report is then written. The next step was the creation of the Minerva software, which, as we have seen, summarises the knowledge acquired, comparing it with the wine tourism firm’s intrinsic characteristics (seeking at the same time to motivate management to improve their knowledge of specific relevant themes). Although in this specific case the focus of reference is the wine tourism sector, it should be remembered that the methodology presented here is designed to be of benefit to SMEs, among whom the next step will be to evaluate their appreciation of the software’s usability in terms of data entry and legibility of the output. A good level of appreciation was already noted among the firms analysed in this study. Specifically, the pilot study highlighted the importance of adopting a structured analytical procedure, i.e. one based on predefined steps that considers both external variables and the internal conditions of the firm.

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With reference to the wine tourism sector, the simulation of a systematic approach helped the firms understand that there are still evident gaps in both their approach to foreign markets and the use of the internet, both of which represent opportunities for increasing output. To summarise, while limited by the lack of a generalised validation of the results of the investigation, it can be argued that the work conducted appears to have managerial implications that may be useful for Italian SMEs working in wine tourism and, more generally, in the agricultural and food-processing sector as a whole. If appropriately involved and stimulated, these SMEs can – especially when they operate as a network – play a key role in global competition. Professor Amedeo Maizza is Full Professor of Economics and Business Management affiliated to the Department of Management, Economics, Mathematics and Statistics, University of Salento (Lecce). He is Dean at the Faculty of Economics and Rector’s Delegate for Territorial Relationship. His research interests include Marketing, Management for Tourism, Wine and Agrifood Business. Professor Maizza’s publications are available at https://unisalento.academia.edu/AmedeoMaizza. For further information: [email protected] Lea Iaia is Ph.D. student in Business Management at Department of Management, Economics, Mathematics and Statistics, University of Salento (Lecce). Her research interests include web marketing, social media communication, wine and agrifood business and tourism. She has authored several publications and presented papers at scientific conferences. For further information: [email protected] Federica Cavallo is Ph.D. student in Business Management at Department of Management, Economics, Mathematics and Statistics, University of Salento (Lecce). Her research interests include web marketing, social media communication, wine and agrifood business and tourism. She has authored several publications and presented papers at scientific conferences. For further information: [email protected]

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Methodological Note The list below shows the sources used to test the model proposed here. This testing was conducted as part of a research project in the period 20102013. 1.

Sources of Table 3 a. France: Atout France (2010), Tourisme et vin : les clientèles françaises et internationales, les concurrents de la France. Comment rester compétitif ?, Marketing touristique; b. Italy: Censis Servizi Spa e Città del Vino (2010), VIII Rapporto annuale – Osservatorio sul turismo del vino in Italia, Febbraio 2010; UnioncamereIsnart, Impresa turismo 2010, Febbraio 2010; c. Australia: Tourism Research Australia-Department of Resources (2010), Energy and Tourism, Snapshots 2009. Food and wine tourism in Australia, Agosto 2010 (http://www.ret.gov.au/tra); d. Spain: Rutas Vino de España-ACEVIN (2010), Análisis Visitantes Bodegas Rutas del Vino 2009 (http://www.wineroutesofspain.com); e. California: MKF Research LLC (2009), Economic Impact of California Wine 2008 (http://www.wineinstitute.org/resources/pressroom/120720060); California Travel & Tourism Commission (2010), California Tourism Highlights. 2009 Data (http://tourism.visitcalifornia.com); f. Cile: OECD (2010), OECD Tourism trend and policies 2010; Chilevid data in Martin H. Kunc (2008), A Review of the Development of Wine Tourism in Chile, School of Business, Universidad “Adolfo Ibañez”, Santiago, Chile. Paper presented al Fourth International Conference of the Academy of Wine Business Research, Siena, 17-19 July 2008; g. South Africa: South African Tourism Strategic Research Unit (2010), Annual Report South African Tourism 2009, (www.southafrica.net); Conningarth Economists (2009), South African Wine Industry Information and Systems (SAWIS), Macro-economic Impact of the Wine Industry on the South African Economy. Final Report, December 2009; Tassiopoulos D., Nuntsu N. and Haydam N. (2004), Wine Tourists in South Africa: A Demographic and Psychographic Study, Journal Wine of Research; h. New Zealand: Ministry of Tourism (2009), Tourism Sector Profile – Tourist activities and wine tourism in New Zealand, September 2009 (http://www.tourismresearch.govt.nz); Krasner H. (2009), An Introduction to Adventure Travel How to Plan Your First Adventure Holiday in a Foreign Country (http://www.suite101.com/content/an-introduction-toadventure-travel-a117249).

2.

For each country in TripAdvisor’s list, the top five nationalities of visiting wine tourists were inserted in a spread sheet and the cumulative frequencies for each of the wine tourist nationalities emerging from this analysis was

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3.

Chapter Twelve calculated (Tab. 2). In the case of South Africa and Spain, due to the paucity of the available data, two and four nationalities of provenance were considered respectively. It should be pointed out that France and California host two destinations each: Bordeaux and Champagne-Ardenne for the former and Napa Valley and Sonoma Valley for the latter (Tab. 1). Thus the overall number of destinations is ten, although the parenthesis includes only eight.

References Atout France (2010), Tourisme et vin - Les clientèles françaises et internationales, les concurrents de la France Comment rester compétitif ?, Éditions Atout France, France. Brouthers, L. E., & Nakos, G. (2005), “The role of Systematic International Market Selection on Small Firms’ export performance”, Journal of Small Business Management, Vol. 43, No. 4, pp. 363-381. California Travel & Tourism Commission (2010), California Tourism Highlights. 2009 Data (available at California%20Tourism%20Highlights%202009%20Final2.pdf). Osservatorio sul Turismo Del Vino, Taiti F. (2010), “I nuovi dinamismi di un turismo di tendenza”, IX Rapporto annuale a cura di Associazione Nazionale Città del Vino e Censis Servizi Spa (available at http://www.censisservizi.com/upload/IX%20RAPPORTO%20FINAL E.pdf ) Chartes, S., Ali-Knight, J. (2002), “Who is the wine tourist?”, Tourism Management, Vol. 23, No. 3, pp. 311-319. Conningarth Economists, South African Wine Industry Information and Systems (SAWIS) (2009), Macro-economic Impact of the Wine Industry on the South African Economy. Final Report, December 2009. Crompton, J. L. (1979), “An assessment of the image of Mexico as a vacation destination and the influence of geographical location upon that image”, Journal of Travel Research, Vol. 17, pp. 18-23. Dematté, C., Peretti, F. (2003), Strategie di internazionalizzazione, Egea, Milano. Doole, I., Lowe, R. (2004), International Marketing Strategy, Thomson Learning, London. Fornari, D. (1995), “La selezione dei mercati esteri nelle strategie di marketing internazionale”, Micro e Macro Marketing, Vol. 4, No. 2, pp. 233-252. Getz, D., (2000) Explore wine tourism: management, development and destinations. Cognizant Communication Corporation, New York. Golinelli, G.M. (2005), L'approccio sistemico al governo dell'impresa.

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L’impresa sistema vitale, CEDAM, Padova. Grandinetti, R. (2002), Concetti e strumenti di marketing. Il ruolo del marketing fra produzione e consumo, Etas Libri, Milano. Guerini, C. (1997), “La selezione e la valutazione dei mercati esteri”, Micro e Macro Marketing, Vol. 4, No. 3, pp. 405-422. —. (2005), Export marketing, Egea, Milano. He, X., & Wei, Y. (2011). “Linking market orientation to international market selection and international performance”, International Business Review, Vol. 20, pp. 535-546. Johansson, J. K. (1997). Global Marketing, Foreign Entry, Local Marketing and Global Management, McGraw-Hill, Chicago. Kotler, P. (1991), Marketing Management (7th ed), Englewood Cliffs Prentice- Hall, New Jersey. Krasner, H. (2009), An Introduction to Adventure Travel How to Plan Your First Adventure Holiday in a Foreign Country (available at http://www.suite101.com/content/an-introduction-to-adventure-travela117249). Kunc, M.H. (2008), “A Review of the Development of Wine Tourism in Chile”, School of Business, Universidad “Adolfo Ibañez”, Santiago, Chile. Paper presented at the Fourth International Conference of the Academy of Wine Business Research, Siena, 17-19 July 2008. Marino, V. (2005), Il governo dell’impresa nella prospettiva sistemica delle relazioni internazionali, Franco Angeli, Milano. Ministry of Tourism (2009), Tourism Sector Profile-Tourist activities and wine tourism in New Zealand, September 2009 (available at http://www.tourismresearch.govt.nz). Mintzberg, H. (1987), “Crafting strategy”, Harvard Business Review, Vol. 4, pp. 66-74. MKF Research LLC (2009), Economic Impact of California Wine 2008 (available at http://www.wineinstitute.org/resources/pressroom/120720060). OECD (2010), OECD Tourism trend and policies 2010. Pellicelli, G. (2007), Il marketing internazionale, Etas Libri, Milano. Rutas Vino De España-Acevin (2010), Análisis Visitantes Bodegas Rutas del Vino 2009 (http://www.wineroutesofspain.com). South African Tourism Strategic Research Unit (2010), Annual Report South African Tourism 2009 (http://www.southafrica.net). Sparks B., (2007) “Planning a wine tourism vacation? Factors that helps to predict tourist behavioural intentions”, Tourism Management, Vol. 28, pp. 1180-1192.

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Tassiopoulos, D., Nuntsu, N., Haydam, N. (2004), “Wine Tourists in South Africa: A Demographic and Psychographic Study”, Journal Wine of Research, Vol. 15, No. 1, pp. 51-63. Tourism Research Australia-Department Of Resources, Energy And Tourism (2010), Snapshots 2009. Food and wine tourism in Australia, August 2010 (http://www.ret.gov.au/tra). Unioncamere-Isnart (2010), Impresa turismo 2010, February 2010. University Of Missouri-Columbia, “The joy is in the social hunt: Facebook users more engaged emotionally when conducting specific searches”, ScienceDaily, 27th April 2010 (available at http://www.sciencedaily.com/releases/2010/04/100423113735.htm). Valdani, E., Bertoli, G. (2010), Mercati internazionali e marketing, Egea, Milano. Vrontis, D., Vignali, C. (2006), Global Marketing and Export Management, Foxwell & Davies, UK.